Posted on 04/03/2008 9:22:59 AM PDT by TigerLikesRooster
April 3, 2008
Ben Bernanke admits Bear Stearns was hours from collapse
Dearbail Jordan
US Federal Reserve chairman, Ben Bernanke, today revealed that Bear Stearns was just one day away from going bust when the central bank stepped in to save the Wall Street bank to prevent chaos and a "severe" impact on confidence.
Speaking for a second day in front of US Congress, Mr Bernanke attempted to justify JP Morgan Chase's rescue of Bear Stearns, in a deal that included the US Fed agreeing to back $29 billion of the troubled investment bank's assets.
Mr Bernanke said: "... on March 13, Bear Stearns advised the Federal Reserve and other government agencies that its liquidity position had significantly deteriorated and that it would have to file for bankruptcy the next day unless alternative sources of funds became available."
The Fed chairman said that the central bank was forced to step in because the US financial system is "extremely complex and interconnected", and the collapse of Bear Stearns would have led to a "chaotic unwinding of positions in those markets are could have severely shaken confidence".
Mr Bernanke added: "Given the exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain."
JP Morgan Chase agreed to acquire Bear Stearns for an initial $2 a share, valuing the lender at just $240 million. However, an investor outcry forced JP Morgan to increase the offer to $10 a share, as well as taking on $1 billion of Bear Stearns' assets with the remaining $29 billion backed by the US Fed.
Jamie Dimon, chief executive at JP Morgan, who was also appearing before Congress today, said the bank would not have offered to buy Bear Stearns if the Fed had not agreed to back the assets. His co-speaker, Alan Schwartz, chief executive at Bear Stearns, said today that the bank was not involved in negotiations between JP Morgan and the government regarding the $30 billion asset deal.
Mr Schwartz also maintained, as he said days before Bear Stearns nearly went bust last month, that the run that brought the lender to its knees was due to a lack of confidence and not because of a lack of capital or liquidity.
Mr Bernanke today reiterated his forecast that the US economy would slow in the first half before staging a recovery in the second half. However, like yesterday, Mr Bernanke refused to label the current economic situation as a recession.
It emerged today that US unemployment claims unexpectedly spiked last week by 38,000 to the highest rate since September 2005, alarming investors ahead of monthly jobless figures due out tomorrow.
New data revealed that the number of unemployment claims rose to 407,000 for the week ended March 29, above an expected 370,000 and the previous week's total of 369,000.
The sudden rise in benefit claims sent the Dow Jones industrial average down 48.6 points at 12,556.7 as investor grew nervous that today's figures are an indication of employment numbers that are due out tomorrow that are expected to show non-farm pay rolls for March have fallen by 60,000.
Have you found your accounting or law diplomas yet?
Probably.
Please do enlighten us.
About what?
What did I say? How does it disagree with what the other poster said? Be specific. I'd be glad to try and clear up your confusion. Again.
I’m not suggesting that residential morgages aren’t going to default and that there will be repurcussions, but they are nothing compared to what we had three weeks ago. Sure, the prices are falling and will continue, but not every mortgage is in default, nor is every bank cited above going to fail. They have had the benefit of being able tu use the cheap money at the fed and still do. I just think we needed the Fed to take action. We’re just gonna disagree on that.
And for that matter, why do you call deflation "crushing" while inflation is not ?
Sorry, creating money is not magic - it's called leverage. Don't be sarcastic. And when deleveraging occurs... but of course you think that's magic too ?
Sorry, wrong figures - different bank. The BSC figures seem to be 13 trillion to, on the Wednesday before the firesale, about 12 billion in capital.
No, I guess we don’t. But we’ll be seeing what happens in the next couple three weeks or so. IMHO, though, what’s going on right now is applying bandaids...and the real, underlying, problems haven’t even been touched, much less solved.
Why ? Have you found your mind yet ? Or are you a mindless apologist for the facists in government ? You need to stop parroting the party line and do some thinking of your own.
I ain’t the only one asking the question.
http://www.hussman.net/wmc/wmc.htm
Bear Stearns is trading at $6 instead of $2 because unelected bureaucrats went beyond their legal mandates, delivered a windfall to a single private company at public expense, entered agreements that violate the the public trust, and created a situation where even if the bureaucratic malfeasance stands, the shareholders of Bear Stearns will either reject the deal or be deprived of their right to determine the fate of the company they own. Very simply, Bear Stearns is still in play. Still, when all is said and done, my own impression is that the ultimate value of the stock will not be $2, but exactly zero.
