Monday, March 17, 2008

BEAR STEARNS BAILOUT—Whatever happened to Laissez-faire and “The Free Market?”

Bailouts for Wall Street, Bankruptcy for the little guy.

As we witness the bailout of billionaires and the economy sinking into recession, or worse, Robert Kuttner’s comments on the effects of deregulation in his 2007 book, The Squandering of America, seem even more prescient:

But if some technical entrepreneurs arguably deserve large earnings, the Wall Street billionaires are a whole different story. There is a very good case that their windfall profits are actually making the economy worse off. The gains to hedge fund operators and merger-and-acquisition specialists in the newly deregulated environment are often not a case of inventing something new and valuable, but rather taking advantage of an insider position to capitalize on information that will move markets before it becomes widely known, or manipulating those markets for personal gain, or rearranging assets for the value that can be extracted from the transaction. While some Wall Street insiders do add value, spillover costs of the windfall economy frequently exceed the benefits.”

Ah, yes—the spillover costs. The fed is doing its best to shield those primarily responsible for the problem from those spillover costs. Those costs will be paid for by the taxpayer, as they often are in American special interest capitalism for the rich.

As the denial continues in some quarters, the 5 articles and the blog comments below help put the Fed’s actions in proper perspective. -Chris

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Bear Stearns Fire-sale sends Global Markets Plunging; Dollar Routed

By Mike Whitney

Bear's travails are just the beginning of Wall Street's woes. Now there's talk of Lehman Brothers going under. According to the Wall Street Journal:


Too Big to Bail

The Fed's Wall Street Dilemma

By Pam Martens

Americans learned two new truths last week from the Bush Administration's version of Life's Little Instruction Book: if you're a Wall Street miscreant you're thrown a lifeline; if you're a Wall Street crime fighter you're thrown a land mine.
See also:
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The $200 billion bail-out for predator banks and Spitzer charges are intimately linked

By Greg Palast
Reporting for Air America Radio’s Clout

Listen to Palast on Clout at

While New York Governor Eliot Spitzer was paying an ‘escort’ $4,300 in a hotel room in Washington, just down the road, George Bush’s new Federal Reserve Board Chairman, Ben Bernanke, was secretly handing over $200 billion in a tryst with mortgage bank industry speculators.

Both acts were wanton, wicked and lewd. But there’s a BIG difference. The Governor was using his own checkbook. Bush’s man Bernanke was using ours.

This week, Bernanke’s Fed, for the first time in its history, loaned a selected coterie of banks one-fifth of a trillion dollars to guarantee these banks’ mortgage-backed junk bonds. The deluge of public loot was an eye-popping windfall to the very banking predators who have brought two million families to the brink of foreclosure.

Up until Wednesday, there was one single, lonely politician who stood in the way of this creepy little assignation at the bankers’ bordello: Eliot Spitzer.

Who are they kidding? Spitzer’s lynching and the bankers’ enriching are intimately tied.

How? Follow the money.

The press has swallowed Wall Street’s line that millions of US families are about to lose their homes because they bought homes they couldn’t afford or took loans too big for their wallets. Ba-LON-ey. That’s blaming the victim.

Here’s what happened. Since the Bush regime came to power, a new species of loan became the norm, the ‘sub-prime’ mortgage and it’s variants including loans with teeny “introductory” interest rates. From out of nowhere, a company called ‘Countrywide’ became America’s top mortgage lender, accounting for one in five home loans, a large chuck of these ‘sub-prime.’

Here’s how it worked: The Grinning Family, with US average household income, gets a $200,000 mortgage at 4% for two years. Their $955 a month payment is 25% of their income. No problem. Their banker promises them a new mortgage, again at the cheap rate, in two years. But in two years, the promise ain’t worth a can of spam and the Grinnings are told to scram - because their house is now worth less than the mortgage. Now, the mortgage hits 9% or $1,609 plus fees to recover the “discount” they had for two years. Suddenly, payments equal 42% to 50% of pre-tax income. Grinnings move into their Toyota.

Now, what kind of American is ‘sub-prime.’ Guess. No peeking. Here’s a hint: 73% of HIGH INCOME Black and Hispanic borrowers were given sub-prime loans versus 17% of similar-income Whites. Dark-skinned borrowers aren’t stupid – they had no choice. They were ‘steered’ as it’s called in the mortgage sharking business.

