On the Bear Stearns Situation

There were some fast-moving developments in the Bear Stearns situation.

Pushed to the brink of collapse by the mortgage crisis, Bear Stearns Cos. agreed -- after prodding by the federal government -- to be sold to J.P. Morgan Chase & Co. for the fire-sale price of $2 a share in stock, or about $236 million.

Bear Stearns had a stock-market value of about $3.5 billion as of Friday -- and was worth $20 billion in January 2007. But the crisis of confidence that swept the firm and fueled a customer exodus in recent days left Bear Stearns with a horrible choice: sell the firm -- at any price -- to a big bank willing to assume its trading obligations or file for bankruptcy.

"At the end of the day, what Bear Stearns was looking at was either taking $2 a share or going bust," said one person involved in the negotiations. "Those were the only options."

To help facilitate the deal, the Federal Reserve is taking the extraordinary step of providing as much as $30 billion in financing for Bear Stearns's less-liquid assets, such as mortgage securities that the firm has been unable to sell, in what is believed to be the largest Fed advance on record to a single company. Fed officials wouldn't describe the exact financing terms or assets involved. But if those assets decline in value, the Fed would bear any loss, not J.P. Morgan.

.....

Former Treasury Secretary Robert Rubin last week described the situation as "uncharted waters," a view echoed privately by top government officials. Those officials have been scrambling to come up with new tools because the old ones aren't suited for this 21st-century crisis, in which financial innovation has rendered many institutions not "too big too fail," but "too interconnected to be allowed to fail suddenly."

Let's make some observations:

-- For all practical purposes, Bear Stearns is bankrupt. Despite the shotgun nature of the Bear/JP Morgan deal, Bear would not have agreed to a $2/share valuation unless the damage to their business was extremely severe.

-- JPM swooped in quickly on this deal. My guess is they have been watching this situation for some time and waited for the right moment to get this deal. All the players lined up too quickly in JPM's favor for this to be a happy coincidence. JPM sees a play here and went for it. This actually is good news. If there are other firms in financial straights right now, others know about it. The Fed has demonstrated they will help to finance the deal. In short, if another firm goes bankrupt it will be a quick procedure to deal with it.

-- The Federal Reserve is scared shitless. There is no reason for them to get involved in this deal unless they were worried about one of two things (and probably both): 1.) the ripple effect and/or 2.) other banks in a similar situation. The Fed is looking for any tool (and making some new ones up) to prevent a system wide crisis.

-- Last week S&P announced the end of the writedowns at the big banks was near an end. Almost on cue, events demonstrated how hapless S&P has become when it comes to credit analysis.

To combat further problems, the Fed has lowered the discount rate and expanded its credit facilities.:

The Federal Reserve, struggling to prevent a meltdown in financial markets, cut the rate on direct loans to banks and became lender of last resort to the biggest dealers in U.S. government bonds.

In its first weekend emergency action in almost three decades, the central bank lowered the so-called discount rate by a quarter of a percentage point to 3.25 percent. The Fed also will lend to the 20 firms that buy Treasury securities directly from it. In a further step, the Fed will provide up to $30 billion to JPMorgan Chase & Co. to help it finance the purchase of Bear Stearns Cos. after a run on Wall Street's fifth-largest securities firm.

``It is a serious extension of putting the Federal Reserve's balance sheet in harm's way,'' said Vincent Reinhart, former director of the Division of Monetary Affairs at the Fed and now a scholar at the American Enterprise Institute in Washington. ``That's got to tell you the economy is in a pretty precarious state.''

The move is Chairman Ben S. Bernanke's latest step to alleviate a seven-month credit squeeze that's probably pushed the U.S. into a recession. The dollar tumbled to a 12-year low against the yen and Treasury notes rallied as traders increased bets that officials will reduce their main rate by 1 percentage point when they meet tomorrow.

