Bear Stearns Bailout Paves Way For $1+ Trillion U.S. Homeowner Rescue Plan

Bummed about all the money you're losing on the value of your house? Don't worry about it! You live in Bailout Nation.

The Bear Stearns collapse was a tragedy for 14,000 hard-working Bear (BSC) employees, all of whom deserved a more vigilant/competent management team. It was also a major bummer for passive shareholders, who got their heads handed to them. But thanks to the generosity of Ben Bernanke, Hank Paulson, and U.S. taxpayers, both camps are walking away with about $10 more than they deserve.

Bernanke and Paulson tried to engineer the Bear Stearns bailout so it didn't look like a bailout -- by insisting on a deminimus $2 takeout price. But by guaranteeing $30 billion of Bear Stearns balance sheet assets, the Fed effectively transformed Bear Stearns into a Treasury Bill. This did a lot more than save Bear from bankruptcy: It made it worth vastly more than the zero it would have been worth had the government not stepped in. And Bear Stearns shareholders, understandably, jumped on this.

Bear Stearns shareholders still got poleaxed, so the Fed will still be able to parrot its "No Bailout" line. But actions speak louder than words. U.S. citizens who gambled on ever-rising home prices are a far more sympathetic lot than Bear Stearns traders and shareholders (and, more importantly, they wield a lot more voting power--especially in an election year).

So get ready for the Fed's next great taxpayer-funded bailout, which is now almost guaranteed: The $1+ Trillion U.S. Homeowner Rescue Plan.

(Wait--you're annoyed that you didn't behave irresponsibly and buy a house that you couldn't afford and you don't want your tax dollars going to help those who did? Tough!)

See Also:
More Moral Hazard: Now Let's Watch Bear and JP Morgan Play the Fed
SEC Saves Bear Stearns Alan Schwartz--Not a Liar!

Comments

[crazyv]

now that JPMorgan has raised the price to close to $10/share even the argument that the shareholders got wiped out no longer applies. Simple question would JPM have paid $10 without the Fed back up? Clearly not and so you an me as tax payers have just handed $10/share to the fat cats at Bear Stearns.

[Tellurider]

The only real solution is to Bail-out everyone.
Which includes the Realtors, the Appraisers, the Mortgage Lenders and Brokers, the Wall Street investment bankers and brokers that all conspired to invent and sell for huge fees this new form of "securitized debt".
Let's add to the bail-out list the pension funds, investment funds, banks and individuals all around the world that unknowingly bought this"junk" and most of all the people of this country who depended once again on their government to protect them from just such a "perfect storm" as no regulation of the mortgage industry and no regulation of Wall Street and the "glut" of world wide savings which funded the scam.
The problem is too big and too perilous to play out everyone's petty dream of seeing people and families throughout our country and the world be punished for acts that for the most part were just bad judgment, hubris, and bad luck.
Millions and million of people that did not borrow money and yes, never missed a payment in their life are going to also lose their homes, their jobs and their dignity if this disaster is allowed to continue.
While you are out there beating the drum and war-whooping for your neighbor's demise--look in the mirror. You may be next.

[Neil Grossman - Huffpost Blogger]

This is more than a bailout of employees and shareholders; it is also a bailout of debtholders. This probably includes money market funds, bond funds, pension funds, endowments, sovereign wealth funds---i wouldn't be surprised if it even protected money lying around in campaign coffers. If Bear had been forced into bankruptcy, losses by creditors could have easily exceeded losses to shareholders. I have a sneaking suspicion Paulke (Paulson and Bernanke) were most afraid of this; a true run on the bank that could have spread everywhere.
Nevertheless, there is no more reason to protect debtholders than shareholders. At the end of the day, they have been paid a considerable premium for the risk of holding the debt of Bear Stearns. If the debtholders had wanted a risk-free investment they could have bought Treasuries, but they would have received much less interest over time. Sadly for everyone else, these fortunate investors received the best of both worlds -- excess return on what has become a government guaranteed investment. Shouldn't we all feel sheepish.
There really should be one simple rule. NO BAILOUTS. Investments are made with the expectation of earning more return than is available from a risk-free alternative. The downside is that you can lose money. If for any reason the resources of the American taxpayer are called upon to protect a private enterprise, as has been the case with Bear Stearns, the taxpayer should be compensated like any private investor. Let's all pretend we are Warren Buffett.

