In a potentially even bigger move, the Federal Reserve also announced its biggest commitment yet to lend money to struggling investment banks. 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 allow the government to hold as collateral a wide variety of investments 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.
Bear Stearns's profit exceeded $2 billion in 2006, yet the price JPMorgan is paying is about one quarter the value of the securities firm's headquarters building in midtown Manhattan. The 1.2 million-square-foot, 45-story structure built in 2001 is worth about $1.2 billion, based on the average $1,000 per- square-foot that comparable office space in the city is currently fetching.
Amnesty As Travesty
And, it appears that the Fed's new TSLF was set up solely to provide Bear Stearns with liquidity, as Bear cannot avail itself of the TAF. Obviously, JP Morgan can use both. Nevertheless, even the TSLF hasn't been enough, as Bear today needed help from JPM and the NY Fed. So, this is the Fed's way of attempting to bail out Bear Stearns. And that illuminates something I have railed against for some time: We have become a bailout nation.
You would think that if ever there was an example to be made of a brokerage firm that took risk-taking to its extreme, it would be Bear Stearns. Given that the company put itself in harm's way, why shouldn't it be allowed to fail? But the sad fact of the matter is that the Fed and the regulators think they can and should prevent anyone from failing. Which is how we got to this point in time -- where, notwithstanding efforts by the powers that be -- the problems are too big to bail out.
Meanwhile, the consequences of their attempts are a collapsing dollar and a higher gold price. And, at some point, it will matter to the Treasury market, though it certainly hasn't yet. The repercussions to the policies pursued by Greenspan and the Fed are now manifesting themselves. Over the course of the coming months, it will finally be clear to everyone just what an abomination and what a dangerous entity the Fed has become. Perhaps the good that will arise from the crackup ahead is a new regime at the Fed, though I am not holding my breath for when that becomes reality.
Suppose that Monday morning, Ben Bernanke is presented with a deal, under which a buyer gets Bear assets on the cheap, Bear stockholders get paid out, and the Fed (implicitly or explicitly) bears residual risk. If the Fed doesn't approve, executives say, Bear will file for bankruptcy. Dr. Bernanke will then have an unappetizing choice. He can say yes, and hope that there aren't any more rumors out there about any other firms. Or he can say no, and make it very clear that if Bear Stearns files for bankruptcy despite the Fed's continuing provision of liquidity, he will do everything in his power to hold Bear executives personally responsible for the crisis that results.
A man who by all accounts is a very nice guy may be forced to play some very hard ball.
Nevada, California and Florida had the highest foreclosure filing rates in the nation. One in every 165 households in Nevada received a filing in February, up 68% from a year ago and more than three times the national average. [...] Outside of the sun belt, Michigan and Ohio each reported more than 10,000 properties with foreclosure filings in February. These "Rust Belt" states with struggling economies were originally at the epicenter of the housing crisis that began last year with the collapse of the subprime mortgage market.
... while rocketing fuel costs hurt trucking companies in particular, other, less-fuel-hungry modes of transport are seen benefiting from their pain ... Trains can move one ton of freight approximately 423 miles on a gallon of diesel fuel, which is almost three times more than the 140 miles trucks can operate.
Here's how it works:
1. An insider client transfers all or a portion of their company stock into a JP Morgan Securities Inc. brokerage account.
2. The insider then develops, in conjunction with the 10b5-1 team, a 'phased, pre-planned sales program to be executed at either market or specified prices'.
3. Depending on the information available to the insider (but not the public), the insider can decide whether to execute the sale or not.
By gaming the system this way, JP Morgan teaches insiders how to use their knowledge to create a rigged market, one in which it is the "house" that always wins, and the small investor that always loses.
According to a statistical research paper published by Stanford's Graduate School of Business in September last year, executive 10b5-1 trades beat gains relative to non 10b5-1 executive trades by more than 500%.
Seriously, is this the end of world as we know it?
• Yes, in a sense it is..