In effect, the Federal Reserve decided last week to overstep its legal boundaries – going beyond providing liquidity to the banking system and attempting to ensure the solvency of a non-bank entity. Specifically, the Fed agreed to provide a $30 billion “non-recourse loan” to J.P. Morgan, secured only by the worst tranche of Bear Stearns’ mortgage debt. But the bank – J.P. Morgan – was in no financial trouble. Instead, it was effectively offered a subsidy by the Fed at public expense. Rick Santelli of CNBC is exactly right. If this is how the U.S. government is going to operate in a democratic, free-market society, “we might as well put a hammer and sickle on the flag.”
What is a “non-recourse loan”? Put simply, if the homeowners underlying that weak tranche of debt go into foreclosure, they will lose their homes, and the public will lose as well. But J.P. Morgan will not lose, nor will Bear Stearns’ bondholders. This will be an outrageous outcome if it is allowed to stand.
In my view, the deal would be palatable if J.P. Morgan was to remain fully responsible for any losses on the “collateral” provided to the Federal Reserve, assuming shareholders were to consent to the buyout. As it stands, Congress should quickly step in to bust the existing deal and demand an alternate resolution, by clearly insisting that the Fed’s action was not legal.
The Fed did not act to save a bank, but to enrich one. Congress has the power to appropriate resources for such a deal by the representative will of the people – the Fed does not, even under Depression era banking laws. The “loan” falls outside of Section 13-3 of the Federal Reserve Act, because it is not in fact a loan to either Bear Stearns or J.P. Morgan. Bear Stearns is no longer a business entity under this agreement. And if the fiction that this is a “loan” to J.P. Morgan was true, J.P. Morgan would be obligated to pay it back, period. The only point at which the value of the “collateral” would become an issue would be in the event that J.P. Morgan itself was to fail. No, this is not a loan. It is a put option granted by the Fed to J.P. Morgan on a basket of toxic securities. And it is not legal.
The deal was made under duress, to the benefit of a private company, on the basis of financial assurances that the bureaucrats involved had no business making. The Federal Reserve is going to put up public assets and accept default risk so that Bear Stearns’ own bondholders are effectively immunized?! That’s not sound monetary policy – it’s a picnic for insiders, bought and paid for through the abuse of public funds by government officials too unprincipled even to recognize the abuse. The only good thing about this deal is that it buys time while principled ways of busting and restructuring it can be settled.
This is not an issue of letting Bear Stearns “fail” on the claims of its customers and counterparties. Nobody wants that. The issue is the method by which it was rescued – who was protected, and who was not; why a consortium was not used instead of a single firm; why the claims of Bear’s bondholders should be secure while the public bears the risk of the toxic waste foisted upon us. This deal should, and I believe will, be restructured. J.P. Morgan will cry foul, but that will be like a child who found the Easter basket and is now forced to share the chocolate. Bear Stearns is worth more than zero in acquisition, provided that the bondholders take an appropriate loss.
http://www.aim.org/aim-column/bushs-big-bank-bailout/
One of the feeble explanations was the Journal’s Saturday page-one story about Bear Stearns receiving “emergency funding backed by the federal government.” The paper explained that “A 1932 provision of the Federal Reserve Act allows the Fed to lend to non-banks if at least five of its seven governors approve. That provision was last regularly used during the Great Depression. It is meant to underscore that the central bank should lend to non-banks only in extreme circumstances.”
But later, the article revealed, “The Fed, with two governors’ seats vacant and one governor overseas and unreachable, invoked a special legal clause to approve the loan with just four governors.”
What is the precise legal and constitutional basis for what the Federal Reserve has done? How is all of this possible under a democratic system where the peoples’ representatives in the Executive and Legislative branches are supposed to make the decisions?
Why don't you find the answers before spouting off about "illegal and unconstitutional?" Are you equipped to answer the question? If so, what is your answer? If not, why have you judged without getting that answer?
OK. Let’s assume that in 2006, residential real estate in this country was worth, collectively, 22 trillion, as Case-Shiller says. http://64.233.169.104/search?q=cache:6wSEMt16gasJ:www2.standardandpoors.com/spf/pdf/index/SP_CS_Home_Price_Indices_Factsheet.pdf+value+residential+real+estate+value+united+states&hl=en&ct=clnk&cd=3&gl=us&client=firefox-a
Let’s take a conservative number. If only 2% of the 22T goes into default/foreclosure, then that’s 440 billion of writedowns the banks will need to take. So far the banks have only written off less than 200 billion (I forget the actual number), and they are already out of reserves. They are existing on borrowed reserves from the Fed.
