In questioning before the joint committee yesterday, Bernanke revealed just how questionable the collateral was, relying on a third party to evaluate the assets in a timeframe of under two days. Furthermore, he admitted they relied on Bears' model to come to its valuation. And the capper? The Fed cannot get more collateral once that original estimate is proven to be far less than their hasty and reckless evaluation.
i listned to the specific questioning of BB on that topic. lots of stuttering and it was amazing how little he knew of the exact details. it was clear he let Tim Geithner at FRBNY deal with those.
Curious that the "hedging assets" mentioned in passing aren't included in the list of securities they hold. Also curious - these aren't limited to AAA, but are "investment grade". As Atrios would say, it's a big sh%tpile
They were performing as of March 14th (we know, because Bear Stearns said so, see?) - who knows what their status is now. Things seem to be moving fast in that regard.
The Federal Reserve would be required by GAAP to report the valuation of the portfolio on an annual basis. We will report the valuation and recoveries from liquidation of the portfolio on a quarterly basis, subject to annual review by our outside auditors Deloitte Touche Tohmatsu.
Making the information public will boost investor confidence. Investors will be thrilled to know that the fed is ready to take junk and keep it even though the value is plunging.
That's good thing right but on the other hand tax payers might asking stupid questions which is bad. Hence the need for secrecy.
The fact of the matter is if this were quality collateral then Bear could have taken it to the discount window. The fact that JP Morgan and nobody else would take the 30bil in securities means that a real mark on them would be zero.
When these marks are finally made the taxpayer will pay for the losses directly.
Any smart people want to look at this new "plan" by the IBanks to send the red-headed step-kids to sleep in the Barn? From the FT
Wall St banks seek to ring-fence bad assets
By Francesco Guerrera and Ben White in New York and Peter Thal Larsen in London
Published: April 2 2008 19:20 | Last updated: April 2 2008 19:20
Wall Street banks are working on plans to separate troubled assets from the rest of their businesses in an effort to ring-fence problems and restore investors confidence in the financial sector.
A number of US firms are looking to follow the example set by UBS, which this week put securities linked to US mortgages into a separate subsidiary with a view to eventually reducing its exposure to the troubled assets, which have been responsible for more than $30bn of losses so far.
The Wall Street banks plans, which are yet to be finalised, would enable banks to move at least some troubled assets off their balance sheets by selling large stakes in the funds to outside investors.
Lehman Brothers, which has been forced to deny rumours about its financial health over the past few weeks, is believed to be one of the banks considering a spin-off, or sale, of some of its assets.
We want to continue to move illiquid assets off the balance sheet, Erin Callan, chief financial officer, told CNBC this week. The bank declined to comment further.
Other banks hit by the credit crisis, including Citigroup, Morgan Stanley and Merrill Lynch, have said they want to take steps to shrink and de-leverage their balance sheets.
The planned creation of bad banks comes as US and European lenders are also discussing the creation of a common fund to buy devalued assets.
According to people familiar with the matter, banks are discussing a joint proposal to regulators to set up a fund, which would absorb US subprime assets and other troubled securities, as a way of restoring confidence in the banking system and ending the pressure to recognise mark-to-market losses.
However, bankers say the prospect of a co-ordinated solution remain remote because of the difficulties in getting banks to agree on the terms and the scope of a common fund.
Similar disagreements among banks this year led to the collapse of talks to create a super-SIV to buy distressed mortgage assets from banks.
Under UBSs scheme, the bad assets will remain on the banks balance sheet because the Swiss bank will initially retain full ownership of the new fund. However, UBS is expected to sell all or part of it to outside investors, or to spin it off, according to people familiar with its plan.
I'm sorry, but the Fed does not have the legal standing to claim this kind of "national security" like secrecy privilege...they aren't even a governmental organization!! We need to crack this egg open..what percent of the portfolio is in what type of assets?
"review of the list of assets on a confidential basis that permits appropriate Congressional oversight of the Federal Reserve's actions while also protecting the ability of the Federal Reserve to minimize risk of loss and danger to markets and preserve privacy and other confidentiality concerns."
While members of the panel were generally supportive of the decisions, Sen. Jim Bunning, R-Ky., asked, "How big do you have to be to be too big to fail? ... Who let our financial system become so fragile that one failure jeopardizes the health of the entire system?"
He said he did not consider the transaction a bailout because of the losses sustained by Bear Stearns shareholders.
The Fed's regional bank in New York hired BlackRock Financial Management Inc. to manage the $30 billion portfolio of securities the Fed obtained from Bear Stearns. Bernanke said BlackRock was "reasonably confident that we will be able to recover the full amount if we dispose of these assets on a measured basis, rather than sell them all at once."
whocoodanode BSC was in such trouble? me for one who's has been so vocal here about shorting the sh*t out of them since last Spring. made a pile off them.
Yes, Dodd is in the hip pocket of the people who benefit from this, at the expense of The People. And this hearing is just a show. Because of this, and their conduct to date leading up to this "crisis", I have no confidence our elected officials will act in the best interests of the public.
When in recent memory, for that matter, have they?
Geithner admitted this was coordinated out of Treasury, obviously Paulson. notice how often Paulson uses the term "orderly unwind". anyone here who doesn't believe Paulson is heading up a PPT to prop up the stock mkt to prevent an unorderly unwind is naive. especially given the extraordinary efforts to date to contain the credit crisis.
Re: On Wednesday, Sen. Charles Grassley, R-Iowa, and ranking member of the Senate Finance Committee, asked the inspector general of the SEC to probe the reasons why the agency's enforcement division did not bring a case against Bear Stearns for improperly valuing mortgage-related products.
Whoa.... don't involve the FBI or DOJ or AG, but by all means bring in some SEC pussy that failed to do anything before this!
Re: Another bailout of a bank like Bear Stearns by the Federal Reserve "must not happen again," said Sen. Jim Bunning, R-Ky. "I do not like the idea of the Fed getting involved," Bunning told Federal Reserve Chairman Ben Bernanke and others. "That is socialism."
Whoa.... tuff guy, what's wrong with socialism on wall street?
"...as well as asset-backed securities, adjustable-rate mortgages, commercial mortgage-backed securities, non-GSE CMOs, collateralized bond obligations, and various other loan obligations."
pretty all inclusive statement; anyone else envisioning a mix of 40% "AAA" CDOs, 25% "AAA" CDO-squareds, etc?
they start the paragraph with 'majority is GSE backed...', then you get to the other details
this whole pathetic yearlong tale of the credit crisis is so well documented in books like Creature of Jekyll Island and the like. i'm ordinarily not a great fan of history in general but i'm so glad i read that book over a year ago. its helped me enormously in navigating whats been happening behind the scene with the banking system.
Re: Meanwhile, J.P, Morgan Chase chief executive Jamie Dimon said in prepared testimony that Bear Stearns would have failed
Whoaaa.... I'm tired of prepared remarks from SIFMA and these people like Bernanke that have a script in front of their lieing faces; they need to tell the truth and be questioned without scripts, we need a hearing with questions where these bastards have to explain things in realtime, NO MORE SIFMA SCRIPTS!
The Fed's regional bank in New York hired BlackRock
ummmm... perhaps it was the other way around?
Anyway, this sounds exactly like the bankruptcy restructuring deals that are in fashion with companies now in order to offload their pension obligations on the Pension Benefit Guaranty Corporation (PBGC)... while the reorganization firm and banks pocket hundreds of millions in fees.
Bernanke expressed optimism for the second half of 2008. "Growth should resume in the 3rd quarter and accelerate into years end." When asked what data supports his view the FED chair said "Sebastian said so, do you know Sebastian,Senator?"
