The Fed bailout Bear Stearns, should they bail you out too?

[Cynthetiq]

View: The next bailout: Homeowners
Source: CNNMoney
posted with the TFP thread generator

The next bailout: Homeowners
The next bailout: Homeowners
Federal government help for Bear Stearns and other Wall Street firms increases the chance that assistance for those facing foreclosure will be approved.
By Chris Isidore, CNNMoney.com senior writer
Last Updated: March 27, 2008: 6:57 AM EDT
NEW YORK (CNNMoney.com) -- The federal government is keeping Bear Stearns out of bankruptcy. Are you next?

Momentum for federal assistance to struggling homeowners, a non-starter with the Republican administration and many members of Congress only a few months ago, has picked up steam in Washington.

The tipping point came March 16, when the Federal Reserve agreed to back up to $30 billion in Bear Stearns (BSC, Fortune 500) losses as part of JPMorgan Chase's (JPM, Fortune 500) fire sale purchase of Bear Stearns. (The Fed cut its guarantee by $1 billion earlier this week when JPMorgan boosted its offer for Bear.)

"I think there's a growing populist feeling that if you're going to bail out Bear Stearns you better bail out individuals," said Greg Valliere, political economist with the Stanford Group, a Washington think tank.

And some consumers clearly are in an uproar about the bailout. According to a Reuters report, about 60 protesters entered the lobby of Bear Stearns's New York headquarters Wednesday and made a fuss about how consumers needed more help from the government than Wall Street investment banks.

The Bear Stearns deal isn't the Fed's only direct exposure to the problems in the financial markets either.

The Fed also announced earlier this month that it would make billions in loans directly to Wall Street firms at the Fed's so-called discount rate, a right previously reserved for commercial banks. In addition, the Fed has said it will now accept troubled mortgage-backed securities as collateral on up to $200 billion in loans to Wall Street.

But some economists think the Fed's moves are only the beginning. Mark Zandi, chief economist with Moody's Economy.com., said he thinks the Fed is telling the presidential administration that more needs to be done to fix the mortgage mess.

Using FHA to help borrowers

Valliere said that the idea gaining the most support is a plan from Senate Banking Chairman Chris Dodd and House Financial Services Chairman Barney Frank. Both are Democrats.

The proposal, likely to be introduced soon after Congress returns from the Easter recess next week, would have the Federal Housing Administration guarantee hundreds of billions of new, lower-cost loans to troubled homeowners. Many borrowers would see their total principal on these new mortgages reduced under this program.

According to an outline of this bill, homeowners could receive $30 billion in mortgage interest subsidies. But it's uncertain just how much this proposal will ultimately cost taxpayers because it depends on what will happen to the housing market going forward.

The bill would also benefit mortgage lenders and investors in many mortgages since it could prevent a wave of foreclosures. While lenders and mortgage holders would receive less than what is currently owed on the loans with the biggest risk of default, they would receive significantly more than they could hope to recover if the loan goes through the foreclosure process and the home is sold at a sharp discount. In other words, something is better than nothing.

With this in mind, some economists believe the Dodd-Frank proposal could cost more than $100 billion. This is obviously a pretty large number and because of this, there is a debate over whether taxpayer money should be used to bail out the relatively small percentage of homeowners that have run into problems paying their mortgages.

Some opposition to bailout

A poll by CNN in December found Americans almost evenly split on the idea of using federal dollars to help out struggling homeowners, with 51% supporting some kind of help and 46% opposed.

The poll also found that 51% believed the borrowers who were in trouble had only themselves to blame, while 46% believed they were victims of bad lending practices. The tide was overwhelmingly against helping out mortgage lenders, with 72% opposed and only 26% supporting.

But that poll was taken before job losses and other signs that the U.S. economy had fallen into recession. Congress has also stepped in since then with at $170 billion economic stimulus package that won wide bipartisan support, while the Federal Reserve has slashed interest rates three times this year to try and get the economy back on track.

On March 17, the day after the Bear Stearns deal was announced, Dodd told reporters he believed there was now "a greater deal of receptivity to this idea" from the Fed and presidential administration than there was before the Bear Stearns bailout.

The support for the mortgage bailout won't be as widespread as it was for the economic stimulus package, nor will it be enacted nearly as quickly as that bill, which went from early discussions to being signed into law in just about a month.

