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.
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SINCE THERE'S NO SUCH THING AS FREE TRADE, while we're cleaning up this mess, how about revisiting the trading relationships that are adding to the pressure on the American tax payer?
http://pac
Rules are needed, and then they should be enforced.
If he was truley the HERO OF WALL STREET he would be putting some of the people in jail for making those overpriced loans
Don't you just love how the KKKonservative "Free-Marketeers" (who obsessively profess to worship
how the "Free Market" will fix all problems and "even out" all rough spots), are grabbing hand-over-fist
for THE PEOPLES' MONEY to bail them out.
What a bunch of 2-faced, phony-ass crooks!!
What happened to the sacred gospel of FREE MARKET SOLUTIONS?
Talk about a false religion!!
KKKonservatives have been proven wrong on ALL counts, again & again & again---They have been right about absolutely NOTHING!
They were liars and fools all along (as most progressives suspected).
Can we urinate on them now?
The answer is: YES!
(It will do them good)
I tried calling my local papers to express concern about a fed bailout of banks when we can't get funding for medical clinics, education and public transportation. Scores of thousands of people who've lost their jobs won't be getting money out of the ATM either. I'll bet we can think of other ways to make sure people get their money from banks besides giving money to the gamblers who got us into this mess. Out of chaos comes opportunity. What innovation will occur if we keep helping these greedy, irresponsible, selfish "businesspeople" out of their jams.
Well, we just learned who Adam Smith's "invisible hand" was. It wasn't God--it was the Fed. So much for laissez faire/neoliberalism capitalism. When the people needed a few bucks for SCHIP, the government gave mom and dad the finger--but if Wall Street needs some "invisible hand" bailout, the Son of God Chairman Ben S. Bernanke is right there to hand out manna from heaven.
I think that if we just dig a little bit, we're gonna find a whole lot of magical funding for "The War." I think you're going to find something over there in that part of the garden that sorta looks like someone's been digging there recently . . .
The reason why Fed acted is very simple:
If Bear would start failing on its financial transaction it would create a domino effect which would include ALL banks. What will you do it Citi, Chase or BofA does not have money to give to you when you go to ATM?
There were no bail out. The shareholders are getting 3% of what their stock was worth less than a year ago...
I would personally like to thank the GOP, in their in infinite wisdom, for their encouragement of corporate welfare. Without their deregulation and greed, and their puppet president, we wouldn't be in half the mess we're in. Special props to the Supreme Court for wrongly appointing the puppet and ensuring that our nation would be weakened and impoverished by the time his two terms were finished.
Yes... thank you from the bottom of my Enron to the top of my Bear Stearns.
I say we use 'imminent domain' to benefit local citizens for a change. Confiscate these ill-gained properties from these criminal corporate regimes, and allow the communities to re-negotiate the loans and restructure their tax base.
Eminent Domain might work better, although perhaps not as quickly as the method you suggest.
I like your concept despite the funny you made :)
Rule of Thumb:
If Bush appointed him or her, we can be assured that the person will be incompetent.
Without exception.
I wouldn't trust Ben Bernanke to roll the coins in my spare change jar.
Right on. Old Man Potter has broken George Bailey, is what it amounts to. Every stinking one of them. We are living on Potterville, not Bedford Falls. It would be good for us all to remember that come November.
Ben Bernanke is pinched into a position that is fraught with political force. Bernanke is an academic with wonderful credentials. He will be damned if he does and damned if he does not. The real failure, the big cause, is easy Al Greenspan. He is the one who warned wall street of "irrational exuberance" yet practiced the same in his position at the FED. (There needs to be a nursery story about feeding cattle too much so they bloat and die...the Greenspan regime)
Too bad Bush doesn't have the balls to A) admit Iraq was/is a HUGE mistake; B) Take the 12 BILLION PER MONTH that we spend there, and C) Pump that into our domestic economy. For Bush to believe that our Iraq indebtedness is not effecting our economy is patently absurd. The boy has got to go...
The problem with that is we're borrowing the 12 billion a month.....
In keeping with the theme of the article, how long before the rest of the world starts rating our treasury bonds as "Junk"?
It's amazing to me that republicans and "free marketers" are always trying to deregulate when the only reason there are regulations are because of past abuse by these same people!! And then, to further insult us, these same free marketers and repubs want us to bail them out. Please someone, help me understand how greed and corruption should be rewarded with a bailout...
Socialism for the rich... government steps in again to bail them and their institutions out from their schemes, bad judgment, and predatory practices gone sour...
everyone needs to compete in this rather rigged games called capitalism, but really is socialism for a few and at it worst it is fascism, merger and commingling large corporate interests with government policy and access to public funds both as a supplier as in Iraq - sell, destroy, rebuild poorly or incompletely, charge for good and services not produced, more destruction, more rebuilding, and so it goes. Despite spending about nearly a Trillion dollars in Iraq/Afghanistan, there has not been a single case of indictment for fraud, waste, or abuse by a contractor
...and they have the NERVE to tell us that bailing them out is really for our own good. That part really sticks in my throat. Everyone knows that it's not wise to shit where you eat, and what did these people do? Crapped all over the hand feeding them.
The Rich get Saved
and
The Poor get screwed
How very Christian.
There's a reason Jesus threw the money lenders out of the temple. And that the old testament lists charging interest as a major sin (in the same section as the gay is a sin part...)
Isn't it strange how the leaders of the religious right continue to support Bush and all the other corporatistas. Aren't their followers paying attention? Would the real Christians please stand up?
I'm not all that religious, but Jesus was nothing if not a crusader for the little guy. I hope there is a special place reserved for the hypocrites who prey on peoples faith for political and monetary gain.
It seems like that was most of what Rev. Wright was saying in his jeremiads, and look how the mainstream media reacted to THAT! They surely don't want to hear any prophetic denunciations of the powers that be, because our talking heads know that real Christians are only interested in preventing gay marriage.
Look at this for what it is. A wonderful shorting opportunity for the big market makers (guess who?) to be covered propitiously "prior" to a big fed funds cut Tuesday that will, if history is a guide, spring a 300 point increase in the dow! All of the cognoscenti will smirk with their gains and evince some doubt about how stupid the public can possibly be!
Market discipline in for taxpayers and stooges, the emotionally involved. Keep your eye on eliot while the magician pulls... yet another rabbit out of the hat. The past is prologue and will continue to repeat until the rabbit dies.
Ben works for the member banks and no one else. He has unlimited power to steal from the poor and give to the rich. Well - at least until there is nothing left to steal. Which is where we headed at warp speed. Is this a great country or what?
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