`Race to the Bottom'

``Clearly, the Fed is trying to provide more liquidity to prevent a more vicious cycle and race to the bottom,'' said Gary Schlossberg, senior economist at Wells Capital Management in San Francisco, which oversees $200 billion. ``The problem is there's so much concern about credit quality that now there are solvency issues, and it's something the Fed has a more difficult time dealing with.''

I was listening to Bloomberg this morning and someone commented that Bernanke is a student of the great depression and that knowledge was serving him well. I agree with that sentiment. I have made a great deal of fun at Bernanke's expense over the past few months. Frankly, I feel a great deal of empathy for him because he is between a rock and hard place.

However, I understand his reasoning for taking these moves. Simply put, Bernanke is trying to prevent a financial sector meltdown.

The central problem the Fed faces right now is their tools are not designed for the problems we face. What we have right now is a collateral and counter-party crisis. That means two things.

1.) The collateral crisis means that collateral on bank's balance sheets isn't performing as well as advertised. Basically, any bond backed by mortgages is in trouble because homeowners aren't paying their mortgages. That means banks who hold mortgages aren't getting the payments they should be getting. As a result, banks balance sheets -- which serve as the basis for their ability to extend credit -- are in serious trouble. That means...

2.) Anyone who might take out a loan might not pay it back. This is called counter-party risk. It simply means that everyone is at risk of defaulting on a loan right now. That means loans aren't getting made. In an economy like the US economy where credit is a prerequisite to everything, that is the kiss of death.

The Fed can provide plenty of money. Over the last 9 months they have flooded the market with cash. But that does not good if people aren't willing to use it. And right now, no one wants to loan anybody any money. That's the central problem -- and so long as that exists there will be a mis-match between the Fed's policy tools and the market's problems.

Let's look to the future:

This week Bear, Goldman Sachs (GS), Lehman Brothers (LEH) and Morgan Stanley (MS) are slated to report results for their first quarter, ended in February. The results won't be pretty.

The new name on everybody's lips is Lehman Brothers:

Lehman Brothers Holdings Inc. Monday said the bank's liquidity position remains strong, as the fire sale of Bear Stearns to J.P. Morgan to prevent bankruptcy increased speculation that other big U.S. brokerages would come under pressure.

"Our liquidity position is and continues to be strong," said Matthew Russell, head of corporate communications for Lehman Brothers Asia Pacific.

His statement came after people familiar with the situation said DBS Group Holdings, Southeast Asia's biggest bank by market capitalization, has asked several traders not to enter new transactions with Lehman Brothers.

"DBS has sent an internal e-mail saying it would not deal with Lehman Brothers from now on. It said DBS shouldn't enter into new dealings with Lehman or Bear Stearns," one person said. Another person said that the email didn't mention anything about closing existing positions with Lehman, which appear to remain in place for now.

DBS's move follows the near-collapse of Bear Stearns Cos. Friday, a similar pullback by counterparties caused the bank's liquidity to dry up. J.P. Morgan Chase & Co. Monday agreed to buy Bear Stearns for $2 a share in a bid to avert a bankruptcy by the U.S. investment bank. (See related article).

Comments

[mbbythesea]

Like a faulty automobile or other dangerous consumer product, the adjustable rate mortgage (ARM) with the intro rate that resets to a higher untenable rate (forcing consumers to sell, refinance or be foreclosed on) should be recalled immediately.
In the guise of 'counseling' organizations recommended by the White House (like Hope Now Alliance) are raking people over the coals to modify their loans into the worst possible deals for consumers (and the most profitable for Lenders). They don't care, they will tell people get a 2nd or 3rd job, sell your vehicle. Forget about the kids & your family obligations. In the meantime, plunging property values are disqualifying people out of good deal refis. The new FHA loan product won't work for most for this reason. The solution? But for excessive lender greed, at today's rates loans could be profitably 'reset' to 30 year fixed loans at 5.5%---abo­ut the same as most intro rates. No more massive foreclosures. Property values will recover for all. Contact your congressman and senator and tell them to mandate a product recall and loan modification to these reasonable terms. Why not? Americans are paying for Lender bailouts, we desire this considerat­ion--which effect every home's value.

