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
What about the wonders of the 'free market?'
Who else has heard on TV business shows that in a 'free market' badly run businesses would fail and and well-run business would flourish?
The obvious lesson here is that the 'free market' is just BS rhetoric to counter proposed government regulations that Wall Street does not want. However, when a crises occurs, these same friends of the 'free market' start crying like babies for big mummy gummit to help.
"SOCIALISM for BILLIONAIRES"..... I am continually amazed at how the 'Democratic' "Leadership" continually, election after election, REFUSES to STAND UP AND FIGHT for the 100 years of liberal, progressive, democratic programs, policies, and progress that have made up the bedrock of our great American economy, which was the envy of the world until WE, The People, ALLOWED Bush and the Republicans to STEAL election 2000 and 2004. (Thanks, Al Gore & John Kerry, for your lame, "see no evil, hear no evil, and for god's sake, speak no evil of George W. Bush's history full of scandals, lies, and corruption" campaigns.)
I have been at a job for the past few weeks where we don' t have cable TV - only network broadcasts - and it is simply amazing how gossipy and UNINFORMATIVE the TV news is. Even the network nightly "news" cast, which we all know consists of no more than 5 minutes of real news, spun from the parent company's vantage point, and the rest of the half-hour nothing but fluff, infotainment, and a human interest story to cap of the show. That is, no more than 10 minutes of REAL news, in an entire day at a network broadcast channel!
Of course a huge part of the problem is that the minute they get to Washington, DC, Democratic challenger candidates who campaigned for election railing against the abuses of Big-Money Washington, get swallowed up in the "belly of the beast", and become Republicrat authoritiarians, like Nancy Pelosi, Steny Hoyer, Harry Reid, Jay Rockefeller, and all the other Bush apologists "leading" the "Democratic" Party of late.
In the 1930s' UAW (United Auto Workers) union organizer Walter Reuther survived TWO ASSASSINATION ATTEMPTS on his life by Ford Motor co. hired goons. The broken bones and crushed skulls of union activists of the '20s, '30s, '40s, 50's, and '60s, were the price Americans paid to ELIMINATE CHILD LABOR, provide for overtime pay/40 hr. workweek, provide minimum job safety standards and disability pay; provide pensions, insurance, health-care, and other benefits... the very foundation of the upwardly mobile American lifestyle - but STILL the Democratic Party has NO VOICE to DEFEND that century of progress!
Which in no small part is why so many voters are flocking to the Obama campaign... they realize that Hillary was a corporate lawyer, and member of the Board of Directors of WalMart (thanks to her husband's position as governor of WalMart's home state of Arkansas), at a time that the company was ferociously busting unions and firing its pro-union employees - and shifting the cost of health care for company employees on to state taxpayers! THANKS FOR NOTHING, HILLARY!
You were defending the billions and millions in profits for WalMart heirs, at the expense of emloyees and taxpayers!
Well, I guess we do have to thank Hillary for one thing... providing us with a text-book example of how so many Democrat "leaders" vote and rule as autocratic Republicans.
Good post, you ought to make this into an article and post it everywhere...
Amen! Ultra rich vs. Everybody else.... Needless to say, it did not work for Marie-Antoinette...
Dumbya would have us throw our Social Security accounts at these flaming idiots too.
Actually that big pile of Social Security money was what he planned to use to cover this steaming pile of crap with; until he could get to Paraguay.
Can you imagine the mess right now if we'd allowed social security to be preivatized back in 2005?
I have heard more than 2 million people are going to lose their homes this year. That's a lot of dominoes.
While I agree that the Fed's corporate bailout is counter-productive, the government and the regulatory agencies do need to do something to help the citizens that are going to be destroyed by this. As we learned in the depression a market adjustment can take on a life of its own.
What's needed is something similar to what was done for the savings & loan crisis. Stop the foreclosures temporarily. Set up a Resolution Trust type organization that will work through these mortgages; saving what can be saved. guaranteeing what can be guaranteed and junking what's left. This Resolution trust will have the power to determine, based on financial strength, what firms have to close down and what firms can stay in business. Yes, major firms will fail and tax payers will scream. Some people will lose their houses. Everyone will feel some pain. But at least we avoid a whole-sale melt-down that is borne only by the home-owners (while the folks in silk suits that got us into this mess get off scott-free).
Bailing out bear stearns doesn't help the people losing their homes. Neither will the "stimulus" package of tax refunds. If we don't restore the regulations that prevented this type of nonsense from happening, we're just dumping money down the drain.
Hey I've got an idea. Let's take the 300 billion and spread it out among the 90% of this country that pay for it all. $300 billion divided by 200 million citizens(approx) = $1500 per person(man, woman and child). Let the rich Wall Streeters eat cake. It's our money and I don't think the jackasses in the financial section of New York are a good credit risk.
THIS lONG BLACK TRAIN HAS BEEN COMING DOWN THE TRACKS FOR NEAR 80 YRS
Let's start at the Beginning shall we....