"It's going to be a tougher sell, just because this is messy, complicated. Giving a tax rebate is simple," said Zandi. "But it may be just as important if not more important, to the economy."

Where the administration stands

The idea of mortgage lenders agreeing to cut the amount owed to them has already won support from the Office of Thrift Supervision, the agency which regulates savings and loans firms. Fed Chairman Ben Bernanke also said in a speech earlier this month to community bankers that he is in favor of such a plan.

But neither the OTS nor Bernanke called for the FHA or other federal agency to take a direct role in negotiating new mortgages.

The administration hasn't commented directly on the Dodd-Frank plan. But President Bush said Tuesday that if there needs to be further action taken to help the economy, the administration will take it.

Treasury Secretary Henry Paulson expressed some caution Wednesday over some of the proposals now being floated by Democrats. But he said the administration is interested in finding solutions to help homeowners who can't afford mortgage payments that are resetting higher.

Paulson also suggested the administration is looking for ways to deal with the Democratic-controlled Congress on the issue.

"We will continue to pursue policies that strike the right balance: that do not slow the housing correction, yet also help avoid preventable foreclosures and unnecessary capital market turmoil," he said.

What the presidential candidates think

Sen. Barack Obama is one of the co-sponsors of Dodd's bill, and his rival for the Democratic nomination for president, Sen. Hillary Clinton, said she also supports it.

However, Clinton proposed a step beyond his plan Monday. She suggested having the FHA become a temporary buyer of so-called "underwater mortgages" -- loans where the principal is now more than a home's value.

Clinton has also talked about a new housing stimulus package to provide $30 billion directly to states and local governments to buy foreclosed or distressed properties. The cities and states could then resell the properties to low-income families or convert them into affordable rental housing.

Sen. John McCain, the presumptive Republican presidential nominee, also expressed a willingness to look at Democratic proposals in a speech about the economy Tuesday.

"I will not play election year politics with the housing crisis," he said. "I will evaluate everything in terms of whether it might be harmful or helpful to our effort to deal with the crisis we face now."

McCain cautioned he wasn't ready to sign onto a bailout, though.

"I have always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers," McCain said.

But Zandi, who is an economic advisor to McCain, said he believes McCain will support some kind of assistance to homeowners and borrowers.

"I think he...understands that the problems in the housing market are broad and deep and threaten the broader economy, and that there may be a role for the federal government to stem those losses," said Zandi, who cautioned he was not speaking on behalf of the McCain campaign.

Stanford Group's Valliere also said he doesn't believe McCain will be able to resist the growing tide to support federal help to troubled homeowners.

"You have to respect McCain's intellectual honesty on this but the Frank-Dodd bill is a steamroller that can not be stopped," he said.

The Feds are bailing out a company worth billions, should they bail you out as well? Why or why not?

About 60 homeowners protested in front of Bear Stearns this week. If I was the kind to join in such things, I may have been there too. I definitely agree that the homeowners need more help than the bankers. I don't think that they are without fault since it takes two to tango.

For me it is dishonorable the things I've been reading in the media about how people are so underwater that they just mail in the keys to the home and move. They don't even try to work it out in any fashion. They have just given up. I'm not sure how to fix the mess, but if people aren't willing to work on it, then there is little that can be done.

I don't think they should bail me out. If I got myself into the situation, it is my fault. I'm the one who is responsible for it and me alone. I signed on the dotted line, I agreed to the bad terms. I would be grateful if they extended some sort of hiatus like a freeze on rates, but the reality to me is that I entered into this thinking that I was going to be able to get something for less than what other people were getting.

[Baraka_Guru]

We should be looking at this from the right angle. This isn't about government bailing out bankers or homeowners just because they want to help those in need. It's about what will have the most impact on the economy. You don't let huge banks sink overnight. It not only shakes the faith in the economy, but it is a loss of financial capacity in the marketplace and a loss of many jobs.

Homeowners...the same thing. People losing their houses are people not spending money.

But which has a more significant impact? Which is government money better spend, dollar for dollar? I don't the figures nor the algorithms, but I'd say keeping banks afloat has a better effect on the economy than individual homeowners. It might seem cold, but economics is often like that.

[QuasiMondo]

When Bear Stearns got into their situation, it was all their fault too. If the government can give an investment bank that played fast and loose with people's money a bailout, I don't see why the government can give a homeowner who didn't fully read the contract a bailout as well.

