Hero Of Wall Street
Federal Reserve Chairman Ben S. Bernanke may be running for a "Hero of Wall Street" award. Over the last few months, he has opened up the Fed's coffers for banks and brokerages to the tune of hundreds of billions, and is accepting riskier loan collateral than ever before. Last week, he threw his body -- or, more accurately, ours -- over the railroad tracks to slow an onrushing Bear Stearns trainwreck.
This time, at least, the acrobatics may have worked. On Sunday, JP Morgan Chase announced that it would buy Bear at a tiny fraction, less than 2 percent, of its market value last fall. According to early reports, the Fed is also kicking in $30 billion of taxpayer money to sweeten the deal.
Is Wall Street happy? Of course not. David Rosenberg, the chief economist of Merrill Lynch kvetched that the Fed's actions do "not materially improve the solvency of the institutions exposed to assets under stress...and does nothing to put a floor under home prices."
Rosenberg makes Merrill and its pals sound like Katrina victims -- just innocent bankers quietly going about their business when they got hit with all these "assets under stress." Who knew?
Bear Stearns's most recent financial filings with the Securities and Exchange Commission make rich reading. The largest chunk of its assets, $46 billion, are in home mortgages and home mortgage-backed securities. They're funded 20-1 with borrowed money, a lot of it very short-term. They're clearly culled from the riskier end of the market, and recent delinquency rates are far higher than the (very high) industry norm.
Given that housing values are falling by some 10 percent a year, a reader would naturally conclude that this is a company on the brink of insolvency -- as, indeed, it turned out to be. But JP Morgan Chase still got a bargain. The $30 billion from the Fed will cover most of Bear's mortgage losses, and JP will pick up Bear's lucrative back office business for a song.
Why did the the Fed think it had to pay to make a deal happen, instead of just letting the market take its course? According to Bernanke and Treasury Secretary Hank Paulson, who made the rounds of the Sunday talk shows, it is because Bear is at the center of a web of other funds that look a lot like Bear - heavily leveraged and holding lots of mortgage-backed paper. If the Fed didn't act, a lot of them, perhaps most of them, would also fail.
Would that be so awful? That depends on what kind of assets we're propping up. Bear skimps on loan detail, but Countrywide Financial is another big mortgage lender on federal welfare -- $50 billion worth, all from Atlanta Federal Home Loan Bank. It is a rich target for litigators, so its lawyers must have insisted on unusually detailed disclosure.
Almost all the mortgages on Countrywide's book are so-called "prime" mortgages. But if you look closer, it turns out about a third of them are nasty things called "pay-option loans." Borrowers can defer both principal and interest. Most of the loans are ARMs (adjustable interest) with monthly interest resets and annual payment resets for deferrers, plus unlimited resets every five years. Countrywide goes on to tell us that 81 percent of such loans - about $24 billion worth - were underwritten "with low or no stated income documentation;" 71 percent are "electing to make less than full interest payments," and - surprise - delinquencies went up about nine times in 2007, from 0.65 percent in 2006 to 5.71 percent now. Although they're carried at full value on the Countrywide balance sheet, in reality, they're junk.
This is the kind of garbage that Bear had on its books, and is precisely the kind of mortgages likely to back the complex "Collateralized Debt Obligations" and other mortgage-backed instruments preferred by yield-seekers like hedge funds. But Paulson and Bernanke seem determined to keep the Ponzi game going. Shamefully, the two biggest rating agencies, Standard & Poors' and Moody's, are playing along by maintaining triple-A ratings on mortgage bonds that probably qualify as junk.
But Wall Street is even marking down bonds from Fannie Mae and Freddie Mac, the complaint goes. That's crazy, right? Everyone knows they're guaranteed by the federal government.
But there is no federal guarantee. In its annual report, for example, Fannie insists that "We are a stock-holder owned corporation...funded exclusively with private capital," with no guarantee "either directly or indirectly" from the federal government. Of course they would say that -- how else to justify a $14.5 million pay package for the boss?
But Paulson and Bernanke seem to be hinting that there really is an "implicit" federal guarantee, as Wall Street has always suspected. They should stop insisting. Fannie and Freddie, between the two of them, have $225 billion in subprime and 'Alt-A' mortgages on their books. (The Countrywide pay-option loans would be categorized as Alt-A.) People with eight-digit pay packages, we have learned, like taking risks with other people's money. If they get into trouble, that shouldn't be a taxpayer problem, and bond-buyers should mark Fannie and Freddie paper for what it's really worth.