[LaFeminazi]

Its called Nationalisation

Of the risk

but

Not the benefits.

[luckyt]

I read articles such as your's, which present to the people of this country historical as well as present facts about the economic policies and the destuctive nature and course in which the Republican Party has taken this Nation. However, come November the idiosyncratic diversity of thought of our people will show that we are still divided along Racial Lines, and that the comments of Reverend Wright will outweigh any economic hardship, or wars they may have to endure under a John MacCain Presidency.

[mmmartymm]

It seems to me that the major asset Bear Sterns may have had was their employees and shareholders. How possible is it that these people are buying up these stocks in order to purchase the company themselves? If they are only getting a $2 per share price when they don't do something, it seems to me with enough people and backing and some organization, they could name their own price.

[katok]

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?

[Podewumun]

"Cock-eyed Optimism" is NOT a viable economic theory.

[JAMES GORMAN]

IT AIN'T MAYBE--we are in a financial melt-down, and the FED is trying to use a row-boat
instead of a battle-ship--better still, Bush is in a row-boat--well aged and leaking--with a few billion
in hand-outs so I can afford a new vacuum cleaner and save American. Nonsense and idiocy--the
rich cats in stocks are saving their corporage asses at our expense. It was all reckless greed,
and pay day time is here: we will all suffer--and of coure, our government will bail them all out.
And one mus not ever regard that as socialism Socialism is when you spend a mere 30 million
to give un-insured pills or vacines to kids whose moms and dads (at work daily) can't afford coverage.
Stuff like this got rid of a Tsar at the start of the last century (1917) and maybe around 2017 we can
can be rid the the new version of Tsar--the Romanov's running corporate boards with people like
George Bush as a puppet--or John McCain as George III--echoing another earlier royal block-head. jmc

[Hansharriet]

You got it right, James Gorman!
In 1989 the dictatorial ruthless form of so- called communism died and the capitalist vultures rejoiced and moved in. A dream came true. We are Number One, the leaders of the free world. Our hands soaked in the blood of 4000 Americans and over a hundred times that many innocent Iraqis. Just for oil or rather the profits from oil. We abandoned the search for terrorists, because, if we would find Bin-Laden, we would have no justification for curtailing the civil liberties of the American people.
The chicken are coming home to roost. Now Capitalism is going into a slow meltdown. It seems that Capitalism without Communism cannot exist. They feed on each other. Forunately Putin is becoming the bad boy and will help us to create another Cold War period. this will let the "Defense" Contractors - or should we call them War Contractors - continue making their exhorbiting profits. And the economy will have an upswing.
In the meantime they are taking away our civil liberties and civil rights and they are stealing our Treasury blind. Thank you, Bush, Cheney & Co. The Mafia were Saints compared to these White House gangsters. There is no money for Healthcare, Education or the Homeless, only for Wall Street

[skyblu]

At the end of the day friends, it is not about partisan politics anymore. Once upon a time, perhaps it was, but this too is in doubt. "The fault, dear Brutus, lies not in the stars (in this case, partisan politics) but in ourselves, that we are such underlings­."

For every blast against the GOP,is an equally legitimate blast against the Dem Party; devastating for working Americans, you and me. Neither act according to ethics, irrespective of Party or any other false divisive label slapped onto the American people, otherise this country would not be imploding. When there is no internal ethical compass within to guide individuals and no ethical compass within society or the culture to reinforce ethical behavior, the banality of evil runs rampant across the board. Greed, sloth, selfishness, destruction; "me first" and the h*ll with you' governs. Easy is it to cast blame on a political party than to cast blame on oneself for the conduct of sins of omission or commission and to work for the common good of this country, the American people, and its future.

[BillZBubb]

Baloney. When the Republicans are in charge of the economy we always have one financial meltdown after another followed by government bailouts. And now, the Republicans are the party of debt, debt, and more debt on top of that. That goes beyond irresponsible.

