Bear Sterns and the Fed bailout
If you haven't heard the news, Bear Sterns almost went under today if it wasn't for the Fed and JP Morgan Chase stepping up to infuse it with cash + buy out some of its bad debts. This was done because of the "liquidity crisis" and the Fed's fear that if this goes down that its only going to get worse out there.
Few observations:
#1 Bear Sterns made some horrid choices and now they are all coming home to roost. They deserve to go under and I can understand the Fed's fears of what happened if the company evaporated overnight, but if they do more than act as a pillow for their fall I will go nuts.
#2. This whole situation is going to make the S&L bailout of the late 80's/early 90's look like a walk in the park. I have read estimates on how much bad debt is out there from 200-500 billion. All of this money is just going to evaporate from the balance sheets.
#2. The next time that some idiot spews to you that the free market does not need regulation and cures all, they should study what has and is happening to the financial markets as we speak. We are a mixed economy and they should be happy that we are, or else things would be a ton worse very, very quickly.
Playing WoW as: Vilius (70 NE Druid)
“The only function of economic forecasting is to make astrology look respectable.” John K Galbraith
Actually, this isn't an argument against free markets... it's a profound argument against the Fed. Bear Stearns took on unacceptable risk becuase they knew the Fed would bail them out, pure and simple. It's called moral hazard.
We don't have free markets, because companies have to be free to fail, not just succeed. What we have instead is corporate welfare. The Fed is stealing money FROM YOU to keep these bankers in their mansions.
If you'd like some background on what's going on, I've posted several long comments on Metafilter. Fortunately, MeFi is very, very smart, and there are plenty of contrasting opinions too, so you won't get pure 100% Malor's view if you read the containing threads and not just what I'm saying. I'm pretty damn sure I'm right, but expose yourself to contrary positions too.
This one is most relevant, talking about how we got into the mess in the first place.
As a followup, I posted this one talking about the last bailout, and what an incredibly bad idea it was. The same arguments there apply here.
I'm getting funny results from these links; they're not always going where they're supposed to. I'm not sure if it's Firefox 3 beta or the new GWJ that's not correctly going to the right comments.
If you're having trouble too, for the first link, search for the word 'malaise': this will take you to the top of my comment. In the second link, the phrase 'my earlier post' will do the same.
edit: minor wording adjustment.
Oh, also note -- that first comment was written in the context of a market crash, which was averted. My assumption was that it was real and would continue. (I fully expect a crash could happen, so it didn't surprise me at all. It's not certain by any means, but quite, quite possible.) So, no, that wasn't a real crash, but everything else still holds true... things will just keep getting worse and worse and worse.
Has anyone seen this?
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That's just craziness. I'm somewhat scared to see what comes out from whisteblowers in the first couple years after Bush is out of office, and I'm even more scared to hear stuff that doesn't come out for decades, because all the proof has been destroyed already.
Hyperbole - THE BEST THING EVER
What gets me is that you get these wall street people demanding a bailout from government, and then turn around and fight any kind of regulation of the more arcane sections of their business. Or they fight every closing of a tax loophole that enables them to pull in insane salaries for managing money. The government should be using bailouts as leverage to get changes made, not just tossing money at them to go back to what they've been doing that got them into the mess in the first place.
The central bank said its new lending program would make money available to the 20 large investment banks that serve as “primary dealers” and trade Treasury securities directly with the Fed. Much like a $200 billion loan program the Fed announced last Tuesday, this program will essentially agree to hold as collateral a wide variety of securities that include hard-to-sell securities backed by mortgages. But Fed officials told reporters on Sunday night that the new program would have no limit on the amount of money that can be borrowed.
Oy vey. It's getting out of control. I expect people are going to interpret this as a sign from the Fed that what's going on behind the scenes is worse than they can say in public. The more they try to avert a panic, the more likely they are to incite one.
The WashPost summed it up in a cartoon.
Is it just me or does this seem to be getting a little ridiculous now? In what economic class does this type of thing make sense?
Rape and Pillage 101?
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This makes me so sick. We're on the brink of a second Great Depression. Where are the defenders of our supposed "Free Market" now?
XBox Live: DSGamer GWJ | PSN: DSGamerGWJ
We needed to let the market crash in 2001 and let everything clear; that would have been the Second Great Depression. But the Fed refused, and jacked up the leveraged speculative players with huge liquidity injections to keep them in the game when things went south. This blew up the debt and real estate bubbles, which are far larger than the stock bubble was. To prevent the fallout from one atomic weapon, the Fed set off two fusion bombs just underneath, and now we get to eat the radiation from all three.