‘Steering,’ sub-prime loans with usurious kickers, fake inducements to over-borrow, called ‘fraudulent conveyance’ or ‘predatory lending’ under US law, were almost completely forbidden in the olden days (Clinton Administration and earlier) by federal regulators and state laws as nothing more than fancy loan-sharking.

But when the Bush regime took over, Countrywide and its banking brethren were told to party hardy – it was OK now to steer’m, fake’m, charge’m and take’m.

But there was this annoying party-pooper. The Attorney General of New York, Eliot Spitzer, who sued these guys to a fare-thee-well. Or tried to.

Instead of regulating the banks that had run amok, Bush’s regulators went on the warpath against Spitzer and states attempting to stop predatory practices. Making an unprecedented use of the legal power of “federal pre-emption,” Bush-bots ordered the states to NOT enforce their consumer protection laws.

Indeed, the feds actually filed a lawsuit to block Spitzer’s investigation of ugly racial mortgage steering. Bush’s banking buddies were especially steamed that Spitzer hammered bank practices across the nation using New York State laws.

Spitzer not only took on Countrywide, he took on their predatory enablers in the investment banking community. Behind Countrywide was the Mother Shark, its funder and now owner, Bank of America. Others joined the sharkfest: Goldman Sachs, Merrill Lynch and Citigroup’s Citibank made mortgage usury their major profit centers. They did this through a bit of financial legerdemain called “securitization.”

What that means is that they took a bunch of junk mortgages, like the Grinnings, loans about to go down the toilet and re-packaged them into “tranches” of bonds which were stamped “AAA” - top grade - by bond rating agencies. These gold-painted turds were sold as sparkling safe investments to US school district pension funds and town governments in Finland (really).

When the housing bubble burst and the paint flaked off, investors were left with the poop and the bankers were left with bonuses. Countrywide’s top man, Angelo Mozilo, will ‘earn’ a $77 million buy-out bonus this year on top of the $656 million - over half a billion dollars – he pulled in from 1998 through 2007.

But there were rumblings that the party would soon be over. Angry regulators, burned investors and the weight of millions of homes about to be boarded up were causing the sharks to sink. Countrywide’s stock was down 50%, and Citigroup was off 38%, not pleasing to the Gulf sheiks who now control its biggest share blocks.

Then, on Wednesday of this week, the unthinkable happened. Carlyle Capital went bankrupt. Who? That’s Carlyle as in Carlyle Group. James Baker, Senior Counsel. Notable partners, former and past: George Bush, the Bin Laden family and more dictators, potentates, pirates and presidents than you can count.

The Fed had to act. Bernanke opened the vault and dumped $200 billion on the poor little suffering bankers. They got the public treasure – and got to keep the Grinning’s house. There was no ‘quid’ of a foreclosure moratorium for the ‘pro quo’ of public bail-out. Not one family was saved – but not one banker was left behind.

Every mortgage sharking operation shot up in value. Mozilo’s Countrywide stock rose 17% in one day. The Citi sheiks saw their company’s stock rise $10 billion in an afternoon.

And that very same day the bail-out was decided – what a coinkydink! – the man called, ‘The Sheriff of Wall Street’ was cuffed. Spitzer was silenced.

Do I believe the banks called Justice and said, “Take him down today!” Naw, that’s not how the system works. But the big players knew that unless Spitzer was taken out, he would create enough ruckus to spoil the party. Headlines in the financial press – one was “Wall Street Declares War on Spitzer” - made clear to Bush’s enforcers at Justice who their number one target should be. And it wasn’t Bin Laden.

It was the night of February 13 when Spitzer made the bone-headed choice to order take-out in his Washington Hotel room. He had just finished signing these words for the Washington Post about predatory loans:

“Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.”

Bush, said Spitzer right in the headline, was the “Predator Lenders’ Partner in Crime.” The President, said Spitzer, was a fugitive from justice. And Spitzer was in Washington to launch a campaign to take on the Bush regime and the biggest financial powers on the planet.

