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Tuesday, March 18, 2008

Welfare for Wall Street

Items of interest:

Jonathan Hoenig / SmartMoney:
Bailout is Capitalism at its Frailest -- WE'D LIKE TO think that the Federal Reserve, or government in general, is some sort of genie with the magical ability to save stocks, rescue real estate and avert recession all with a wave of the hand. But after several rate cuts from the Fed, a "stimulus" program from the president and promises of more regulation from Congress, markets are in chaos. Stocks are down double digits for the year, and currencies, bonds and commodities are all extremely volatile.

No free market goes up forever without interruption. But it's my belief that the government's escalating intervention, including the Fed's latest moves on Sunday, isn't helping matters, but rather making them far worse.

The seeds of financial crisis have been sown by the various government backstops and bailout programs that encourage banks, brokerages and other financial institutions to take on unsustainably high levels of risk. Instead of having to accept the consequences of bad judgment, as businesses should, the message is being sent that the American taxpayer stands by to save financial institutions that, in a truly free market, would otherwise be brushed aside into insolvency. That's precisely what we've seen in recent days.

The Federal Reserve Bank of New York's bailout of Bear Stearns has unwillingly exposed innocent taxpayers to precisely the risk the smart ones have sought to avoid. The collectivist underpinning of such maneuvers is that, although many of us didn't invest in Bear Stearns — or leveraged hedge funds or speculative real estate for that matter — somehow "we're all in it together." As such we share the cost and responsibility for keeping many of these fundamentally unsound institutions and markets afloat. . .

comment: Here we go again with a bailout somewhat like the "Savings & Loan crisis."

The US Savings and Loan crisis of the 1980s and 1990s was the failure of several savings and loan associations in the United States. More than 1,000 savings and loan institutions (S&Ls) failed in "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time." The ultimate cost of the crisis is estimated to have totaled around USD$160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government -- that is, the U.S. taxpayer, either directly or through charges on their savings and loan accounts-- , which contributed to the large budget deficits of the early 1990s. The resulting taxpayer bailout ended up being even larger than it would have been because moral hazard and adverse-selection incentives compounded the system’s losses.

A taxpayer-funded government bailout related to mortgages during the S&L crisis may have created a moral hazard and acted as encouragement to lenders to make similar higher-risk loans during the 2007 subprime mortgage financial crisis.

The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990-1991 economic recession. Between 1986 and 1991, the number of new homes constructed dropped from 1.8 million to 1 million, the lowest rate since World War II ...
J. Pethokoukis / US News:
Congress Will Force a Housing Bailout -- Will President Bush go for a housing bailout? In both his speech to the Economic Club of New York on Friday and, later that day, a televised interview with CNBC's Lawrence Kudlow, the president stopped short of ruling out such a move, though he was critical of the idea. Yet the more folks I talk to in Washington, the more likely it seems to me that the White House will, in the end, support a proposal quite similar to the one being pushed by Democrat Barney Frank in the House. As one former member of the Bush economic team put it: "I do think the odds of enactment have increased and will continue to increase as the economy worsens." Republicans in Congress, up for re-election unlike Bush, may force his hand. . .
The Fed Gave JPM a Big Present - Cactus, Angry Bear
Was Bear Stearns the Sacrificial Lamb? - Larry Kudlow
Government Bailout Necessary to Prevent Furthur Deterioration - Hemanth Kumar
How subprime killed Bear Stearns - CNNMoney
Felix Salmon / Portfolio.com:
Explaining the Bear Stearns Share Price -- why Bear Stearns shares are trading in the $5-$7 range. [when the price is $2] . . .

The main thing that needs to happen for the deal to go through is that shareholders vote in favor. And the only way that bondholders can ensure yes votes for the deal is to own those shares and vote them themselves. Says Neubert: "They will eat the difference between where they buy the equity and $2.00 in order to protect much higher numbers in debt." . . .

people aren't buying Bear stock at these levels because they think it's going to go up: rather, they're buying stock because they hope it's going to go down. Ain't finance wonderful?

Calculated Risk

MishTalk - Mike Shedlock

Paul Krugman - NY Times

The Big Picture - Barry Ritholtz

naked capitalism - Yves Smith

Pragmatic Capitalism

Washington's Blog

Safe Haven

Paper Economy

The Daily Reckoning - Australia