"Why a bailout is inevitable"

The Bush administration's oft-stated opposition to a housing bailout for lenders and borrowers is under assault from many corners today.  The Fed-backed, administration-brokered  weekend bailout of Bear Stearns' debt makes it nearly impossible for the administration to continue to argue against more government aid to borrowers.

Reuters: "Federal Bailout of U.S. Housing Gaining Momentum" ... "'There is no question but that there will be a federal bail-out of subprime mortgage loans this year," Linda Lord, the top lobbyist for Swiss bank UBS, wrote in a memo last week."

David Brooks, resident non-liberal at The New York Times: "It makes sense to try to find some circuit breakers so the housing market doesn’t totally collapse.... First, no bailout for the true greedheads: the speculators, the flippers, the people who bought second homes they couldn’t afford. Help only those who can stay in their homes with a modest amount of aid. Don’t succumb to lenders who want the government to buy up their bad paper."

Paul Krugman, one of many resident liberals at The New York Times: "Let’s talk about why a bailout is inevitable.... 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."

Comments? Thoughts? Email story tips to peter.viles@latimes.com.
Hat tip: Cal
Photo Credit: Treasury Secretary Henry Paulson, by Getty Images

Comments

[Rich]

A patient and reasoned essay on why characterizing this as a "bailout" is wrong, and why you should be glad it was done:

http://seekingalpha.com/article/69020-let-s-get-
real-about-bear-stearns

[sunsetbeachguy]

RTC v.2.0 was predicted on the bubble blogs up to 2 years ago.

As long as it is an orderly and timely liquidation, OK, if we must.

If it is a bailout, No Way.

[MyLessThanPrimeBeef]

I read the other day about some brain-eating amoeba. Apparently the epidemic is spreading.

[peteviles]

Rich writes, "A patient and reasoned essay on why characterizing this as a "bailout" is wrong, and why you should be glad it was done."

Thanks Rich. Perhaps we should all be happy that Bear was saved from bankruptcy. That shouldn't blind us to the fact that Bear was saved not by JP Morgan, but by the Fed and the Bush administration. It appears likely Bear had a large negative value. It was worth less than zero. JP Morgan did not want that exposure, in fact refused to take it. The Fed took it. I'll call that a bailout and I'll agree that it might also be the right thing to do.

I know, I know, the Bear shareholders got screwed.

[GDC]

I am sick and tired of those saying this is not a bailout of the rich. Maybe 3% of this whole mess is affecting joe public. This is a bailout for the wealthy investors who made tons of money the past 6 years, investment bankers who made millions in bonuses, and banks that made record profits. Now that there's going to be some pain for these people, the government is trying to do anything possible to save them. Let the free markets work for God sake. They need to feel this pain; they need to remember the pain; that's the only way they will be discouraged to do what they did in the future.

[Patrick Duffy, HousingChronicles.com]

I've been openly saying on my own blog for a few months now that some type of bailout for lenders and borrowers is inevitable.

Yes, I know it isn't fair. Yes, I know it could help support artificially high housing values that bear little relationship to incomes or potential rents. But the problem that's unwinding is so much larger than a renter's desire to buy an affordable home that the Federal Reserve and the Bush Admin. may have no choice.

John McCain is also behind the times on this issue, continuing to insist that the market will sort out its own mess. Well, it won't, not this time.

Like children running amuck with Mommy's purse, borrowers/lenders/investors/speculators not only emptied it but then grabbed her credit cards and maxed them out with little thought on how to pay off those balances. Now the adults -- taxpayers -- will have to step in and clean up the mess. But just like a huge fire encroaching on your neighborhood, you don't simply ignore it because you didn't start it -- you put it out

Fairness no longer has anything to do with it.

[kat]

Anyone who thinks this Bear Sterns deal is not a sub prime borrower's bailout must be hanging around with the people who think that this housing debacle is going to cause the end of civilization as we know it.

The government is guaranteeing Bear Sterns debt the same way they guarantee a student loan. So, what we have is a back door bailout of the deadbeats and greed mongers who are defaulting on the notes bought by Bear Sterns. The government has said they would make good on the debt owed by Bear Sterns so that J.P. Morgan would buy it. So when the greed mongers, dead beats and other sundry idiots who bought half million dollar slums in So. Cal's DMZs walk way, the goverment will be there to make good on thier defaulted loans via Bear Sterns. Pretty damn slick I have to say.