Geithner is being so disingenuous. why is it such a "challenge" to figure out how to make the future system less susceptible to a similar crisis. hey, hire me. eliminate the shadow banking system, make mortgage lenders keep loans on books, no more DTI levels over 36%, eliminate Fed, go back on glod std, yadda, yadda, yadda.
Hardly ..all I see is patronizing, bullshit, and pandering to create the illusion of caring and diligence.
Biggest scam we've ever seen. Makes watergate look like a church picnic however the connections still remain if you look at the player's now. Not much difference
idoc said: "...these bankers seem to have a distinctly different view of the banking system than you do? who's smarter you or them?"
Pick a side, idoc. Are these bankers smart or are they stupid, because I can't remember the last time anyone here was complimenting them on what a great job they were doing.))
IMO, it's not a question of intelligence, but perspective and understanding. Maybe it's easier for me to think straight if there's not a $13 trillion economy and 138 million jobs hanging in the balance based on what I say or do next.
Re: Robert Steel, Treasury undersecretary for domestic finance, and former Goldman Sachs executive, said the bailout was "necessary and appropriate."
The chaotic market events of Friday, as market participants prepared for the possibility that Bear Stearns would not be open for business once Asian markets opened on Sunday night.
This convinced the Fed and Treasury that a solution to Bear Stearns difficulties would have to be addressed over the weekend.
OH no, the markets are going to open
This looks like pressure from Japan to force the US Fed/treasury to manipulate global markets, which is what I would call treason! These bankers are acting without authority to usurp powers from Congress to act as a global market manipulator and that is treason!
Re: Early on Sunday morning, after a review of Bear's books, J.P. Morgan officials said that they "had become significantly more concerned about the scale of the risk that Bear and its many affiilates had assumed," Geithner said.
This led to the negotiations of a $30 billion loan against Bear Stearns collatera
Bernanke called this an acquisition yesterday so why the fuck id The Fed loaning $30 billion to JPM for an acquisition ????
I bought stocks in the dotcom era that had liquidity problems and their value dropped and I lost money, but then why did The Fed fail to provide that same helping hand to loan my company the billions they needed?
What is your opinion as to how the accounting will work here with this deal, i.e, the "portfolio", will JPM or bear look at this as an off balance sheet entity, or an asset, or what? How can this $30 billion be at The Fed in terms of accounting and why would GAAP even be a factor if this has never been done, i.e, there are no GAAP rules in place for this situation?
Any ideas out there"
Re: The Fed's regional bank in New York hired BlackRock Financial Management Inc. to manage the $30 billion portfolio of securities the Fed obtained from Bear Stearns. Bernanke said BlackRock was "reasonably confident that we will be able to recover the full amount if we dispose of these assets on a measured basis, rather than sell them all at once."
If you grant me this one wish, to explain this, I think I will leave you in peace and surf for porn; I'm sick of this!
Everybody knows the deal is rotten
Old Black Joe's still pickin' cotton
For your ribbons and bows
And everybody knows
And everybody knows that the Plague is coming
Everybody knows that it's moving fast
Everybody knows that the naked man and woman
Are just a shining artifact of the past
Everybody knows the scene is dead
But there's gonna be a meter on your bed
That will disclose
What everybody knows
Should the U.S. government let Chrysler fail? Let's reword the question: Should the government force taxpayers to subsidize a company whose products do not meet the market test? The answer becomes clear: No. Why should taxpayers have to pay to keep a firm in business?
The Chrysler subsidy would violate two political principles that have been highly important in this country: the principle that individuals are responsible for themselves and the principle that the government should treat people equally. It violates individual responsibility by making Chrysler stockholders and employees into wards of the state and taxpayers into servants of the state. It violates equal treatment by bailing out a particular firm. Yet the ends are desirable to many. Who wants to see Chrysler employees suffer, even if only for a short time?
Realizing that the company would go out of business if it did not receive a significant amount of money to turn the company around, Iacocca approached the United States Congress in 1979 and asked for a loan guarantee. While it is sometimes said that Congress lent Chrysler the money, it, in fact, only guaranteed the loans. Most thought this was an unprecedented move, but Iacocca pointed to the government bail-outs of the airline and railroad industries, arguing that more jobs were at stake in Chrysler's possible demise. In the end, though the decision was controversial, Iacocca received the loan guarantee from the government.
Of course, everyone here just passes by the best line:
The assets were not individually selected by JPMorgan Chase or Bear Stearns.
So the Fed stepped in and took the best they had off the top, based on its assessment. But I suppose all of you posting about this have a better valuation than the Fed, Blackrock, or JPM on what was there.
This legislation does not violate the principle of letting a competitive free enterprise system in our country function on its own, because Chrysler is unique in its present circumstances.
This legislation will permit the Federal Government to guarantee $1 1/2 billion in loans to Chrysler from private sources, provided an additional $2 billion in commitments or concessions can be arranged by Chrysler for the financing of its operations. This has to be an entire package. This legislation is only the beginning.
The loan guarantees will not be made by the Federal Government unless the other contributions or concessions are given to Chrysler by its own owners, stockholders, administrators, employees, dealers, suppliers, foreign and domestic financial institutions, and by State and local governments. It's got to be a package deal, and everyone understands this. And because they have already probed for the best possible interrelationship to form a team to protect Chrysler's viability, I believe there's a good chance that this package will be put together.
The Chrysler Corporation Loan Guarantee Act of 1979 was signed into
law January 7, 1980, and established a loan guarantee board with the
authority to issue up to $1.5 billion in government loan guarantees for
the Chrysler Corp., a failing company, over the next three years. This
assured private creditors that the government would assume the losses if
Chrysler failed. The loans were to be repaid by the end of 1990(CQ
Almanac 1979).
A number of strings were attached to the bill. To receive the loan
guarantees, Chrysler was required to:
· "Win concessions from the companyŐs workers, plus $500 million in new
credit from U.S. banks; $125 million in new loans from foreign banks and
other creditors; $250 million in aid from state and local governments;
$180 million in aid or credit from dealers and suppliers.
· Sell off $350 million of company assets or other equity.
· Develop an energy-saving plan.
· Issue $162.5 million of new common stock to its employees.
· Make another $100 million of new common stock available for sale to its
employees. Any worker purchase of such stock would count against the
required wage concessions." (CQ Almanac 1979, P. 292).
Unlike the many terms and conditions included in the Chrysler
legislation, few terms and conditions are given to the airlines under S.
1450 in exchange for the loans and compensation. The act creates an Air
Transportation Stabilization Board "to review and decide on application
for federal credit instruments." It goes on to say that "A federal credit
instrument shall be issued under section 101(a)(1) in such form and on
such terms and conditions and contain such covenants, representatives,
warranties, and requirements as the board determines appropriate," (S.
1450). It seems that the board can determine certain conditions for the
loans, but these conditions are not spelled out in the legislation like it
was with Chrysler. By giving away $5 billion in compensation in addition
to not providing stricter guidelines to receive money, lawmakers are not
holding the airlines accountable for their actions.
This is not a fucking loan to JPM, there are no terms, there are no details, this was a blank check, without approval, without authority, without precedents and now a buck of wall street crooks saying this is the way it is.
Yes, blame the shorts for accounting fraud, collusion, corruption, treason, extortion, point fingers away from Bear and JPM and then let the attention deficit retards drop this in about 2 hours and get back to business as usual!
Lewis v. United States, 680 F.2d 1239 (1982)
John L. Lewis, Plaintiff/Appellant,
v.
United States of America, Defendant/Appellee.
No. 80-5905
United States Court of Appeals, Ninth Circuit.
Submitted March 2, 1982.
Decided April 19, 1982.
As Amended June 24, 1982.
