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Ritholtz:
Pretty wild stuff -- $200 Billion in Fed lending against junk paper, to bail out one mid-size investment bank.
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Ain't Socialism grand?
In response to the recent news that "The Fed has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets", Atrios writes "Capitalism rawks!".
Ritholtz notes: "This was not a bailout of any sort. What the NY Fed did was allow for an orderly liquidation. The Fed is providing the liquidity for JPM's Bear unwind, guaranteeing a good chunk of the debt."
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Remember: "Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich."
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Here are some quotes from an article in the WSJ weekend edition titled "Debt Reckoning: the U.S. receives a margin call".
The unfolding financial crisis -- one that began with bad bets on securities backed by subprime mortgages, then sparked a tightening of credit between big banks -- appears to be broadening further.
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Recent days' cascade of bad news, culminating in yesterday's bailout of Bear Stearns Cos., is accelerating the erosion of trust in the longevity of some brand-name U.S. financial institutions. The growing crisis of confidence now extends to the credit-worthiness of borrowers across the spectrum -- touching American homeowners, who are seeing the value of their bedrock asset decline, and raising questions about the capacity of the Federal Reserve and U.S. government to rapidly repair the problems.
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Hopes are fading fast that the U.S. economy was suffering from a thirst for liquidity that standard Fed remedies could quench. Former Treasury Secretary Lawrence Summers, speaking in Washington yesterday, said he sees "an increasing risk that the principal policy tool on which we have relied -- the Federal Reserve lending to banks in one form or another" -- is like "fighting a virus with antibiotics."
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President Bush, speaking in New York and in a television interview yesterday, showed little appetite for further action.
HA! Yeah, right! That's why Bush is going to meet with his Plunge Protection Team to prop up the markets tomorrow, and that's why the Fed guaranteed the Bear Stearns shitpile that JP Morgan helped "liquidate" at $2 dollars/share. Little appetite, my ass. This recession will thoroughly discredit Bushonomics, and will lead to a Democratic successor in the White House. Do you think he's not going to throw the kitchen sink at this thing, trying to somehow postpone the pain by bailing out Wall Street with easy, weak-ass dollars?
The response of the Republican White House, Democratic Congress and Federal Reserve have been substantial. President Bush and Congress, with remarkable speed, agreed to a $160 billion fiscal-stimulus package that will put money in consumers' wallets soon. The Fed already has cut interest rates by 1 1/4 percentage points this year, and markets anticipate another 3/4 point cut on Tuesday. The Fed has moved to buy $400 billion worth of mortgage-backed securities for its $800 billion total securities portfolio in an effort to jolt that crucial market back to life and prevent rising mortgage rates from further depressing the U.S. housing market.
While there is continued debate about how to treat the current disease, there is a consensus emerging on the causes. "Soaring delinquencies on U.S. subprime mortgages were the primary trigger," the heads of the Treasury, Federal Reserve and Securities and Exchange Commission said in a lessons-learned report. "However, that initial shock both uncovered and exacerbated other weaknesses in the global financial system."
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The resulting blow to confidence threatens to further weaken lending, borrowing, spending and investment in the U.S. economy. "Hedge fund blowups have so far been one-off situations. One worry is that we'll cross some line and there'll be a systemic wave of fund failures. It's a reason why the market is so nervous," says John Tierney, credit derivatives strategist at Deutsche Bank.
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Hank is there to provide "zero credibility when it's most needed".
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Kunstler's quip from March 10 applies now more than ever: "A whole flock of black swans is flying in front of the sun. Don't expect to work on your tan this month."
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Update: Thanks to the intrepid Athenae at First Draft for pointing me to a beautiful N. Roubini quote that I'd like to highlight, as well:
So the question is: if Bear Stearns screwed up big time - as it did - with huge leverage, reckless investments, lousy risk management and massive underestimation of liquidity risk why should the US taxpayer bail out this firm and its shareholders?
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Unless public money is used on a very temporary basis to achieve an orderly wind-down or merger of Bear Stearns this is another case where profits are privatized and losses are socialized. By having thrown down the drain the decades old doctrine and rule that the Fed should not lend or bail out non-bank financial institutions the Fed has created an extremely dangerous precedent that seriously aggravates the moral hazard of its lender of last resort support role. If the Fed starts on the slippery slope of providing massive liquidity support to non-bank financial institutions that have recklessly managed their risks it enters into uncharted territory that radically changes its mandate and formal role. Breaking decades-old rules and practices is a radical action that seriously requires a clear public explanation and justification.
There was no public discussion or debate about this radical maneuver. The Fed is going to use all it's "ammo" in order to slow down and postpone the inevitable "reckoning". It probably won't work, but "socializing" the big boys' losses by saddling the American taxpayer with more debt, inflation, and a weaker dollar is a risk Bernanke and the Bushies are willing to take. They're willing to courageously risk our money when their legacies are on the line.
Labels: Bush, Dismal Science, Housing, Markets