Again, we should let it collapse, let the bad players fail, and focus on preventing people from starving, while we pick up the shattered pieces of the economy and rebuild. But the Fed is doing everything it can to prevent deflation, which means, I believe, that hyperinflation is the likely eventual endgame. That's even more destructive than deflation, but it's slower.... the immediate pain looks less, so that's what they'll choose.
Each time you see things unravel further, spare a little time out of your day to throw bad thoughts at Alan Greenspan. This is all his mess. Bernanke is going to take the blame, but it's Greenspan that created the problem. True, Bernanke's being egregiously irresponsible, but he wouldn't have the opportunity if not for his predecessor.
I completely agree. I was on many forums such as this one back in 2001 begging for the govt. to let the economy fall flat. Let the market do what it needed to do. I'm just a guy and not an economist, though, so no one listened to me.
XBox Live: DSGamer GWJ | PSN: DSGamerGWJ
This thread promised Beer Steins and so far I am very disappointed.
NOTE: This is not a doodle bug.
Spore
Week ot week, the dollar continues to set new exchange rate lows against Euro and Yen.
By the way, it is curious how the voices that pooh-poohed Malor's stance on the impending crisis as the-sky-is-falling alarmism have subsided somehow.
Xbox Live tag Gorilla800lbs
Is the sky falling? Having gone through the 1970s, S&L crisis, stock market bubble crash, I expect that this is yet another iteration of the boom and bust cycle of American finance. As ever, after lots of smart people assured us that we were too stupid to understand the intricacies of the new paradigm, old fashioned fundamentals reared up and smacked the arrogant and the credulous around. This happens once or twice every decade to Wall Street and the government.
JPMorgan Chase (JPM) bought out Bear Stearns (BSC) this weekend for $2/share (roughly $236mil).
That's the 5th largest US Bank reduced to practically nothing, not some rinky dink little investment house that went splat.
How would you like to be a BSC shareholder? Imagine if you picked them up at their 52 week high of $159.36 or even at $57 last Thursday and now you've got $2/share! ouch. Might still be a horrible investment for JPM as they're betting the $236mil is going to be a bargain and not a complete disaster if more of BSCs assets substantially devalue.
Problem with BSC is they have around $425 billion worth of assets on the books and obviously it's not all laying around as cash or cash-equivs. Now you end up where large investors are pulling out of their BSC funds and suddenly BSC has a huge liquidity problem as cash-out is vastly out pacing new investments. BSC has to fire sale assets (stocks, bonds, etc) to raise cash, beg the Fed for to loan them tons more cash, etc.
Investors are only going to make the mess worse as they all freak out and start dumping their holdings everywhere, putting more strain on the banking system. Oil and gold prices are going to go through the roof, the markets are going to take a beating. Enjoy your $5/gallon gas this summer boys.
Call me crazy, but I think this is just the first casualty, the real sh*t storm is about to start...
XBL: MikeMac75
That's the problem with all these financial companies. Nobody can value them right now. I was reading today that the foreclosure rate on homes is running at around 2%, which is considered high based on historical averages. But that means the 98% of mortgages are generating income from the owners. Some of these mortgages still represent good investments, so you figure at some point the crap will get separated out from the good stuff. I suspect some insiders will emerge from the carnage with very good portfolios of paper that they bought on the cheap.
I'm not sure it's accurate to say that someone who isn't foreclosing on their home is making money on it. It just means they can afford to keep it, right?
NOTE: This is not a doodle bug.
Spore
If homeowner is making payments, doesnt that generally mean a good portion of interest is being paid, which I thought was almost pure profit. That homeowner is a keeper within a portfolio isnt it?
Xbox Live: Irongut | Playstation ID: Irongut_GWJ
Let me rephrase that. I meant the people who are getting the interest payments on the debt from the homeowner. The people who own the debt.
It guess depends on if they're making more money per mortgage payment than they're spending on monthly expenses.
NOTE: This is not a doodle bug.
Spore
The economy's going to pot a little later than I expected (I honestly expected this mess to really kick in back in late 2006), but it's still happening.
I thought the economy would go to pot in 2001. So it's 7 years late for me. But then I think we created another bubble to temporarily prop it up.
XBox Live: DSGamer GWJ | PSN: DSGamerGWJ
Funken, it has nothing to do with the actual value of the mortgages. It has to do with the value of the securities that these mortgages were wrapped up into. If they are not tradeable then the people that are holding the securities are worthless... no one wants to buy them.
Playing WoW as: Vilius (70 NE Druid)
“The only function of economic forecasting is to make astrology look respectable.” John K Galbraith
NYT this morning:
I don't see why we let these financial companies get so big that the government can't permit them to fail.
Another sign of the times: I have a 401(k) from a previous employer toggled to a setting where Merrill Lynch rebalances the portfolio as it thinks best. I checked it for the first time in a while yesterday. It's 68% bonds.