The Great Depression when the psuedo Gov't agency was formed to be a net for which these gamblers could fall an dnever hit the ground.
they take OUR money, Gamble liberally (failure need not be a concern because...) had US the bill with Interest- WIN WIN situation was formulated for their advantage, It's deceivingly referred to a sthe 'Federal Reserve' - Nothing 'Federal " about it- Private banking firms, Nor does it 'Reserve ' anything for US- only them . Add a little Illegal 'Personal Income tax' on wages (for labor= a trade, no profit to be taxed) and Voila you have yourself a Money Laundering & Rackeeting business ordained by the Gov't (unbenounced to most citizens- the term 'Federal ' was an intentionalDeception)
SO TELL ME WHAT DOES TH EUS TREAASURY DO- GET THEM COFFEE EVERY MORNING????
Maybe we should put all of our Social Security into the market so that Wall Street can really fuck us over.
Classic corporate welfare case. Funny how these freemarketeers don't mind government intervention when it bails them out. Maybe something this public will help expose the truth...there is no free market, never has been, and never will be.
"Bailing out the Billionaires" should be the moto for the Republican party.
The truth is what the fed is doing is idiotic and screwing the long term economy over in order to prevent it from correcting. Instead of having us enter the recession we are naturally falling into thanks to horrific economic policy and lack of regulation we are killing the value of the dollar to slow the fall (not stop it). As the value of the dollar rapidly declines gas prices boom, which of course further slows the economy as inflation sours, consumer confidence falls, and even people that could afford their morgages now can't because they can not afford $4-$5 gas, 25% increases to their food budget, and pharmaceutical companies gouging them by raising their prescriptions by 75%. It may seem rather vicious, but the poor would be better off losing homes they have little equity in and renting, while keeping the price of true necessities such as food, water, and energy low. Instead many are being tricked into hanging onto mortgages they can't really afford long term while the price of everything they need sky rockets.
Mr. Morris I thought your comment was hilarious.
Do you really expect anyone to believe this now?
Here's why, two weeks ago the Fed pumped 200 billion dollars into the economy, then the following monday it put another 100 billion dollars in. Since there there have been so many actions by the Fed that I can't keep track of them all.
If you think, as would most of those trying to calm the public down, that this is happening because of some unscrupulous real estate con men, then you better take another look at things.
It's happening because for the last 7 1/2 years, this country under Bush has gone trillions of dollars in debt for the war in Iraq.
Bush & Co. knew that the public would never accept the war, if the economy was bad, so Greenspan made money easy, to keep the public happy. In good times Americans didn't seem to care how much the war was costing.
America wen't into debt, because they were sold the idea that the value of homes would always increase.
So, that papered over the big black hole our economy was developing from some very serious economic problems that you left out in you post.
No. 1 being that America has become a debtor nation, and that debt has been used to take the place of all the manufacturing, and jobs that have happen elsewhere. Debt as Derivatives, were bundled and sold, sliced and diced. This made Wal-Street lots of money, but at the same time it impoverished the Average American.
But that didn't matter, until the Average joe couldn't pay on his debts. So they needed a way to make the Average American unable to walk away from his debts. So, that's where credit card reform and bankrupcy reform came in.
This worked fine until the dollar began to fall, because Bush & Co. kept the printing pressess going day and night. Now that the dollar is falling all that debt isn't worth much.
Hence, Gas is rising, as is food.
America is not in a recession, instead we are experiencing a falling standard of living, which will stay with us, until we reform the poltics of our economy. As long as the free market types are in charge, we will keep heading down the drain. Except of course unless your rich already.
Blame the right people though. This has been comming at us since Regan.
Okay, this might be a really stupid question, but why is the Fed throwing in $30 billion for the Bear Stearns take-over? Is this considered a loan to JP Morgan?
"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..."
The Bush administration has prized incompetence, fraud and un-regulation over the stability of our over-financialized economy. The financial system is one of the few 'industries' left in America today and its crashing. How prophetic you were, Kevin Phillips.
Crony capitalism with a dash of convenient FDR/New Deal. The bailout should have been contingent on someone/ many getting disciplined or banned from 'the street.' But then, the Fed would not do that to their buddies, er cronies, would they? Classic Republican swindle: you and I are paying for it.
We could use some New Deal right now. How about some big infrastructure projects here (instead of Iraq)? That would create middle class jobs, improve the solvency of middle class America, and spread out to other sectors of the economy.
As has been said elswhere, the Strategy of Bushco is to tear down government create chaos and then come in and profit from it.
An elegant and truly beautiful discussion of the current financial crisis; Morris's commentary should be posted on every telephone pole and sign post in the country.
There is a revolution afoot, led by fiscally responsible people not interested in bailing out fiscally irresponsible and possibly corrupt lenders and irresponsible borrowers. Unfortunately, it is the fiscally responsible who are going to have to pay to clean this mess up; and what is really horrifying is that we're not even being asked to pick up the tab...one federal agency after another is simply propping up one failed institution after another with our hard-earned.
Absolutely disgusting.
Don't worry about it. Your children will pay for it, or maybe your grandchildren. Really, I can't believe these people. They even go on TV after doing this and say this is the best thing to do. They just didn't mention that it's the best thing to do for their cronies.
I agree.
Plus congress will fight tooth and nail to eliminate a SCHIPS program (for deserving children) just to save bucks from the budget BUT, will have no problem giving away MILLIONS OF OUR TAX MONEY TO WALL STREET WITHOUT ANY PUBLIC DISCUSSION AT ALL!
My daughter (who is 14) doesn't live in this country so I guess she won't be paying for it. I guess there's an upside to everything.
You must be logged in to comment. Log in or connect with