Plaintiff, who was injured by vehicle owned and operated by a federal reserve bank, brought action alleging jurisdiction under the Federal Tort Claims Act. The United States District Court for the Central District of California, David W. Williams, J., dismissed holding that federal reserve bank was not a federal agency within meaning of Act and that the court therefore lacked subject-matter jurisdiction. Appeal was taken. The Court of Appeals, Poole, Circuit Judge, held that federal reserve banks are not federal instrumentalities for purposes of the Act, but are independent, privately owned and locally controlled corporations.
Affirmed.
United States
There are no sharp criteria for determining whether an entity is a federal agency within meaning of the Federal Tort Claims Act, but critical factor is existence of federal government control over "detailed physical performance" and "day to day operation" of an entity. . . .
United States
Federal reserve banks are not federal instrumentalities for purposes of a Federal Tort Claims Act, but are independent, privately owned and locally controlled corporations in light of fact that direct supervision and control of each bank is exercised by board of directors, federal reserve banks, though heavily regulated, are locally controlled by their member banks, banks are listed neither as "wholly owned" government corporations nor as "mixed ownership" corporations; federal reserve banks receive no appropriated funds from Congress and the banks are empowered to sue and be sued in their own names. . . .
United States
Under the Federal Tort Claims Act, federal liability is narrowly based on traditional agency principles and does not necessarily lie when a tortfeasor simply works for an entity, like the Reserve Bank, which performs important activities for the government. . . .
Taxation
The Reserve Banks are deemed to be federal instrumentalities for purposes of immunity from state taxation.
States Taxation
Tests for determining whether an entity is federal instrumentality for purposes of protection from state or local action or taxation, is very broad: whether entity performs important governmental function.
What are the terms of the loan??? What are the conditions?? What is going on?? I see a portfolio of toxic waste but I see no loan terms, no contract with America......why is this a loan??
-- Federal Reserve Chairman Ben S. Bernanke said the central bank extended unprecedented loans to avoid ``severe'' damage to financial markets that would have resulted from a default by Bear Stearns Cos.
Bernanke had defended the special loans in a solo appearance before the Joint Economic Committee yesterday, saying he's ``reasonably confident'' taxpayers won't lose money on the $29 billion in financing.
The Fed voted March 14 to make an emergency loan to Bear Stearns to keep it afloat after the company told the central bank it would otherwise have to file for bankruptcy, Bernanke said yesterday. Two days later, on a Sunday, the Fed authorized a loan against $29 billion of Bear Stearns assets, including mortgage-backed securities, so JPMorgan would buy the company.
I keep seeing the word loan, but NO details or contract or suggestion as to what the terms are?
Is an emergency loan a loan with no details, like a loan offered undr duress??
That decision was taken under emergency authority of the Fed, and was the first time it allowed money to be loaned by a non-bank since the Great Depression.
When was this type of loan used, by who, and what were the terms?
Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly
The Fed is allowed to buy certain short-term private instruments, such as bankers' acceptances, that are not much used today. It is also permitted to make IPC (individual, partnership, and corporation) loans directly to the private sector, but only under stringent criteria. This latter power has not been used since the Great Depression but could be invoked in an emergency deemed sufficiently serious by the Board of Governors
I have wondered about the haircut on this deal. Putting up $30B in collateral for a $29B loan (since JPM will absorb the first $1B in losses, in theory) seems to be a damn thin haircut.
So, is this $30B in collateral the best of the best that BSC has (and even then a bit of it sounds dodgy)?
Or could they have put up more collateral but JPM didn't want that put at risk because the deal didn't look so good then, so instead the Fed (read, taxpayers) got to take the maximum exposure to losses on the collateral proferred?
That is, why didn't BSC put up say $36B (or whatever) in collateral for a $30B loan?
The 1934 bill that would open the Fed to industrial lending had its genesis under the Hoover administration two years earlier. Tucked inside a highway construction bill in 1932 was an amendment to the Federal Reserve Act allowing the Fed to allocate credit to individuals, partnerships and corporations in emergency situations. This language, amended again in 1991, as we shall see later, is still with us today. The major difference between this enduring legislation and Section 13(b) passed two years later is that the 1932 amendment is only meant to address crisis situations.
The 1932 bill became law on July 21, 10 days after President Hoover had vetoed similar legislation, arguing that such a plan would violate the very principle of public relations upon which we have builded [sic] our Nation, and render insecure its very foundations.
Clearly, though, many in Congress did not agree with the president. It's useful to recall that the Fed was still less than 20 years old and many likely remembered the arguments put forth during the System's founding, when some advocated that the discount window should be open to all comers, not just member banks. That essential questionwhat is the role of the Fed in the economy?was very much alive, especially during those years of economic decline.
This 1932 emergency authority for discounts in unusual and exigent circumstances for individuals, partnerships and corporations was used sparingly, and just 123 loans were made over four years by all 12 banks, totaling about $1.5 million; the largest single loan was for $300,000. Perhaps the main reason so few loans were made was because forthcoming legislation would trump its effect. Other reasons were the substantially higher interest rate for such discounts and the number of restrictions placed on such loans.
The 1932 bill was quickly overshadowed by the passage of the Emergency Banking Act of March 9, 1933, signed by newly elected President Roosevelt at the height of the banking crisis. Among many other things, the bill briefly but explicitly authorized the Federal Reserve Banks to make advances to individuals, partnerships, and corporations on their promissory notes secured by direct obligations of the United States, according to Howard H. Hackley's Lending Functions of the Federal Reserve Banks, a very useful but out-of-print history. These advances were only for 90 days and at rates set by the Reserve banks and reviewed by the Federal Reserve Board (as it was then knownthe 1935 Banking Act would change the name to the Board of Governors).
The idea of the Reserve banks as merely bankers' banks was fast losing ground, as Sen. Carter Glassone of the intellectual founders of the original Federal Reserve Actobserved, noting that under the 1932 and 1933 provisions, individuals were
... permitted to do business with the Federal Reserve banks, something that has never been done before since they were organized, individuals who have eligible paper in their possession, and who can not get accommodation at the member bank, permitted to take it directly to the Federal Reserve banks and be accommodated.
But the cat wasn't completely out of the bag just yet. The ink had barely dried on the 1933 bill when the Fed, once again, became a player in the government's attempt to revitalize the U.S. economy.
Though Sen. Glass was certainly right that the 1932 and 1933 bills moved the Fed in a new direction, they arguably did not destroy the very foundations of the country, as Hoover had warned, perhaps largely because the loans were limited to certain types of commercial paper, with penalty rates of interest, for short duration and with other restrictions. The figurative floodgates opened in 1934 when the Reserve banks were authorized to extend credit, either directly or through banks, to business enterprises for working capital purposes with permissible maturities of up to 5 years and without any limitations as to the type of security, according to Hackley.
The problem with your conclusion that the Fed took the best assets is that everything else which has transpired points to that not being the case. If they had taken non-worthless collateral, why not give breakdowns by type, rating, and backing? Why not make the adviser (Blackrock) financially liable for losses beyond their valuation? Why take the liability from JP Morgan, instead of letting them shoulder it after the acquisition?
Everything they have done (as opposed to said) points to worthless collateral which they know is worthless.
I mean, if they wanted to plausibly demonstrate that it's not worthless without revealing the contents, let JP Morgan select the assets to pledge, and make them liable for any losses absorbed by the Fed in selling those assets over the next year. My bet is their mark-to-market would be substantially revised if someone other than the US taxpayers were liable for the accuracy of that blatant fiction.
In other words, according to the change, the Reserve banks would no longer be the first source for government credit. The amendment, Section 13(b), was adopted. And, as Hackley stated: So it was that, as finally enacted, the statute authorized business loans by the RFC when credit was not otherwise available at banks, thereby indicating that, despite all that had been said earlier, the RFC's authority was not to be merely supplemental to that of the Reserve Banks.
