The Bear Stearns bailout: America's Northern Rock

Sometimes the Brits say it best. Here's how BBC business editor Robert Peston is describing the joint rescue of Bear Stearns by J.P. Morgan and the New York Fed: "Since J.P. Morgan is saying there is no risk to its shareholders, this represents a central bank bailout of Bear Stearns."

Well put.

"This is America's Northern Rock," Preston added, referring to the British bank bailed out by the Bank of England.

Other takes: The New York Times headlines its story, "JPMorgan and Fed Move to Bail Out Bear Stearns."

The L.A. Times: "Bear Stearns Cos., one of Wall Street's biggest investment banks, got an emergency loan from the Federal Reserve today to help it stay in business, a dramatic development that threatens to take the global credit crunch to a dangerous new level."

In the sound-bite logic of American politics, the Bear Stearns rescue makes a massive housing bailout more likely. Today's sound bite: "If the Fed can bail out wealthy investment bankers at Bear Stearns, the government can certainly offer aid to struggling homeowners." We are halfway down the slippery slope to a full-fledged government rescue for just about everybody with a grievance or a problem that involves a mortgage: banks, lenders, borrowers, the whole crowd.

Your thoughts? Comments? Send story tips to peter.viles@latimes.com
Hat tip: PS via e-mail.
Photo credit: Getty Images

Comments

[Tombstone Realty]

Well, a bailout of everyone except those of us who weren't stupid to get involved, or those people who bought responsibly before the run up. The only problem is, the Feds have dumped half their available funds into the past week's action. They *can't* save one bank, never mind the entire financial system. And now that JP Morgan is involved with Bear Stearns, that means WaMU isn't going to have a white knight.

I also laughed this morning at the "weaker than expected" inflation for last month. They acted like this was something fantastic.

But the reason it was lower, was because people had stopped buying anything extra - cars, houses, clothing - which lowers prices, but also shows the effect of recessionary mentality...... Of course the Fed excludes the food/energy costs, so they refuse to see that the costs of these items are the reason people aren't buying anything extra.

This is reminding me of that old Smothers Brothers skit of the "less-ons", versus the "more-ons" that were running the country.

[Michael Snyder]

Although Einstein codified relativity and the the laws surrounding conservation of mass, it was Newton who defined the laws of motion. Principle among them is; For every action there is an equal and opposite reaction. Wall St is proving the undeniable link between economics and physics this morning as it retreats in the face of yet another federal cash infusion. Remember when the economist is asking what 2+2 should total, he's talking to a politician.

[Digitalian]

This coming just days after Bears Stears' denials of severe trouble at their firm and less than 24 hours after Standard & Poors offered the opinion that the worst of the credit crisis had passed shows just how little anyone involved in this mess can be trusted to offer anything remotely close to an honest accounting. And of course once again Bernanke is there "making it rain" for the boys on Wall Street.

[John Quin]

Homeowners are struggling because they took on a mortgage that was priced well above their affordability range. If I make minimum wage and decided to lease a BMW for $700/month, will the government bail me out when I default on the payments?

Although it sucks that many people will lose their homes, they won't be pouring onto the streets. That's what apartments, condos and "starter homes" are for.

By bailing out the homeowners, we area also bailing out lenders and real estate "professionals" i.e. Countrywide) who helped created this mess. Whatever happened to a free market and economy?

By the way, great blog!

[LA-renter]

Who's deserving of sympathy? Not lenders. In the end, the lost money was the lender's money --or their client's money. They had all the incentive to be diligent and not mesmerized by inflated, imaginary gains. In the end, they are responsible for the credit bubble.

Yeah, we enjoy moralizing about our anonymous neighbor's foolish, wasteful excess consuming. But, no matter how much that neighbor wanted more stuff and more house, it would have remained a dream if lenders had minded their business.

[Laura]

And to think, the real market pains haven't even begun to be felt. Imagine what machinations will come about from the government and Wall Street when everything hits the fan.

[Michael Snyder]

As if we needed proof there's no honor among thieves, http://www.bloomberg.com reports in a n article titled, "Borrowers Find What Citigroup Says Isn't What It Does (Update1)" proving there's always a loophole.

" March 14 (Bloomberg) -- Real estate developer John Wimmer paid Citigroup Global Markets Realty Corp. almost $1 million last year to lock in a 5.6 percent mortgage rate on the refinancing of six commercial properties.