[WIpatriot]

STOP THE ILLEGAL BAILOUTS!

[FreedomCorpse]

I was so silly to buy a house that did not exceed $10,000 a year in interest payments, I couldn't get a mortgage interest deduction like those that did pay so much more for their mcshacks. Its quite a badly rigged system. It will on fire sometime later this year as it was all leveraged to the hilt and spun off into financial world space....now it glows in the dark.

[NABNYC]

It's more accurately called another bailout of the financial institutions. As I understand Hillary's latest proposal, if the bank loaned $500,000 to the home buyer, but the house is now worth $400,000 and the buyer's in default, the generous taxpayers will give the bank $100,000 as a reward for making unsecured loans to people who had no credit, no savings, no down payment, and no job. In the meantime, Hillary will also pass new laws saying no citizen can sue any financial institution ever for anything. Thanks Hillary. Oh yeah, and one more thing: social security and medicare are both teetering on the edge and will likely be eliminated by the neocons, just like they took away sick leave, holidays, the 8-hour day, overtime pay, job security, health care, and pensions. Thanks to both Republicans and Democrats in Congress for holding the citizens down while the neocons screwed us, stole our money, threw us out of our homes, and took our jobs to China. Good job Democrats. Send me another e-mail asking for a contribution. Then hold your breath while you wait for my reply.

[WIpatriot]

Yeah, that plan of hers made absolutely zero sense.

[Thermodynamics]

I smell another rat. Bernacke could have bailed out Bear for one-tenth as much. He is spending $30 billion at the top of a leveraged financial pyramid.

Bear was stuck with leveraged derivatives. Those derivatives probably only represented about $1 billion or less in actual mortgages. Am I right?

[LRM216]

Yeah, I'm annoyed - big time annoyed. I don't enjoy watching anyone's foundation break from underneath them; however, I bought what I could afford and still liked - not what I liked but couldn't afford. Yeah, they were greedy creeps handing out the mortgage money, but we all make our own decisions in the end - good or bad and, as adults, have to learn to live with them. I have a mortgage I can afford, my home equity is more than 60% of my loan, I pay each and every bill I have on time and for more than the minimum, but still live basically paycheck to paycheck. I'm tired of jerk-offs getting bailed out at the good guys' expense.

[rmcneal103]

I couldn't agree more.

[outnow]

"I'm from the government and I'm here to help you." Ronald Reagan - preaching the deregulation theme song. Scary isn't it? The "invisible hand" of the free market indeed! I paid cash for my home. Who is going to bail me out? Americans are the only people in the world who put 5% down on a home and mortgage it over thirty years and claim that they "own it." What a joke we have become. Borrowing, running deficits and starting wars to stimulate the economy. Now that we need a "jump start," we've already used the "tools" in our capitalist tool kit. A zero savings rate, no manufacturing sector, more military spending, record deficits, and an unbalanced budget. The U.S. .is morally, legally, and equitably bankrupt. Starting a new war, running more deficits or running an even larger trade deficit are not going to work because we just did that.

[MilwaukeeDan]

outnow, I'm with you, paid cash back in the early 1990s(when homes where more affordable and there where more good paying jobs). Does anyone ever calculate how much in interest you pay the bank on that 30 year rape called a mortgage? David Walker and Peter Schiff are two guys that make sense to me, too bad few Americans are listening.

[WIpatriot]

I did, Dan, and it made me sick. But then, I'm playying on paying off my mortgage early and the bank won't get what they thought they were going to get...who has the last laugh, now?

Ha ha! What?!

[vippy]

First of all, one is not a home-owner if you finance it for 15 or 30 years' loan. Compare that with Europe's. And when I built my home, a modest 3 bedroom in 1979 with a 9.75%
interest, I paid something like $ 165,000 back, and even with today's prices it would
never reach that estimate should I sell it and recoup what I put in it. The recent home prices are unreal, get thrown together in record time, in areas that are flood prone when
it rains heavily and the ground has not yet settled. Amazing.

[abbiehoffmansghost]

Bail away, but if you think that this will not have an affect elsewhere you are delusional. This is nothing more than the obverse side of trickle down economics; the middle and lower middle classes pick up the bill again. How about this: we take all the property and assets of those responsible and give them to those disenfranchise by this greed and those who stupidly and blindly went along with it screw 'em. I know some folks that wouldn't mind living in mansions in the Hamptons and Miami though the residents might not like to see them moving in.