This was a small wording change with a big impact, and for many, the resultant change in lending activity was unintended. Advocates of Fed primacy in this regard, including Rep. H.B. Steagall, still assumed that the Fed would become the primary agency lenderdespite the wording changebut time would prove otherwise. Far from being a short-lived emergency agency, the RFC would become a fixture in Washington; also, it became something of a preferred government lender as Congress eased its lending restrictions, thus making RFC loans more attractive than those from Reserve banks.
Finally, in 1957, Fed Chairman William McChesney Martin exorcised most of the demons of Section 13(b) when he appeared before a subcommittee of the Senate Banking and Currency Committee to discuss the problem of small business financing:
... the Board would favor neither the financing of such institutions by the Federal Reserve by purchase of stock or otherwise, nor the exercise by the System of any proprietary functions.
... Basically, our concern stems from the belief that it is good government as well as good central banking for the Federal Reserve to devote itself primarily to objectives set for it by the Congress, namely, guiding monetary policy and credit policy so as to exert its influence toward maintaining the value of the dollar and fostering orderly economic growth.
One year later, legislation creating the Small Business Investment Company Act, subject to regulation by the relatively new Small Business Administration, officially repealed Section 13(b), thus ending what economist Anna J. Schwartz has termed a sorry reflection on both Congress's and the Fed's understanding of the System's essential monetary control function.
Tranchefoot, you are correct that BSC was not a bank entitled to use the discount window. The Fed apparently put it down to put the fear of God into the rest of the broker dealers before opening the discount window to them.
Most of the ranting about Bear Stearns ignores the much bigger extension of the discount window to broker dealers.
This was a much wider bailout. My understanding is that they are taking agency paper at a 10% discount. I know some of it is being thrown on the market at 90 cents on the dollar.
Ipodius, might as well just head off into the sunset. This is like the earlier hysteria over loan modifications and workouts. Tanta never could get people to understand the essentials.
MaxedOutMama- you are correct about the discount window availability for brokers but when NY Fed Pres. Geithner was asked about this today he said that they thought about doing it but they were very uncomfortable about opening the window to Bear. At the same time he claimed that the 30bil in collateral taken by the Fed was a prudent move. Being that it is obviously the worst of BSCs derivatives that the Fed took with the US Treasury guaranteeing against it why would the Fed not take that at the window in this emergency case? They know the paper is near worthless and the Fed will not book losses like that or else lose its credibility. If anyone has a better explanation I am interested in hearing it.
Should the U.S. government let Chrysler fail? Let's reword the question: Should the government force taxpayers to subsidize a company whose products do not meet the market test?
Well at least Chrysler was a company with real products, crappy as they may have been/are.
protecting the ability of the Federal Reserve to minimize risk of loss and danger to markets
Risk of loss to the market? Why should the taxpayers be on the hook for minimizing loss to the market? What kind of a "market" is it if the Fed explicitly wants the ability to prevent loss?
In my opinion this hearing thingie is ass backwards. Shouldn't the focus be
(1) Whether the law was broken.
(2) If so then to what extent.
(3) Penalties imposed, if appropriate.
Instead what I'm hearing is 'we did it for your own good' therefore laws are of no consequence is this case. Is this what the constitution has come down to?
Bruiser- yep, if we were allowed to see what was in the collateral package I believe it would shake the bond markets to the core causing the effect they feared from a BSC failure. Blackrock get's to hold onto it for at least a few years to hide the moldy sausage.
if we were allowed to see what was in the collateral package I believe it would shake the bond markets to the core causing the effect they feared from a BSC failure. Blackrock get's to hold onto it for at least a few years to hide the moldy sausage.
If the details of the collateral are such an earthshaking secret, how long do you think Blackrock employees will keep it secret, and not try to trade on it?
Hmmm... if Blackrock also owns MBS paper or related derivatives as any decent part of it's $1.3 trillion in assets under management, I think they will be keeping that secret until the deal is over... years. If the paper gets marked at major losses they will see major losses in their management portfolio and investors won't likey.
Also Merrill Lynch has a majority stake in Blackrock and you can guarantee they have an interest in keeping the marks from happening. Wasn't there a MER liquidity rumor running around not to long ago?
I just hope Michael Moore is sitting at home watching these hearings and downloading them into his PC as material for his next documentary on how these guys ripped off all us dollar holders (not only just Americans).
Can you think of a title, its going to be a box office success!!
first and first post.
In questioning before the joint committee yesterday, Bernanke revealed just how questionable the collateral was, relying on a third party to evaluate the assets in a timeframe of under two days. Furthermore, he admitted they relied on Bears' model to come to its valuation. And the capper? The Fed cannot get more collateral once that original estimate is proven to be far less than their hasty and reckless evaluation.
This bailout is an outrage.
The Federal Reserve will make arrangements with the appropriate Committee staffs to allow review of the list of assets on a confidential basis
Making it confidential somehow reduces risk?
umber2son
i listned to the specific questioning of BB on that topic. lots of stuttering and it was amazing how little he knew of the exact details. it was clear he let Tim Geithner at FRBNY deal with those.
and this guy is an academic?
"Making it confidential somehow reduces risk?"
Absolutely. If investors knew the truth, panic would ensue and markets would crash.
Curious that the "hedging assets" mentioned in passing aren't included in the list of securities they hold. Also curious - these aren't limited to AAA, but are "investment grade". As Atrios would say, it's a big sh%tpile
If the portfolio consists of all investment-grade assets, all of them performing, then why was Bear Stearns in trouble?
same here, idoc. I was amazed that he came so totally unprepared to answer basic questions about the deal.
And now, as pointed out above, there will be a "confidential" review of the deal with Congress.
Transparency indeed.
They were performing as of March 14th (we know, because Bear Stearns said so, see?) - who knows what their status is now. Things seem to be moving fast in that regard.
What does "first billion in losses" mean?
A) Does this mean any sales of these assets goes to the Fed and if they only fetch 29 billion then JPM loses a billion?
B) Or does it mean JPM loses a billion if the sales prodcue zero dollars?
C) If the sales produce 15 billion, does JPM get their billion back and the Fed loses 14 billion?
The Federal Reserve would be required by GAAP to report the valuation of the portfolio on an annual basis. We will report the valuation and recoveries from liquidation of the portfolio on a quarterly basis, subject to annual review by our outside auditors Deloitte Touche Tohmatsu.
My old employer... Ok. Now we're in trouble.
My oh my. This is truly Orwelian.
Imagine what $30B could have done to shore up the real economy (jobs programs, education, etc).
$300 from each taxpayer, plus interest.
Nice.
Anyone else listening to congressional testimony? How long are they going to repeat the lie that the Bear situation threatened the end of the world?
"Avert substantial damage to the economy"?
This is sickening.
Making the information public will boost investor confidence. Investors will be thrilled to know that the fed is ready to take junk and keep it even though the value is plunging.
That's good thing right but on the other hand tax payers might asking stupid questions which is bad. Hence the need for secrecy.
Actually, I feel a lot better about this ridiculous bailout having read that.
At least they're agencies.
El Cliffo-
No shit.......why are we all here questioning the hell out of this if those assets are all performing.
Sounds like that $30 billion is already gone.......prepare for more.
Ciao
MS
They would have broken up the percentages if there was more than handful agency bonds.
Hey helicopter Ben:
I've got a 98' Subaru, good condition, runs well and just a little bit of rust (as of 4/3).
I was wondering if I could borrow a couple hundred million against it.
It's probably worth more than the shit you, oops, I me "we", just bought from poor little JPBearMorgan.
American capitalism. You gotta love it. Privatize the Profits, Socialize the Losses.
Good work if you can get it...
The fact of the matter is if this were quality collateral then Bear could have taken it to the discount window. The fact that JP Morgan and nobody else would take the 30bil in securities means that a real mark on them would be zero.