The Democrats may have their faults and moral failings just like the Republicans, but on economic issues, the Republicans always fail because their fundamental belief system is absurd and ignores historical evidence.

So, I am sorry, but this is partisan to the core.

[BrooklynBookWorm]

First off, it's "financial STRAITS," meaning "narrow passage for a flow of capital," not "financial STRAIGHTS," referring to heterosexual brokers and bankers. Does Huff Post have copy editors?

Second, there is speculation here in New York City that Chase may be looking for a way out of its commitment to put up a new building at Ground Zero. The goal was to build a state-of-the-art trading floor -- wirh a tax subsidy. But clearing the site for the new building is many months behind schedule, and there is such a facility in the building Chase is acquiring from Bear Stearns, directly across the street from its corporate HQ. Why pay full price when you can get your trading floor on sale? Blue light specials are rare indeed on Madison Avenue.

[Janelynne]

The Bear Stearns meltdown is the harbinger for the class war to come. The fed has no problems bailing out the bankers, but won't bother to bail out Americans. MIddle class America and underclass America were snookered by the bad loans, and we will pay the individual costs as well as the collective costs in our taxes. And we will suffer the costs in the cutbacks to our "Entitleme­nts."

Meanwhile, the perpetrators of the bad loans, the officers of the banks will float away in their golden parachutes. There are no laws to protect Americans, and there are no regulations to stem the corruption. I heard Bear Stearns referred to as "venerable". Who says they are venerable or ever were? Venerable has come to mean: the wealthy buy into it.

So when the whole thing goes "poof" the fed runs in to save the wealthy from themselves. And the middle class, and the marginal classes sit here and watch the important people squirm. They, not us, will have to sell their second homes, lose their staff, sell off their fine art, and figure out how to find new jobs. Our lives won't change much, because we are already doing that. Everything is costing more and more, and we are falling farther and farther behind. This is not a cataclism for us, it is chronic erosion of the American way of life.

For the middle class, it is just another headline. We are not venerable, you see.

[LuckyBlessed]

Hey boys and girls, “It’s a beautiful day in the neighborhood, won’t you be my neighbor?” Time for Ms. Roger’s neighborhood mortgage 101.

Dietrich said they don’t know where this thing is going and neither did the people at the top. I spent the last 10 years of my life in the mortgage biz top to bottom, no I didn’t make much money, AND WHAT A LONG STRANGE TRIP IT WAS! I outlined a 30+ chapter book and pitched a show in LA two years ago, the day after I was laid off by the COO, whose son I supervised. But I digress.

I worked for a small lender, but for various reasons we could negotiate like the Big Dog (at the time) Countrywide. Two years ago in a boardroom I was reviewing bulletins I prepared for underwriting guidelines for a new set of products we were going to offer from either Bear Stearns or Lehman Bros. We jokingly referred to the loans as the NINA, the SISA, and the SantaMaria. I had some concerns.

One of the biggest problems with this whole mess is that no one understands what the terms mean, my first boss, known to the public as the EVIL mortgage broker (has anyone questioned REALTORS?, Realtors whose commission comes from a higher price home they can shove someone into, on no, cause that’s a trademark owned by the Natl Assoc of Realtors and as such they are above reproach, see Mary Umberger’s rag about the movie “Realtors”­.) Once again I digress.

My evil mortgage broker boss was big on education and started out by defining terms.

Conventional- these are loans sellable to Fannie Mae and Freddie Mac, Government Sponsored Entities and with loan to values (LTVs) above 80% require mortgage insurance from private insurers and Fannie and Freddie have expanded these to 100% LTV.
Federal Housing Administration (FHA)- these loans are insured by Upfront Mortgage Insurance Premium and monthly Mortgage Insurance Premium. These loans can go up 97% LTV. While having a lower rate and payment than many conventional products and subprime, lost market share b/c certain Realtors, I’m sorry-real-estate professionals and loan officers, didn’t like the inspections, loan limits, and the fact their customers would have to come up with a down payment or gift for the 3%.
Rural Development(RD- very similar to FHA.

