abra cadabra.. poof!!!! WM becomes JPM!

Wow!! The FDIC did not even wait until the weekend to seize Washington Mutual(WM), the nation's largest savings bank and sell it to JP Morgan Chase (JPM). This will spare the taxpayers another bailout at the cost of shareholders and bond holders of WM. Hey!!! the people who took on more risk for more reward are left holding the bag, not the taxpayers and responsible mortgage holders!!! This is an event that should become a trend.
Just remember one thing. The root cause of this sub-prime lending crisis is the government's extension of credit (via Fannie Mae and Freddie Mac) to mortgage borrowers who could not handle the mortgage they were receiving. When Bill Clinton told Fannie Mae and Freddie Mac to lend money to people who could not handle the debt, that started the current sub-prime lending crisis. This occurred in 1995. In 1996 Bill Clinton became the first Democrat to be re-elected as President of the USA since FDR.
HHHMMMMMM!!!!
More to come.

deja vu: another weekend another bailout act 3

Good Grief!!! The feds are getting more done on the weekend than they do during the week. This weekend they drafted a 3 page bill requesting congressional approval of a $700 billion bailout fund to buy the bad debts that banks & insurance companies are carrying on their books. The goal is to get financial institutions to stop hoarding cash and increase the liquidity of the short term credit markets. The fear is that without increased liquidity soon, there will be an economic meltdown and collapse similar to the Great Depression. My hope is this will be the last bailout needed. Altogether this bailout is pushing the $1 trillion mark, which is a high price to pay for a soft landing. I also hope that this turns the tide on large companies expecting the taxpayers to bail them out every time their business cycle enters the slump phase.
On another front of this bailout war, the Federal Reserve gave the last 2 major US investment banks permission to change their status to bank holding companies. On Sunday Goldman Sachs and Morgan Stanley received the Fed's blessing to buy a commercial bank. The goal here is to give these investment banks access to commercial banks' deposits for the short term loans that are the lifeblood of investment banks. Hours after this permission was granted, Morgan Stanley signed a nonbinding letter of intent for Mitsubishi UFJ Financial Group to buy 20% of Morgan Stanley. Alas, a wall street company trying to rise from the ashes without 100% assistance from the Feds!! Is that a light I see at the end of the tunnel?

Warning!! Another wild and wooly weekend ahead!!!

The Feds have announced plans for more intervention in the credit markets to prevent more chaos and disruption to the markets. President Bush authorized the Treasury dept to use $50 Billion from the exchange stabilization fund to guarantee money market mutual funds. These funds have been hurt by high redemption rates recently. The straw that broke the camel's back was when Putnam Investments Primary Fund was hammered by high redemptions to the point where the funds shares dipped below the $1.00 share price to $0.97. Since money market funds inception in 1970, this has been only the second "breaking the buck" incident. According to imoneynet, $169 billion was redeemed from money market mutual funds from Sept. 10 to Sept. 17. That decreased the funds total assets almost 5% in one week!! On sept 17 total money market mutual fund assets were around $3.4 trillion. Once again the phrase "too big to fail" occurred.
Good news for the taxpayers is the transfer of these redemptions to more liquid and more stable debts, mainly government debt. In effect, the redemptions are given to the government & the government uses the funds to keep the redemptions from destabilizing the money market funds. Talk about working miracles in strange ways!!!
The Treasury Dept and the Federal Reserve Board announced plans to work with Congress throughout the weekend to set up a comprehensive plan to buy out the "toxic debt" that is plaguing the credit markets. When I review the results of the government's work on market stabilization the last two weekends, Monday should prove very interesting.

P. S. The Exchange Stabilization fund was started back in the 1930s to provide emergency funds to help stabilize the US Dollar.

Time to sound the Tocsin?? revisited

See the post for 9/9/08, time to sound the tocsin. I have been pondering that quote for a week now and I realize that Director Lockhart may have meant that investors are only buying higher quality mortgage backed security portfolios, especially those with low or no exposure to sub-prime mortgages. Of course the higher quality MBS command a higher price than those with riskier mortgages in them. If you have an opinion on this please express it in the comments section.