Spitzer wrote, “When history tells the story of the subprime lending crisis and recounts its devastating effects on the lives of so many innocent homeowners the Bush administration will not be judged favorably.”

But now, the Administration can rest assured that this love story – of Bush and his bankers - will not be told by history at all – now that the Sheriff of Wall Street has fallen on his own gun.

A note on “Prosecutorial Indiscretion.”

Back in the day when I was an investigator of racketeers for government, the federal prosecutor I was assisting was deciding whether to launch a case based on his negotiations for airtime with 60 Minutes. I’m not allowed to tell you the prosecutor’s name, but I want to mention he was recently seen shouting, “Florida is Rudi country! Florida is Rudi country!”

Not all crimes lead to federal bust or even public exposure. It’s up to something called “prosecutorial discretion.”

Funny thing, this ‘discretion.’ For example, Senator David Vitter, Republican of Louisiana, paid Washington DC prostitutes to put him in diapers (ewww!), yet the Senator was not exposed by the US prosecutors busting the pimp-ring that pampered him.
Naming and shaming and ruining Spitzer – rarely done in these cases - was made at the ‘discretion’ of Bush’s Justice Department.

Or maybe we should say, 'indiscretion.'

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March 17, 2008

Bailing Out Billionaires

Ward Sloane is a CBS News producer based in Washington.

“. . . . Over the weekend, the Federal Reserve Board's Ben Bernanke announced another billionaire bail-out. This time he has decided the American people should take on $30 billion in potentially and likely bad mortgage debt so that JP Morgan could then assume the other assets of the formerly venerable Bear Stearns investment house. We get $30 billion in bad debt; JP Morgan gets Bear Sterns at two dollars per share.
. . . .
What seems to be happening before our eyes is the evolution of a national economic policy that puts the full faith and credit of the United States government behind Wall Street at the expense of the United States taxpayer.
. . . .
Here's what the Federal Reserve and the economic gurus of the administration think about the average homeowner facing sky-rocketing mortgage increases or worse, foreclosure: Too bad. Those folks made bad decisions and now should have to live with them.
. . . .
The current economic crisis can be boiled down to this – the big bad boys and girls on Wall Street sold to a willing public the idea that it's possible to get something for nothing.
. . . .
I generally don't have much sympathy for people who buy into this, but let's be real. Everyone bought into it and the economic boom times rolled merrily along.

The only difference, it seems, is that when Wall Street billionaires live beyond their means, they never have to pay the consequences when the house of cards comes tumbling down. The have the full faith and credit of the United States Government to back them. For everyone else it's just tough noogies.

And here is the endgame. The fat cats are reaping their rewards for the millions and millions of dollars they've pumped into the political system. Money talks, everybody else walks

Read the entire article:
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Bear Stearns in Bankruptcy: Can You Feel Their Pain?

By Dean Baker

Monday 17 March 2008

According to the current plans being crafted in Washington, you will. Bear Stearns, one of the longstanding giants of Wall Street investment banking, is now on life support, the victim of its own excessive greed and bad judgment. Apparently, the wizards who run the show at Bear Stearns (I will resist the temptation to use initials) somehow couldn't see an $8 trillion housing bubble in the US economy. They made highly leveraged bets on assets backed by mortgages.

These bets have turned bad in a big way. Bear Stearns would now have less value than a corner lemonade stand, if not for the generosity of the Federal Reserve Board. The Fed lent money to Bear Stearns under terms no private lender would have agreed to. The risk it will end up with a substantial loss on its loans to Bear Stearns is quite large, with no prospect for any real return on its investment.

This raises the obvious question: Why is the Fed, an agency of the government, using our tax dollars to keep Bear Stearns and its rich managers and shareholders above water? After all, the government supposedly doesn't have enough money to provide kids with health care and childcare, to guarantee families decent housing or to meet a long list of other needs. Why do we have the money to lend tens of billions of dollars to Bear Stearns at below market interest rates?

There are two points about this bailout that should be clear. First, this is a bailout - we are handing money to Bear Stearns. Second, we don't have to hand tens of billions of dollars to the country's richest people to save the financial system.

The politicians will try to do their best to obscure the first point. They say, "we aren't giving them money - we're lending money and we're getting interest, so the government can make a profit."