When these marks are finally made the taxpayer will pay for the losses directly.
number2son writes:
same here, idoc. I was amazed that he came so totally unprepared to answer basic questions about the deal.
It's a variation of The Gonzalez Defense.
"I don't know."
I'm not aware of..."
I'll get back to you about that."
The secrecy is because your betters need to know. You don't. You're just the miniMAC machine. Now quit your gripping and get back to the fry-o-lator.
Any smart people want to look at this new "plan" by the IBanks to send the red-headed step-kids to sleep in the Barn? From the FT
Wall St banks seek to ring-fence bad assets
By Francesco Guerrera and Ben White in New York and Peter Thal Larsen in London
Published: April 2 2008 19:20 | Last updated: April 2 2008 19:20
Wall Street banks are working on plans to separate troubled assets from the rest of their businesses in an effort to ring-fence problems and restore investors confidence in the financial sector.
A number of US firms are looking to follow the example set by UBS, which this week put securities linked to US mortgages into a separate subsidiary with a view to eventually reducing its exposure to the troubled assets, which have been responsible for more than $30bn of losses so far.
The Wall Street banks plans, which are yet to be finalised, would enable banks to move at least some troubled assets off their balance sheets by selling large stakes in the funds to outside investors.
Lehman Brothers, which has been forced to deny rumours about its financial health over the past few weeks, is believed to be one of the banks considering a spin-off, or sale, of some of its assets.
We want to continue to move illiquid assets off the balance sheet, Erin Callan, chief financial officer, told CNBC this week. The bank declined to comment further.
Other banks hit by the credit crisis, including Citigroup, Morgan Stanley and Merrill Lynch, have said they want to take steps to shrink and de-leverage their balance sheets.
The planned creation of bad banks comes as US and European lenders are also discussing the creation of a common fund to buy devalued assets.
According to people familiar with the matter, banks are discussing a joint proposal to regulators to set up a fund, which would absorb US subprime assets and other troubled securities, as a way of restoring confidence in the banking system and ending the pressure to recognise mark-to-market losses.
However, bankers say the prospect of a co-ordinated solution remain remote because of the difficulties in getting banks to agree on the terms and the scope of a common fund.
Similar disagreements among banks this year led to the collapse of talks to create a super-SIV to buy distressed mortgage assets from banks.
Under UBSs scheme, the bad assets will remain on the banks balance sheet because the Swiss bank will initially retain full ownership of the new fund. However, UBS is expected to sell all or part of it to outside investors, or to spin it off, according to people familiar with its plan.
Does the Fed get to own any houses out of all this?
The fact of the matter is if this were quality collateral then Bear could have taken it to the discount window.
At the time, no discount window mechanism was available to BSC. (Correct me if I'm wrong.)
I'm sorry, but the Fed does not have the legal standing to claim this kind of "national security" like secrecy privilege...they aren't even a governmental organization!! We need to crack this egg open..what percent of the portfolio is in what type of assets?
"review of the list of assets on a confidential basis that permits appropriate Congressional oversight of the Federal Reserve's actions while also protecting the ability of the Federal Reserve to minimize risk of loss and danger to markets and preserve privacy and other confidentiality concerns."
Don't worry Dr. Jones...we have top men working on it.
Who are these men? I want names!
TOP....MEN.
While members of the panel were generally supportive of the decisions, Sen. Jim Bunning, R-Ky., asked, "How big do you have to be to be too big to fail? ... Who let our financial system become so fragile that one failure jeopardizes the health of the entire system?"
Good question.
RE: and this guy is an academic?
Bernanke was a star academic. Academics hate dealing with real data. Lots of hard work. The RAs and grad students can do that.
riptide of panic that threatened to have taken hold."
I guess Sen. Jim doesn't get enough contributions from banks.
Jim Bunning: Campaign Finance/Money - Top Donors - Senator 2000 | OpenSecrets
On the other hand Senator Dodd is their right hand man.
Chris Dodd: Campaign Finance/Money - Top Donors - Senator 2008 | OpenSecrets
"chaotic unwinding
financial disruptions beyond Wall Street
He said he did not consider the transaction a bailout because of the losses sustained by Bear Stearns shareholders.
The Fed's regional bank in New York hired BlackRock Financial Management Inc. to manage the $30 billion portfolio of securities the Fed obtained from Bear Stearns. Bernanke said BlackRock was "reasonably confident that we will be able to recover the full amount if we dispose of these assets on a measured basis, rather than sell them all at once."
The assets were not individually selected by JPMorgan Chase or Bear Stearns.
What the heck is that supposed to mean?
IB ringfence=Paulson Super Sewer.
whocoodanode BSC was in such trouble? me for one who's has been so vocal here about shorting the sh*t out of them since last Spring. made a pile off them.
Yes, Dodd is in the hip pocket of the people who benefit from this, at the expense of The People. And this hearing is just a show. Because of this, and their conduct to date leading up to this "crisis", I have no confidence our elected officials will act in the best interests of the public.
When in recent memory, for that matter, have they?
why don't they allow someone with some balls, like Denninger, to question these clowns? or at least testify to give the alternate view?
Re:
Despite the run on the bank
Whoa, wait a second, this was cslled an aquisition yesterday
whoa. Bear Stearns was adequately capitalized "at all times
Which was they freaked out?
Geithner admitted this was coordinated out of Treasury, obviously Paulson. notice how often Paulson uses the term "orderly unwind". anyone here who doesn't believe Paulson is heading up a PPT to prop up the stock mkt to prevent an unorderly unwind is naive. especially given the extraordinary efforts to date to contain the credit crisis.
Senator Dodd is the only one who will be well capitalized!
Re: On Wednesday, Sen. Charles Grassley, R-Iowa, and ranking member of the Senate Finance Committee, asked the inspector general of the SEC to probe the reasons why the agency's enforcement division did not bring a case against Bear Stearns for improperly valuing mortgage-related products.
Whoa.... don't involve the FBI or DOJ or AG, but by all means bring in some SEC pussy that failed to do anything before this!
Re: Another bailout of a bank like Bear Stearns by the Federal Reserve "must not happen again," said Sen. Jim Bunning, R-Ky. "I do not like the idea of the Fed getting involved," Bunning told Federal Reserve Chairman Ben Bernanke and others. "That is socialism."
Whoa.... tuff guy, what's wrong with socialism on wall street?
"...as well as asset-backed securities, adjustable-rate mortgages, commercial mortgage-backed securities, non-GSE CMOs, collateralized bond obligations, and various other loan obligations."
pretty all inclusive statement; anyone else envisioning a mix of 40% "AAA" CDOs, 25% "AAA" CDO-squareds, etc?
they start the paragraph with 'majority is GSE backed...', then you get to the other details
this whole pathetic yearlong tale of the credit crisis is so well documented in books like Creature of Jekyll Island and the like. i'm ordinarily not a great fan of history in general but i'm so glad i read that book over a year ago. its helped me enormously in navigating whats been happening behind the scene with the banking system.
Re: Meanwhile, J.P, Morgan Chase chief executive Jamie Dimon said in prepared testimony that Bear Stearns would have failed
Whoaaa.... I'm tired of prepared remarks from SIFMA and these people like Bernanke that have a script in front of their lieing faces; they need to tell the truth and be questioned without scripts, we need a hearing with questions where these bastards have to explain things in realtime, NO MORE SIFMA SCRIPTS!
Re: Meanwhile, J.P, Morgan Chase chief executive Jamie Dimon said in prepared testimony that Bear Stearns would have failed
finally someone using the word "derivatives" as a risk to the system.
Re: "The notion that Bear Stearns' riskiest assets have been placed in the $30 billion Fed facility is simply not true."
This sucker was to bring details and offer America evidence, not a prepared speech!
The Fed's regional bank in New York hired BlackRock
ummmm... perhaps it was the other way around?