At the November closings, Citigroup, citing plummeting demand for mortgage bonds, boosted the rate to 7.123 percent.

``I was very upset,'' Wimmer said in a phone interview from his office in Hales Corners, Wisconsin. ``We had many proposals to lock the rate with other financial institutions and we picked Citigroup because of their reputation and strength.''

Wimmer sued. So did a developer in Kentucky after Prudential Mortgage Capital Co. invoked the ``material adverse change'' clause in their loan agreement to raise his rate.

Banks have used the clause after calamities such as the terrorist attacks of Sept. 11, 2001, to free themselves from lending obligations. With the spreads between commercial mortgage- backed securities and 10-year U.S. Treasuries at their widest in at least 12 years, banks are applying the concept to avoid lending at money-losing rates, scuttling deals, leaving borrowers at risk and casting doubt on contracts that have already been negotiated.

In spite of a desperate need for the return of transparency to the financial markets, it seems they're going from opaque to bullet proof. If top tier clients can't rely on lenders to keep their agreements, what chance does a homeowner have? It won't matter where home prices go if people can't get a loan from a lender that won't invoke a "do over" that would be unacceptable in a childhood game.

[twohoos]

Apparently a major consideration for Bear Stearns' bailout was its role as as administrative clearinghouse for a huge percentage of Wall St trades (i.e. even trades in which it had no direct part). The operational consequences to the rest of Wall St. were too great to let BS die overnight. However, that aspect may only have delayed the inevitable; if the BS ship truly can't be righted, it will eventually (after Wall St. makes other clearinghouse arrangements) be allowed to sink.

[lefty]

that reminds me of a joke, a guy crashes a car and the police come. they say 'why are you smiling?' and he says, 'it's not my car!' now is the time to get into fantastic metro L.A.!! the money is starting to flow so choose your spot and make a deal! then hit the beach!

[TrojanDLA]

The "market" knows the truth and has been saying so - you just have to know where to look. If you look at bond contracts for insurance (hedges against the market falling) against falls in the equity market (only traded in the bond market) the prices have ramped up BIG TIME. Normally, these insurance contracts and the stockmarket track each other, but currently the disparity is huge. The stock market reflects optimism whereas the bond traders (people who are bearish in their objectivity and serve to temper irrational exuberance) know better and have bought HUGE positions of bets that the market will continue to fall and fall and fall.

These contract prices have been rising since the spring of 2007. People in the "know" who pay attention to those insurance contracts realize that it was just a matter of time before the whole house of cards fell. When the fundamentals of the market does not support the prices of stocks, bond traders rush for the exits FIRST. Right now, the exit is full of bond traders with expectations that things are not getting better in 2008.

Take it for what it is.

[JohnnyB]

Birds of a feather...

...fly poopin' on the middle class.

Where's my umbrella?

Hmm... umbrella stock.

[sfvrealestate]

Lefty for President! Don't forget the Valley!

[Bryan T]

I'd like to announce that my own cash situation has "'significantly deteriorated' during the last 24 hours" after I bought a bunch of booze and lottery tickets. I'm expecting a Federal Reserve bailout shortly. Stay tuned.

[adrian]

So, where are the financially responsible Republicans?Step by step, they act like Socialists.
Long life, Comrade Bush!!

[Jason]

So bailing out banks is ok, but bailing out a middle class family with kids unable to afford their adjusting mortgage is a handout.

What did I miss?

[MyLessThanPrimeBeef]

Read the latest No. 1 topseller from Lefty: 'Dummies Guide to Financial Suicide in One Easy Step: Buy Metro LA NOW!!!'

[jb]

I am confused - could someone explain why bankers and Wall Street refer to Bernanke as "Kristen"?

[amir]

At this rate the Fed runs out of bailout money by next month.

Time to raise taxes!

Cheers!

[MyLessThanPrimeBeef]

Digitalian got it right. I think it was only yesterday the company denied any liquidity problem.

According to the cockroach theory, if you find one mass weapon of wealth destruction, likely there are more to follow.

So, I suggest President Bush send our crack liberating boys into Wall Street and take out those MWWDs like CDO's, SIV's and MBS's (aka Mothers of all BS's).