"All that time you waste dating and having sex could be better spent scouring the web for new game developer press releases." - Quintin_Stone
The problem isn't limited to just mortgages that are being foreclosed on today. It's estimated that 10% of US homes are now worth less then the loans on them. That's about 8.8m homes. I think it's a reasonable bet that most of the homes are in expensive markets and so the dollar amounts of loans that are in the red is immense (trillions).
Foreclosures are happening for a variety of reasons:
1) People just can't afford the home anymore (loss of income, etc.)
2) Adjustable Rate Mortgages for a while were going up in cost and exceeded people's ability to pay.
3) Teaser rates expiring resulting in 150-300% monthly payment increases.
Massive cuts to the lending rates helps mitigate #2. In all cases you're somewhat fine if the value of the home exceeds the loan amount. Then you just sell, pay off the loan, take your lumps and move on with life. Unfortunately many of the loans are exceeding the value of the home. Even if you sell it, you're in the hole (often for hundreds of thousands) or in the case of the teaser loan people, they just say "screw it", walk away and the bank is left to auction the home.
In California, you have 100% loans on homes for $900k that are now selling at auction for $600-700k. It takes quite a few other mortgages making you 5-6%/yr to cover that loss.
The current foreclosure rate may be 2%, but if you have 10% in the red and the housing market on the decline (huge supply + less qualified buyers) putting more homes into the red or further into the red everyday, then you stop looking at the 2% number and you have to look at the over all risk of default on the loans.
Tons of the loans (esp. in expensive markets) are interest only and/or for 100% of the home's value. This means the loan value to property value ratio is never going to correct itself until the housing market picks back up again - how long will that be? Without interest only loans and 100% value loans, the problem would slowly correct itself over time as principal payments added up.
Imagine you hold a mortgage backed security. You're expecting say a 5% return based on the mortgage interest rates. Now the asset that's backing these loans goes down and the risk for substantial loss (home sold at auction) increases. Imagine it's a pool of ARMs and your interest income is declining. Imagine it's the worst case and it's a pool of loans written with teaser rates. What's the value of the security now? It's very hard to know, the risk is high, the return is minimal and investors aren't touching them with a 10ft pole. If you already hold the security it's basically worthless as you can't sell it on the open market. This is where the Fed is being mental and allowing banks to use these worthless securities at face value as collateral on new loans.
Another contributor to the whole mess is the economic slowdown and decline in the US dollar. Foreign investors hold huge amounts of US Equities. Now imagine you hold some nice Blue Chip stocks that are poking along at a nice steady rate. Perhaps your portfolio on the whole has averaged 5%/yr in USD. Now you look at what's happened with the US dollar and suddenly your rate of return in your own currency (the one you buy crap with!) nets out to a year over year loss. Do you stick it out? Maybe. Do you instead start selling some of your US Equities and diversifying into Asian/Euro Equities instead? How about pulling all your funds and sinking it into a market like China that's growing at double digits? Hmm.
All that capital outflow results in banks needing cash for settlement and in billions of USD being sold in exchange for other currencies. Is it any wonder the US banks are having liquidity problems? Or that the USD continues to decline?
As a little side bonus, there will be tons of job cuts in the Financial sector (jobs that generally pay rather well) which of course means less people to buy homes, keep their homes, pay taxes or consume goods. Bear Stearns certainly isn't paying any Income Tax this year... imagine how many other banks are taking a hit and what that'll do to the US tax revenue? Not to mention all the investors who aren't earning any taxable gains. Ouch.
Big mess, buy gold
XBL: MikeMac75
I so wanted to buy gold so badly around the bursting of the Internet bubble bursting. But at the time it seemed way more expensive than I wanted to pay. Who knew it would be worth over 5 times as much from then to now.
XBox Live: DSGamer GWJ | PSN: DSGamerGWJ
At this point, though I think I would "invest" in MREs.
XBox Live: DSGamer GWJ | PSN: DSGamerGWJ
What gets me is the Fed has a rather intimate view of what's REALLY going on in the credit markets so the fact that they've made emergency rate cuts out of the blue (the 0.75% one and this weekend's discount rate cut) and that they've taken other extraordinary measures to increase liquidity and now bailed out a bank... well it should really make investors with a less intimate view of what's going on sh*t bricks.
When the Fed acts like it's an emergency/panic situation you can't help but get a little alarmed yourself!
XBL: MikeMac75
MikeMac, maybe this is just the bitter working man in me, but I'm not terribly worried about the welfare of people who buy a million-dollar house exclusively as an investment. They can probably "take their lumps" better than most of us.
NOTE: This is not a doodle bug.
Spore