Everything else outside of these loans is Non-conforming, some of which is subprime. If you have a trailer, non-conforming. If you have a home in CA above the old $417,000 limit, non-conforming, Jumbo loans.

Sub-prime- this gets a little tricky, but traditionally this has been everything outside of the Conventional, FHA, RD, Trailers, and Jumbos. What’s the difference?? Subprime borrowers don’t meet credit score guidelines, job requirements, and don’t have much money to put down.

WHAT VERY FEW haven’t understood is that FHA has been doing Subprime Borrowers, credit scores in the 500s, 2 years out of Chapter 7, successfully for years, but with limits certain loan officers and Realtors didn’t like, like verifying that pesky job or money for a down payment. It’s these customers who really got shafted into high interest rate loans with pre-payment penalties as high as 6 months interest. Or higher rate and high, high mortgage insurance premiums into the hundreds of dollars versus forty some dollars on $100,000 FHA mortgage. They called them A- loans, and who did these loans boys and girls? Fannie Mae and Freddie Mac, that’s right boys and girls, they did subprime.

Now, back to the NINA, the SISA, and the SantaMaria. NINA- No Income No Asset ie. No job and No money to put down, SISA – just “state”, wink, wink, the income and money in the bank. And what concerned me about these from Bear Stearns and Lehman Bros. wasn’t the fact that they were doing these No Verification loans, b/c Fannie Mae and Freddie Mac had been doing them for years (that’s right boys and girls) with their automated systems at higher scores. But it was that the credit scores were very low. Short version, just pull somebody off the streets and give them a loan. We never did these loans, my boss wasn’t very happy with me boys and girls.

Other loans we didn’t do to the dismay of many. The “Option” arms. All I want to know is who has most of these babies so I can bet against them. You had the “option” to pay various payments. If you paid the lowest payment then you were borrowing against the house every month, but no worries, the value will keep going up, right boys and girls? The rate jumps and you can’t borrow against the home anymore, then you have to make the real payment. And you “have to” because you owe more than it’s worth.

This didn’t just happen overnight. The envelope was pushed for years by loan officers, Realtors, account reps, and execs. And when things are busy you hire all these people, then you look out at all of these cubicles, these faces and families when it slows down and you try to figure how to make up the lost volume so you can keep these people employed. I did it by getting more FHA business, which I’m sure cost many others’ jobs and put companies under.

I had a job interview the other day, she couldn’t understand why I didn’t stay in the mortgage business.

[StephenJK]

"Sub-prime- this gets a little tricky, but traditionally this has been everything outside of the Conventional, FHA, RD, Trailers, and Jumbos. What"s the difference?? Subprime borrowers don"t meet credit score guidelines, job requirements, and don"t have much money to put down."

Sounds like someone needed some money. I'm not talking about the borrower.

"NINA- No Income No Asset"

Since when does anyone loan anyone money under these conditions and expect to get their money back?

To me it sounds like someone put a lot of bloody chum in the lending biz waters. Are these unscrupulous lenders to blame? Really? Or was it some measure, carrot-stick, whatever that was put in place that put these lenders into a feeding frenzy?

Now they're like the mosquitoe who partook in too much "food". Bloated and too heavy to move under their own weight. Now the giant hand is coming to swat them meanwhile all that hard earned "food" will be wasted in a nasty infectious explosion.

[Dajo]

I posted earlier but for some reason it wasn't posted. I used the S word SOCIALISM. I simply stated that IMO, We are in the death throws of Capitalism. Capitalism has been allowed to run Amok since the Reaga ERA, it came to it's ugle head under Bush. Tax Cuts, Bailouts, and government contracts for the Corporate Rich, while the Workers lose thier low paying jobs, lose their benefits and pensions.
Plenty of Corporate Welfare but nothing for the Poor and the Working Class. Pathetic.
Time for a new economic plan. Socialism!!!