[Kijam]

"So, where are the financially responsible Republicans?Step by step, they act like Socialists.
Long life, Comrade Bush!!"

It was Bush's so-called "ownership society" and mortgage deregulation that lead to this mess. He's just trying to save his legacy.

[anon1137]

This is a catastrophe!!

Think about it - all of the stock options granted to those Bear Stearns execs are plummeting in value.

A huge infusion of government cash is needed to restore the net worth and egos of those execs and provide for $100M+ parachutes for each of them!

[GeekSeek]

"So did a developer in Kentucky after Prudential Mortgage Capital Co. invoked the ``material adverse change'' clause in their loan agreement to raise his rate."

BofA has the same little time bomb hidden in their Countrywide purchase agreement. If we assume that BofA isn't stupid, they were expecting many material adverse changes from the getgo and.... what... the whole thing was just a sham? Elliot, Elliot, where aaaaaare you? No answer.

[Mike]

If banks are bailed out, then the executive pay should be regulated

[blunderer65]

Loweri interest rates ?
200 billion loan for 28 days - collateral value very doubtful
150 cash infusion into the economy
bailout for bear stearns.
Band aids, band aids, band aids . This is a hemmoraging of the highest order. Credit crisis just beginning. Thank goodness I ow no money. Here comes the hight interest rates Banana Republic

[King Khufu]

Whatever you use to invest get the US Dollar out of your investments. Invest in the Aussie & Canadian Dollar, Euro, Yen. Invest in ETF's, Exchange Traded Funds, it is now available to anyone not just the filthy rich anymore. THE DOLLAR IS DONE!!!!!! The Fed is going to wipe out your investments and retirement funds if you keep them as US DOLLARS, get them out of the US DOLLAR!!!!! Where do you think they're getting the money to bail out the banks? The Fed Reserve is the only entity on the planet that creates money out of thin air, you or I do it we get charged with counterfeiting. The more US Dollars is circulation the less it's worth, WAKE UP!!!!!! Look at how much the commodities are going for right now and compare it to 6-12 months ago or even 1-3 years ago!!! The dollar is plummeting, the currency of Botswana, Africa is more valuable than a US Dollar right now!!!!!!

[Humphrey S Tyler]

It is outrageous that the Federal Reserve is using taxpayer money to bail out the Wall Street investment firm of Bear Sterns while its CEO, board chair and other executives are being paid tens of millions of dollars a year.

Last year, the current CEO and Chairman of the Board at Bear Sterns were paid a total of almost $75 million.

Here is the compensation report from Forbes.com for James E Cayne, former CEO and current Chairman of the Board, last year:

Cash Compensation (FY November 2007)
Salary $250,000

Bonus $17,070,746

Other long-term comp. $20,993,144

Total $38,313,890

Mr. Cayne has purchased an apartment in the Plaza Hotel on Central Park in NYC worth several million dollars. (Similar apartments have sold for up to $7 million). Compare that to the millions of Americans who will lose their homes to foreclosures initiated by Bear Sterns and the holders of mortgage-backed securities on which Mr. Cayne’s company earned billions in fees.

Here is a report from Forbes.com on the compensation of Bear Sterns CEO Alan D Schwartz for last year:

Cash Compensation (FY November 2007)
Salary $250,000

Bonus $16,237,150

Other long-term comp. $19,247,272

Total $35,734,422

Mr. Schwartz became Chief Executive Officer of the Company and Bear Stearns in January 8, 2008. Mr. Schwartz became sole President of the Company and Bear Stearns in August 2007. Mr. Schwartz became a President of the Company and Bear Stearns and a member of the Executive Committee in June 2001. Mr. Schwartz was Co-Chief Operating Officer of the Company and Bear Stearns from June 2001 to August 2007. Mr. Schwartz joined Bear Stearns in 1976. He became executive vice president and head of the Investment Banking Division in 1985.

How can the federal government use taxpayer funds to keep Bear Sterns afloat when its executives are paid obscene salaries and bonuses and when the company has been so badly mismanaged?

At a time when hard working Americans are losing their jobs and their homes, it is unconscionable that the federal government is using taxpayer money to bail out a company that is paying its executives at such high levels.

It is time speak out against this travesty and insist that our representatives in Washington make sure that those in the executive suite at Bear Sterns make no more in total compensation this year than directors of the Federal Reserve Bank.

