Looks like the Fed is flipping and flopping a lot like the McCain campaign in its policy pronouncements. “Being for something before being against the same”.
When the financial markets were melting down on Monday with Lehman going under and jobs lost all around, McCain coolly comes up and tells us that the economy is strong. Later he backtracks and says that he was talking about the American people and not the health of the economy actually. Likewise, the Fed initially said that they will not bail out AIG before actually deciding to bail them out late evening yesterday. Yes, it called for an injection of $85 billion of taxpayer money this time. Of course, this is on top of the bail out of Bear, Fannie and Freddie.
The latest bailout might be labeled as the ‘mother of all bailouts’ since it was not just the company (AIG) that was bailed out, but all those toxic assets from companies that AIG had insured. In essence, AIG's clients still got to chew on their toxic mortgage meatballs while the taxpayers stepped in to foot the bill. Of course, many will advance the argument that AIG was 'too big to fail'. Even if one agrees with this theory (yes, this too big to fail thing is fast becoming a theory as more and more banks are signing on the bailout bucket list), the bailout should have come with regulatory conditions that will prevent this mess from happening again. Of course, none of that happened. Taxpayer money was pledged to straighten a large Wall Street firm with minimal guarantees ensuring the survival of the firm, ensuring the people at the top get their regular bonuses and also ensuring that nary a legislation or regulation is passed that would have prevented a meltdown like this from happening in the future. Well, this is free market at its best.
Two things were clear after the latest bailout: The first being that the Fed is absolutely clueless and has just about zero control over the rapidly deteriorating situation in the financial markets. The other being that we have just further slowed down what was essentially an already very slow moving financial train wreck. What is that expression of Chinese torture – death by a thousand cuts – is what we will be subject to….
Showing posts with label bear stearns. Show all posts
Showing posts with label bear stearns. Show all posts
Wednesday, September 17, 2008
Friday, March 28, 2008
On the tragicomedy of investment bank bailouts and distressed homeowners
From 1929 to 1933, during the time of the Great Depression, U.S. gross national product declined 29% and unemployment rate reached 25%. About 9000 banks suspended operations because of the financial distresses. In order to remedy the situation and restore consumer confidence in the banking system, The Banking Act of 1935, was introduced and a separation of bank types according to their business (commercial and investment banking) was developed. This was about the time that the Federal Deposit Insurance Company (FDIC) was created for insuring consumer deposits when a bank falls under. This means that if an individual puts their money (and faith) in a bank that is ‘FDIC’ insured, and in the event of the bank falling under, the Federal Government would step in to cover the shortfall and the consumer can ‘bank’ on the faith that s(he) will be compensated for the banks follies. In order that banks have this extra level of protection and Federal backing, they had to submit to a set of terms and conditions that included laws like minimum fractional reserves held in bank vaults as a hedge to cover shortfalls. The Federal regulatory framework also included a host of additional laws and rules that made the banks more beholden to Federal oversight (as it should - they are holding our monies). All of this extended regulatory frameworks put in place in turn cleared up the muddied reputation that the banks had developed after the Depression years…
Recently, I had written about the Bear Stearns bailout and how in my opinion, Bear should have been allowed to fail thus paving the way for a 'structural (re)adjustment' of the economy. Yes, this is bitter medicine, but much better than to live within the hype of inflated expectations and trigger happy indices that yo-yo on moment’s whim. Well, what happed was just the reverse, the Federal Reserve stepped in, bailed out Bear and helped JPMorgan orchestrate what now seems like a slapdash deal done hastily and a little bit suspiciously... A largely ignored sub-aspect of the flurry of activity that surrounded the Bear brouhaha was fine print news that the Federal Reserve also opened up its money spigots to non-commercial banks (the investment banks on Wall Street) and told them to borrow any amount that they wished from the Reserve sans oversight nor regulation. It was an open call – come by, take Federal monies, shore up your finances – all in the name of ‘preserving financial liquidity’. Recent reports state that the amount of drawing out of monies from this 'fund (called under the complex title of Term Securities Lending Facility)' is estimated to be in the region of 33 billion dollars a day over the last week and the number doubling to about 60 billion dollars a day as recent as yesterday. Can you guess the interest rate? - It was 0.33% (yes, that is correct).
