Tag: Federal Reserve

White House Seeks New Power to Keep Markets Stable

From The New York Times: White House to Seek New U.S. Power to Keep Markets Stable

The Bush administration will propose on Monday that Congress give the Federal Reserve broad authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.

The proposal is part of a sweeping blueprint to overhaul the country’s hodge-podge of regulatory agencies, which many specialists say failed to recognize rampant excesses in mortgage lending until after they triggered what is now the worst financial calamity in decades.

I think this is precisely what Naomi Klein warned about in her book, The Shock Doctrine. I suspect the Bush administration is going to try to use the shock of the collapsing economy to quickly deregulate the entire economy to make it easier to loot.

Why the Stock Market Going Up Means Nothing

So, after yet another rate cut by the Federal Reserve, along with better than expected earnings from Lehman Brothers today (who many feared would follow the path of Bear Stearns), the Dow rocketed up over 400 points.  Economy solved, right?

Nope.  Doesn’t mean anything.  Don’t let anyone fool you into thinking it does.

First of all, the market in equities is now a mere fraction of the size of the market in derivatives.  The assets which are toxic right now are derivatives; Collectivized Debt Obligations and Credit Default Swaps primarily.  The big problem is that everyone knows these derivatives are worth less than they thought, but no one is sure just how much less.  So, no one wants to buy them, out of the fear that the bottom is a long way off.  Compared to these assets, stocks are incredibly stable – the market should do alright, even as these assets get worse.

But second, stock prices increasing doesn’t by default mean what you might think.  For a neat example, Bear Stearns makes for a fascinating example.

The Fed-brokered JP Morgan bailout of Bear is at a share price of $2 a share, as most everyone aware of this story knows.  So why on earth did shares of Bear Stearns close at about seven dollars the day after the sale price was announced?

The big winners from the Bear Stearns acquisition are Bear’s bondholders. They came close to an event of default this weekend; if all goes according to plan, they’ll soon own nice safe debt from JP Morgan Chase. The only thing which can derail their glide path (if Krugman can mix his metaphors, so can I) would be if the deal doesn’t go through at $2 as planned.

The main thing that needs to happen for the deal to go through is that shareholders vote in favor. And the only way that bondholders can ensure yes votes for the deal is to own those shares and vote them themselves. Says Neubert: “They will eat the difference between where they buy the equity and $2.00 in order to protect much higher numbers in debt.”

There’s another reason for bondholders to buy stock above $2.

…if the deal falls apart, the value of the company might go down, all the way to zero eventually. But on the way there, volatility will be huge – and if volatility is high then the value of the equity will go up. In this sense, the equity is a hedge against the deal falling apart. If JP Morgan doesn’t buy Bear, bondholders’ bonds will fall in value – but their stock will rise, helping to offset the loss.

So, shares of Bear are going up because Bear’s bond holders are hoping those shares go down, and are planning to vote for the shares to be sold for less than they paid for them.  But the shares also make a nice hedge for them, since if the sale fails, their bonds will become worthless but their shares will go up.  But nothing about this at all speaks to any macro positive news about the state of the economy.

Things I’d Like To See, Part 1: Krugman As Federal Reserve Chairman

Leave it to Paul Krugman to tell the hard truth about what needs to be done in this financial crisis.

[T]he important thing is to bail out the system, not the people who got us into this mess. That means cleaning out the shareholders in failed institutions, making bondholders take a haircut, and canceling the stock options of executives who got rich playing heads I win, tails you lose.

Not that the Fed shall listen, mind you; Ben Bernanke, like Alan Greenspan before him, cares about the laissez-faire swindlers who caused the latest financial meltdown.  Factoring in the taxpayers only counts for bailing out the criminals, not bailing out the system the crooks abused in order to flush the economy down the toilet.

Krugman goes on to caution:

According to late reports on Sunday, JPMorgan Chase will buy Bear [Stearns] for a pittance. That’s an O.K. resolution for this case – but not a model for the much bigger bailout to come. Looking ahead, we probably need something similar to the Resolution Trust Corporation, which took over bankrupt savings and loan institutions and sold off their assets to reimburse taxpayers. And we need it quickly: things are falling apart as you read this.

He’s right, of course.  Bailing out Bear Stearns might be the smart thing to do as an individual case; for better or worse, that bank is large enough that its failure could — as Krugman suggests — hasten the market panic that would make the Depression we now suffer (the one OpEdNews.com contributor Michael Fox wrote had begun back in November)  official.  But if it’s used simply as a model for bailing out the rest of the Wall Street rip-off artists, then we taxpayers shall have been forced yet again to foot the bill for the irresponsibility of Wall Street.  It’s like a mugging victim being told by a jury that the thug who robbed him wasted the cash on booze and women, so now the victim has to reimburse the thief.

If the Democratic nominee somehow manages to survive the general election in November and become president, he (or she) could do a lot worse than to ask for Bernanke’s resignation as Fed chairman, and offer the job to Professor Krugman.

Bear Stearns and the N-Word: Nationalization

Today, the United States will do something which it hasn’t done since the New Deal: it will nationalize a corporation.  Bear Stearns is the new Tennessee Electric Power Company.

After a weekend of intense negotiations, the Federal Reserve approved a $30 billion credit line to help JPMorgan Chase acquire Bear Stearns, one of the biggest firms on Wall Street, which had been teetering near collapse because of its deepening losses in the mortgage market.

In a highly unusual maneuver, Fed officials said they would secure the loan by effectively taking over the huge Bear Stearns portfolio and exercising control over all major decisions in order to minimize the central bank’s own risk.

President George Bush is responding to the disasters of one of Wall Street’s most reckless firms by echoing the actions which he has so passionately criticized in Evo Morales and Hugo Chavez.  When the high-stakes financial gamblers of derivatives trading are exposed, the true face of Bush Republicanism has been revealed: they are nothing less than communists.

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