[Sara]

I can't believe this, what is happening? I miss Greenspan. Bernanke is getting it all wrong. The Fed is choosing policies that are causing more problems than they are solving.

[Cal]

Random OT musings:

Peter, Countrywide had their foreclosure report out this week if you run out of material to post next week there is some there.

----

Dataquick posted its LA Times chart for Feb:
http://dqnews.com/Charts/Monthly-Charts/
LA-Times-Charts/ZIPLAT0802.aspx

40% down in San Marino! The good areas are crashing!

Just goes to show what low volumes and medians can do. That is unfair, volumes aren't much of a factor, median is just a horrible indicator of what is going on in the market. With home sales so low we don't really know what prices will be for things to normalize back to equilibrium, regardless of measurement.

----

If someone wanted to bet me a nickel that December 2007 was the bottom in terms of sales.. I would be hard pressed to take the other side of that bet. But then again Fannie/Freddie have their announced pricing adjustments for anyone under a 720 FICO and they are majorly expensive. I CAN see a scenario in which sales drop even more but I think sellers/realtors are finally letting the possibility that this all might just be real (lol). Sales will be better in March, that is a given just on seasonality and April is looking better than March just on some of the other data I am seeing.

What can potentially lead the market lower is they are literally running out of lenders. Everyone thinks , "oh just get a FHA Loan"... FHA is insurance.. the loan must be held by someone, A very important point to realize. the people holding the paper don't want too much more of it. Private Mortgage insurers are all tightening up. Fannie/Freddie are looking shaky financially so they are about to charge a bunch more for lower quality loans (the CEO of the NAHB just went off on them because of it).. so who then buys the paper? Secondary market is losing its appetite, hedge funds are deleveraging and giants like Citi are going to be net sellers of paper over the next year (already announced). But lower prices will mean more mortgages can be given for the same

[jb]

pasted from CNN - Dean Baker for President!!! finally someone who is not willing to allow the inept highly paid bankers to rape us!!! (I have no idea who Dean Baker is but I like him a lot)

Inflation isn't the only worry on the minds of Fed critics. Dean Baker, co-director of the Center for Economic and Policy Research in Washington, says the Term Securities Lending Facility and moves like it amount to a government bailout of corporate executives who made reckless bets - and who should be made to pay the tab with their jobs.

"The Fed's actions are keeping banks from having to write down large losses and quite likely go into bankruptcy," he writes on his blog at the American Prospect. "The result is that the bank executives, whose inept management pushed them into bankruptcy, get to keep their jobs and their salaries, which run into the tens of millions a year." Meanwhile, homeowners facing foreclosure - not to mention ordinary savers who are watching inflation erode the value of their nest eggs - remain quite unbailed-out.

[Sean]

This is pathetic.

Bear Stearns acted irresponsibly and greedy. They have only theirself to thank for their mess.

Bear Stearns made wrong way bets on home mortgages and lost. Now they are getting a bailout.

This is TOTAL BS

[sean]

Hey Jason,

Bailing ANYONE out is wrong. Whether it be the greedy investment bankers at Bear Stearns who bet the wrong way on mortgages and LOST or the greedy home buyer who had no business buying a home he/she could not afford to pay for which led to the hyperinflation in home prices and the on going correction.

Its time to get back to "He who makes the loan keeps the risk"

NO BAILOUT TO IRRESPONSIBLE LENDERS - NO BAILOUT TO IRRESPONSIBLE HOME BUYERS.

[waitingforgodot]

For Peter, Cal, Michael Snyder, or other people much smarter than I am:

Have you read John Mauldin's "muddle through" scenario (in his newsletter)? What do you think of his projected scenarios.

Personally, I'm past the point of kvetching about a government bailout because I've resolved that such intervention is a done deal (I've been known to be very wrong before, and hope I am in this case). I'm against it and think it one of the most deceitful and tyrannical of moves that our federal government could make... but like I said, I don't need to elevate my blood pressure over a fait accompli.

So my question: what are indicators that these measures to mitigate the credit crisis are working? What should we as laymen be looking for?

Personally, part of me is wishing for a precipitous drop, but I know that more than just housing prices will be affected in such a scenario.