The hard truth is that a decade of flooding markets with easy money enabled greedy and stupid lending, and probably a good deal of conscious fraud. Houses, like most other leveraged assets, are now grossly overpriced relative to home-buyers' ability to pay. Home prices have perhaps another 15-20 percent to fall - maybe even more as the recession starts to bite.
"Placing a floor under home prices" benefits nobody but the banks and hedge funds, and will delay essential market adjustments. It's time to start letting the dominoes fall.
Originally published in the Washington Independent.
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
BTW, where have all the trolls gone, long time passing?
There must be SOMEONE out there who will stand up for Wall Street!
Trolls, you were there, when us libs came down on the lack of WMD's, when we stood up for Valery Plame against the Republican Mud Machine, when we had the temerity to ask a seven-year-old what SCHIP insurance had done for him and his sister.
You're still out there, I know. You show your face whenever someone calls for impaling our so-called "War President." But why not here? There seem to be no voices supporting the "Free" Market's right to Karap all over the financial security of middle America. It's a "free" country, right? So where are you?
Oh- Could it be that trolls live in houses? I thought they lived under bridges; they certainly seem to have wet dirt clogging up their human-empathy organs. But if they live in houses, just like us, I guess that explains a lot. Even trolls must not want to be booted out of their homes by the friendly peace-keeping County Marshalls.
Good luck with that.
------
kill your tv.
When the economy is in the dumps, the Fed's provide "tax relief" and incentives to the corporate overlords. When Bear Stearns crumbles on it's and Wall Street greed, it is rescued for its misdeeds. Rather than giving JP Morgan 30 Billion, why not provide 30 Billion in relief to mortgagees, who then meet their mortgages, avoiding continued write off's and institutional failure? Why does all relief need to trickle down? Why can't relief trickle up?
IT'S JUST another excuse to toss middle-income Americans' tax money into pockets of greedy, corrupt CORPORATE WELFARE QUEENS.
Hey, rich republicans! why not following your ideology of letting the market make or break
the company! Why are we BAILING OUT THE RICH GUYS who'll walk away with
bye-bye packages worth billions?
Happy days are here again..Bear Stearns is still safe...the country is saved!! But wait a minute...what was it that this compant actually produced? Was it food to feed our children, or energy to warm us or light our homes? Perhaps it made clothing to cover us or houses to keep us dry and safe. Or maybe steel to build our cars or bricks to build our schools. No, actually they were bankers and investment gamblers who made billions loaning money to other companies for risky schemes at inflated rates. If you actually owns a company that makes any of these afore mentioned things and find yourself on the financial rocks your just out of luck. The Government won't lift a finger to bail you out, your on your own. Funny how the Bush folks are quick to step in when a corporation that produces absoutly nothing is in trouble and the C E O's golden parachutes get a rip in them. But then they'll all be out of jobs in a few months and will need to have the guarantee of big bucks from these same companies if they are to continue to live the lifestyle they have become acustomed to. It's for sure they won't be putting in any job applications for some $9.00 + an hour job at Lowe's, Publix ,7-11 or Wal Mart like the "little people" who make up the bulk of Americans, or working in some place that actually produces the tangible things that make life better for the rest of us.
My latest Letter to Editor in our Regional Paper, the Modesto Bee (CA)
"The Value of Debt"
"America’s financial system is about to be, “marked to market!” It will not be a pretty picture. As more speculation has fed this monster the more severe will be the repercussions; the steeper the drop.
We have been sold a bill of goods that debt is a cloak of respectability. The more debt we have the more respectable we are. The more “sophisticated” the models for our financial transactions are, the more “sophisticated” we become as consumers, be it the small local purchaser to the global mega behemoth corporation. As long as we are in debt, and the deeper we go there, the “richer” we become!
Our whole economy is based not on investment but on debt...which is then, “transmuted” into investment according to models that have not taken into consideration a “downside” to the whole structure. Witness the last financial hearings before Congress several weeks ago where CEO’s were queried on that question regarding the housing securities meltdown.
We have elected a government that believes in the “free market.” Well, folks we are bout to see what the “free market” has in store for all of us. No one will escape except the “exceptionally rich.”
As an "addendum" the "markets" are built on "trust." The TRUST is GONE!!!!
In the 1980's the reckless investment abandonment destroyed the "peoples" banks, the savings and loan companies. They were there to lend money to those who would be home buyers. They kept it "real simple."
