Fed acts Sunday to prevent global bank run Monday ( Bear Stearns Taken over,...rates cut )

MarketWatch ^ | 9:40 p.m. EDT March 16, 2008 | Rex Nutting, MarketWatch

[Ernest_at_the_Beach]

WASHINGTON (MarketWatch) -- Acting quickly to prevent a run on major global financial firms, the Federal Reserve cut its discount rate by a quarter percentage point to 3.25% and offered to lend money to a longer list of firms than ever before.

he extraordinary weekend moves came as J.P. Morgan Chase sealed a deal to buy Bear Stearns Cos. for just $2 a share backed by funds borrowed from the Fed. The Fed board gave its approval to that unique funding arrangement, which guarantees JP Morgan against losses from buying Bear. See full story.

The Fed board also approved the creation of a special lending facility through the New York Fed that would be available to members of its primary dealers list, which includes both commercial banks and investment banks. Investment banks, such as Bear Stearns, have not been allowed to borrow directly from the Fed.

JP Morgan has access to the discount window through its Chase Bank subsidiary, but Bear Stearns does not have direct access.

Events have unfolded at warp speed over the last week. On Tuesday, the Fed announced a new lending program for primary dealers in the bond markets, but that program won't go into effect for two more weeks. On Friday, the Fed allowed Bear Stearns to borrow money via JP Morgan in a desperate bid to save the firm, which has been pummeled by losses on exotic securities backed by subprime mortgages.

The Federal Open Market Committee meets on Tuesday. Analysts expect the FOMC to cut the target for the federal funds rate by as much as a full percentage point to 2%. Another cut in the discount rate is also likely.

[Ernest_at_the_Beach]

fyi

[vox_freedom]

BAILOUT.
Do we really want the Federal Government to be the backstop for every (major and minor) financial downfall in our country? Just wondering here.

[spanalot]

http://www.youtube.com/watch?v=QPlMmwOq7U8&feature=related

(disregard some of the pix - the rest are somewhat prescient)

[Obadiah]

This is not good. The feds are expected to cut the discount rate another half point on Tuesday. And then Greenspan was grousing about the worst situation since WWII, yet somehow FAILED to mention that he caused much of this mess! He’s the guy who left the fed rate at 1% waaay too long and got us into this mess. Of course, if you remember, Greenspan did this to get us out of te tech bubble he also helped create.

[irish guard]

I don’t really think this was as much of a bailout as you might think. They fascilitated a merger and at the same time made sure the markets had something to rely on. Bear Sterns shareholders were only paid $2.00 per share...effectively JPMorgan Chase got them for nothing. Where’s the bailout in that other than to make sure money market funds didn’t have to break the buck by losing on faile Bear repos. JPM Chase now makes good on those obligations and all Bear shareholders lose everything.

[NaughtiusMaximus]

I’m going to get out early tomorrow morning so I can claim the best corner for my apple stand.

[DuncanWaring]

...all Bear shareholders lose everything.

I wonder how many margin calls that's going to trigger.

[al baby]

I don’t because the Fed is funded by you and me im sick of paying everyones way f them

[Obadiah]

Good point.

[Ernest_at_the_Beach]

I think I need to go to Walmart before the prices go up....

[vox_freedom]

...I don’t really think this was as much of a bailout as you might think. They fascilitated a merger...

From article: The Fed board also approved the creation of a special lending facility through the New York Fed that would be available to members of its primary dealers list, which includes both commercial banks and investment banks.

This is what I'm asking about, not just the Bear Stearns "fire sale." The bailout of perhaps dozens or hundred or more will likely be in the offing...

[DuncanWaring]

Merry-Monday-WTF-now ping.

[BellStar]

The sky is falling! Duck!

[kms61]

The Asian markets are down again anyway.

[RayChuang88]

I'm really crossing my fingers and hoping we're NOT going to have a repeat of the 1930's, when the Great Depression lead to political extremism and that led to a world war.

[BGHater]

Wal-mart would actually be a safe bet for a stock investment now. That, BJ warehouse and Costco.

[Southerngl]

Ok, please explain this to this poor girl who does not understand the ins and outs of the stock market.

Thank you.

[irish guard]

While it is unusual, I don’t see the creation of such a facility as a bailout. On the other hand, let me say that a year from now, when the dust has settled and we read about all this, I suspect you might actually feel different about the Fed’s actions.

[ncalburt]

Was Greens pan misquoted again by the Dem party operatives at AP?
I stopped believe these quotes after the Dem Media misquoted the guy twice !

Bearns group was stupid enough to get hooked up with the
Carlye group !

[AmericanInTokyo]

WOW, over here in Tokyo as I Freep, the US dollar is getting kicked to the sidewalk; it is now 96 Yen to the US Dollar. 10 p.m. Eastern Time Sunday night.

I don't think I have seen these levels in 12-15 years!

Well, there goes Hawaiian real estate! Visiting Japanese in limos will be putting down hard cash, 100% of the sales price, after just driving by condos that meet their fancy, parking the car (with the engine running) and negotiating with the owners directly, paying with Yen-based traveler's checks on the spot. Talk about "bargain basement." YIKES.