[formerlahomeowner]

So bailing out banks is ok, but bailing out a middle class family with kids unable to afford their adjusting mortgage is a handout.

What did I miss? - Jason

Sir, do you have lobbyists in Capitol Hill? Do you have a direct line to the White House? Are you part of the elite class? Are you a top executive of a Fortune 500 company?

No? Sorry, no bailout for you. Bailouts are for the rich who don't play by the rules. The masses get scr3w3d. Be a good American. Stand in line and pay your taxes so you can help bailout Bear Stearns.

[srla]

Dean Baker was the first notable economist on record to call the housing bubble (some 2 years before Shiller seemed to come on board). Baker has also been one of the few truly pragmatic voices throughout this entire mess.

Now Wall Street is betting on another Fed cut of 75 basis points. This would move the Fed Funds rate to 2.25% and would cause even more intense inflationary pressure. With food prices already rising at annualized double digit rates and fuel prices skyrocketing, odds are that further cuts to the Fed Funds rate could cause inflation to spiral completely out of control (a concern raised yesterday by Richard Fisher, the head of the Federal Reserve Bank of Dallas).

Given that this would cause economic chaos and lead to massive unemployment down the road, a journalist with a pulse might question why exactly the Fed is cutting the rates. But, of course, journalism is moribund, and no such questions are being asked.

As Dean Baker keeps pointing out, rising fuel costs are NOT being driven by rising global oil prices, but, rather, by the plummeting dollar. If the dollar were holding steady, fuel costs would also be holding firm.

Let's all get this clear - Bernanke's Fed is NOT rescuing the economy, nor is it ultimately concerned with curbing job losses. It is concentrating solely on bailing out Wall Street fat cats, and that is an utter travesty.

[Andy H]

In one weeks time both Spitzer and Bear Stearns fell on their own sword for their misdeeds. Others will follow ...

[vultur]

" March 14 (Bloomberg) -- Real estate developer John Wimmer paid Citigroup Global Markets Realty Corp. almost $1 million last year to lock in a 5.6 percent mortgage rate on the refinancing of six commercial properties.
___________________________________________
$1,000,000 against 6 commercial properties? I don't blame Citi for jacking the rate on this one! How good could these properties be at less than $200,000 each? Even if the loan was 50% LTV that's $400,000. What kind of commercial property is worth $400,000? You can't even buy a parking spot in Manhattan for that little!

[Tony]

I don't know want my taxpayer dollars bailing anyone out! Everyone knows the risks - this was all about greed.

When the govt hands out checks in the coming months I won't get one because I make well over 75k. I don't have kids and I am single, so I pay more tax than most, and I chose not to buy a home because, as a single guy making $150, I didn't think I could reasonably afford one with traditional terms.

I am tired of reading about my tax dollars going to people/institutions who made unwise, greedy decisions!

[Gene J]

What would be the problem if Bear Stearns tanked? Someone would buy the assets and life would go on. Maybe then they would lean to be more cautious.

Why would Countrywide going bust be bad? They sold their loans, they only have servicing and the bankruptcy court would sell those rights to someone. Other companies would jump in for new loan originations.

Where is the problem? The employees would get a job with the companies rushing in to fill the gap.

[amir]

Two notes:

If big wall street firms/banks need a bailout to survive and the federal government (the people) is the one helping them, then some strings need to be attached. The banks should agree to several new rules before getting the big b.

1. Executive pay is no more than 1 million a year including bonuses. Difficult to get top talent? obviously, your current talent didn't do better.

2. Credit card rates can't top over 7% above prime. You can't compete like that? get out of credit cards.

3. Mortgage holders and lenders will have to be told the truth.

4. In return for the bailout, the government owns 25% of the bank. You don't like that? try getting a better deal from Dubai.

The bank will be regulated much more for the benefit of the people, you know, the people that saved your ass. If you want ruthless capitalism then go bankrupt, I'm all for it, survival of the fittest, but if you want socialism for the banks, than it's time for some heavy regulation.

[sfvrealestate]

Here's a URL to an article from Greg Palast regarding the Spitzer/Bear Sterns bailout connection. Robert Scheer said the same thing pretty much on yesterday's NPR's "Left, Right and Center."
http://www.gregpalast.com/elliot-spitzer-gets-nailed/

[ShameandScandal]

Now things have turned serious. These issues have moved far beyond politicians mouthing platitude soundbites on TV news. That won't stop them, but it feels good to write it.