It's a good thing for the deadbeats that they have the remaining 95% of remaining grown ups who live within thier means to clean up this mess.

It's pretty funny that the very people who had the party are handing the rest of us the broom to clean up with.

[Mike S]

Bear typifies what IS a BAILOUT morass. Moral hazard aside, the Fed again showed it cares more about expediency than making a "good" deal. The FED is a lousy dealmaker and that's what's most flawed in how this deal went down.

THE FED OR A HASTILY-CREATED BAILOUT AGENCY IS LOUSY AT ATTAINING A "FAIR" BARGAIN. IT IS AN 'ACTOR-AGENT' PROBLEM FOR THE GOV DEALMAKER DOESN'T GET A BONUS CHECK FOR DRIVING A HARDER BARGAIN/BETTER DEAL FOR TAXPAYERS. If you recall how abysmal the RTC handled the S&L selloff, that alone should scare the bejesus out of folks enough to write their Congressman/woman to stop bailing institutions out. The government is horribly inefficient as a market clearer--this deal just reflects that in spades.

As for the hyperlinked article, it is crap. John Mauldin is flat WRONG in claiming the Fed received collateral that is neutral, if not profitable, in the long term. Except for Bear's office buildings, they sold off everything of value months ago. What's left may recover 40c on the dollar, probably less, while JPM skims any profit from the scrapes that are performing. NOTE: Bankruptcy protects assets--Bear would of still carried out it's clearing functions while in bankruptcy.

Lousy Fed dealmaking on this one transaction translates to adding $18bil (60% of $30 bil) to the inflation ticker, or an additional burden of ~ $60/American man, woman and child!!! You give the Fed (Bank or Gov) carte blanch to make more 'deals' of this calibre and we are going to lose foreign governments pegging their currency to the dollar.

Mike S.

[Uncle Billy]

Bailouts are inevitable because now when the Fed Funds rate goes down .75 of a percent, wall street investors are disappointed because it wasn't a whole percent.

[JohnnyB]

"…weekend bailout of Bear Stearns' debt makes it nearly impossible for the administration to continue to argue against more government aid to borrowers"

Right… exactly as planned.

The Street kills/sacrifices one of THEIR own to facilitate the broader mortgage bailout that will attempt to construct an artificial floor in the market in order to mitigate the housing price declines, now in free fall. That's the big "multi-trillion" pie they're trying to slice up and save.

It’s more a symbolic sacrifice. It has nothing to do with middle class families that cannot afford a home.

The Street "mob" was looking for blood... and a scapegoat... classic, really.

What ever happened to disclosing all the banks "off book" holdings?... nuttin' honey.

Improper bank/investment bank coupling?... not a word.

Focusing on long term home ownership sustainability and affordability?... that ain’t the game.

What about addressing the “financial wizards” ongoing flawed derivative structured schemes (and risk management) that inappropriately leverage our collective assets and drive asset bubble formation and inevitable burst-ation?... I hear a pin drop.

What about calling to account the actual individuals who bundled the kindling (Ponzi & friends) and lit the first match?... yea, right.

[Andrew Z]

I'd be interested to see what kind of homeowner gets "bailed out". Is it those that are current on their mortgages? Do you have to have a personal hardship to qualify? Who would be the judges on this stuff?

Like anything else it's easy to talk theory but when they break down the details it's almost an impossible task considering the man hours it will take to get this done and the number of people/businesses/organizations that would have to be involved.

It just seems easier for the government to bail out the big guys on Wall Street and hope their charity trickles down to the individual homeowner.

[puckhead]

Peteviles,

The Bear “takeunder” was a bankruptcy in disguise engineered by the FED. If Bear had filed for chap 11, their balance sheet would have been exposed as containing who knows how much worthless paper. This would have been an admission that other large banks own equally large amounts of worthless paper. It’s in no one’s interest to allow large banks to fail and create a financial meltdown. If you want to blame anyone, don’t blame mom and pop borrower for overextending themselves on a mortgage, blame the govt for allowing investment banks to leverage themselves 30-1. It’s all one big sh$t sandwich that this govt has created and we’re all going to take a big bite from it. I think the end game for the FED, which they’ve been holding off until this point, is to start buying back mortgage back securities to create a market for them. It’s probably an unpopular view on this board, but having Bear or BofA or WaMu or Lehman fail in bankruptcy will do more harm to the economy than the FED essentially taking them over.

[Uncle Billy]

Question: How bad is it going to get?