Contrast this situation with news surrounding the deepening crisis that homeowners face as a result of the mortgage mess and the current state where millions of homeowners are either unable to pay their mortgages or are in danger of losing their homes because they are behind on their mortgage payments… Politicians talked about the crisis and proposed broad government rescue plans for homeowners that would each cost about $30 billion. The reply they got from the current administration was a dismissal of such ideas as bailouts and a vow (and threat) to veto even modest bills to help homeowners.
From NY1 news "All we're saying is homeowners need assistance too," said Darren Duarte of the Neighborhood Assistance Corporation. "You can't bail out the investors, bail out the Wall Street firms who created this crisis and leave homeowners at risk. We think that's not fair. And that's not the American way."
It is indeed funny and sad to see that modest bailouts for distressed homeowners screwed over by unscrupulous lenders and investment banks have little chance of success and have to go through a board legislative procedure with the attendant veto threats while broad bailouts where investment banks have easy access to over 50 billion dollars a day with little legislative oversight, zero threats of veto and little or no regulatory network passes muster with little talk or analysis… It is indeed staggering.
Georges Rouault, 1871-1958, 'Clown Tragique', 1911, oil and peinture à l'essence on paper laid down on cradled panel
Recently, I had written about the Bear Stearns bailout and how in my opinion, Bear should have been allowed to fail thus paving the way for a 'structural (re)adjustment' of the economy. Yes, this is bitter medicine, but much better than to live within the hype of inflated expectations and trigger happy indices that yo-yo on moment’s whim. Well, what happed was just the reverse, the Federal Reserve stepped in, bailed out Bear and helped JPMorgan orchestrate what now seems like a slapdash deal done hastily and a little bit suspiciously... A largely ignored sub-aspect of the flurry of activity that surrounded the Bear brouhaha was fine print news that the Federal Reserve also opened up its money spigots to non-commercial banks (the investment banks on Wall Street) and told them to borrow any amount that they wished from the Reserve sans oversight nor regulation. It was an open call – come by, take Federal monies, shore up your finances – all in the name of ‘preserving financial liquidity’. Recent reports state that the amount of drawing out of monies from this 'fund (called under the complex title of Term Securities Lending Facility)' is estimated to be in the region of 33 billion dollars a day over the last week and the number doubling to about 60 billion dollars a day as recent as yesterday. Can you guess the interest rate? - It was 0.33% (yes, that is correct).
Contrast this situation with news surrounding the deepening crisis that homeowners face as a result of the mortgage mess and the current state where millions of homeowners are either unable to pay their mortgages or are in danger of losing their homes because they are behind on their mortgage payments… Politicians talked about the crisis and proposed broad government rescue plans for homeowners that would each cost about $30 billion. The reply they got from the current administration was a dismissal of such ideas as bailouts and a vow (and threat) to veto even modest bills to help homeowners.
From NY1 news "All we're saying is homeowners need assistance too," said Darren Duarte of the Neighborhood Assistance Corporation. "You can't bail out the investors, bail out the Wall Street firms who created this crisis and leave homeowners at risk. We think that's not fair. And that's not the American way."
It is indeed funny and sad to see that modest bailouts for distressed homeowners screwed over by unscrupulous lenders and investment banks have little chance of success and have to go through a board legislative procedure with the attendant veto threats while broad bailouts where investment banks have easy access to over 50 billion dollars a day with little legislative oversight, zero threats of veto and little or no regulatory network passes muster with little talk or analysis… It is indeed staggering.
Georges Rouault, 1871-1958, 'Clown Tragique', 1911, oil and peinture à l'essence on paper laid down on cradled panel Monday, March 17, 2008
On why Bear Stearns should have failed this time
For all the talk about 'government is the problem' and 'too much regulation stifles the free market', the events that unfolded over the weekend saw the government actually financing the purchase of a troubled investment bank (Bear Sterns) through a conduit (JP Morgan Chase) leaving one to believe ardently in the fact that, more, if not an excessive oversight of the financial markets would be the medicine for the boom-bust cycle that we seem to be living through (with a cyclic frequency approaching the 10 year mark - the last one I remember was the dot com bust).
The government yesterday evening, decided to underwrite the take-over of a troubled investment bank on Wall Street in the hopes that rescuing this one might stave off further collapse of the financial system. While, it is well intentioned, this has left me pondering on these open unanswered questions:
- In bailing out some of the key stakeholders of the financial system, isn’t the government also bailing out some of the same people who led us into this mess (people who lived and got their bonuses through promising people easy homes with no money down, interest only payments and adjustable rate mortgages)?
