Mortgage Agencies may need to be Nationalized

[The Rover]

The US Federal Reserve has taken the boldest action since the 1930s, accepting $200 billion of housing debt as collateral to prevent an implosion of the mortgage finance industry and head off a full-blown economic crisis.

3/13/2008

http://www.telegraph.co.uk/money/main.jhtm...12/cnfed112.xml

The Bank of England, the key European central banks, and the Bank of Canada all joined in a co-ordinated move with a mix of policies to halt the dowward spiral in the credit markets, expanding on the "shock and awe" tactics used late last year.

The Fed's dramatic step came after an emergency conference call by governors on Monday night. It followed the melt-down of the US chartered agencies -- Fannie Mae, Freddie Mac, and other lenders -- which together guarantee 60% of the entire US home loan market. Fannie Mae's share price fell 19% in panic trading on Monday after Barron's magazine said it may need a rescue package.

"The agency crisis was a Tsunami event," said Tim Bond, global strategist at Barclays Capital.

"The market was starting to question the solvency of bodies that stand at the top of the credit pile. These agencies together wrap or insure $6 trillion of mortgages. They cannot be allowed to fail because it would cause a financial disaster. The fact that this sector has blown up has caught everybody's attention in Washington," he said.

Anna Schwartz blames Fed for sub-prime crisis

The Fed action set off a powerful relief rally, lifting the Dow Jones index over 340 points in early trading. Both US and European equities have been hovering on key support lines in recent days, threatening to break down through 18-month lows in a second, brutal leg to the bear market.

Stress indicators across almost all parts of the global credit system fell from extreme levels on the Fed news. The CDX and iTraxx Europe indexes that serve as a default barometer for corporate bonds retreated from record highs, although it is too early to judge whether the latest action will start to thaw the credit freeze. The stock market rally after the last central bank intervention in December fizzled out after just one day.

"This is not going to be enough," said Hans Redeker, currency chief at BNP Paribas.

advertisement"The Fed is doing absolutely the right thing by soaking up mortgage debt that nobody else wants. This will have an impact on spreads, but we're seeing the deflation of a major bubble. The Fed is still going to have to cut interest rates by 75 basis points next week," he said.

It is a ground-breaking move for the Fed to accept mortgage collateral, even if the debt is theoretically 'AAA-grade' debt. The Fed is constrained by Article 13 of the Federal Reserve Act from buying mortgage bonds outright, but it can achieve a similar effect by letting banks roll over collateral indefinitely. The European Central Bank is already doing this, shielding Dutch, Spanish, German, and some British banks from the full impact of the credit crunch.

The Fed is to create a new facility that allows banks to swap their mortgage bonds for US Treasuries. It is a well-targeted "sterilized" move to avoid adding fuel to inflationary fire. It follows the Fed's separate pledge last Friday to add up to $200bn in liquidity.

The Bank of England also announced that it was widening the range of elligible collateral as it offers £10billion of three-month loans, saying pressures in the money markets "have recently increased again." The ECB and the Swiss have boosted swap agreements with the Fed to provide $30 billion and $6 billion respectively in dollar liquidity to their own lenders.

Bernard Connolly, global strategist at Banque AIG, said the Fed action may help calm the markets for now, but it cannot solve the root problem of eroded of bank capital.

"There is the risk of a very damaging credit contraction. We face the most serious global crisis since the Great Depression. But this time at least the North American central banks are doing their best to stop it spreading to the real economy," he said.

The emergency actions appear to have been co-ordinated by the Fed's top two figures, Ben Bernanke and Donald Kohn, working closely with the Bank of Canada's Mark Carney. "We should be thankful that we have people in charge who appreciate the gravity of the situation," said Mr Connolly.

The travails at Fannie Mae and Freddie Mac -- once rock-solid institutions -- had combined in a deadly cocktail with a fresh wave of panic over the solvency of the investment banks with heavy exposure to sub-prime debt.

Bear Stearns was forced to deny reports that it was running out of capital and may seek Chapter 11 bankruptcy protection. The spreads measuring default risk on its debt rocketed from 246 to 792 on Monday.