Another day another line in the sand drawn

The Federal Reserve Board announced an $85 billion loan to AIG in exchange for a 79.9% equity stake in the company. The Fed, along with the US Treasury, consider AIG too big, too interconnected to fail. The good news is the Fed might actually turn a profit on the deal. The Fed's hope is that AIG will be able to ride out the current storm in the credit markets and get back on its feet again. When that occurs, the Fed will cash in their equity stake and pay back the loan. Let's hope this works.
Apparently the "line in the sand" the Fed drew with Lehman Brothers can shift. It seems that sand line is actually calculated on a case by case basis. The criteria being how big the company is and what impact its failure will be on the US and world economy. Lehman Brothers just didn't qualify for a direct bailout. A year ago LEH's market capitalization was $33 billion, now it's in bankruptcy proceedings and selling off its assets at bargain basement prices. Barclays bank is offering $250 million for LEH's North American investment banking and trading operations. Barclays is also paying $1.5 billion for the LEH New York headquarters and 2 New Jersey data centers. The deal is subject to approval by the bankruptcy court. The deal would save almost 10,000 LEH employees from job loss. This makes me believe the court will have no problems with it, unless it considers the price way,way,way too low.
Here's another interesting development in the LEH bankruptcy, JPMorgan Chase (JPM)advanced LEH $87 million Monday morning to allow LEH to continue its trading operations and avoid disruptions to financial markets. The New York Federal Reserve Board reimbursed JPM for this. Apparently the treasury secretary's refusal to bail out LEH did not apply to loans made after no deal was reached and LEH decided to file chapter 11 bankruptcy. On Tuesday, JPM advanced LEH another $51 million. The bankruptcy court judge also appointed JPM as LEH's clearing house for its trading operation during the proceeding. This means that JPM has put $138 million into LEH to fund its trading operations in 2 days. This is over 50% of Barc's offer of $250 million for trading and investment banking operations. What this means is beyond me, if anyone out there has any knowledge on this please share it in the comments section.

Another day another sunrise!!

Good Morning from Mt. Washington everyone!! Despite all the bad news from the world's stock markets, the Sun is rising today. Another ray of hope, the UK based Barclays (barc) bank is negotiating with Lehman Brothers to buy some units of LEH's business, just not asset and wealth management. Barc backed out of a purchase deal when the US Treasury would not guarantee LEH's future trading obligations. Barclays is interested in LEH's core broker dealer businesses. There is an urgency to the deal because Barc wants to close before LEH loses staff and clients, which would diminish the value of the purchase and make resumption of operations more difficult. Another concern is Barc's shareholders who will want to see a very low price as reward for the risk of investing in a bankrupt company.

Praise for The Feds!!!

Here in Mt. Washington, It is Monday morning and the Federal Reserve Board's meeting failed to arrange a buyer for Lehman Brothers(LEH). The Feds refused to provide any funding or guarantees for a buyer of LEH so no one offered to buy it. Bank of America, one of the potential buyers of LEH did buy Merrill Lynch(MER)for $50 billion. LEH will file for chapter 11 bankruptcy protection.
I am very pleased with the feds decision not to fund the purchase of LEH. The American taxpayers have already bailed out too many companies. We cannot afford to keep protecting investors from the risks they took on when they invested in subprime real estate. The credit markets need a correction and the sooner it starts the sooner the markets will recover. In my opinion, the bailout of Fannie Mae/Freddie Mac was good money after bad. Hopefully I am wrong and the Fannie/Freddie buyout will help stabilize the market in the long term. Today and this week will be an interesting one for Wall Street and the financial services sector of our economy.

P.S. Remember yesterday's post saying that LEH was the most urgent concern? The meeting also was concerned about other financial services firms in dire straits. Two of the other firms on the short list of troubled companies are Washington Mutual, the largest savings bank in America and American International Group(AIG), one of the world's largest insurance companies. More to come on these companies soon.