- By bailing out banks and institutional players in the industry, is the government also helping to prop up what might be a house of cards built upon the mortgage bubble? Shouldn’t the government just sit and wait this one out and let the structural readjustment process bring the hype to what the markets can nominally sustain? Isn’t the government just putting off for another day what might have happened today (a normal structural adjustment to prevailing levels)?
- Aren’t we, in effect, playing dice with 'free-market / market-knows-best’ principles that was embraced in better times but thrown to the winds at the first sign of trouble?
As this and other questions swirl in my mind, it is worth reading excerpts from the op-ed column by Paul Krugman in today’s Times
Between 2002 and 2007, false beliefs in the private sector — the belief that home prices only go up, that financial innovation had made risk go away, that a triple-A rating really meant that an investment was safe — led to an epidemic of bad lending. Meanwhile, false beliefs in the political arena — the belief of Alan Greenspan and his friends in the Bush administration that the market is always right and regulation always a bad thing — led Washington to ignore the warning signs.
The result of all that bad lending was an unholy financial mess that will cause trillions of dollars in losses. A large chunk of these losses will fall on financial institutions: commercial banks, investment banks, hedge funds and so on.
Nobody expects an investment bank to be a charitable institution, but Bear has a particularly nasty reputation. As Gretchen Morgenson of The New York Times reminds us, Bear “has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach.”
Bear was a major promoter of the most questionable subprime lenders. It lured customers into two of its own hedge funds that were among the first to go bust in the current crisis. And it’s a bad financial citizen: the last time the Fed tried to contain a financial crisis, after the collapse of Long-Term Capital Management in 1998, Bear refused to participate in the rescue operation.
Bear, in other words, deserved to be allowed to fail — both on the merits and to teach Wall Street not to expect someone else to clean up its messes.
At the time of writing this, the markets and futures are still falling globally, the Federal Reserve further cut the overnight lending rate and the New York Stock Exchange just opened with a 150 point drop in the DOW.
The government yesterday evening, decided to underwrite the take-over of a troubled investment bank on Wall Street in the hopes that rescuing this one might stave off further collapse of the financial system. While, it is well intentioned, this has left me pondering on these open unanswered questions:
- In bailing out some of the key stakeholders of the financial system, isn’t the government also bailing out some of the same people who led us into this mess (people who lived and got their bonuses through promising people easy homes with no money down, interest only payments and adjustable rate mortgages)?
- By bailing out banks and institutional players in the industry, is the government also helping to prop up what might be a house of cards built upon the mortgage bubble? Shouldn’t the government just sit and wait this one out and let the structural readjustment process bring the hype to what the markets can nominally sustain? Isn’t the government just putting off for another day what might have happened today (a normal structural adjustment to prevailing levels)?
- Aren’t we, in effect, playing dice with 'free-market / market-knows-best’ principles that was embraced in better times but thrown to the winds at the first sign of trouble?
As this and other questions swirl in my mind, it is worth reading excerpts from the op-ed column by Paul Krugman in today’s Times
Between 2002 and 2007, false beliefs in the private sector — the belief that home prices only go up, that financial innovation had made risk go away, that a triple-A rating really meant that an investment was safe — led to an epidemic of bad lending. Meanwhile, false beliefs in the political arena — the belief of Alan Greenspan and his friends in the Bush administration that the market is always right and regulation always a bad thing — led Washington to ignore the warning signs.
The result of all that bad lending was an unholy financial mess that will cause trillions of dollars in losses. A large chunk of these losses will fall on financial institutions: commercial banks, investment banks, hedge funds and so on.
Nobody expects an investment bank to be a charitable institution, but Bear has a particularly nasty reputation. As Gretchen Morgenson of The New York Times reminds us, Bear “has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach.”
Bear was a major promoter of the most questionable subprime lenders. It lured customers into two of its own hedge funds that were among the first to go bust in the current crisis. And it’s a bad financial citizen: the last time the Fed tried to contain a financial crisis, after the collapse of Long-Term Capital Management in 1998, Bear refused to participate in the rescue operation.
Bear, in other words, deserved to be allowed to fail — both on the merits and to teach Wall Street not to expect someone else to clean up its messes.
At the time of writing this, the markets and futures are still falling globally, the Federal Reserve further cut the overnight lending rate and the New York Stock Exchange just opened with a 150 point drop in the DOW.
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