My attitude would've been different if there was a headline in the Daily News that read "BUSH TO BEAR STEARNS: DROP DEAD" but there wasn't, so what's good for them is good for us.

[BadNick]

This situation is caused by greed; do almost anything for a faster bigger buck. I say they should pay the price and let them suffer. And of course we'll all take part of the suffering because we didn't jump up and scream and holler for it to change before it was too late ...or demand responsible oversight by our regulators/financial/political leaders. Time to vote in somebody who will do the right thing.

PS: I'm sorry I didn't buy Bear Stearns stock when I might have gotten it for a buck or two.

[Yakk]

Bear Sterns stockholders where bought out at 2$ on the 100$ approximetally.

Stockholders are analagous to Homeowners. You can leverage a home and you can leverage stock. In both cases, the owner has last rights to assets, and infinite upside on price increases.

So, provide guaranteed loans that allow someone to mass purchase defaulted homes at 2$ on the 100$.

Wait, that's a pretty crappy bailout, isn't it? The owners of Bear Sterns got screwed.

[uncle phil]

if i spent more than i earned, i would freakin' LOVE it if somebody bailed me out when i couldn't make payments...

guess i just gotta live within my means, as i have since day one...

[roachboy]

predatory lending would have been a problem had there not been reagan-period deregulation of banking. the earlier version of the subprime fiasco, which was called the "savings and loan" crisis should have been a signal that something was seriously wrong--that was brushed aside...i think you can make one argument that the effects of subprime mortgages follow from the ideologically driven incompetence of the us state. so that's one.

another is the same kind of realpolitik that issued in the bear-stearns buyout: this sector of homeowners may be too big to be allowed to just go under without generating political consequences that are potentially unacceptable. maybe the political legitimacy of the neo-liberal state is at stake in it.

or maybe the calculation is the obvious one: without some help to the folk who are getting foreclosed, but with help to bear-stearns and other financial institutions, the Interests of the state become a bit too transparent, even for the comfort of the right.

i'm not sure that the crisis we are tipping into is driven by this alone, however: most of it seems to be a function of the transnational trafficking in debt as a commodity, which is itself the leading edge of maybe other problems to come as the consequences of the range of new financial instruments the nature of which i don't entirely understand (but i'm working on it) since the reagan period start to surface.

this is a multi-pronged cluster fuck--so at bottom, i think most of the moves are political face-saving and ass-covering--system protection in short. none of the moralizing interpretations of borrowers seem relevant. and i don't see their problems as in themselves motives for any state action.

[Derwood]

if the government had bailed out homeowners, I couldn't have bought this sweet house i'm sitting in for under market value

[Ustwo]

Since I wasn't a dumb ass taking on a house I couldn't afford, could I get some free money too anyways?

[ngdawg]

Originally Posted by Ustwo

Since I wasn't a dumb ass taking on a house I couldn't afford, could I get some free money too anyways?

You will. This Summer. Don't spend it all at once.....

[MSD]

Originally Posted by Ustwo

Since I wasn't a dumb ass taking on a house I couldn't afford, could I get some free money too anyways?

I'll take two. My parents bought this house in the '80s for under $100k and we're working on a $180k mortgage now because after the income loss when my father died, we can't make the needed repairs to make it sellable at its appraised value, and if we sell it we wouldn't have enough left to buy another house. Unforseeable circumstances fucked us over, so surely we deserve a bailout, too.

But we live in the real world. Bear Stearns will get a bailout while we stand here trying to pull ourselves up by our bootstraps.

[Xazy]

I think we should not bail anyone out this is a capitalist society, they took a gamble and it lost.

That being said the reason I see in this case being different is a fear of a depression. If our banks are not stable people might make a run on them for their money. If that was to happen then our economy would crumble. I do not think this is right, but I think it is a necessary evil and sadly therefore acceptable.

The idea is to minimize the damage to our already very fragile economy.