In the late "90's the Clinton administration (I'm a Non Partisan voter) helped pass the rescinding of the "Glass Steagal" Act. (Google it and learn) This was the agenda of Robert Rubin former head of CitiCorp who acted as the Clinton financial point man. That destruction removed the remaining "firewall" between the ravages of unbridled capitalism (sounds real Marxian, doesn't it?) and society as a whole.
We will now pay for not paying attention and for electing such prostitutes of government such as our, "elected officials."
As the sheeple watch "Amerikan (idle) Idol" and "Dancing with the (CEO's) Stars", NASCAR Racing, etc., that pronging feeling you are getting in the rear of your financial pants will be a virtual meltdown of virtual financial instruments who, by the way, "nobody owns!"
So went the TRUST in our financial system; and the plunging of our currency, that paper with all the dead presidents on it.......
sierra
On the other hand, Paulson may have a portfolio that he was given or gathered while he was at Goldman Sachs that he feels the need to protect.
That is the one common thread to this Administration: They talk "big picture", but in general if you pick their motives apart you find significant personal interest.
By george, I think you've got it.
I am as clueless as anyone else here (whether they are willing to admit it or not) when it comes to complex banking and currency issues
but I know one thing for sure after living in America and watching finacial markets and reactions for almost half a century:
EVERYBODY NEEDS TO COOL IT.
All this worrying, whining and loose talk does nothing but make everything potentially worse.
Will everyone PLEASE just cool out and let (fiscal) nature take it's course.
I guarantee you, you will not like the alternative.
BREATHE ...
I am as clueless as many here are (whether they admit it or not)
But I know one thing from 60 years of life and experience in America:
EVERYONE NEEDS TO COOL IT
From as far back as the late 50s, I have seen so much damage done by loose talk and worry-warts.
We will survive this if everyone will just take a breath and chill out.
Trust me, keep up all this worrying and whining, and you will not like the alternative.
Breathe.
To davequ,
I think you are right about the whining part, but I disagree with you about the not worrying part. What do you think we should do, sit back and just do nothing. Or maybe we should all just keep buying and investing. Don' t you think that's precisely what Bear Stearns was hoping they could get people to do by not admitting that they were in trouble. Instead they painted a rosy picture right up until the night before they collapsed so that more suckers could be persuaded to buy their stocks. Don't you think Lehman Brothers is doing just exactly that same thing. How many more of us should be suckers, Hmmmm?
If, we're going to "Let the dominoes fall..." Then let's begin by letting them fall directly into Prison! Confiscate all earnings from every executive at every Financial company that has bled this country dry. Go after each and every bank account, real estate holding, or offshore trust. Every single asset they own should be taken and put directly into a fund to help homeowners keep their homes. They should forfeit all wealth. Be placed in jail, and then released after they serve their time into half way houses and prohibited from ever again working in the world of banking or finance. With the new WPA there will be plenty of shovels available for them to use.
And those most accountable--Bush, Cheney, Greenspan, Bernanke, and all their buddies at the Fed and Goldman-Sachs should be renditioned to Bulgaria for a little reeducation.
Putting the rich in prison is a non-starter, with George Butch in office. This is the kind of thing that happens, when the hyper-carnivorous are put in charge of America's economy.
Two words: Buy guns.
----------
Shoot your televisions.
A very simple solution for our stupid Government to have applied to the housing mess would have been
to simply pass a bill that would freeze all loan rates at the initial purchase rate if no lower than say 5 1/2 %. That would probably not have made the Loan Agencies very happy since it would have put a crimp in their greed, but so what, at least the homeowners would have felt more confident about their purchase. As it is once the homeowners realized that their payments were getting too high to afford they ditched. The fact that their government is more concerned for the security, solvency and comfort of the Corporations and uppercrust is no surprise. We should all be aware if we haven't known this already that this present Administration is not about what is good for the masses. Congress is also lacking since they seem to be incapable of doing the right thing. If I were to give folks some advice it would be to build a strong community network and make that community as self-sufficient as possible. Learn to depend on yourselves, family, friends and neigbors. We can't depend on our Government. The Corporations only want to make us more dependent on them since it is in their interests to do so. We can't be so compliant. We have to do more to get out from under their thumb. When a Corporation sees it to be in their interest to move on they do so without hesitation. They don't care about the damage they do to people or communities. We need to treat them in kind. Our Government is supposed to work for us the people. As I recall it says that in our Constitution and our Declaration of Independence. A Government of the People, By the People and for the People not of the
Corporations, by the Corporations and for the Corporations. If this President is so pro Corporation , If our Supreme Court and our Congress are so pro the Corporation, then they should be treated to the same kind of reward for their ineptitude that the Corporations are known to give to the average Joe or Jane, Fire them, Fire them all and do it now before it's too late.
