'Helicopter Ben' Bernanke and the 'Bankers' Bailout'

Since there is so much opposition here to the idea of using taxpayer money to bail out borrowers and lenders who made bad choices, it's worth facing the facts: a stealth government bailout of the mortgage industry is well underway, and a bigger, more ambitious rescue plan appears more likely every day.

Today the Fed is gladly accepting as collateral mortgage-backed securities that are so toxic the private sector can't even put a price tag on them.  As John Cassidy wrote recently in Portfolio, "This is the same toxic paper that institutions like Citigroup and Merrill Lynch have been unable to sell or even value because the market for it has dried up."

Or, as The New York Times columnist Paul Krugman wrote, "In a worst-case scenario, the Federal Reserve would find itself owning around $200 billion worth of mortgage-backed securities."  The problem is, Krugman made that estimate before today's new lifeline from the Fed.

Fed Chairman Ben Bernanke's latest dollar-dumping mission (they don't call him "Helicopter Ben" for nothing) is the latest chapter in what Cassidy calls "The Bankers' Bailout." It's too late to write your congressman to protest -- the bailout began last summer: "'It is no exaggeration to say that the mortgage market was effectively nationalized" in the third quarter, BNP Paribas economist Richard Iley wrote.

Quickly and quietly, risk has been shifted from the private sector to the Fed, Fannie Mae, Freddie Mac and the FHA.  The only question now is how much more risk will be offloaded onto the government, and how Congress will structure the various lifelines, rescues and giveaways. And lastly, what maddening acronyms they will dream up as a patriotic cover for the whole thing. (HOPE NOW! The SAFE Act! The HOME Act!)

Feel free to send in your favorite acronyms for future bailouts and rescue plans.
Photo Credit: Fed Chairman Ben Bernanke, by Bloomberg News.

Comments

[Gene J]

The question is will the Fed still have recourse if the loans go bad? They have a history of taking good collateral. But junk??? On the plus side the loans can't all be bad.

[Laker]

straight forward name: The big financial bailout act BS
PR name: American Family homestead preservation act of 2008

[MyLessThanPrimeBeef]

You know what they say about the Holy Roman Empire - it's neither Holy, nor Roman nor an empire.

Well, the Federal Reserve has nothing to do with the federal government (some secret society owns it, I think) and it looks like it will have no reserve after this.

The only remaining question is this: Is Bin Lackey flying the same black helicopters that have been reported over the skies of Montana and Michigan?

[Michael Snyder]

To be filed under "I See Said the Blind Man": The Fed's "coincidental" cap of $200 billion earmarked for "loans" to investors "suffering " from $188 billion in write downs from subprime investments has no foundation in common sense, but it looks good on paper. That's because ratings agencies like Moody's & Standard & Poor"s are allowing most the "questionable" investment vehicles, CDOs SIVs etc. to retain their AAA status.

Investors aren't having any of it as is exemplified by the meltdown in the bond market. Most experts feel these vehicles are worthy of a BB rating at best which places them in the junk bond category where they belong. (where's Ted Turner when we need him?)

In an article on http://www.bloomberg.com titled, "Moody's, S&P Defer Cuts on AAA Subprime, Hiding Loss (Update2)" Reporter, Mark Pittman puts the story in prospective. To quote;

"None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February, according to data compiled by Bloomberg. A bond sold by Deutsche Bank AG in May 2006 is AAA at both companies even though 43 percent of the underlying mortgages are delinquent.

Sticking to the rules would strip at least $120 billion in bonds of their AAA status, extending the pain of a mortgage crisis that's triggered $188 billion in writedowns for the world's largest financial firms. AAA debt fell as low as 61 cents on the dollar after record home foreclosures and a decline to AA may push the value of the debt to 26 cents, according to Credit Suisse Group.

``The fact that they've kept those ratings where they are is laughable,'' said Kyle Bass, chief executive officer of Hayman Capital Partners, a Dallas-based hedge fund that made $500 million last year betting lower-rated subprime-mortgage bonds would decline in value. ``Downgrades of AAA and AA bonds are imminent, and they're going to be significant.'' End quote.

