The Back Alley Archives

March 14 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke invoked a law last used four decades ago to keep Bear Stearns Co. from collapsing after the securities firm approached the central bank for emergency funding.

The loan to Bear Stearns required a vote today by the Fed's Board of Governors because the company isn't a bank, Fed staff officials said. The central bank is taking on the credit risk from Bear Stearns collateral, lending the funds through JPMorgan Chase & Co. because it's operationally simpler to accomplish than a direct loan, the staff said on condition of anonymity.

Bernanke took advantage of little-used parts of Fed law, added in the 1930s and last utilized in the 1960s, that allows it to loan to corporations and private partnerships with a special Board vote. The Fed chief probably sought to stave off a deeper blow to the financial system from a Bear Stearns collapse, former Fed researcher Keith Hembre said.

``The Fed really doesn't have any obligation to help a non- bank aside from its role or responsibility to keep the financial markets functioning,'' said Hembre, who helps oversee $107 billion as chief economist at FAF Advisors Inc. in Minneapolis. ``They made a judgment, probably an accurate one, that they're not going to function very well if you've got a full-blown crisis with a major Wall Street firm.''

Hmm. Maybe I'll wait another week on that refinance.

March 16 (Bloomberg) -- JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for about $240 million, less than a 10th of its value last week, after a run on the company ended 85 years of independence for Wall Street's fifth-largest securities firm.

Shareholders of New York-based Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the two companies said in a statement today. The U.S. Federal Reserve will provide financing for the transaction, including support for as much as $30 billion of Bear Stearns's ``less-liquid assets.''

No shock, lawsuits start flying over the $2/share sell price.

Bear didn't manage their risk properly. They were the most aggressive purchaser and underwriter of mortgage-based securities. They chased the fast money, the hot returns. When you take on that kind of risk, there's always the chance you'll fail. It's like when a weatherman says it's going to be a nice day with just a 10 percent chance of rain. Then thunderstorms come and people say, "Gee, this weatherman really sucks." No, what happened was the low probability event just came up.

With Bear Stearns, guess what? It rained. There were plenty of warnings, but no one brought their umbrellas.

I know plenty of people who were happy they blew up. Not quite Eliot Spitzer happy -- people weren't high-fiving -- but somebody taped a $2 bill to the front door of Bear Stearns , right over the logo, took a photo and sent it around to all the trading desks. Man, that’s just cold

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We saw a complete abdication of responsibility by the regulatory supervisors who oversee banking and lending institutions. Think about it: How on Earth was a strawberry-picker in California making $15,000 a year able to qualify for a no money down loan on a $720,000 mortgage? That is just unconscionable. And that basically tells you that the mortgage industry was saying, “Fuck it! We don’t care. Make Money!” There was no supervision, no leadership. No one performed any kind of due diligence. Imagine if the Super Bowl were played with no referees on the field -- that’s what this was like.

The mortgage industry built their entire business on ass-backwards, shit-kicking, dumb-fuck assumptions. The housing market couldn't just go up forever. Yes, that was part of their “models.” You just have to be alive for 15 years to know that these things cycle. People who said that real estate prices weren’t ever going to go down should be beaten over the head with piles and piles of foreclosed mortgages. Idiots.

And, lots of people got quite rich off of it. The guys running the homebuilders were telling the world that everything was great, they were building homes as fast as they could -- and selling their stock like their was no tomorrow. Like Angelo Mozilo, the founder of the biggest mortgage company in the U.S. He's the poster boy for inside sales. The guy sold $400 million in stock. That's a red flag that way too many people missed.

But it didn't pay to get upset about it. Mortgage brokers -- some of these guys can’t walk and chew gum at the same time -- were pulling in $3 million dollars a year. All of sudden, real estate agents were driving new Lexuses. Home Depot and Lowe's insiders got rich. There’s a whole infrastructure that went along with the real estate boom and that included everybody from contractors and builders to developers and brokers. Northern Trust had a study, I think from 2005, that showed 41 percent of new job creation was real-estate complex related. Typically, it’s 8-to-10 percent. Another red flag that was mostly ignored.

People still don't get it, though. I really wish more folks understood the concept of MEW, or Mortgage Equity Withdrawal. A few years ago, lots of people looked at the value of their home and said, "Gee, I bought this for $90,000 in 1995 -- and now it's worth $300,000!" And so they took out $175,000 in a home equity loan and bought cars and vacations and plasma screens. They financed their lifestyle with what has always been a savings vehicle. It's one thing if they used the money for “improvements” -- fix the driveway or remodel the kitchen. That adds value. But they didn't -- they ate their seed corn.

You're supposed to raise your standard of living by working harder, being clever, earning more income -- not by using your long-term savings. And now this current generation is pretty much fucked. When push comes to shove and they go to take money out of their houses at retirement time, they’re going to find out that there ain’t a whole lot there. They better pray that Social Security is still around in 20 years -– not exactly a sure thing.