Bear Stearns-II
The Fed insists that the action it took in connection with Bear-Stearn's liquidity crunch was not a bail-out. They point to the Bear Stearns' shareholders who saw their stock drop to nearly nothing over just a couple of days.
It's semantics, folks. It's a bail-out, paid for by taxpayers through a Fed and a Bush Administration that let things go too far before intervening. It's a bail-out, not of Bear-Stearns' shareholders, true, but a bail-out of the investment bankers and their management who have already pocketed a ton of money in bonuses.
Basically, the Fed committed the American taxpayer to stand behind about $30 billion in residential mortgage debt and made itself a direct lender to investment banks. It lowered interest rates as well. The idea is that if investment goes forward, the economy will avoid a deep recession, housing prices will rebound, and the securitized value will hold up. The idea is that the deal should cost taxpayers nothing in the long run--so long as the bail-out works. My guess is that, along with the further actions taken by the Fed this week (a further injection of liquidity into the investment banking business), it will work. It will work, because the Fed can't afford to let it fail at this point.
But does anyone else find it ironic and a little hard to swallow that an action of such magnitude (i.e., we're betting the farm that this bail-out and other actions by the Fed will save the American economy), was done without Congressional oversight, without taxpayer input? Does anyone else find it ironic and a little hard to swallow that the Bush Administration allowed the free market to flourish while the mortgage lenders, commercial bankers, realtors, investment banks, and hedge funds (and their managers) were getting rich by taking advantage of lack of regulation and enforcement (where have you gone, Elliott Spitzer?), yet the Fed is right there with our (yours and mine) money when these guys falter?
The reality is, there was consumer fraud perpetrated in the selling and underwriting on these mortgage loans. There were likely violations of the Sarbanes-Oxley Act as investment banks cozied up to their accounting firms to have their financial statements look better than they really were. There was likely fraud perpetrated by the investment banks and the rating agencies--how else do you explain so many smart people believing that these mortgage-backed securities were of "high-quality?" And the reality is that little will be done about any of it. Congress and the Fed are focused on cleaning up this mess, rather than seeking retribution.
Maybe that's not a bad thing, if it saves the financial system.
But, and here's the next hot topic, if the Fed and the American taxpayer are going to bail-out the investment banking system (as Roosevelt bailed out the commercial banks in the '30s), Congress must insist on better regulation and enforcement going forward. Investment banks should be forced to manage risk better and be subject to regulatory oversite. Hedge-funds should be subjected to disclosure requirements. And consumer fraud laws should be shored up and enforced.
Who among the current crop of Presidential candidates has the intestinal fortitude to take that on?
Gary
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Reader Comments (8)
It is definitely a bailout. But I also think the semantics are important, at least to the Republicans. Even they would sense the hypocrisy in being okay with a bailout of BS when they all screamed bloody murder, (to the point of the disavowal of it by the Reagan administration) at the Chrysler bailout in the ‘70’s.
So it can’t be a bailout. I do find it ironic, but not surprising, and maybe not even bad, that it was all done without congressional or taxpayer input or approval. Because of the immediacy of the financial crisis, this may have been one of those rare cases where a lengthy public debate, congressional hearings, etc. may have negated any public benefit from what was being debated.
What seems obvious to me is that if a total collapse is to be averted, the efforts to save the credit markets are going to have to be as much psychological as financial in order to maintain enough investor confidence so that the house of cards can be dismantled before it falls. The psychology of markets is as much timing as anything and in this case the window was narrow.
It was announced today that the Bush administration is initiating a substantial reform of the banking, investment, and credit regulations, which is something I have been hollering about for years. Having not seen any details, I would like to be optimistic, however I have to keep reminding myself that this is the Bush administration and this would be the first and probably only time that it will have shown any ability to fix something that it has screwed up. If they can avert a financial collapse and enact meaningful regulations, I suppose I would have to take back at least some of the rotten things I have said about them over the last 7 years. I would do so willingly, but I’m not holding my breath.
As for Elliott Spitzer, I guess we all know where he went. I have anxiously been waiting on your take on him and his collapse. Do you, like me, see some parallel between his collapse and that of Kelvin Sampson?
http://stanleybing.blogs.fortune.cnn.com/2008/04/02/please-mr-bernanke/#comments
I'm a fan of this guy. He is too cynical and sarcastic for words. He merits mention in this forum. Be sure to read the comments, too.