Mr Bond said the mortgage agencies may ultimately need to be nationalized. Fannie Mae has already seen its stock price drop 70% since October at a cost of $50 billion in market value, even though it has an implicit federal guarantee. "There is going to have to be a very big bail-out," he said.

[The Rover]

As rebukes go in the close-knit world of central banking, few hurt as much as the scathing indictment of US Federal Reserve policy by Professor Anna Schwartz.

The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.

Anna Schwartz wrote a seminal text

on the causes of the Great Depression

"They need to speak frankly to the market and acknowledge how bad the problems are, and acknowledge their own failures in letting this happen. This is what is needed to restore confidence," she told The Sunday Telegraph. "There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for," she says.

Schwartz remains defiantly lucid at 92. She still works every day at the National Bureau of Economic Research in New York, where she has toiled since 1941.

Her fame comes from a joint opus with Nobel laureate Milton Friedman: A Monetary History of the United States. It revolutionised thinking on the causes of the Great Depression when published in 1965. The book blamed the Fed for causing the slump. The bank failed to use its full bag of tricks to stop the implosion of the money stock, and turned a bust into calamity by raising rates.

"The book was a bombshell," says British monetarist Tim Congdon. "Until then almost everybody thought the free-market system itself had failed in the 1930s. What Friedman-Schwartz say was that incompetent government bureaucrats at the Fed had caused the Depression."

"It had an enormous impact in revitalising free-market conservatism, and it broke the Keynesian stranglehold over policy," he says. Keynes himself was a formidable monetarist. He became a "Keynesian" big spender only once all else seemed to fail.

The tale of the early 1930s is intricate, but worth rehearsing in the climate of today's credit crunch.

The October 1929 crash did not cause the slump, it was merely a vivid detail. The US economy muddled through for another year, seemingly sound. Then it buckled as rising defaults in the farm belt set off a run on local banks.

It was at this juncture that critics claim the Fed lost the plot. Washington prohibited the pros at the New York Fed from injecting sufficient stimulus through open market operations [buying bonds].

Contagion spread. The Jewish-owned Bank of the United States was allowed to collapse by fellow clearing banks, for reasons of snobbery and malice.

The Chicago Fed insisted into the depths of the deflation that inflation still lurked, that there was an "abundance of funds", that speculators had to be punished, and that bad banks should fail. The staggering blindness of Fed backwoodsmen from 1930-1933 is hard to exaggerate.

In hindsight, it seems astonishing that the Fed raised the discount rate twice in late 1931 to 3.5 per cent even as global finance was disintegrating. It did so to halt bullion flight and defend the Gold Standard, but it failed to offset the effects with bond purchases. Britain was forced off the Gold Standard in September 1931 after the Atlantic Fleet "mutinied" at Invergordon over 10 per cent pay cuts. That proved a providential crisis - the pound fell. The Bank of England was soon able to slash rates. The slump proved less serious than in the US, and not a single bank collapsed in the British Empire.

Schwartz warns against facile comparisons between today's world and the Gold Standard era. "This is nothing like the Depression. I don't really believe the economy as a whole is going to fall apart. Northern Rock has been the only episode of a bank failure so far," she says.

Over 4,000 US banks - a fifth - collapsed in the 1930s. There was no deposit insurance. Real economic output fell by a third, prices by a quarter, and unemployment reached a third. Real income fell by 11 per cent, 9 per cent, 18 per cent, and 3 per cent in the years to 1933.

According to Schwartz the original sin of the Bernanke-Greenspan Fed was to hold rates at 1 per cent from 2003 to June 2004, long after the dotcom bubble was over. "It is clear that monetary policy was too accommodative. Rates of 1 per cent were bound to encourage all kinds of risky behaviour," says Schwartz.

She is scornful of Greenspan's campaign to clear his name by blaming the bubble on an Asian saving glut, which purportedly created stimulus beyond the control of the Fed by driving down global bond rates. "This attempt to exculpate himself is not convincing. The Fed failed to confront something that was evident. It can't be blamed on global events," she says.

That mistake is behind us now. The lesson of the 1930s is that swift action is needed once the credit system starts to implode: when banks hoard money, refusing to pass on funds. The Fed must tear up the rule-book. Yet it has been hesitant for three months, relying on lubricants - not shock therapy.