[Ernest_at_the_Beach]

Bear Stearns was a very big player in the Sub Prime Mess....they needed to be taken out!

[GRRRRR]

Pelosi's Fault!!

Ever since the DemonRats took over, the economy has gone down. It's all THEIR FAULT!!

[HereInTheHeartland]

“I’m going to get out early tomorrow morning so I can claim the best corner for my apple stand.”

I already took the prime corners on Friday. But I am selling pencils

[Ernest_at_the_Beach]

Maybe you should cash out in Japan and move to Hawaii....

[Travis McGee]

Man the pumps!

[Walmartian]

I already took the prime corners on Friday. But I am selling pencils

I hope you're not selling those crappy saw dust pencils. Mine are solid wood and far more superior.

[palmer]

The bailout is in the rates. In 1998 for example, the LTCM bailout was relatively minor, a couple billion, but the rates were lowered by 0.75 which reignited the Nasdaq bubble and made the 2000 pop much worse. The other direct effect of 1998 was that was when the subprime mortgage security market was rescued (as it was about to die).

[AmericanInTokyo]

They used to tell me I was building a dream, and so I followed the mob,
When there was earth to plow, or guns to bear, I was always there right on the job.
They used to tell me I was building a dream, with peace and glory ahead,
Why should I be standing in line, just waiting for bread?

Once I built a railroad, I made it run, made it race against time.
Once I built a railroad; now it’s done. Brother, can you spare a dime?
Once I built a tower, up to the sun, brick, and rivet, and lime;
Once I built a tower, now it’s done. Brother, can you spare a dime?

Once in khaki suits, gee we looked swell,
Full of that Yankee Doodly Dum,
Half a million boots went slogging through Hell,
And I was the kid with the drum!

Say, don’t you remember, they called me Al; it was Al all the time.
Why don’t you remember, I’m your pal? Buddy, can you spare a dime?

Once in khaki suits, gee we looked swell,
Full of that Yankee Doodly Dum,
Half a million boots went slogging through Hell,
And I was the kid with the drum!

Say, don’t you remember, they called me Al; it was Al all the time.
Say, don’t you remember, I’m your pal? Buddy, can you spare a dime?

[DWC]

Out come the chicken littles.

[Travis McGee]

"The first rule of bank runs: get there first."

[AmericanInTokyo]

I won’t wax personal personal here, but let’s just say Plans B, C, and D are all in place for ol’ AiT. Sheesh. What a day.

[Ernest_at_the_Beach]

Another thread with some links to Mr. Liu's articles....:

Bear Stearns Racing Toward Selling Itself to JPMorgan ( Fed driving the deal before Asia Mkt opens)

He talks about Greenspan setting up these bubble's.

[TigerLikesRooster]

There was a report that Fed beefed up manpower to handle bank runs. When some banks(even if they are relatively small) go under, dollars would tank further, and Japanese could buy stuffs real cheap.

[Travis McGee]

The first rule of bank runs: get there first!

[DuncanWaring]

Ain’t it past your bedtime?

[Travis McGee]

You kidding? This is my prime time.

[Nervous Tick]

>> when the dust has settled and we read about all this, I suspect you might actually feel different about the Fed’s actions.

What I expect to see are the financially irresponsible breathing a HUGE sigh of relief... “Way to go Helicopter Ben! You da man! Bail me out and inflate my debt away BABY!”

And another (probably smaller) group... responsible folks who didn’t join the go-go speculation craze... who had little or no debt and cash. Cash that is now worth less, if not worthless. Do you think those of us in that category will also “feel different” about the Fed’s actions?

You get what you reward. Ben Bernanke is rewarding the profligate and the irresponsible. Tell me... can this go on forever? The bubble is dead, on to the next bubble? Leaving the taxpayer and the financially responsible to clean up on Aisle 9 while the speculators move on to the next party?

Is this a good long term strategy for the financial health of the US?

[AmericanInTokyo]

Already the oft whispered word out here in Tokyo this Monday morning is バーゲン・ベースメント ("sale", as in "fire sale", buy up stuff in the US on strong Yen that Americans with their shrinking US Dollars won't be able to afford). It is sad to see happening as an American, that's for sure.

[Obadiah]

No, Greenspan was not misquoted as it was an article he wrote for the Financial Times (Drudge has a link). Greenspan’s thesis is that rating agencies are to blame for not properly valuing market risk. While this is certainly true, again, Greenspan fails to point out that it was on his watch that he left the 1% punchbowl out waay too long that created a feeding frenzy environment which led to the current mortgage crisis.

[Ernest_at_the_Beach]

More direct link:

Greenspan, the Wizard of Bubbleland

By Henry C K Liu
Sep 14, 2005

************************EXCERPT************************

The Kansas City Federal Reserve Bank annual symposium at Jackson Hole, Wyoming, is a ritual in which central bankers from major economies all over the world, backed by their supporting cast of court jesters masquerading as monetary economists, privately rationalize their unmerited yet enormous power over the fate of the global economy by publicly confessing that while their collective knowledge is grossly inadequate for the daunting challenge of the task entrusted to them, their faith-based dogma nevertheless should remain above question. That dogma is based on a single-dimensional theology that sound money is the sine qua nonof economic well-being. It is a peculiar ideology given that central banking as an institution derives its raison d'etre from the rejection of a rigid gold standard in favor of monetary elasticity.