Gary, if you are offended, just delete this post -- I'll understand.
What I find troubling and don't agree with is the point in the article and in many of the comments that consumers have only themselves to blame. That might be true if the mortgage crisis had occurred in a context where borrowers had ready access to lawyers as savvy as those who drafted the lender's mortgages, if income and wealth gaps in this country hadn't widened significantly over the last few years making it more difficult for ordinary people to buy homes without "creative financing," if politicians weren't lying to their constituents and telling them that the American Dream is still possible notwithstanding a Global Economy where the US worker has to compete for jobs with people for whom a grass hut is a step up, if mortgage brokers and realtors and investment bankers hadn't made a fortune off selling those bad loans, if existing consumer protection laws had been enforced while the mortgage crisis was in the making, and if the housing sector boom hadn't been allowed to proceed without regulation in order to sustain the rest of the economy and a poorly-conceived war in Iraq.
I find it more than a little troubling that Bing and his readers are willing to put people just trying to keep a roof over their families' heads in the same category as the politicians, the lenders and realtors, the investment bankers, and the Bush Administration. There's a vast difference between the sins of naivety and greed.
For the record, I refinanced a few years ago with a 30-year fixed at about 5%.
I'd be happy to see the politicians, regulators, mortgage brokers, and Wall Street types living in grass huts.
We have houses in foreclosure near us too. Everyone does. Ugly stuff.
I originally had a 30-year fixed, then a 15-year fixed. None now, which is great.
From my years in banking I know first hand the lack of knowlege of most marginal borrowers. It was reassuring as well as a bit scary, the amount of trust they had in me and my bank. It was a quasi-fiduciary trust that we all took very seriously. As loan officers we were taught: If a loan fails it is YOUR fault, but your CUSTOMER will suffer. In this day of commissoned loan officers, I wonder how long its been since that statement was dropped from the training manual?
Now that the bank is one of the "nationals" and knowing the qality of their staff and their incentivized compensation plans, I have often wondered if those borrrowers (and now their sons and daughters) are being treated with the same level of benevolence. I suspect we're seeing that question answered in the papers almost daily.
BTW, my mortgage is a portfolio loan at my local bank, which is almost unheard of today. It is manually calculated, simple interest with no prepaymemt penalty. We make a half payment every two weeks, to save the interest. I guess those years in banking may have been worth something after all.
Before we would make any crazy moves, we would wait for things to drop, which will happen. Is happening.
Last summer I was shocked at the number of auction notices in the Baltimore Sun. That was my first clue that something was going on. Page after page. Now even more. The Washington Post has them too, though it lagged Baltimore. Different economic situation.
A house that is six houses down from ours emptied out last fall, and a bank notice went up in the front window. I checked it out on my walk past. Still stands empty. And yet, my next-door neighbor just put her house up for sale, for the highest price yet asked in our neighborhood. Not very good condition, either. (Although the immediate owners next door are fabulous people!) Talk about confusing.
I honestly cannot formulate a good answer on what should happen to make this situation right. It is just not my area of expertise, and it might be too late for any good answers to emerge. As they say, though, all politics is (are?) local. I am definitely interested in where this goes.
You probably will find that borrowing money against a portfolio is more hassle than it is worth. It is (or at least used to be) the most highly regulated of all bank loans, with security assignments, margin requirements and a multitude of other hoops to jump through. Also, the interest rates are higher. Up until the last year, real estate loans were considered some of the safest loans a bank could make.
Sorry to create the confusion.
I think our mortgage was of the type you described, in the beginning. When we refinanced, it was too. I think. It all sounds familiar. Local bank, no hassles. Then we did what you described, paying ahead (no pre-payment penalty -- I remember that!) and got rid of the whole thing. Very contrary to the actions of most homeowners, apparently.
Maybe I should pay more attention to it all, but I have not been inclined to learn borrowing details unless it was needed. As banks gobbled each other up, it got so much more baffling.
This weekend's paper was interesting -- many articles were questioning why we should bail out mortgage brokers who had none of their own assets at risk, and who were totally motivated by greed. I hope our legislators were reading the same articles as I saw.
Thanks for the good info, Jeff. I am impressed to know that you are so well-versed in this aspect of finance. Though I really should have known, given your line of work.