"Liquidity doesn't do anything in this situation. It cannot deal with the underlying fear that lots of firms are going bankrupt," she says. Her view is fast spreading. Goldman Sachs issued a full-recession alert on Wednesday, predicting rates of 2.5 per cent by the third quarter. "Ben Bernanke should be making stronger statements and then backing them up with decisive easing," says Jan Hatzius, the bank's US economist.

Bernanke did indeed switch tack on Thursday. "We stand ready to take substantive additional action as needed," he says, warning of a "fragile situation". It follows a surge in December unemployment from 4.7 per cent to 5 per cent, the sharpest spike in a quarter century. Inflation fears are subsiding fast.

Bernanke insists that the Fed has leant the lesson from the catastrophic errors of the 1930s. At the late Milton Friedman's 90th birthday party, he apologised for the sins of his institutional forefathers. "Yes, we did it, we're very sorry, we won't do it again."

[redrum]

'GREED'

'Nuff said.

[Suz]

Can we say the "R" word, yet? Or is this supposed to head it off.

[wanna be drummer]

Screw the Federal Reserve. The new guy in charge has fucked up so much already, I don't how he's been able to keep his job

[The Rover]

The folly at the onset of the Great Depression

http://www.dinocrat.com/archives/2007/01/1...eat-depression/

[Dzldoc]

What astonishes me is the fact that so many people I talk to don't realise that the

Federal Reserve is a Private corporation and it's only affiliation with the government is that they circulate the money into the economy and charge interest. The government could do this interest free at cost.

The Federal Reserve is the biggest scam in this nations history.

[wanna be drummer]

Nothing ever has to be nationalized. Save the military, police, and security forces, nothing ever truly has to be monopolized in any way

[ally]

I won't pretend to have an answer to this crisis. All I will say though is, people losing they're homes is not a confidence builder. We went through this in the early eighties and still IMHO have not truly recovered from the damage it caused. I'm not a fan of nationalization per say, but it is unrealistic to expect a generation of people to wait and let the market's correct themselves. Too much long term damage and the fall out could have it's own repercussions

[Bonham]

What astonishes me is the fact that so many people I talk to don't realise that the

Federal Reserve is a Private corporation and it's only affiliation with the government is that they circulate the money into the economy and charge interest. The government could do this interest free at cost.

The Federal Reserve is the biggest scam in this nations history.

Truer words have never been said.

[2bitnogoodjive]

I won't pretend to have an answer to this crisis. All I will say though is, people losing they're homes is not a confidence builder. We went through this in the early eighties and still IMHO have not truly recovered from the damage it caused. I'm not a fan of nationalization per say, but it is unrealistic to expect a generation of people to wait and let the market's correct themselves. Too much long term damage and the fall out could have it's own repercussions

Welcome to the United States of Japan.

[The Rover]

After Enron, we all know that we CANNOT trust what any MAJOR Investment firm's CEO says.

THEY WILL DISH OUT OTHE LIES AND BULLSHIT TO PUT A GOOD SPIN ON THEIR COMPANY, FOR THE SAKE OF THEIR "STOCK".......

LIES..... FOR THSE "SAKE" OF THE COMPANY ! ! ! !

The FED, today, March 14th, has just bailed out Bear Stearns, and MAJOR Investment Bank......

The CEO of Bear Stearns was quoted in an interview with CNBC, just 2 days prior, on March 12th saying:

"We don't see any pressure on our liquidity, let alone a liquidity crisis," he said.

Bear finished fiscal 2007 with $17 billion of cash sitting at the parent company level as a "liquidity cushion," he said.

"That cushion has been virtually unchanged. We have $17 billion or so excess cash on the balance sheet," he said.

Schwartz denied speculation that other brokers were turning down Bear's credit on trades for fear of counter-party risk.

Bear Stearns Chief Executive Alan Schwartz on Wednesday dismissed recurring speculation that the investment bank faces a cash crunch, saying it has hefty cash reserves that have remained little changed this year.

Schwartz, in a televised interview on CNBC, also said he is comfortable with the range of analysts' earnings estimates for the fiscal first quarter ended February 29. Results for the quarter are due next week.