Right you are, Artos. Rolling back mortgage rates to the initial terms certainly would have solved this crisis, spreading the penalty among the lending institutions, while largely limiting the default rate, and thus also, the loss rate for the institutions.
But that's not the plan. Remember the part about making money off of crisis? That's the plan. A wave of "consolidation" is just what their doctors ordered. The outcome of this crisis -- oh, besides all the lost homes, that is -- will be a rash of shotgun mergers, at rates that might make the Bear Stearns deal seem like a win-win. Even anti-trust will be "relaxed," so as not to queer the "recovery."
And this is the perfect Administration to facilitate a realignment like this.
You know, you could look at much of what Butch and the Repuglicans have done, as just ham-handed amature fudging, or you could do what the banks and their lobbyists do, and look at the results. The result of the long-playing "Permanent" Republican Majority has been to steal the livelihoods of middle Americans, and funnel those funds into mega-corp coffers.
Anyone want to say that was the plan all along?
------
Kill your TV.
A very simple solution for our stupid Government to have applied to the housing mess would have been
to simply pass a bill that would freeze all loan rates at the initial purchase rate if no lower than say 5 1/2 %. That would probably not have made the Loan Agencies very happy since it would have put a crimp in their greed, but so what, at least the homeowners would have felt more confident about their purchase. As it is once the homeowners realized that their payments were getting too high to afford they ditched. The fact that their government is more concerned for the security, solvency and comfort of the Corporations and uppercrust is no surprise. We should all be aware if we haven't known this already that this present Administration is not about what is good for the masses. Congress is also lacking since they seem to be incapable of doing the right thing. If I were to give folks some advice it would be to build a strong community network and make that community as self-sufficient as possible. Learn to depend on yourselves, family, friends and neigbors. We can't depend on our Government. The Corporations only want to make us more dependent on them since it is in their interests to do so. We can't be so compliant. We have to do more to get out from under their thumb. When a Corporation sees it to be in their interest to move on they do so without hesitation. They don't care about the damage they do to people or communities. We need to treat them in kind. Our Government is supposed to work for us the people. As I recall it says that in our Constitution and our Declaration of Independence. A Government of the People, By the People and for the People not of the
Corporations, by the Corporations and for the Corporations. If this President is so pro Corporation , If our Supreme Court and our Congress are so pro the Corporation, then they should be treated to the same kind of reward for their ineptitude that the Corporations are known to give to the average Joe or Jane, Fire them, Fire them all and do it now before it's too late.
Where do I get a job that guarantees a 5% ROI, a license to print money, and silk parachutes made from the remains of my competitors, and AND a Fed guarantee of 30 Billion against questionable securities that I have purchased for .05 cents per dollar..... I have not found that job yet, but I am sure to foot the bill for Bernanke's "largesse". There ought to be a law!
14,000 jobs gone! $2/share, why not $3 or $4? A steal for JPM that is why. Keep lowering interest rates but don't pass them to the consumers until "the Banks are more capitalized," or have recuperated from their losses from the subprime mortgages. The Fed doesn’t obligate Banks and other Financial Institutions to report Liquidity (measure called the GAP), which is a System relatively easy to implement. But we continue to hear the mantra that the Free Market combined with the “ingenuity of our great American people…” So the praise us and we eat it. That is the typical extremely simple, non-intelligent Republican speech. After that we hear: “We don’t know much about this guy Obama, He only talk generalities.” Obama gives more detail in any of his speeches than any stupid Republican (redundant word.)
Mr Morris, all of what you say makes complete sense on the surface, however, the Fed had one very powerful motivation to act. If all of the other firms with junk home-mortgage securities paper fell, so would a lot of banks, including Citibank, and the US would be plunged into the Great Depression 2.0.
There was no question that the Fed would act because, as Calvin Coolidge famously said (and in this era of the Corporatocracy is more true now than ever), "The business of America is business".
My question is, can he bail out all of the other banks now? We have not seen the tip of the iceberg yet.
And the new Budget the DEMS have concocted is ludicrous. Apparently no one told them that we are
broke! For those of you who believe we will have change I have a bridge to sell!
It seems a lot of people have a bridge to sell these days.
If our government and the Fed have the political guts to do the right thing, the Fed would raise rates, restoring the dollar and stalling stag-flation in its tracks. It will be tough on the economy and the American people----it is a tall political order and will require leadership of an outstanding caliber.
You must be logged in to comment. Log in or connect with