[Guitarsandmore]

Deregulation has run its course out to an extremely bad end. Yes, there were some jobs created and yes there were some new products created by deregulation but on balance many other jobs were lost.

New laws that keep the consumer safe from loan sharks are not socialistic laws. Legislation that prevents electric companies from overcharging customers in a captive market are not socialistic. Restructuring hospitals into non profit institutions does not mean we have succumbed to socialism. It just makes good sense to protect the citizens from rip off artists and at the same time make sure the industry will stay afloat with a normal small profit.

[veracity]

ummm..
That is exactly the point, Dajo.. what we have here is socialism, SOCIALISM FOR THE RICH!(wealthy bankers and financial institution execs, etc.) Indeed, we always have had socialism for the wealthy, as Republican author (former Nixon advisor) Kevin Phillips wrote in his excellent book, "Wealth and Democracy" from wa-ay back in 2002. (--"Phillips' new book, Wealth and Democracy, is an historical argument that ever 'freer' markets have been leading us to plutocracy­:...The rule of the rich."--)
http://www.pbs.org/newshour/bb/economy/july-dec02/democracy_7-17.html
What is amazing is how we Americans have been trained like Pavlov dogs to despise the word "socialist" - or even analyze that that is what is happening when it recurrs time after time - for the wealthy - in our national economic policy.
Even more glaring is the fact that _THE_ central factor of our entire American culture - our automotive lifestyle - would be quite impossible without spending billions of government "TAX AND SPEND _Taxpayer Dollars_ on our public roads and highways - our SOCIALIZED transportation network!
HOW can "conservatives" decry "big government tax-and-spend spending" - when they hop in their cars and trucks and drive out to their suburban homes or ranches??
Answer: Because Democrats stopped STANDING UP for the progress, policies, and programs of the past 100 years of increasingly Progressive, democratic politics, programs the very define and enable the upwardly mobile American lifestyle we have taken for granted to now.
We ALLOW Righties to blather on with their "HATE SOCIALISM!" talking points, even though entire swaths of American industry - very CONSERVATVIE industries - are COMPLETELY DEPENDENT on our SOCIALIZED road and highway network, from the OIL INDUSTRY to the TRUCKING industry , to of course the AUTO industry, construction industry, highway industry, real estate industry, and financial industry which underwrites, and profits from, each of the above. FIRST comes the BIG GOVERNMET-SPENNDING ROADS... THEN come the suburban communities, developers, real estate agents, home builders, manufacturers, etc.
It is like we Americans are like the children (or rats) in the story of the Peid Piper... being led to our demise by the sweet sounds of "conservative" mantra that "SOCIALISM IS BAD!" even though our socialized roads and highways are the foundation upon which our entire economy has been built.

[DietrichMoody]

These people like Paulson aren't scared shit less because they don't know enough to be. Look at their fearless leader, Bush. Their heads are in the clouds.

THEY HAVE NO IDEA WHERE THIS IS GOING. That is partly why Greenspan does not want anything to do with this. Even though he helped create the whole environment.

Nobody knows, and shouldn't speculate.

[realist333]

This is a "Chicken Little" flap. The sky isn't falling, nor is the economy.
Failures like Bear Stearns aren't fun and fortunately don't happen often. But the Bear Stears bailout is peanuts compared with the Long Term Capital Management debacle a few years ago. It was the New York Fed, not the Chairman, who oversaw the LTCM refinancing. It was bigger and potentially far more perilous.
Oh, and (ahem!) it happened during the Clinton presidency.

[andyboy]

realist333,

The economy isn't falling? I beg to differ my good man. Your in deep denial.

Then you go on to write that this is all peanuts as if the bad news is now officially over and everything is just fine. So I take it tommorow we all wake up to a stock market at 15,000 (where it SHOULD be) and steak on the table?