Answer: http://tinyurl.com/2x992p

[Jonathan]

"things are falling apart as you read this"

Excellent... Let chaos reign.

[Tombstone Realty]

How can we determine who is someone who just needed "a bit" of help. To me, you can either afford something, or can't.

If someone falls behind due to illness or a temporary job loss, hell yah, help them out. I've got no problem with that. If it's some elderly person who got screwed over by the banks, absolutely help them stay in their home. But there aren't that many people in this situation.

This is just a way for the banks to pass on their screwup to the government. Nothing can convince me otherwise. I know it's going to happen, but I also know it's going to fail. The market is happy today, because they've gotten their drug injection for the week, but I guarantee you it won't last. The government doesn't have enough to bail out everyone.

If I lose my job, or my landlord goes into default - noone in the government is going to help me get back on my feet.

[mbob]

Our currency might as well have the mattress salesman on it, screeching that "it's free!" so that we are reminded what our money is worth -- paper stuffing to toss and turn on while we are haunted by oncoming suffering. The worthless securities that are backed by non performing assets will be inflated away.

[Jonah1979]

The real question is will this bailout come too late? I think it will because the larger adjustable rates are hitting now and we know that congress takes forever. If there was a bailout I don't see it happening until winter.

[LA-renter]

Please spare me the "looks-like-there'll-be-a-bailout"...

People who lack financial sophistication, including myself, were well aware that a bailout was inevitable... two years ago!

Please stop the "experts" --who were surprised by the bubble burst-- from relating the plight of former Bear Stearns employees, who own 30% of whatever is left.

I know a former Bear Stearns employee, and he's done very very well the past several years. Now, he works at JP Morgan where I suspect he'll do very very well. I'll go hungry before he starves.

Bear Stearns is no victim. Bear Stearn facilitated the mortgage mess. Bear Stearns deserves whatever happened to them.

There is too much grey in this mess. David Brooks is only fooling himself if he thinks that the bailout can be focused on "innocent" victims...everybody who over-extract value from their house believes they were deceived by experts, advertisements, lenders... Everybody is a victim...

... except us.

[gary]

the fed and bush are so evil.....think of the guys who owned BSC at $30 a share on friday then woke up on monday and its worth $2 share. Did they have achance to sell short on friday????? oh course not. But the CEOs sure got there millions. bushco and family may you all burn in hell. thank god at least that slug from ameriquest is paving the way for the bushco family. rich helping rich and telling all the rest of us its to bad....

[l.a.guy]

When Brooks and Krugman are in agreement you know the apocalypse is near.

If, and it's a big IF, there is a good mechanism for determining the fair market value of distressed properties, and the GSE's bought them for that price allowing investment banks to take the loss and get it off their balance sheet, then I think it's probably the best available solution. The uncertainty over the value of all the mortgage backed securities is just killing the financial markets.

But as everyone notes the devil is in the details. Do you wait until the property reaches NOD, bankruptcy? Do adjust everyone's loan, even if they've been able to make the payments? It will be interesting to see what they work out.

[Nancy]

Where can I shelter my tax dollars so they are not all spent on this bailout? ;-)

[Cal]

kat:"It's a good thing for the deadbeats that they have the remaining 95% of remaining grown ups who live within thier means to clean up this mess. "

She used to say 99%.

I consider this a moral victory.

[Fourth Generation]

When the Fed intervenes and put the taxpayers’ money on the line to keep the investment institutions and other financial players solvent, those companies might well be very aware that this is not a free lunch. They are signing a pact with the devil and deservedly so. There must be a series of requirements for the government intervention. First all the top executives should be fired. No compensation packages, no golden parachutes, stock options etc. Second and concurrent with number one above, the board of directors will be immediately dissolved and any agreement as to salaries and compensations made with executives of said company will be effectively null and void. Third a new gov Trust Corporation will be overseen the operations and will name a new board of trustees and a new trustee to direct the bailed out company back to solvency or to liquidate it. This new trustee will have a salary and the knowledge he/she did a good job and a public service. If you want corporate welfare be ready to dance with the devil.

[Tombstone Realty]

I also read on Marketwatch that the investors have to agree to the sale apparently, so it may have been just a tactic to keep the bank from falling, but then the investors would reject it, and have the thing sold at say, $10 a share later. Once people forget.

[Mike S]

I thought the Fed was suppose to remove the punchbowl, not refill it after midnight...