It's been said "Timing is everything." and in this scenario it's the proof of the pudding as well. As long as these ratings agencies continue to prop up this garbage paper the Fed can justify buying it as an "investment in the taxpayer's future." (I want to hurl) Trouble is they're buckling under the strain and their credibility has been stretched to incredulity. By foisting this bad paper onto the taxpayer the Bush Brain Trust thinks they can "save" the economy.
What they're doing is a real good imitation of those three chimps in a row; see no evil, hear on evil, speak on evil...

In effect their action will continue to exacerbate the problem by allowing continued opacity in the bond market and rating agencies. Obvious collusion at this level may make for a spike in the DJIA, but in the end it will confirm the rampant corruption rife within the bond/ packaged investment market. The freezing body has hacked off yet another limb in it's struggle to survive/ maintain the status quo.

[IToldu2CashOut]

Banks still aren't going to release easy credit to unqualified borrowers so this will do nothing to ease the housing crisis. Until home price come in line with income the buyers strike will continue and the economy will continue to lag. Basically this does nothing but let the banks off the hook and give us a couple point jump in out stock portfolio which will soon be lost also. Thank for sticking us with the another 200 billion debt to pay off BB.

How about:
Selling the Future of America Act of 2008

[Cal]

If you consider the enormous amount of leverage in many insitutions (many specifically tied to mortgages) and consider that this amount of leverage has never been under stress before you can see why the market is freezing up the way it has.

This was a credit bubble and it is now unwinding, the Fed is just trying to make sure the deleveraging doesn't unwind in a disorderly manner. So far not much has worked. Or maybe it has worked and things would be much worse if the Fed hadn't taken the unprecedented steps it had taken.

I don't see how you can unwind such leverage without reducing the amount of credit available to the general economy.

[Michael Snyder]

Bernanke, Paulson & Bush could be Manny, Moe & Jack or even Dewey, Screwem & Howe, but the still see no evil, hear no evil & speak no evil. (dyslexia strikes again!)

[LA-Architect]

...and all of this from a government who decries socialized medicine!!!

We have socialized corporate welfare in this country. We taxpayers get nothing, except rising costs for everything.

[Jeremy S.]

A naive question - so where does this $200 billion and for that matter the other billions already "auctioned" off to the banks really come from? Is this the Fed literally printing more money? If so is this a guarantee of further inflation in all sectors? I have this vision of a currency printing press going at full speed with Bernanke only slowed by how quickly the money can be printed and everytime he finds out that the press has printed a few billion more, viola, time for another "auction". Is that too simple an impression? Also are the Banks just taking this money and putting it in, essentially, a vault (instead of lending the money out for profit) and turning around and telling us that as of today they are that much more solvent and doesn't this "loan" have to be repaid? If so where do the funds to repay come from if loans to you and I aren't being made with it?

[lefty]

hey guys, you know what this means? it's time to snap up metro L.A. just like a diamond on the ground!! if you don't like standing in long lines, make your move today! don't forget, san diego is pretty nice too; good luck!

[mike]

this is clearly the financial boost that the banks need to keep this country strong and afloat. i think it is a brilliant plan to boost stocks and keep the dollar strong by not lowering interest rates. bernanke is brilliant.

[victor knopp]

the bubble machine is back on,willy wonka would be proud

[90402buyer_postcrash]

Mr. Bernanke's action is quite an obscenity.

Less than 3 months ago, these institutions that were just awarded massive federal assistance gave their staff massive bonuses.

http://www.observer.com/2007/
wall-street-bonus-estimate-38-b

Now, the taxpayers are asked to bail them out?

They had plenty of money to handle this problem, they just chose not to. The principals at JP Morgan etc. whose earnings were unrelated to mortgages presumably felt that it was unfair that their bonuses be reduced to cover the sins of their peers.

Instead, they took out their money in bonus season and dumped this problem on all of us.

Now, Joe Taxpayer can fairly be thought to be paying for the multi-million dollar bonuses for Mr. Moneybags.

This is so wrong I just don't know where to begin to phrase a critique, other than to say I can hear "Brownie, you're doing a heckuva job" echoing about.

[MyLessThanPrimeBeef]

Random musing, completely unrelated of course...if you have the file on client #10, you can make him do anything now.

[Peter Basson]

Since the S&L bailout was approximately $100B and still left us in a deep and protracted recession, why would anyone think a $200B will solve things this time around?

The problems are by degrees of magnitude greater than 1988-89, so the chances are the current recession will turn into a fully fledged depression.