For a realist you have mighty Pollyannish views. If only saying a thing made it so you'd probably be considered a genius. Instead of just cynical and dishonest.

I wonder just how far a neo-con would go try to maintain the unregulated wholesale fleecing of America on every imaginable front?

This is nothing more than the Wild Wild West with cellphones and laptops. Your country is being systematically torn apart and eaten whole by animals and your actually cheering them on.

Enjoy the slaughter. When it gets to you you'll be screeching.

There's nothing more ugly than selfish, greedy pigs who care for nothing but themselves. Your minimizing the suffering of millions of Americans gleefully. I guess one can hazard a guess you don't work for Bear Stearns or are a former Enron employee.

Nothing bothers a neo-con. No conscience. Just good credit. For now.

[Rog49Thomas]

For "Realist"333

Beg to differ ...

LTCM was solved within a week and the markets resumed functioning.

This crisis has been going on since August.

The Fed has undertaken a series of rate cuts, including an extraordinary one between Fed meetings.
And there is probably another one in the cards.

It has thrown $200bn at the problem in terms of financing and has provided term financing (as opposed to short term). It's taking "stuff" as collateral that it wouldn't have in the past..

The government has passed its "stimulus" package (don't spend that $600 all at once!)

The markets have not reacted in a positive way.

Like the surge in Iraq, this financial surge ain't working.

You'd be well advised to be very scared. Particularly given Pan's record of flawless incompetence.

[Rog49Thomas]

For Realist 333

I do have to join with you in looking back on those dark days of the Clinton Presidency. I well remember the economic suffering and loss of confidence in our nation.

But, what a difference seven years can make:

(1) Our currency is much much stronger than when Clinton was in the White House

(2) Pan has reined in Clinton's profligate spending and a balanced budget and paydown of our national debt is on the horizon

(3) Our financial system is robust and strong - leading the world (as of course it should)

(4) The price of gasoline has been driven down to unprecedented levels

When my friends in the Republican Party said that God had personally selected Pan to be our President, I was initially skeptical.

I no longer am.

[Rog49Thomas]

For Realist333

A couple more chicken lilttles have added their voices and I relay them to you.

http://www.ft.com/cms/s/0/682b8db0-f0a0-11dc-ba7c-0000779fd2ac.html

John Lipsky, First Deputy Managing Director

Mr Lipsky warned: "The risks of further escalation of this crisis are rising and decisive policy action will be needed."
He said this crisis was different from recent past crises because both the financial markets and the banking system "have faltered simultaneously". The first priority had to be to reverse the "spreading strains" in global financial markets and restore the functioning of the financial system in advanced economies.
http://www.ft.com/cms/s/0/86e11670-f41b-11dc-aaad-0000779fd2ac.html

Dominque Strauss-Kahn, Head of IMF

”Obviously the financial markets crisis which started in the United States is now more serious and even more global than it was a few weeks ago. The risks of contagion are very high,” he said.

[andyboy]

Hi Hale you said:

"That's the central problem -- and so long as that exists there will be a mis-match between the Fed's policy tools and the market's problems"

The damage is done. The only "tool" the Fed has is your money. The Fed can't engineer a robust, fair, honest, marketplace without proper regulation. The sub-prime racket is a RICO case. It's a product of the government (The Fed) looking the other way while financiers cheated, gouged and gorged.

Now a projected 7,000 of Bear Stearns 15,000 employees will be told to take a hike. Your bosses were so spectacularly greedy and criminal they brought the whole house down around them to collect short term profits and then left the firm's stock price to burn.

This is nothing more than another Enron type swindle. 33% of Bears stock is owned by employees and it's now worth nothing. People's lives ruined. Their retirement gone.

The Fed's job is to prevent this stuff from happening. There are plenty of actuaries and loan underwriters and risk managers who saw all this coming ten miles away. They got while the getting was good and damned the consequences. But who can blame these guys from robbing the henhouse when the door is so blatantly left ajar? Evidence of massive collusion between the Fed and the Banks is as plain as the nose on your face.