In plain language, central banking sees as its prime function the management of the money supply to fit the transactional needs of the economy, instead of fixing the amount of money in circulation by the amount of gold held by the money-issuing authority. Thus

central bankers believe in sound money, but not too sound please, lest the economy should falter. Their mantra is borrowed from the Confessions of St Augustine: "God, give me chastity and continence - but not just now."

This year, the annual august gathering in August took on special fanfare as it marked the final appearance of Alan Greenspan as chairman of the US Federal Reserve Board of Governors. Among the several interrelated options of controlling the money supply, the Federal Reserve, acting as a fourth branch of the US government based on dubious constitutional legitimacy and head of the global central-banking snake based on dollar hegemony, has selected interest-rate policy as the instrument for managing the economy all through the 18-year stewardship of Alan Greenspan, on whom many accolades were showered by invited participants in the Jackson Hole seminar in anticipation of his retirement early next year.

Greenspan's formula of reducing market regulation by substituting it with post-crisis intervention is merely buying borrowed extensions of the boom with amplified severity of the inevitable bust down the road. The Fed is increasingly reduced by this formula to an irrelevant role of explaining an anarchic economy rather than directing it towards a rational paradigm. It has adopted the role of a cleanup crew of otherwise avoidable financial debris rather than that of a preventive guardian of public financial health. Greenspan's monetary approach has been "when in doubt, ease". This means injecting more money into the banking system whenever the US economy shows signs of faltering, even if caused by structural imbalances rather than monetary tightness. For almost two decades, Greenspan has justifiably been in near-constant doubt about structural balances in the economy, yet his response to mounting imbalances has invariably been the administration of off-the-shelf monetary laxative, leading to a serious case of lingering monetary diarrhea that manifests itself in runaway asset price inflation mistaken for growth.

Volcker's bloody victory
Paul Volcker, as chairman of the Fed before Greenspan, caused a "double-dip" recession in 1979-80 and 1981-82 to cure double-digit inflation, in the process bringing the unemployment rate into double digits for the first time since 1940. Volcker then piloted the economy through its long recovery that ended with the 1987 crash. To his credit, Volcker did manage to bring unemployment below 5.5%, half a point lower than in the 1978-79 boom, and the acknowledged structural unemployment rate of 6%.

To achieve his heroic, albeit bloody, victory over intractable inflation, Volcker adopted a "new operating method" for the Fed in 1980 as a therapeutic shock treatment for Wall Street, which had been spoiled fearless by the brazen political opportunism of Arthur Burns, Volcker's predecessor during the Nixon-Ford era. Wall Street had lost faith in the Fed's political will to control inflation.

[Travis McGee]

“Derivatives have permitted financial risks to be unbundled in ways that have facilitated both their measurement and their management…. As a result, not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.”~~Alan Greenspan, May 2003

"American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."~~Alan Greenspan, February 22, 2004

“The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions.”~~Alan Greenspan, May 2005

"We're not about to go into a situation where (real estate) prices will go down. There is no evidence home prices are going to collapse."~~Alan Greenspan, May 21, 2006

[HeartlandOfAmerica]

This is gonna be a disaster of biblical proportions.

Gonna make the 1987 crash look like a tea party. Lot closer to 1929 I think than 87.

Watching it on a forex demo acct. Asia has to be hemorrhaging something awful.

Gonna be a horrible, horrible day!!!

God Bless America (cuz we're gonna need it!)

[Ernest_at_the_Beach]

The Petro Dollars are a real problem....then there is this Factoid I heard...

USA consumes ?Crude at the rate of 29 barrels per capita per annum...China consumes at the rate of 2 barrels per annum./////there is a problem.....

[DuncanWaring]

Silly me. I forgot - you used to be one of those guys who swims 20 miles in the morning to work up an appetite for breakfast, then runs 50 miles afterwards to help it digest. ;-)

[Travis McGee]

"A Wall Street Domino Theory" NEW YORK TIMES The Federal Reserve’s unusual decision to provide emergency assistance to Bear Stearns underscores a long-building concern that one failure could spread across the financial system.

[Lijahsbubbe]

It’s all being created by the media to make Republicans look bad. /s

[Obadiah]

Wow...just wow. Are those factual Greenspan quotes. Oh, my.

[Travis McGee]

And that was an easy day.

[Hacklehead]

“Ok, please explain this to this poor girl who does not understand the ins and outs of the stock market.”

Basically it’s like this.
The ecomony is headed for a disaster of biblical proportions, real wrath of God type stuff. Fire and brimstone coming down from the skies! Rivers and seas boiling! Forty years of darkness! Earthquakes, volcanoes...
The dead rising from the grave! Human sacrifice, dogs and cats living together... mass hysteria!