This is the third time around in the last 8 months. We get a bounce in the stock market before rude reality intrudes.

Snap up metro LA?

I'm assuming that's either a joke, or a real estate agent pissing in the wind.

[Rich]

Cal has the right train of thought here, the FED's moves aren't about bailing out homeowners, even though the simultaneous political rhetoric is about that; it's about normalizing the chain of risk so that the markets can become liquid again. The amount of leverage built into these transactions becomes very dangerous to each player as their holdings unwind (think Thornburg, which wasn't even in trouble 2 weeks ago). By offering the government up as an ultimate resource Bernanke is trying to stop the unwinding leverage which is damaging the serious players more than he's trying to help the little guys...

[Laker]

Guys here pointed out a good question, if the $200 Billion are loaned for 28 days, they will need to be repaid, and the junk mortgage securities returned back from FED to the bank...
Do you think the banks will like that?
Why is that i have a feeling that the 28 days loan will be extended indefinitely or renewable until further notice...
Money can't come from no where (unless you print it), and can't disappear...(unless you burn it).
So, what happens when banks need to repay but can't,...bank go under, and stocks will crash big time.
What happened today that justifies 4% rise in stock values...they got loan...
What happened to the houses in LA that rose 300% ? They got Option ARM, IO loans...
I believe it is a good exit point for those still in stocks...beware.

[sandiegan]

My vote:

"RTC 21"

[Roger]

It is a good question of where the Fed get's it's money. The following is what I found. It seems that get it from the interest that they hold on US Treasury's. In 2005 this revenue was $25Billion. So where do they get $200 billion from? It seems like they don't print money. Which branch of the government actually prints money? Would really like to know.

Press Release: January 10, 2006

Federal Reserve System income is derived primarily from interest earned on U.S. government securities that the Federal Reserve has acquired through open market operations. This income amounted to $28.959 billion in 2005. Additionally, income from fees for the provision of priced services to depository institutions totaled $901 million. The remaining income of $386 million includes earnings on foreign currencies, earnings from loans, and other income.

The operating expenses of the twelve Reserve Banks totaled $2.193 billion in 2005, including the System's net pension credit. In addition, the cost of earnings credits granted to depository institutions amounted to $212 million. Assessments against Reserve Banks for Board expenditures totaled $266 million and the cost of currency amounted to $477 million.

Net deductions to income amounted to $3.577 billion, primarily representing unrealized losses on assets denominated in foreign currencies that are revalued to reflect current market exchange rates.

Total net income for the Federal Reserve Banks in 2005 amounted to $23.521 billion. Under the Board's policy, each Reserve Bank's net income after the statutory dividends of $781 million to member banks and the $1.286 billion necessary to equate surplus to paid-in capital is transferred to the U.S. Treasury.

[areles]

"Random musing, completely unrelated of course...if you have the file on client #10, you can make him do anything now."

HA! Awesome. OT or not, the laugh was certainly needed.

[Rocketj]

1) This action does not prevent banks from continuing to take risks. It's their fault they got into this mess, and why should we help them out?
2) Tied to the first one. By "we" I mean the American public. Pumping more money into the economy makes stocks go up, but makes the dollar go down. As the dollar falls, oil prices go up, imports go away, consumer prices go up. Inflation keeps rising.

[victor knopp]

the economy is becoming like the series lost,everybody creating there own reality,i cant wait to see the next episode

[Jeremy S.]

Okay different naive question: If the leaders of the reality industry constantly and now pathologically come up with reason why "you must buy property today or risk losing out forever" no matter what the reality on the ground clearly is, then what about the financial markets? I mean what's the calculus for figuring out just how bad things are viva what they are saying? In other words, do they operate using the same spin as the reality market in most instances? Never admit failure, never admit fear, don't panic the markets but let them down easy over time even if we've fallen off the cliff. Is that the game?

[tony]

At this point there is only one way to preserve our wealth. The stock market is too dangerous, and saving money is once again being penalized. Whether or not you want to, you have to own gold in this environment. It is the only way to preserve your buying power with the criminals we have running Wall Street and the U.S. Government.

[mbob]

Guess we're all like properly installed clothes dryers: expelling large amounts of hot air, well vented.

Treasury securities of all stripe are now debased.