This is what politicians tell people who they think are stupid. No private bank would lend money to Bear Stearns at the same interest rate and under the same terms as the Fed. (We know this for certain; otherwise, Bear Stearns would not have run to the Fed.) When the government makes a loan at below market interest rates, it is giving away money. People on Wall Street know this very well, that is how they got to be fabulously rich: They borrow money at a lower interest rate than they lend it out.

If they can't get away with the "no bailout" nonsense, the Wall Street welfare boys will then try the route of claiming we have to bail them out in order to prevent the whole financial system from collapsing. Such a collapse could turn the recession into a depression leaving millions unemployed for years.

This is also nonsense. We know how to keep banks operating even as they go into bankruptcy. England just did this with Northern Rock, a major bank that managed to get itself into huge trouble because of its holding of bad mortgage debt. After it was clear the bank was insolvent, the Bank of England stepped in and essentially took over the bank. It replaced the incompetent managers who had ruined the bank and brought in a new team to straighten out the books. The plan is to resell the bank to the private sector once the books are in order.

In the meantime, the bank keeps operating. The depositors can continue to make deposits and withdrawals just as before. This prevents any chain reaction from bringing down the financial system.

The difference between the Northern Rock route and what happened with Bear Stearns last week is that in the Northern Rock, the highly paid managers that ruined the bank are sent packing. Similarly, the shareholders will get little or nothing. They own a bankrupt company; why should the government give them money?

As the financial crisis deepens, it is important the public realize the distinction between what the Bank of England did with Northern Rock and the handout from the Fed to Bear Stearns. There are other banks in serious trouble that are also looking to the Fed for help.

The best thing the Fed can do is to go the Northern Rock route. Instead of giving more money to troubled banks, it should give less. It should end the Term Auction Facility and other special mechanisms for injecting money into banks. The economy will recover quickest if we let the banks and the bankers get the full benefit of their own bad judgment. When they have written down their bad debts and are taken over by new management, the banks will again be able to play a productive role in financing growth.

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Robert Rubin Still Doesn't Know
Dean Baker and others have been alerting people to the housing bubble and the enormity of the problems associated with it for some time. Robert Rubin, who was head of the Treasury Department in the Clinton Administration and who even today is a Democratic policy advisor, is still pretending otherwise.

March 14, 2008

Robert Rubin Still Doesn't Know that People Warned About the Bubble

"Former Treasury Secretary Robert Rubin was at a session at the Brookings Institution this morning at which said that "few, if any" people anticipated the sort of meltdown that we are seeing in the credit markets at present.
This should be newsworthy. Mr. Rubin is not only a former Treasury Secretary, he is in the top management at Citigroup and he is one of the top Democratic policy advisers. The failure to recognize the housing bubble and the danger it posed was an act of extraordinary negligence that would get people fired in most lines of work. The fact that he still doesn't recognize the enormity of this oversight even after the fact (economists did recognize the housing bubble and the dangers its collapse would pose to the financial system) is remarkable.
There were several reporters from major media outlets at this event. It would have been appropriate to note that Mr. Rubin is apparently still does not recognize that the collapse of the bubble and the resulting financial chaos was both predictable and predicted by economists who did understand the financial crisis that it would create
--Dean Baker

The NYT Hides the Bailout of Bear Stearns From Readers

"The NYT told readers why the Fed had to use tens of billion of taxpayer dollars to kep Bear Stearns in business. It explained that letting the bank go under would lead to a chain reaction of collapses throughout the financial system.
This is not true. The Fed could have followed the example of the Bank of England in its takeover of Northern Rock. Northern Rock continues to function paying off depositors and honoring other commitments. The major difference is that the incompetent managers who drove Northern Rock into bankruptcy were thrown out on the street. At Bear Stearns they are still collecting multi-million dollar salaries.
The other big difference is that Northern Rock's shareholders essentially lost all their money. That's what happens when you buy stock in a company that goes bankrupt. (It is possible that when the company is resold to the public there will be some money from the sales to kick back to shareholders.) By contrast, stockholders in Bear Stearns still have $4 billion in equity, courtesy of U.S. taxpayers
--Dean Baker

See all of Dean Baker’s Blog at:

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