Who's going to answer the phone?

Reading this story on FoxNewsreminded me to post my thoughts on the growing cries for more government regulation of the mortgage and brokerage industries.  Basically, I think we need to stop the Fed interventions and roll back the regulations we have now.

That comes with a caveat though – no regulation and no intervention also implies no bailouts.  That means that Bear Stearns would have shut their doors last week. That means that Citi and JP Morgan wouldn’t be able to dip their hands into the Fed’s cookie jar to stay afloat.  That means that more home owners would be in foreclosure.  But I happen to think that those are all good things.

The trillions of dollars of CDO’s, CDS’s, and derivatives that are based on bad mortgages (and that are being propped up by the Fed’s intervention) need to reflect the losses they’re actually sustaining at some point.  You can’t carry a bad mortgage on the books as an asset at full face value forever, and the longer they delay writing off the losses, the longer it will take to sort through this mess.

Get it out there, get it over with, and move on. 

gk

More on Bear Stearns

According to CNN, it appears that the deal bailing out Bear Stearns is costing JP Morgan a lot more than the $236.2 million that the $2 per share announcement would lead you to believe.   According to CNN:

The Fed also approved the financing arrangement announced Sunday in which JPMorgan Chase & Co. will acquire rival Bear Stearns Cos. The deal valued at $236.2 million, a stunning collapse for one of the world’s largest and most venerable investment banks. The Fed will provide special financing to JPMorgan Chase for the deal, JPMorgan Chase said. The central bank has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets.

In other words, the Fed just printed another $30 billion in fresh money to loan to JP Morgan.  JP Morgan will use that money to buy up the Bear Stearns “assets” – and I use that term loosely – and give them to the Fed.  In other words, the US taxpayers are now on the hook for the defaults looming in Bear Stearns portfolio.

Hmmm….  How is JP Morgan going to make the payments on that $30 billion loan?  Think that has anything to do with the discount rate cut from 3.5% to 3.25%?  I wonder what interest rate that $30 billion loan carries…. 

Of course it doesn’t really matter, as when you always lose in the long run when you borrow money short term to pay back long term debt. 

Now the question is who’s next?  There’s a lot of chatter about Lehman, but there’s going to be bigger fish to fry soon.  JP Morgan may be safe for now, but I think we’re going to see some chinks in the venerable Goldman Sachs’ armor soon. 

I’m going to try to total up the amount of money the Fed has injected into the markets over the past 6 months or so;  regardless of the amount, it dwarfs the $160 billion stimulus package to taxpayers coming in a few months. 

If the hundreds of billions (it’s got to be over $500 billion) that the Fed has put into the economy hasn’t solved the crisis, do you really think another $160 billion is going to do it?

gk