Bear Sterns Sold!

[Embar Angylwrath]

The Fed is artificially reducing the risk for JP Morgan in the purchase of Bear Sterns (and hence giving them money in the interest they save by borrowing to finance at a reduced rate). They're not actually paying anything *unless* JP Morgan goes under and their creditors hit the Fed up for the guarantee - then shit's hit the fan so bad anyway that the 1930s will look like a minor correction.

It was the right move for the Fed to make, but the overall effect is going to be to drive up inflation and drop the dollar, which is the direction it's been heading for a long time now. Real Estate is a good option, or moving your investments to European or Chinese stocks (in my rather stupid opinion). The US still isn't out of crisis.

Dd

I agree the Fed is artificially reducing risk for JPMorgan. But I disagree that it is the right move. See.. there IS a market for mortgages. They CAN be sold. Hell, I'd buy my mortgage back for $0.10 on the dollar and retire the note. Maybe that's what needs to happen. Unbundle the mortgages and try to sell them to servicers at a discount. But the Fed prevented that from happening. It, in essence, moved to protect the investment of JPMorgan, and I have real issues with that.

[Embar Angylwrath]

Oh.. and is it just me? Or is anyone else noticing that Partha has flipped on himself and is advocating for an unregulated, free-market approach now? It's all bullshit of course, he's just in favor of whatever the government can do to punish big evil corporations, but its funny to see him eat his soul and push for a hands-free economic stance on this issue.

[rodric]

(Mostly) free trade is good for everybody.

However, if spending a few pennies (relatively speaking) on a couple of major companies prevents unnecessary panic in the economy why wouldn't you do it?

Sure,it's annoying when people "get away" with bad behavior by being bailed out by the government. (If you can call losing your house or losing 98% of your market share "getting away with it")

But if it staves off recession then I'm all for it.

Practical >>> Ideological

Rhodric

[Kulaf]

Oh.. and is it just me? Or is anyone else noticing that Partha has flipped on himself and is advocating for an unregulated, free-market approach now? It's all bullshit of course, he's just in favor of whatever the government can do to punish big evil corporations, but its funny to see him eat his soul and push for a hands-free economic stance on this issue.

He's not.....he's pushing a Communist agenda. Basically he wants the workers to rise up and throw off the shackles of Imperialism!

Always knew he was a closeted communist.....just nice to see it out in the open.

Come out of the closet mister Partha.

[Finglefinn]

I dub thee Partha, Premier Dimitri Kissov

[Embar Angylwrath]

(Mostly) free trade is good for everybody.

However, if spending a few pennies (relatively speaking) on a couple of major companies prevents unnecessary panic in the economy why wouldn't you do it?

Sure,it's annoying when people "get away" with bad behavior by being bailed out by the government. (If you can call losing your house or losing 98% of your market share "getting away with it")

But if it staves off recession then I'm all for it.

Practical >>> Ideological

Rhodric

I see your point, but I guess I disagree the economy will implode over this. I think it will take a beating, and I think it needs to take a beating, so it can shake out a lot of unhealthy and weak companies. When that happens, there is opportunity for other companies. Other people with better plans and organization can help find creative solutions to this, if the government just stays the fuck out of it.

They want to open up the tap on cash by lowering interest rates? Fine. They want to readjust guidelines for mortgage guarantees under FannieMay? Fine. They want to assume risk in a private venture by underwriting 30b? No way, unless that option is open to everyone who wants it.

What if Bear Sterns went BK? lets play that out a minute. Let's assume its a liquidation BK, because most of their assets were unmarketable, and therefore worthless (you can't sell something people aren't buying). I tell you, I would LOVE to get my hands on mortgages for pennies on the dollar. If the mortages in a bundle were intact, and not just slices of mortgages, hell yes I'd buy them. I'd buy as much as I could, because its really real estate you're buying.

Look at it this way. Lets say a mortgage bundle once worth $100,000,000 is now selling for $1,000,000, or 1% of the original value. That $100,000,000 may have depreciated by 50%, but that's still $50,000,000 worth of property bought for only $1,000,000. And all those people who are paying on those mortgages... well.. that's your money now. Even if 50% wallk away from the property, and you forceclose on it, you could still turn it around and sell the propery for half of what the original sale price was and STILL make a shit ton of cash.