[thegreatgiginthesky]

Isn't it a better plan to change the mortgage amount to what the house is really worth instead of this artificially inflated amount?

[worldtraveller]

This is the worst idea ever and does nothing to solve the problem. What is wrong with this country that everyone feels so self-entitled to everything at others expense nonetheless. I read this sob story in the Wash Post recently about some woman who came to this country 3 years ago from Honduras and making 30k a year losing her 500k house. I mean C"mon I saved 10 years to buy my first house and this person I should feel bad for losing her house. What the hell is she doing buying a half million dollar house? Why is it that instead of saying this bailout is unfair and leaving it at that, must everyone say it"s unfair-so what do I GET!!!

[worldtraveller]

Sorry.. I posted this all messed up and what ends the post actually appears first... if moderator can fix.. great if not.. once again sorry.

[worldtraveller]

Now lets walk this through¦.

[worldtraveller]

1- Mr. A goes out and buys his house 100% financed, making the biggest financial decision of his life, with little thought involved. He pays 500k but now the house is worth 400k. He can"t sell it because the bank won"t let him lower it to 400k. Now the bank resets the loan to 400k, and since Mr. A stil lcan"t pay for it he immediately puts it on the market for 400k, and then sells it for 390k walking away without even a scratch on his credit report. Yaa Hoo for Mr. A!!!

[worldtraveller]

2- Mr. B saved for years and paid 20% for the house next door. He paid the same as Mr. A because he missed the first 3 houses he bid for in the neighborhood as other Mr. A 's were paying whatever they had to, pushing up prices everywhere, since they never really cared what they were paying because they couldn't pay anyway. Had Mr. A not been in the market competing with Mr. B that house never would have gone up in price above 400k forcing Mr. B to pay 500k for it. Mr B makes makes his payments every month. He watches Mr. A sell his house for 375k making his house worth 375k. Of course he still has to pay his mortgage every month on the full amount since he was responsible, while Mr. A walks away without a scratch to his credit score.

[dadw5boys]

THIS IS UNREAL.

[WIpatriot]

Just wait, dad. After all the write downs, and punches below the belt are all over, the financial wizardry will suddenly ADD value to their assets, explaining that the loses were overstated, so we will now have GDP gains, too.

[jsarets]

We have two choices: bail out the broken financial system by taking out a massive long term loan or let it fail in favor of some sort of worldwide economic revolution. There are no good options -- besides not letting this happen in the first place, of course.

[RogerHWerner]

Perhaps Blodget would help explian to use non-economic majors how a Bear Stearn's bankruptcy would have affected the billions of dollars hald as assests for third parties (IRAs, 401ks, pension plans, etc). As I understand the situation, third party assests would have been held up in bankruptcy court for years, negatively affectinbg anyone presently living off them. Maybe I've got this wrong....

[crazyv]

I think you have. Those assets are only being held by Bear as custodian- they are not Bear Sterns assets.

[joebaggadonuts]

Well Henry I am glad that someone finally put this on the table. Why should all the taxpayer money go to the masters of the financial universe, the freebooters and the traders many of whom either pay no taxes or who have corporations who receive their booty for them in offshore locations to avoid recognizing income? Why not send some to the people who actually pay taxes? Possibly the get rich quick crowd of flippers and speculators aren't properly sympathetic victims? How about those folks who were pushed into higher risk mortgages in cooperative schemes between lenders and builders and mortgage brokers?Or how about those who COULD afford them but because of an unexpected loss of a job (perhaps not those who were working as a mortgage broker recently) and now have an uncovered and very expensive life threatening illness? They perhaps deserve something of a safety net, eh? The idea of separating out some victims as deserving is not something the market does well, unless you WANT to push into oblivion those on the edge. What happened to government responsibility for painting bright yellow double lines on the financial transaction highways and enforcing the law against the trucker/mortgage consolidator or pick-up truck/mortgage broker who went over the line and took out that bus full of kids? God forgive them because this public is not in the mood.

[writerjohnny]

With all due respect Henry, most homeowners didn't and don't have anywhere NEAR the control or influence the owner and managers of various mortgage lenders did or do. They fucked up(owners, managers and their employees) - not the borrowers.

[Thermodynamics]

$100.000 X 2 million mortgages = $200 billion