Anyway, this sounds exactly like the bankruptcy restructuring deals that are in fashion with companies now in order to offload their pension obligations on the Pension Benefit Guaranty Corporation (PBGC)... while the reorganization firm and banks pocket hundreds of millions in fees.
Where the fuck is Paulson today????
From CNBC:
Bernanke expressed optimism for the second half of 2008. "Growth should resume in the 3rd quarter and accelerate into years end." When asked what data supports his view the FED chair said "Sebastian said so, do you know Sebastian,Senator?"
Geithner is being so disingenuous. why is it such a "challenge" to figure out how to make the future system less susceptible to a similar crisis. hey, hire me. eliminate the shadow banking system, make mortgage lenders keep loans on books, no more DTI levels over 36%, eliminate Fed, go back on glod std, yadda, yadda, yadda.
New information?????
Hardly ..all I see is patronizing, bullshit, and pandering to create the illusion of caring and diligence.
Biggest scam we've ever seen. Makes watergate look like a church picnic however the connections still remain if you look at the player's now. Not much difference
Ciao
MS
hey Seb and OJoe,
these bankers seem to have a distinctly different view of the banking system than you do? who's smarter you or them?
where is The Honorable Henry M. Paulson
Secretary of the Treasury ???
he was invited, but why is he not there?
hey Geithner,
make banks maintain 9:1 fractional reserves, tighten lending stds, eliminate SIVS, VIES, prevent 31:1 IB leverage, yadda, yadda,yadda.
going up to top thread.
Bernanke can't speak for Paulson, what the fuck is this?
hey Seb and OJoe,
these bankers seem to have a distinctly different view of the banking system than you do? who's smarter you or them?
idoc | 04.03.08 - 11:52 am | #
Well, if you are including BB in the 'bankers' group, then based on his performance with Congress, I guess I'd have to vote for Seb and OJoe.
Deloitte Touche fails audits, why is this a good thing to let a bogus accounting firm go over bogus books from Blackrock??
idoc said: "...these bankers seem to have a distinctly different view of the banking system than you do? who's smarter you or them?"
Pick a side, idoc.
Are these bankers smart or are they stupid, because I can't remember the last time anyone here was complimenting them on what a great job they were doing.
))
IMO, it's not a question of intelligence, but perspective and understanding. Maybe it's easier for me to think straight if there's not a $13 trillion economy and 138 million jobs hanging in the balance based on what I say or do next.
Sebastia
At the time, no discount window mechanism was available to BSC. (Correct me if I'm wrong.)
Correct. The Fed didn't open that window until several hours after Bear signed the agreement.
Re: Robert Steel, Treasury undersecretary for domestic finance, and former Goldman Sachs executive, said the bailout was "necessary and appropriate."
The chaotic market events of Friday, as market participants prepared for the possibility that Bear Stearns would not be open for business once Asian markets opened on Sunday night.
This convinced the Fed and Treasury that a solution to Bear Stearns difficulties would have to be addressed over the weekend.
OH no, the markets are going to open
This looks like pressure from Japan to force the US Fed/treasury to manipulate global markets, which is what I would call treason! These bankers are acting without authority to usurp powers from Congress to act as a global market manipulator and that is treason!
Re: Early on Sunday morning, after a review of Bear's books, J.P. Morgan officials said that they "had become significantly more concerned about the scale of the risk that Bear and its many affiilates had assumed," Geithner said.
This led to the negotiations of a $30 billion loan against Bear Stearns collatera
Bernanke called this an acquisition yesterday so why the fuck id The Fed loaning $30 billion to JPM for an acquisition ????
I bought stocks in the dotcom era that had liquidity problems and their value dropped and I lost money, but then why did The Fed fail to provide that same helping hand to loan my company the billions they needed?
Why???
Screw Dodd, Paulson, Bernanke, wall street, Bush.....
Just surf for porn and shut the fuck up
Will the public ever find out how much of the pledged 29 or 30 billion was used?
Tanta or CR,
What is your opinion as to how the accounting will work here with this deal, i.e, the "portfolio", will JPM or bear look at this as an off balance sheet entity, or an asset, or what? How can this $30 billion be at The Fed in terms of accounting and why would GAAP even be a factor if this has never been done, i.e, there are no GAAP rules in place for this situation?
Any ideas out there"
Re: The Fed's regional bank in New York hired BlackRock Financial Management Inc. to manage the $30 billion portfolio of securities the Fed obtained from Bear Stearns. Bernanke said BlackRock was "reasonably confident that we will be able to recover the full amount if we dispose of these assets on a measured basis, rather than sell them all at once."
Everybody knows the deal is rotten
Old Black Joe's still pickin' cotton
For your ribbons and bows
And everybody knows
And everybody knows that the Plague is coming
Everybody knows that it's moving fast
Everybody knows that the naked man and woman
Are just a shining artifact of the past
Everybody knows the scene is dead
But there's gonna be a meter on your bed
That will disclose
What everybody knows
A Step Toward Feudalism: The Chrysler Bailout
by David R. Henderson
A Step Toward Feudalism: The Chrysler Bailout
Should the U.S. government let Chrysler fail? Let's reword the question: Should the government force taxpayers to subsidize a company whose products do not meet the market test? The answer becomes clear: No. Why should taxpayers have to pay to keep a firm in business?
The Chrysler subsidy would violate two political principles that have been highly important in this country: the principle that individuals are responsible for themselves and the principle that the government should treat people equally. It violates individual responsibility by making Chrysler stockholders and employees into wards of the state and taxpayers into servants of the state. It violates equal treatment by bailing out a particular firm. Yet the ends are desirable to many. Who wants to see Chrysler employees suffer, even if only for a short time?
Realizing that the company would go out of business if it did not receive a significant amount of money to turn the company around, Iacocca approached the United States Congress in 1979 and asked for a loan guarantee. While it is sometimes said that Congress lent Chrysler the money, it, in fact, only guaranteed the loans. Most thought this was an unprecedented move, but Iacocca pointed to the government bail-outs of the airline and railroad industries, arguing that more jobs were at stake in Chrysler's possible demise. In the end, though the decision was controversial, Iacocca received the loan guarantee from the government.
good answer Seb
Of course, everyone here just passes by the best line:
The assets were not individually selected by JPMorgan Chase or Bear Stearns.
So the Fed stepped in and took the best they had off the top, based on its assessment. But I suppose all of you posting about this have a better valuation than the Fed, Blackrock, or JPM on what was there.
Chrysler Corporation Loan Guarantee Act of 1979 Remarks on Signing H.R. 5860 Into Law.
January 7th, 1980
Richard Nixon: Letter to the President of the Senate and the Speaker of the House Transmitting a General Revenue Sharing Bill.
This legislation does not violate the principle of letting a competitive free enterprise system in our country function on its own, because Chrysler is unique in its present circumstances.
This legislation will permit the Federal Government to guarantee $1 1/2 billion in loans to Chrysler from private sources, provided an additional $2 billion in commitments or concessions can be arranged by Chrysler for the financing of its operations. This has to be an entire package. This legislation is only the beginning.
The loan guarantees will not be made by the Federal Government unless the other contributions or concessions are given to Chrysler by its own owners, stockholders, administrators, employees, dealers, suppliers, foreign and domestic financial institutions, and by State and local governments. It's got to be a package deal, and everyone understands this. And because they have already probed for the best possible interrelationship to form a team to protect Chrysler's viability, I believe there's a good chance that this package will be put together.
The Chrysler Corporation Loan Guarantee Act of 1979 was signed into
law January 7, 1980, and established a loan guarantee board with the
authority to issue up to $1.5 billion in government loan guarantees for
the Chrysler Corp., a failing company, over the next three years. This
assured private creditors that the government would assume the losses if
Chrysler failed. The loans were to be repaid by the end of 1990(CQ
Almanac 1979).