Bill, after watching the market action in the wake of the Bear Stearns disaster, I've decided to invest in beans, rice and canned goods. Oh, and lots of ammo to defend it when people finally wake up to reality.
• Not a bad idea.
Fed's $200 billion loan scheme won't work
The giveaway strategy -- creating a huge pool of cash to lend to securities dealers, with risky mortgage-backed debt as collateral -- is little but stalling for time.
For some time now, the Federal Reserve has been writing a book. It's called "What Not to Do," and on Tuesday it penned a chapter called "The Prudent Bailing Out the Reckless."
That was via the Fed's creation of a $200 billion Term Securities Lending Facility, a pool of money it can lend to securities dealers on top of funds it has already injected into the financial system.
I guess the sight of all those suffering hedge funds and brokers was just too much to bear.
Now, I realize the Fed was created to provide a liquidity backstop in times of emergency. But the Fed has abused its privilege for so long -- by being the creator and proponent of excess liquidity and the problems it causes -- that, in my book, the Fed is nothing short of an abomination. The reality that's eluded Fed "experts" is simple: Credits in much of the financial system are simply no good. And creating liquidity and stalling for time won't make those credits good.
I find it stunning that the Fed is willing to open up its tool kit when faced with liquidity problems -- spawned from bubbles of its own making -- and yet while those bubbles were inflating, the Fed kept it snapped shut tight.
The cheerleader for excess
Former Fed Chairman Alan Greenspan is responsible for this mess. At every juncture, he insisted on getting out a megaphone and cheering the bubbles. That is why we're in dire straits now.
This action by the Fed will temporarily alleviate some pressure, but it will not change the fundamental problem: Home prices were in a bubble that has now burst. People making median salaries in this country can't afford to buy houses. And even folks who make more money often own more house than they can afford.
The Fed's move set off a big rally on Wall Street, but it lasted just one day. This problem is going to run its course. There's no bubble to bail out the housing bubble.
As to the folks who think commodities may be the next bubble: They might be right.
But exploding commodity prices will not help. They're not going to make housing more affordable because less of people's paychecks will be available for mortgage payments.
Will Fed be left holding the bad?
This just goes to show you the Fed will move heaven and earth to try to keep Wall Street (and, by extension, the economy) running. The Fed cares nothing about capitalism, inflation or the dollar, and it really cares nothing about the message that it sends to the world regarding its aims. Just imagine the image that would be projected if the comrades in power here declared Fannie Mae (FNM, news, msgs) to be a ward of the U.S.
Consider the potential ramifications of the Term Securities Lending Facility, under which the Fed will lend Treasurys for a period of 28 days, taking mortgage-backed debt as collateral.
Before its implementation, the chance of the Fed buying a piece of paper that could deteriorate rapidly over the course of a couple of repo terms would have been small. But now that the Fed, through this facility, is willing to accept (exchange for Treasurys, actually) "AAA-rated" paper -- and remember that the rating agencies are suspect -- it's not inconceivable that the following could occur:
The Fed might actually start taking paper at one price and then find out (by the time XYZ financial institution is supposed to take it back) that the paper is trading at a different price. Inquiring minds would like to know what the Fed would do about these losses if the repo'ing entity was determined not to take back the collateral.
The ball is in Bernanke's court
Creating liquidity and stalling for time won't make those credits good. Credit is contracting all across the financial system, in America as well as around the globe. At the same time, credits are going bad. Both of these problems keep lapping up against each other, and their magnitude will render bailouts useless.
Despite that glaring reality, the Fed remains intent on monetizing whatever needs to be monetized, as Chairman Ben Bernanke thinks this can prevent the underlying mass of home-price issues and the economic consequences of the burst housing bubble from doing what they will do.
But in the end, he's going to shred the currency market and at some point the Treasury market. And, though Greenspan deserves all the blame, Bernanke will likely get it -- with history erroneously declaring him to be the worst Fed chairman ever.
At the time of publication, Bill Fleckenstein did not own or control shares of any equity mentioned in this column.
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