But the government got in the way of investors exploring that opportunity. I really feel that Bear Stern going BK would have generated more cash through the liquidation than the $2/share pittance they received. This smells like an insider deal to me. No way is this in the shareholders best interests. And I bet a couple of those shareholders would have ponied up a lot more than $237 million to buy Bear Sterns outright.

[Ddrak]

The problem is that Bear wouldn't have that option - if they went into bankruptcy then the liquidators would foreclose on every loan they could (which has issues in itself if there isn't a clear title) and use it to service the $102b of repurchase agreements Bear has outstanding. The reason they are bankrupt is the value of the loans isn't 2c in the dollar, it's their balance sheet that is broken. They would need the *full* value of the loans to service the debt and they sure aren't going to give homeowners a good deal in doing that.

The Fed moved to protect them because foreclosing on every loan they own would completely destroy the real estate market in the US, and as a result pretty much every other market.

Dd

[Embar Angylwrath]

The problem is that Bear wouldn't have that option - if they went into bankruptcy then the liquidators would foreclose on every loan they could (which has issues in itself if there isn't a clear title) and use it to service the $102b of repurchase agreements Bear has outstanding. The reason they are bankrupt is the value of the loans isn't 2c in the dollar, it's their balance sheet that is broken. They would need the *full* value of the loans to service the debt and they sure aren't going to give homeowners a good deal in doing that.

The Fed moved to protect them because foreclosing on every loan they own would completely destroy the real estate market in the US, and as a result pretty much every other market.

Dd

Mortgage holders can't arbitrarily foreclose on a note. The note has to be in arrears before foreclosure is allowed. In other words, a bank or servicer can't liquidate your residence soley because they want to. There are specific, contractural obligations they must adhere to first. Primarily, if the mortgagee is abiding by the terms of the mortgage, they can't liquidate the asset.

If you're saying the liquidators would sell every mortgage in default or foreclose.. well good! That floods the market with opportunities to purchase distressed real estate. The price would adjust to meet the demand. And the market would begin a correction. Painful, to be sure, but it has to happen. The market MUST be allowed to correct. Artificially subsidzing any market element never works. Ever. There's always a correction.

[rodric]

The stock market crash of 1929 was a correction.... followed by the Great Depression.

I'm not convinced a decade of joblessness and near-starvation for millions of people was necessary to correct the market.

With all the new financial products (hedge funds, bundled mortgages and SIVs, etc) and the fact that most people have a significant amount of their retirement savings in uninsured products, there is no reason to think that the could not be a "run on the bank" in the equities market or some other disaster that has not been foreseen by economists or the Fed.

World central banks like the U.S. Federal Reserve have been guiding monetary policy for decades, in part to avert a diasaster like the 1930s.

I believe that correction is necessary, but I belive it's possible to control it to some extent, and I'd like the Fed to continue making the effort, even if the results are not guaranteed like a $100,000 savings account.

Rhodric

[Klast Brell]

90% of sub prime loans are in good standing and monthly payments are coming in on schedule. This should not take the economy down. But when investment banks take out hundreds of billions in loans to invest in mortgage back securities 10% less profit on the investment than they expected means that they can't make their own loan payments.
It's usually considered foolish to gamble with borrowed money. butr on wall street they call it "Leveraging"

[Finglefinn]

The problem is that Bear wouldn't have that option - if they went into bankruptcy then the liquidators would foreclose on every loan they could (which has issues in itself if there isn't a clear title) and use it to service the $102b of repurchase agreements Bear has outstanding. The reason they are bankrupt is the value of the loans isn't 2c in the dollar, it's their balance sheet that is broken. They would need the *full* value of the loans to service the debt and they sure aren't going to give homeowners a good deal in doing that.

The Fed moved to protect them because foreclosing on every loan they own would completely destroy the real estate market in the US, and as a result pretty much every other market.