Add in HELOCs worth about 1 Trillion, CC debt, and the leverage on all that, and the number starts to look fairly staggering.
If you still think we aren’t in big trouble and that putting the taxpayer on the hook via the Fed is a good idea, then we will certainly disagree.
From a reliable source...."Jamie Dimon [Chairman of the Board and Chief Executive Officer of JPMorgan Chase, on the Board for the NY Federal Reserve] yesterday, under oath, admitted that JP Morgan saw no "Systemic Risk" from a Bear bankruptcy. Yes, he said it on national TV, under oath."In Orange County, MOST of the loan officers for WAMU all WALKED out yesterday..it was a rather large herd of them in all the offices. Something is going on.
Followup #1....
I spoke to a guy who works closely with WAMU (Title Rep). He has had their biz forever! He went in late yesterday and found they had all packed their **** and left! He is trying to find out exactly what is going on, however he had heard rumor that they are the next Bear Stearns. Take it for what it is worth, but that is what I am hearing.
There is no “finding answers” because the point is
THERE IS NO FREAKING LAW OR REGULATION THAT AUTHORIZES SUCH A DEAL !
You can’t “find” a negative.
Why don’t YOU find the law that says this is legal.. OK ? Cite me the law and the section under which this is legal.
I can tell right now you’re not a lawyer.
Exactly. BTW, see my post #131...it may interest you.
Liar liar pants afire ! Unbelievable. Yet they put the Enron execs in jail over less.
I know WaMu has a large exposure and there’s been speculation about their solvency for a few months. It’s getting interesting in a not so good way.
Some discussion: http://www.tickerforum.org/cgi-ticker/akcs-www?post=38473
Never said I was. So toddle off and find me that law, OK ? That’s a good boy.
Exactly right. Thanks for the posting of that link, and your comments on this thread. At least some folks can see the signs and are using their brains.
You’ll note that (a) I did not say you claimed you were a lawyer (it’s obvious you’re not; and (b) I am not going to school you in the law without upfront tuition payment.
"On or about March 16th, 2008, George W. Bush, both personally and through his Treasury Secretary Henry Paulson, caused to be provided to JP Morgan/Chase a bribe(1) ultimately flowing from the United States Treasury in an amount not to exceed $30 billion dollars US, via The Federal Reserve, in order to induce JP Morgan/Chase to assume the liabilities and assets of Bear Stearns and Company at a price not determined in the free market or via public bidding, in violation of the limitations expressly set forth in The Federal Reserve Act of 1913, 12 USC Ch 6."
Why is Bear Stearns Trading at $6 Instead of $2?
In effect, the Federal Reserve decided last week to overstep its legal boundaries – going beyond providing liquidity to the banking system and attempting to ensure the solvency of a non-bank entity. Specifically, the Fed agreed to provide a $30 billion “non-recourse loan” to J.P. Morgan, secured only by the worst tranche of Bear Stearns' mortgage debt. But the bank – J.P. Morgan – was in no financial trouble. Instead, it was effectively offered a subsidy by the Fed at public expense. Rick Santelli of CNBC is exactly right. If this is how the U.S. government is going to operate in a democratic, free-market society, “we might as well put a hammer and sickle on the flag.”
Constitutional Crisis
by Richard K. Brawn, CCREA (retired), MPA | March 27, 2008
Is preservation of personal financial benefits justification to destroy even one principle of our Constitution? This question is raising a new and much insidious fear. A realization is dawning that interests in key positions within the Executive Branch have created a constitutional crisis that will further hollow out U.S. Constitutional protections for private ownership and contract sanctity. In the post Bear Stearns period, the provisions of Article 1 Section 8 and 9 of the US Constitution mean even less now than they did before. A rational fear gathering force in the market is belief that America will not abide by its own Constitutional guarantees. If the United States of America will set aside clear principle because of fear of economic loss, what principles will stand to protect personal wealth and private property.....Article 1 Section 8 (an excerpt):
Article 1 Section 9 (an excerpt):Ok, now you have refreshed your memory, here is the situation. .
Article 1 Section 8 gives Congress authority to create the Federal Reserve Bank and Federal Reserve Board which may use only the powers granted to Congress. Section 9 denies to the Congress and therefore the FED the authority to take any money from the Treasury except as allowed by a specific lawful appropriation by the whole Congress.....
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