A number of strings were attached to the bill. To receive the loan
guarantees, Chrysler was required to:
· "Win concessions from the companyŐs workers, plus $500 million in new
credit from U.S. banks; $125 million in new loans from foreign banks and
other creditors; $250 million in aid from state and local governments;
$180 million in aid or credit from dealers and suppliers.
· Sell off $350 million of company assets or other equity.
· Develop an energy-saving plan.
· Issue $162.5 million of new common stock to its employees.
· Make another $100 million of new common stock available for sale to its
employees. Any worker purchase of such stock would count against the
required wage concessions." (CQ Almanac 1979, P. 292).
Unlike the many terms and conditions included in the Chrysler
legislation, few terms and conditions are given to the airlines under S.
1450 in exchange for the loans and compensation. The act creates an Air
Transportation Stabilization Board "to review and decide on application
for federal credit instruments." It goes on to say that "A federal credit
instrument shall be issued under section 101(a)(1) in such form and on
such terms and conditions and contain such covenants, representatives,
warranties, and requirements as the board determines appropriate," (S.
1450). It seems that the board can determine certain conditions for the
loans, but these conditions are not spelled out in the legislation like it
was with Chrysler. By giving away $5 billion in compensation in addition
to not providing stricter guidelines to receive money, lawmakers are not
holding the airlines accountable for their actions.
Where are these types of details and due process in regard to loaning JPM $30 Billion?????????????
the chairman of the SEC has just confirmed that there is an investigation into possible illegal short selling prior to the collapse of bear stearns...
YouTube -
This is not a fucking loan to JPM, there are no terms, there are no details, this was a blank check, without approval, without authority, without precedents and now a buck of wall street crooks saying this is the way it is.
Why is America filled with retards???
Yes, blame the shorts for accounting fraud, collusion, corruption, treason, extortion, point fingers away from Bear and JPM and then let the attention deficit retards drop this in about 2 hours and get back to business as usual!
Lewis v. United States, 680 F.2d 1239 (1982)
John L. Lewis, Plaintiff/Appellant,
v.
United States of America, Defendant/Appellee.
No. 80-5905
United States Court of Appeals, Ninth Circuit.
Submitted March 2, 1982.
Decided April 19, 1982.
As Amended June 24, 1982.
Plaintiff, who was injured by vehicle owned and operated by a federal reserve bank, brought action alleging jurisdiction under the Federal Tort Claims Act. The United States District Court for the Central District of California, David W. Williams, J., dismissed holding that federal reserve bank was not a federal agency within meaning of Act and that the court therefore lacked subject-matter jurisdiction. Appeal was taken. The Court of Appeals, Poole, Circuit Judge, held that federal reserve banks are not federal instrumentalities for purposes of the Act, but are independent, privately owned and locally controlled corporations.
Affirmed.
There are no sharp criteria for determining whether an entity is a federal agency within meaning of the Federal Tort Claims Act, but critical factor is existence of federal government control over "detailed physical performance" and "day to day operation" of an entity. . . .
Federal reserve banks are not federal instrumentalities for purposes of a Federal Tort Claims Act, but are independent, privately owned and locally controlled corporations in light of fact that direct supervision and control of each bank is exercised by board of directors, federal reserve banks, though heavily regulated, are locally controlled by their member banks, banks are listed neither as "wholly owned" government corporations nor as "mixed ownership" corporations; federal reserve banks receive no appropriated funds from Congress and the banks are empowered to sue and be sued in their own names. . . .
Under the Federal Tort Claims Act, federal liability is narrowly based on traditional agency principles and does not necessarily lie when a tortfeasor simply works for an entity, like the Reserve Bank, which performs important activities for the government. . . .
The Reserve Banks are deemed to be federal instrumentalities for purposes of immunity from state taxation.
Tests for determining whether an entity is federal instrumentality for purposes of protection from state or local action or taxation, is very broad: whether entity performs important governmental function.
Court Rules Fed is Privately Owned
Isn't that just peachy.
What are the terms of the loan??? What are the conditions?? What is going on?? I see a portfolio of toxic waste but I see no loan terms, no contract with America......why is this a loan??
-- Federal Reserve Chairman Ben S. Bernanke said the central bank extended unprecedented loans to avoid ``severe'' damage to financial markets that would have resulted from a default by Bear Stearns Cos.
Bernanke had defended the special loans in a solo appearance before the Joint Economic Committee yesterday, saying he's ``reasonably confident'' taxpayers won't lose money on the $29 billion in financing.
The Fed voted March 14 to make an emergency loan to Bear Stearns to keep it afloat after the company told the central bank it would otherwise have to file for bankruptcy, Bernanke said yesterday. Two days later, on a Sunday, the Fed authorized a loan against $29 billion of Bear Stearns assets, including mortgage-backed securities, so JPMorgan would buy the company.
Is an emergency loan a loan with no details, like a loan offered undr duress??
That decision was taken under emergency authority of the Fed, and was the first time it allowed money to be loaned by a non-bank since the Great Depression.
When was this type of loan used, by who, and what were the terms?
Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly
The Fed is allowed to buy certain short-term private instruments, such as bankers' acceptances, that are not much used today. It is also permitted to make IPC (individual, partnership, and corporation) loans directly to the private sector, but only under stringent criteria. This latter power has not been used since the Great Depression but could be invoked in an emergency deemed sufficiently serious by the Board of Governors
I have wondered about the haircut on this deal. Putting up $30B in collateral for a $29B loan (since JPM will absorb the first $1B in losses, in theory) seems to be a damn thin haircut.
So, is this $30B in collateral the best of the best that BSC has (and even then a bit of it sounds dodgy)?
Or could they have put up more collateral but JPM didn't want that put at risk because the deal didn't look so good then, so instead the Fed (read, taxpayers) got to take the maximum exposure to losses on the collateral proferred?
That is, why didn't BSC put up say $36B (or whatever) in collateral for a $30B loan?
Lender of More Than Last Resort
Recalling Section 13(b) and the years when the Federal Reserve opened its discount window to businesses
Lender of More Than Last Resort
- The Region - Publications & Papers | The Federal Reserve Bank of Minneapolis
Tucked inside a highway bill
The 1934 bill that would open the Fed to industrial lending had its genesis under the Hoover administration two years earlier. Tucked inside a highway construction bill in 1932 was an amendment to the Federal Reserve Act allowing the Fed to allocate credit to individuals, partnerships and corporations in emergency situations. This language, amended again in 1991, as we shall see later, is still with us today. The major difference between this enduring legislation and Section 13(b) passed two years later is that the 1932 amendment is only meant to address crisis situations.
The 1932 bill became law on July 21, 10 days after President Hoover had vetoed similar legislation, arguing that such a plan would violate the very principle of public relations upon which we have builded [sic] our Nation, and render insecure its very foundations.
Clearly, though, many in Congress did not agree with the president. It's useful to recall that the Fed was still less than 20 years old and many likely remembered the arguments put forth during the System's founding, when some advocated that the discount window should be open to all comers, not just member banks. That essential questionwhat is the role of the Fed in the economy?was very much alive, especially during those years of economic decline.
This 1932 emergency authority for discounts in unusual and exigent circumstances for individuals, partnerships and corporations was used sparingly, and just 123 loans were made over four years by all 12 banks, totaling about $1.5 million; the largest single loan was for $300,000. Perhaps the main reason so few loans were made was because forthcoming legislation would trump its effect. Other reasons were the substantially higher interest rate for such discounts and the number of restrictions placed on such loans.