I don't profess to be a banking expert, but I'm thinking that the Bear Stearns crisis would require one of two basic choices, either a) a massive capital addition to a highly leveraged balance sheet that has huge amounts of stuff no one knows the value of, or b) liquidation of the company that would require these securities to be transferred to other owners, thus requiring those securities to have prices attached to them. (Imagine conference calls with Wall Street CEOs screaming at each other, very likely happening right now.) Mr. Bernanke and the Board of Governors chose option (a). Why?

Since the markets for these securities have frozen, pushing several hundred billions of dollars of junk securities will take prices way down far. Low prices would cause other companies holding similar securities to mark down the values on their respective balance sheets. This would push lots of banks to bump into their minimum capital requirements. Answers -- cut dividends, raise capital, stop lending money to people who can't afford to pay it back, fund the pensions, stop cooking the books.

No one has said much about putting an end to the fiction that passes for acceptable accounting practices these days, but it's worth mentioning. What ever happened to post-Enron Sarbanes-Oxley ? It's starting to look more and more that the 'lessons of Enron' were viewed more as a 'how to' tutorial. Um, might want to ask the political bums in Congress why they screwed up on this one, maybe they're busy with other important stuff, taking a hard look at their credit card receipts this weekend, post-Spitzer. Remember, vote out all the old bums, vote in new ones.

I will give credit to the Federal Reserve for seeking to try to prevent the financial system from becoming 'disorderly,' that's polite language for 'avoiding total panic and chaos.' Maintaining an orderly financial system is its official job. While financial companies are greedy profit seeking scumbags, there might be nothing worse for the nation at this point than an entire fleet of panic-stricken scumbags. The every-day value of an orderly financial system is that we don't have to go to the supermarket to barter for food, at least not yet.

The potentially enormous downside -- no one knows how many more ticking time bombs may be out there that could leave hundreds of billiions (or a Trillion) of junky securities on the balance sheet of the Federal Reserve. Lots of mischief (and precedential) questions here for the Bear Stearns crisis --- if Fed is acquiring assets, at what 'price' ? How long are the securities held ? If they are eventually sold at a gain, who benefits ? Um, taxpayers ? Can citizens and taxpayers be guaranteed that neither the Oval Office nor any member of Congress is involved in the negotiations ?

I'm relieved that Sarbanes-Oxley and the other actions taken by the bums in Congress to 'make sure that there is never another Enron' have had such long-lasting effect. Yet another shining example of the greed, corruption, incompetence, and recklessness of the lame ducks Bush-Cheney, and the Congress that hid its ineffectiveness behind the corruption. Let's pause to reflect on this shameful failure of political leadership and the legacy these two politicians leave to the writers of history, and to the future well-being of the nation and its citizens.

I will give credit to Paulson at Treasury, at least he has said the right things, that the banks need to clean up their own businesses and that these rocket-science financial securities and the related derivatives products contributed further to the mess the nation is in presently, and to not go begging to the Congress for a bailout. In a 'socialize the costs' debate, his comments are refreshing. Bad news is that 'refreshing' doesn't pay the bills, his comments seem to go in the opposite direction of the Federal Reserve actions, a lesson in 'watch what we do, not what we say.'

Still, the underlying hard assets, U.S. residential real estate, continue to sink in value, especially in the western states, Florida, and the rust belt, more mortgages going underwater, more foreclosures looming. ARM resets continue and now mortgage rates are rising. Retail prices keep going up, squeezing consumers. The good news is that in a few years, when we start to see headlines that life on earth as we know it is about to end, it will be a perflect time to go shopping for a cute beach property. Enjoy the weekend.

[Michael Snyder]

waitingforgodot
You're right, kvetching about socialism for the wealthy is pointless as it is a fait accompli. It is therapeutic though.

Today on www.bloomberg.com Craig Torres reports on the Fed's "situation" in an article titled,"Bernanke Discards Monetary History With Bear Stearns Bailout". To quote," Federal Reserve Chairman Ben S. Bernanke is being forced to throw out four decades of monetary history by a financial system choking on miscalculated risks and a deepening recession.