[roachboy]

this is just another of the seemingly endless series of situation in which the petit-bourgeois viewpoint says nothing at all about structural problems. this is self-evidently a political matter and not a "market" one.

kinda makes you wonder whether there are any "market" issues, when you get down to it---markets being state/legal creations and so political--bigger markets being therefore political matters in themselves--financial markets first and foremost in this enlightened capitalist society within which human beings are worth less than cash and commodities---when things are operating normally, the political underpinning of markets can disappear into the background (along with the regulatory underpinnings) and so it becomes possible, given an adequately superficial view (no need to say more about neoliberalism) for people to talk in terms of abstract market relations and forces and to moralize about those who win and those who loose as if all of this was necessary and natural---so it is here---but when things get squirrely, the regulatory underpinning and political stakes resurface.

the mortgage "bailout", if it comes, will follow from the perceptions of political damage created by the bear-stearns buyout, and not because suddenly the republicans, for example, start actually giving a damn about the regular people who are loosing their homes.

but they have to appear to give a damn.
pace machiavelli

[MSD]

Originally Posted by roachboy

the mortgage "bailout", if it comes, will follow from the perceptions of political damage created by the bear-stearns buyout, and not because suddenly the republicans, for example, start actually giving a damn about the regular people who are loosing their homes.

but they have to appear to give a damn.

It all boils down to a return on investment. Banks lend money to generate capital gains via interest, legislators placate the masses to generate a climate favorable to re-election. Banks have a duty to their stockholders to return a profit, but our leaders hardly have any de facto responsibility to anyone.

Nobody will bail out the consumer because they think it's the right thing to do, they'll do it because it keeps them in office.

[Ustwo]

Originally Posted by MSD

Nobody will bail out the consumer because they think it's the right thing to do, they'll do it because it keeps them in office.

Amen.

The problem of course the government shouldn't be bailing out anyone in this case, but the Nanny State mentality is such that they have to do SOMETHING.

This btw isn't a failure of capitalism or neoliberalism roachboy its just a little socialism to buy votes. SOP.

[snowy]

Originally Posted by Baraka_Guru

People losing their houses are people not spending money.

But which has a more significant impact? Which is government money better spend, dollar for dollar? I don't the figures nor the algorithms, but I'd say keeping banks afloat has a better effect on the economy than individual homeowners. It might seem cold, but economics is often like that.

I don't know about that; consumer confidence and consumer spending plays a large role in the U.S. economic system. In theory, Shoring up the middle class by bailing out homeowners would certainly make those people more economically secure, and allow them to spend more of their money. However, I do not think consumer confidence is currently high enough to get people to spend their excess money, especially given the media's influence on consumer confidence.

I would like to see common people keep their homes, but I'm not so naive as to believe that this is done out of the goodness of politicians' hearts; they are politicians, after all.

[Poppinjay]

How many people will take their gummint check and spend it on the mortgage? Almost none, according to George Mason economists, and these are guys who are always in the tank for the GOP.

http://www.gmu.edu/departments/econo...genonsense.htm

That dumbass Mike Huckasbee had a good point, why put the country further in the red by borrowing money from China to offput a recession? Better go through it, get it done, and learn the lessons.

Elect me, and I promise, 50% fewer people, but everybody on TFP will be on board.

[BadNick]

I want to take a cheap shot at the "stupid" people who financed houses they couldn't otherwise afford via variable rate mortgages that they GAMBLED would not go up so much that they couldn't afford to pay or they didn't even figure out what that number would look like run on sentence. I've also had the "pleasure" of dealing with ill-motivated mortgage brokers who just wanted to make their quick buck on your financing with no regard to the borrowers' longer term well being; but any consumer who decides to commit so much of their financial resources without understanding the details is a stupid consumer. I hope we at least end up with smarter consumers after this debacle, that's worth something.

[Yakk]

Originally Posted by Ustwo

Amen.

The problem of course the government shouldn't be bailing out anyone in this case, but the Nanny State mentality is such that they have to do SOMETHING.

This btw isn't a failure of capitalism or neoliberalism roachboy its just a little socialism to buy votes. SOP.

Well, they should be injecting the liquidity that went away somewhere.

I suppose that making it the same scale is easier if it ties in, but the moral hazard is an issue.

[Merlocke]

Originally Posted by Baraka_Guru

We should be looking at this from the right angle. This isn't about government bailing out bankers or homeowners just because they want to help those in need. It's about what will have the most impact on the economy. You don't let huge banks sink overnight. It not only shakes the faith in the economy, but it is a loss of financial capacity in the marketplace and a loss of many jobs.

Homeowners...the same thing. People losing their houses are people not spending money.