Bear's stock has plunged in recent weeks, and the cost of insuring its debt against defaults has spiked, as mortgage and credit markets continue a slump that began a year ago.

As one of the largest players in mortgage-backed bond markets, investors have assumed Bear's exposure would lead to crippling losses.

"None of that speculation is true," Schwartz said. When speculation starts in a market, one that has a lot of emotion in it and people concerned with volatility, "they will sell first and ask questions later," he said. "That creates its own momentum."

And, on March 10th:

Financial services firm Bear Stearns Cos. said late Monday in a brief statement "there is absolutely no truth to the rumors of liquidity problems that circulated today in the market."

Shares of the company hit a 52-week low in intraday trading and ended the session off $7.78, or 11 percent, at $62.30 on heavy trading volume. The stock was driven down by unconfirmed speculation the company was having funding problems, even after Bear Stearns dismissed the rumors.

"Bear Stearns' balance sheet, liquidity and capital remain strong," Alan Schwartz, president and chief executive of Bear Stearns, said in a statement.

------------------------------------------------------------

It's all such a lying game.......Just keep the decpetion going until we can just roll this thing over....One More Time......

Well, there's the last time.... when the it doesn't roll over over one more time..... and then you're done.....

Only is Bear Stearns case.... the Govt. is propping them up......

Keep those outrageoud CEO compensation packages going! ! ! !

The American Way !!!

[eternal light]

Ah, my favorite topic, the Federal Reserve System.

The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. Created in 1913 by the enactment of the Federal Reserve Act, it is a quasi-public (part private, part government) banking system composed of (1) the presidentially-appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) 12 regional Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors; (4) numerous private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks; and (5) various advisory councils. Currently, Ben Bernanke serves as the Chairman of the Board of Governors of the Federal Reserve System.

In 1863, as a means to help finance the Civil War, a system of national banks was instituted by the National Currency Act. The banks each had the power to issue standardized national bank notes based on United States bonds held by the bank. The early national banking system had two main weaknesses: an "inelastic" currency; and a lack of liquidity. During the last quarter of the 19th century and the beginning of the 20th century the United States economy went through a series of financial panics. A particularly severe panic in 1907 provided the motivation for renewed demands for banking and currency reform. The following year Congress enacted the Aldrich-Vreeland Act which provided for an emergency currency and established the National Monetary Commission to study banking and currency reform.

Only is Bear Stearns case.... the Govt. is propping them up......

It appears Bear Stearns is trying to maintain either consumer or investor confidence or both. I wonder if Bear Stearns is one of the "numerous private U.S. member banks" that wiki mentions.

The Member Banks. Approximately 38 percent of the 8,039 commercial banks in the United States are members of the Federal Reserve System. National banks must be members; state chartered banks may join if they meet certain requirements.The member banks are stockholders of the Reserve Bank in their District and as such are required to hold 3 percent of their capital as stock in their Reserve Bank.

www.richmondfed.org/publications/educator_resources/federal_reserve_today/structure

NEW YORK (CNNMoney.com) -- Following are the minutes from the Federal Reserve meeting held January 29 to January 30.

By unanimous vote, the Committee made a few amendments to its rules and to the Program for Security of FOMC Information. The amendments primarily addressed the Committee's practice of approving the minutes via notation vote, attendance at Committee meetings, and access to Committee information by System employees. By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account.

By unanimous vote, William C. Dudley was selected to serve at the pleasure of the Committee as Manager, System Open Market Account, on the understanding that his selection was subject to being satisfactory to the Federal Reserve Bank of New York.

By unanimous vote, the Authorization for Domestic Open Market Operations was reaffirmed in the form shown below (Reaffirmed January 29, 2008):

1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the Committee:

(a) To buy or sell U.S. Government securities, including securities of the Federal Financing Bank, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States in the open market, from or to securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at market prices, and, for such Account, to exchange maturing U.S. Government and Federal agency securities with the Treasury or the individual agencies or to allow them to mature without replacement;

Minutes from the Federal Reserve meeting

[The Rover]

As an "Investment Bank"... Bear Stearns is NOT a member of federal reserve system. Morgan Chase is though, and that's who the the Fed will be funneling money through to "prop" up this private corporation.