Bernanke and the four Fed governors voted yesterday to become creditors to Bear Stearns Cos., a securities firm that isn't a bank, by invoking a law that hasn't been used since the 1960s. Three days earlier, the Fed said it would swap Treasury notes on its balance sheet for privately issued mortgage-backed securities held by Wall Street firms.

``It's a re-drawing of the relationship of the Federal Reserve with the rest of the financial system,'' said Vincent Reinhart, former director of the Division of Monetary Affairs at the Board. Risks of so-called moral hazard, where firms will now come to count on bailouts by a federal agency, ``are considerable,'' he said.

The cost of doing nothing may have been even greater, say other former Fed officials. Bernanke is attempting to keep the nation's financial machinery working as record home foreclosures make investors reluctant to hold even bonds backed by Fannie Mae and Freddie Mac, government-chartered firms. The 54-year-old Fed chairman is also trying to contend with a worsening economic slump: Reports this week showed that retail sales unexpectedly fell and consumer confidence slid to a 16-year low." End quote.

By becoming the lender of last resort the Fed has undermined one of the few remaining investment vehicles not infected with the subprime virus. Politicos and other "experts" may argue for a soft landing, but physics dictate an increased impact due to the added mass of debt. Spreading the footprint will not serve as a "snowshoe" but instead will spread the impact to the detriment of a larger segment of the population. Diluting a poison dose not change the fact it is a poison.

Much like the LBOs & junk bonds of the 80's and the Lincoln Savings debacle, these positions need to be excised from our economy like the cancer they are. Personally I don't think Bernanke has the cahonees to step up to the truth and regain some modicum of creditability, but he certainly has the chutzpa hand the American consumer the bill for his arrogant stupidity.

As to what to do? Get involved. Writing to our "representatives" is as therapeutic as kvetching and about as productive. It's time to vote the bast**ds out! Talk to your neighbors, find out who's as fed up as you are and get them on your side. Years ago I got the City of Burbank to down zone a block and stop a developer already in plan check from destroying a beautiful home in Magnolia Park. It took walking my feet off every night for a week distributing fliers throughout the area. When the issue came before the Consul, there wasn't standing room left in the foyer. A shocked Consul did a quick straw poll and went into closed session for about an hour. When they came out, well let's just say that house is still standing on Cordova St. My point is anyone can make a difference. All that's really between you and your goals is "wanna". Do you?

[sfvrealestate]

Check out this post from Greg Palast re the connection between the Bear Stearns bailout and Spitzer. Robert Scheer essentially said the same thing yesterday on NPR. I'm not defending Spitzer's actions, but it all does seem a little coincidental.
http://www.gregpalast.com/elliot-spitzer-gets-nailed

[Mike S]

Great comments that should go to those who can actually do something about this matter.

How many of you posted your comments to your Representative and Senator?

Instead of just fuming, cut/paste your comments in an email to your Representative and Senator. Even better, send em an old fashion letter.

Mike S.

[LA-renter]

It's off topic, but sfvrealestate's post prompts me to ask questions:

Does it disturb anyone else how Former Governor Spitzer was caught?

Flagging financial transactions is fishing for wrongdoing. What criteria decides whether investigators pursue wrongdoing?

News reports said that investigators pursued an inquiry because they suspected Governor Spitzer was making political payoffs. When proven wrong, why did they contiue an investigation into paying a prostitute?

Yeah, I know that soliciting prostitution is illegal. So is jaywalking, attempted suicide...

More on topic: Why have the supercomputers been blind to financial shenanigans that drove the credit bubble?

[NevadaGal]

It has been asked on this blog on why Helicopter Ben is now being called "Kristen."

The answer can only come from this Nevada Lady.

It means that Ben is now Wall Streets little "*****"

[buz]

Bear Stearns will go under despite the "band-aide" provided by the Fed. The Fed doesn't know what else to do at this point. We are heading over the waterfall soon.

[Sean]

Does anyone know of a start up group or website that opposes any government bailout to these homeowers or greedy banks?

Are there any grass root organizations that oppose a bailout that we can join to stop tax payer money from bailing out irresponsible people?

[JL]

Try contacting the "representatives" who back this lame bailout and let them know your disapproval:

Barney Franks - 202-225-5931
Chris Dodd - 202-24-2823
Chuck Schumer - 202-224-6542

Federal Reserve - 202-974-7008