But which has a more significant impact? Which is government money better spend, dollar for dollar? I don't the figures nor the algorithms, but I'd say keeping banks afloat has a better effect on the economy than individual homeowners. It might seem cold, but economics is often like that.

I'd have to agree with this one, it's not the government's job to create jobs, it's their job to create an environment where businesses can thrive and help the economy flow. The better purchase from an overall economic standpoint is to help the investment bank that provides liquidity and cash flow to the US Note. If they bailed out homeowners, as a whole, the people would feel happier but if they let the bank fall, then any stocks underwritten by them fall off the wayside, companies depending on financing through them fall, jobs fall, and even more people will lose houses in the echoes that follow.

It's a crappy decision, but made in the right direction for the greater good.


It's just like the conundrum where if it was wartime, and you were a refugee hiding in a house. 12 people are hiding with you when soldiers raid the house. You're in a well covered up area that is not easily found, but a baby starts crying. If the soldiers find the people, everyone dies, including the baby. You can't quiet or comfort the baby to any degree. The question is, do you kill the child so that 12 lives are saved? Another twist would be if the child wasn't yours - would you have any easier time taking one life to save many? It's not an easy choice, but in the end - the alternative is that everyone dies, including the child. Sometimes the people in charge have to make the difficult decisions.

[host]

Arthurdale, in 1933, seemed a better project for the government, than bailing out Bear Stearns. Lehman, et aL:

http://www.nps.gov/archive/elro/glossary/arthurdale.htm

When you attempt to resell loans you have on your books <h3>that investors mostly rejected</h3>, doesn't that mean that there was no bid for them...as in worthless crap?

http://www.reuters.com/articlePrint?...39492520080411

Lehman makes move to turn unsold debt to cash: report
Fri Apr 11, 2008 6:27am EDT

NEW YORK (Reuters) - Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research) repackaged unsold debt and used the Federal Reserve's new borrowing facility to convert loans <h3>that investors mostly rejected</h3> into cash to finance its business, the Wall Street Journal reported.

According to the Journal, Lehman transferred $2.8 billion in loans that included some risky leveraged buyout debt into a new investment entity called Freedom.

Freedom then issued debt securities backed by the loans, and $2.26 billion of the securities got investment-grade credit rankings from Moody's and Standard & Poor's, according to the report.

The bank used some of those securities as collateral for a low-interest, short-term cash loan from the Federal Reserve, the Journal said, citing people familiar with the matter.

The move was meant as a test to see what the Federal Reserve would accept, and the size of the loan was not material, the Journal added, citing a person familiar with the matter.

Lehman representatives and the Federal Reserve could not be reached immediately for comment.

Conflict of interest?

http://www.reuters.com/articlePrint?...46902620070830
Lehman hires Jeb Bush as private equity advisor
Thu Aug 30, 2007 5:36pm EDT

NEW YORK, Aug 30 (Reuters) - Lehman Brothers has hired Jeb Bush, brother of the President of the United States, as an advisor to its private equity business, a source familiar with the situation said.

Lehman hired another relative of U.S. President George W. Bush last year--George Walker, a second cousin, who heads up the bank's asset management business.

Jeb Bush is the former governor of Florida.

Lehman Brothers declined to comment.

http://www.dailykos.com/story/2008/3...365/755/482314

New York Times, October 8, 1931

"President Hoover's financial plan," Joseph P. Day said in part, "is a step in the right direction towards making real estate investment more liquid. The system will make it possible for the Federal Reserve Bank to issue acceptance notes against sound real estate securities, thus stabilizing their values. <h3>Real estate mortgages are commonly regarded in banking as frozen assets.</h3> The Hoover plan seeks to take these substantial investments from the frozen asset class and give them a recognized value."

[Cynthetiq]

Originally Posted by host

Arthurdale, in 1933, seemed a better project for the government, than bailing out Bear Stearns. Lehman, et aL:

http://www.nps.gov/archive/elro/glossary/arthurdale.htm

When you attempt to resell loans you have on your books <h3>that investors mostly rejected</h3>, doesn't that mean that there was no bid for them...as in worthless crap?

That is correct host. The way that I understand this debacle is that everyone was playing the shell game and musical chairs. At some point in time, someone has to call for the pea or the music has to stop.

Either way, a that point there is a winner and there is a loser.