Dd

A mortgage backed security has a one way realtionship with the actual mortgage. If the security instrument fails, or the company who sold the security fails (Bear Stearns) the mortgage is unharmed. If the mortgage fails, the quality of the security is decreased. If enough mortgages fail, the quality of all mortgage backed securities decreases, which is the situation we are in now.

Embar is right about forced liquidation of homes. There needs to be a correction in the housing market. There are way too many places in the US where homes are simply not affordable for the even the above-average income family. I make triple the Oregon median income and there are a lot of average neighborhoods around Portland I could not afford to live.

[Kulaf]

Correct technically.......but perhaps not "visually". Yes they cannot foreclose on you for no reason. However since these companies are not in the loan origination business......they are far less forgiving of any deliquency that an originator. Basically if you are late on a payment they could initiate foreclosure proceedings at once if they wished to.

[Klast Brell]

Good article in the NY Times on this
http://www.nytimes.com/2008/03/19/busin ... ref=slogin
Tries to explain the problem with borrowing money to make risky investments.

[Embar Angylwrath]

Correct technically.......but perhaps not "visually". Yes they cannot foreclose on you for no reason. However since these companies are not in the loan origination business......they are far less forgiving of any deliquency that an originator. Basically if you are late on a payment they could initiate foreclosure proceedings at once if they wished to.

And they SHOULD foreclose. They'd get more value. Trying to trade bundled mortgages when no one is buying them isn't working for them is it? So they've seen the value of those investments drop to almost nothing. The problem is, the value they try to assign is framed by what does and doesn't trade on Wall Street. That property has real intrinsic value. If you were an investor, would you throw up your hands when the people you normally sell to won't buy from you, but there are plenty of other entities out there that will buy those mortgages? Hell, I'd take one off their hands at 30% of the previously traded price. Even if I had to deal with foreclosures, I'd still make a killing. I could sell the foreclosured homes at 50% of the purchase price, and still be on top.

[Partha]

Oh.. and is it just me? Or is anyone else noticing that Partha has flipped on himself and is advocating for an unregulated, free-market approach now? It's all bullshit of course, he's just in favor of whatever the government can do to punish big evil corporations, but its funny to see him eat his soul and push for a hands-free economic stance on this issue.

Not at all. I'm saying that you can't argue for a hands-off economic policy that cuts regulations to businesses and advocates for a libertarian free-trade market without also having those businesses fail without government intervention to save them.

[Embar Angylwrath]

Quite frankly, there SHOULD be a fire sale and liquidation on exactly those kind of mortgage securities. Gaming the system to prevent unwelcome outcomes for the plutocrats is the reason we're in the mess we're in now - without any risk, they felt free to gamble on bad loans. If you take away the negative outcomes from the system, why bother with the system?

You can't run away from your statements so soon Partha. That post right there embodies free market economic principles, whcih you have argues against in previous posts.

[Partha]

Show us those posts in context, and I'll discuss in further depth. Right now, all you have is that I've argued that businesses should be allowed to fail - if you believe in a free market system. If you believe in a social net for bad companies, then you could argue otherwise. (And it's funny to see you picking nits, seeing as we both agree that 30B should never have been offered.)

[Embar Angylwrath]

That's not really an honest statement, now is it...

You've argued that business should be allowed to fail. You've also argued that "gaming the system" (protectionism) for a segment of a given business sector (in this case investment banks) is wrong. Taken together, those two positions are are the cornerstone of hands-off free market principles.

[Ddrak]

Now you mention it, you're probably right. I don't think they can reasonably foreclose - the government would step in and stop them. A lot more voting people own houses than care about Wall Street (whether that's rational is another question, but it's true).

Dd

[Partha]

That's not really an honest statement, now is it...

You've argued that business should be allowed to fail. You've also argued that "gaming the system" (protectionism) for a segment of a given business sector (in this case investment banks) is wrong. Taken together, those two positions are are the cornerstone of hands-off free market principles.

Can you read?

Gaming the system to prevent unwelcome outcomes for the plutocrats is the reason we're in the mess we're in now - without any risk, they felt free to gamble on bad loans. If you take away the negative outcomes from the system, why bother with the system?