Consider the logic of charging a customer who has a lower credit worthiness a HIGHER interest rate thus making it more difficult to pay the loan. Well, actually there is no logic in that at all. The prudent thing to do is not to make a loan at all but of course in America today noone knows the meaning of the word no. Your ambitious financier, looking for ever more "exotic" ways (I call them criminal ways) to increase profit gazed upon the completely un-regulated market and saw that it was ripe for corrupt Mafia style usery. In fact they lobbied for decades to create just such conditions.

I wouldn't be applauding the Fed about now. They're doing nothing but robbing Peter (you) to pay Paul (their cronies). The Fed is spilling YOUR cookie jar out on the counter and breaking YOUR piggy bank in a desperate attempt to look like it isn't anything but an accomplice to dirty thieves. These people are the new gangsters gone legit. The cycle started with Enron and has been cascading end over end for 8 long years of pillage and economic perversion. This idea that American businessmen must be free to perpetrate any and all kinds of scams, schemes and cons on hapless consumers is the "central" problem here Hale.

I wrote in a previous post that some things, when not maintained properly, break down and are ruined for good. Like a junk car they are consigned to the scrap heap. Do you see people lining up to install brand new engines in rusted out old broken down hoopdies? Bear Sterns should have been left to die a quiet if somewhat undiginified death. It's upper echelon executives should be prosecuted under RICO laws. Is this the market reform we heard so much lip service from George Bush about post Enron? America is under economic assault from it's own captains of industry and we lack the will to face up to it. The old axiom has been turned on it's head.

In America, crime does pay. Big.

[mlambert890]

This is a great post until the last part. If Bear dies, they take out most of the US economy with them. They are the B side of too many credit default swap arrangements. If Bear dies without another entity assuming their obligations, the bond market literally falls out.

Bear *can't* be left to die a "quiet" death. That "quiet" death would usher in a depression as the banking system collapsed. We're talking hundreds of billions of additional write downs and wealth evaporation if Bear just disappeared.

As a result, the Fed pushes JPMC to assume Bear obligations and promises a special loan rate to finance it. Yes this falls on us. Yes this sucks. Yes sub-prime was criminal. Yes there should be prosecutions, BUT, the Fed *is* doing the right thing here in attempting to intervene.

Your post was good, but I think the blog entry is spot on.

[andyboy]

mlambert890,

Thanks for your response. This idea that the Fed can swoop in and "save" the economy from itself is a pipe dream. Your underlying premise that somehow what the Fed did today "fixed" something and now everything is alright is faulty I'm afraid.

What good is a credit line that no one can use to sell a loan from? Do you know how many millions of foreclosures have occurred and how many millions more are about to?

Can you imagine the second and third tier effects we are about to face in the credit card business? Auto loans? There isn't some vast pool of home buyers out there lining up my friend.

I saw where another blogger who was very eager to calm everyone's nerves wrote about the 900 billion dollars the Fed has at it's disposal to shore up the economy so not to worry they got our back. I'd hate to be the guy to go ask them to produce it. And I'd really hate to see the shambles the economy would be in if it was actually used up. That's if it actually exists in the first place.

Tapping the Fed is a very poor way of running a supposed "free market" capitalist economy. Anathema I believe is the term. But I hope your right for God's sake. If your not we're in for some bad times.

Let's remember something here. There isn't some rule written somewhere that says you can just avoid a Depression by willing yourself out of it. The bills still come due. If you don't pay you sink into default. All that sweet Fed cash isn't going to do a thing for the citizens who are already left crumpled up and laying in the ditch. Ask the Bear Stearns employee who's stock is worthless and is hitting the street with nothing what this Fed money is doing for him.

[marleysghost]

George Bush is consistent. Having bankrupted four companies, he set his sights on flushing the US economy and political capital down the toilet. And he has had a lot of help from his Republican posse who would like nothing better than to sell us to the Chinese and the Saudis as long as his family can keep the money.