The 1932 bill was quickly overshadowed by the passage of the Emergency Banking Act of March 9, 1933, signed by newly elected President Roosevelt at the height of the banking crisis. Among many other things, the bill briefly but explicitly authorized the Federal Reserve Banks to make advances to individuals, partnerships, and corporations on their promissory notes secured by direct obligations of the United States, according to Howard H. Hackley's Lending Functions of the Federal Reserve Banks, a very useful but out-of-print history. These advances were only for 90 days and at rates set by the Reserve banks and reviewed by the Federal Reserve Board (as it was then knownthe 1935 Banking Act would change the name to the Board of Governors).
The idea of the Reserve banks as merely bankers' banks was fast losing ground, as Sen. Carter Glassone of the intellectual founders of the original Federal Reserve Actobserved, noting that under the 1932 and 1933 provisions, individuals were
... permitted to do business with the Federal Reserve banks, something that has never been done before since they were organized, individuals who have eligible paper in their possession, and who can not get accommodation at the member bank, permitted to take it directly to the Federal Reserve banks and be accommodated.
But the cat wasn't completely out of the bag just yet. The ink had barely dried on the 1933 bill when the Fed, once again, became a player in the government's attempt to revitalize the U.S. economy.
Though Sen. Glass was certainly right that the 1932 and 1933 bills moved the Fed in a new direction, they arguably did not destroy the very foundations of the country, as Hoover had warned, perhaps largely because the loans were limited to certain types of commercial paper, with penalty rates of interest, for short duration and with other restrictions. The figurative floodgates opened in 1934 when the Reserve banks were authorized to extend credit, either directly or through banks, to business enterprises for working capital purposes with permissible maturities of up to 5 years and without any limitations as to the type of security, according to Hackley.
To ipodius:
The problem with your conclusion that the Fed took the best assets is that everything else which has transpired points to that not being the case. If they had taken non-worthless collateral, why not give breakdowns by type, rating, and backing? Why not make the adviser (Blackrock) financially liable for losses beyond their valuation? Why take the liability from JP Morgan, instead of letting them shoulder it after the acquisition?
Everything they have done (as opposed to said) points to worthless collateral which they know is worthless.
I mean, if they wanted to plausibly demonstrate that it's not worthless without revealing the contents, let JP Morgan select the assets to pledge, and make them liable for any losses absorbed by the Fed in selling those assets over the next year. My bet is their mark-to-market would be substantially revised if someone other than the US taxpayers were liable for the accuracy of that blatant fiction.
In other words, according to the change, the Reserve banks would no longer be the first source for government credit. The amendment, Section 13(b), was adopted. And, as Hackley stated: So it was that, as finally enacted, the statute authorized business loans by the RFC when credit was not otherwise available at banks, thereby indicating that, despite all that had been said earlier, the RFC's authority was not to be merely supplemental to that of the Reserve Banks.
This was a small wording change with a big impact, and for many, the resultant change in lending activity was unintended. Advocates of Fed primacy in this regard, including Rep. H.B. Steagall, still assumed that the Fed would become the primary agency lenderdespite the wording changebut time would prove otherwise. Far from being a short-lived emergency agency, the RFC would become a fixture in Washington; also, it became something of a preferred government lender as Congress eased its lending restrictions, thus making RFC loans more attractive than those from Reserve banks.
Finally, in 1957, Fed Chairman William McChesney Martin exorcised most of the demons of Section 13(b) when he appeared before a subcommittee of the Senate Banking and Currency Committee to discuss the problem of small business financing:
... the Board would favor neither the financing of such institutions by the Federal Reserve by purchase of stock or otherwise, nor the exercise by the System of any proprietary functions.
... Basically, our concern stems from the belief that it is good government as well as good central banking for the Federal Reserve to devote itself primarily to objectives set for it by the Congress, namely, guiding monetary policy and credit policy so as to exert its influence toward maintaining the value of the dollar and fostering orderly economic growth.
One year later, legislation creating the Small Business Investment Company Act, subject to regulation by the relatively new Small Business Administration, officially repealed Section 13(b), thus ending what economist Anna J. Schwartz has termed a sorry reflection on both Congress's and the Fed's understanding of the System's essential monetary control function.
Tranchefoot, you are correct that BSC was not a bank entitled to use the discount window. The Fed apparently put it down to put the fear of God into the rest of the broker dealers before opening the discount window to them.
Most of the ranting about Bear Stearns ignores the much bigger extension of the discount window to broker dealers.
This was a much wider bailout. My understanding is that they are taking agency paper at a 10% discount. I know some of it is being thrown on the market at 90 cents on the dollar.
Ipodius, might as well just head off into the sunset. This is like the earlier hysteria over loan modifications and workouts. Tanta never could get people to understand the essentials.
OT - please check out the RE agent selling borrowers on walking away from thier homes after they have bought another home to live in...
Who Knew?
MaxedOutMama- you are correct about the discount window availability for brokers but when NY Fed Pres. Geithner was asked about this today he said that they thought about doing it but they were very uncomfortable about opening the window to Bear. At the same time he claimed that the 30bil in collateral taken by the Fed was a prudent move. Being that it is obviously the worst of BSCs derivatives that the Fed took with the US Treasury guaranteeing against it why would the Fed not take that at the window in this emergency case? They know the paper is near worthless and the Fed will not book losses like that or else lose its credibility. If anyone has a better explanation I am interested in hearing it.
Should the U.S. government let Chrysler fail? Let's reword the question: Should the government force taxpayers to subsidize a company whose products do not meet the market test?
Well at least Chrysler was a company with real products, crappy as they may have been/are.
protecting the ability of the Federal Reserve to minimize risk of loss and danger to markets
Risk of loss to the market? Why should the taxpayers be on the hook for minimizing loss to the market? What kind of a "market" is it if the Fed explicitly wants the ability to prevent loss?
In my opinion this hearing thingie is ass backwards. Shouldn't the focus be
(1) Whether the law was broken.
(2) If so then to what extent.
(3) Penalties imposed, if appropriate.
Instead what I'm hearing is 'we did it for your own good' therefore laws are of no consequence is this case. Is this what the constitution has come down to?
The Federal Reserve will make arrangements with the appropriate Committee staffs to allow review of the list of assets on a confidential basis
So much for transparency.
We are a Banana Republic, and the monkeys are in charge.
So we're on the hook for $29 Billion, but we are not allowed to see what we just bought for that $29B?
Are these bankers smart or are they stupid
They are crooked. This is why the collective term for them is "A Wunch".
e.g. "What a Wunch of Bankers!"
Bruiser- yep, if we were allowed to see what was in the collateral package I believe it would shake the bond markets to the core causing the effect they feared from a BSC failure. Blackrock get's to hold onto it for at least a few years to hide the moldy sausage.
Harsh Reality-
You inadvertently summed it up perfectly... .. Chrysler was a crappy company that made crappy products.
How far ahead might the US have been in auto making if we had allowed the crap car makers to just go away instead of propping them up?
One thing is for sure, now we will never know.
if we were allowed to see what was in the collateral package I believe it would shake the bond markets to the core causing the effect they feared from a BSC failure. Blackrock get's to hold onto it for at least a few years to hide the moldy sausage.
If the details of the collateral are such an earthshaking secret, how long do you think Blackrock employees will keep it secret, and not try to trade on it?
Hmmm... if Blackrock also owns MBS paper or related derivatives as any decent part of it's $1.3 trillion in assets under management, I think they will be keeping that secret until the deal is over... years. If the paper gets marked at major losses they will see major losses in their management portfolio and investors won't likey.
Also Merrill Lynch has a majority stake in Blackrock and you can guarantee they have an interest in keeping the marks from happening. Wasn't there a MER liquidity rumor running around not to long ago?
I just hope Michael Moore is sitting at home watching these hearings and downloading them into his PC as material for his next documentary on how these guys ripped off all us dollar holders (not only just Americans).
Can you think of a title, its going to be a box office success!!