TheStreet.com's Jim Cramer says beyond the long tradition, it's what we need now as a nation.
How did "bailout" become such a curse? The U.S. has a long history of bailouts, the big ones being most successful. The U.S. government saved Lockheed (NYSE: LMT) (Cramer's Take) in 1974 -- we need all the competition in military procurement we can get, considering how precious little of it there is -- so it's hard to judge that one a loser. The feds profited from the Chrysler bailout five years later .Not just profited, but had a huge success. The Mexican bailout in the 1990s saved that country's financials and gave the U.S. a tidy profit. The Resolution Trust bailout worked perfectly in restoring the banking system at a small cost, in retrospect, to the chaos we could have had.
Yet here's JPMorgan (NYSE: JPM) (Cramer's Take) taking on a lot of risk, in retrospect, given the junk nature of Bear's portfolio, and there's a tremendous amount of hand-wringing about it?
I say get used to it. General Motors (NYSE: GM) (Cramer's Take) and Ford (NYSE: F) (Cramer's Take) can't cut their way out of their jam, not with the F Series down 40% and GM still paying more for its labor force than it thought would have to. Both have strong, salvageable franchises, but they need capital, a la Chrysler in 1979. I think the feds should give it to them with contingencies that allow the U.S. to profit from any rebound.
The evils a broad bailout for reckless lenders and speculative buyers are so obvious that even President Bush can understand them.
Referring to the housing bill that has bipartisan support in the Senate, Mr. Bush said that "Laws shouldn't bail out lenders. Laws shouldn't help speculators. The government ought to be helping creditworthy people stay in their homes."
Bush has also threatened to veto the "cash for trash" bill that would use taxpayer money to insure $300 billion in mortgages for distressed home owners. Remember: if the banks won't make the loans without a federal guarantee, it's because they know that the loans are garbage. If we're going to use taxpayer money to insure the loans, we should expect to shell out a good chunk of money when they end in default.
The larger point that people are missing here is that no homes will be lost -- the person who sees their home go into foreclosure will have to move into a rental --, but the sale of that distressed property might be the difference between renting and homeownership for a young family. Or it could be sold to an investor, adding to the supply of rental housing and making that more affordable. It's not like the banks are foreclosing on houses and then burning them to the ground.
It's a sign of an election year when an outgoing President of very limited intellect can understand something that far more intelligent politicians running for office can't.
How in the world did they get into such hot water? I mean, it takes real talent to lose this kind of money. Buying at the highs, over-leveraging and using poor investment disciplines. Why does it all sound so familiar?
Perhaps it is because these are the phrases that come to mind when I think of the plight of the individual investor who rode the market rollercoaster of the early 2000s. Yet, what I am discussing is not about them at all. No, they learned a hard and costly lesson when March of 2000 came in like a lion Saber-Tooth Tiger and continued downward with a bloody vengeance for the next two years. No, no ... they learned their lesson.
I am referring to the scores of poorly run banking and brokerage operations that have managed to make all of the combined post-depression market catastrophes look like a Sunday walk in the park. Maybe it is not entirely their fault, but they need to take a good portion of the blame for much of our economy's problems related to their poor decisions and lack of oversight on the millions of mortgages and loans that were improperly underwritten.
We already know that though. It is the most recent bit of news that is causing me to wonder how deep of a hole we are really in. This weekend, news for both Wachovia (NYSE: WB) and Washington Mutual (NYSE: WM) tells of desperate attempts by companies with big problems looking to bring in life-saving cash infusions. Unfortunately, both deals have the potential to really hurt shareholders. If you hold positions in either one of these fine messes, maybe it is time to consider alternative opportunities.
Call me old fashioned, but the weekend business news releases are starting to get to me.... While it is well known that Washington Mutual is in big trouble as its business is suffering the after-effects of all sorts of bad business practices, it did appear as if the TPG bailout would provide some relief until the credit markets regrouped. But as reported by the WSJ today, that deal stinks to high hell. Shareholders may wake to an ugly pre-market quote for WM as it is now being revealed that part of the TPG deal includes giving away somewhere in the neighborhood of $1.8 billion ... give or take a hundred million or so in order to get the deal done.
Yesterday I received a great comment from long-time reader Dr. Michael Schneider of barrelomoney.com. He wrote:
Every market has buyers and sellers-- so far it seems the remedies for the housing mess have been directed at helping the banks and homeowners (sellers) and, rightly or wrongly, propping up housing prices. This has the effect of helping those who created the mess or who profited from it while possibly hurting potential buyers-- including 1st time home-buyers who may have to pay higher prices for homes that may still be overpriced.
This may seem like fairly obvious point but it has profound ramifications: it's been completely missed by the people who are supposedly working to solve these problems. Propping up home prices delays the inevitable reversion to something resembling intrinsic value, and prices first time home buyers out of the market.
This was one of the effects of the subprime bubble as well: lax lending prices that made homes available to people with brand new SUVs and double-digit FICO scores made it difficult for people who wanted to do it the right way: work hard, save money, and make a 20% down payment on an affordable home with a 30-year fixed mortgage.
When you think about it like that, you have to wonder why there is so much resistance by supposedly reasonable politicians to just letting the darn prices come back down to earth: it's a zero-sum game, and lower home prices will help just as many people as they hurt.
When I first saw the news that JPMorgan Chase & Co. (NYSE: JPM) was quintupling its partially fed-funded offer for The Bear Stearns Companies, Inc. (NYSE: BSC), I felt my blood boil. I wrote that "no taxpayer-subsidized bailout should include over $1 billion in cash for shareholders of a mismanaged company."
While I'm usually able to resist the tempting allure of populism, in this case I can't. I have no evidence to back this up, but I do have a sneaking suspicion that the average shareholder of Bear Stearns is somewhere above the median in terms of wealth. Chairman and former CEO James Cayne -- who is partly responsible for the company's mess -- is set to receive around $75 million if the $10-per share offer goes through. And we can all thank the Federal Reserve for that bit of charity.
But maybe I've got it wrong. Maybe the role of the federal government really is to bail out people who made crummy investments in stuff they didn't really understand. If that's the case, I have another bailout idea:
I've had just about enough of this Federal Reserve dilution of dollars scheme. What's going on here? Our national economic team has gone mad I suppose. Reserve chairman Bernanke seems bent on flooding the world with greenbacks which are becoming increasingly useless. Am I the only one who sees this?
The latest Federal Reserve backed dollar setback, the Big Bank Bailout, is underpinned with moves like the Bear Stearns purchase (NYSE: BSC) by J.P. Morgan Chase (NYSE: JPM) backed by YOUR ever shrinking dollars. I'm sick of it, just sick.
Yet now Wall Street is all giddy again, waiting for the next rate cut to be announced by the money fools. Oh please, give me some confetti and a kazoo! I have to celebrate the further deflation of my savings account before I puke.
Bear Stearns (NYSE:BSC)was sold to J.P. Morgan Chase (NYSE:JPM)over the weekend for $2 per share in stock. The Federal Reserve also provided substantial financing to J.P. Morgan Chase to facilitate the transaction. This is quite incredible since Bear Stearns stock traded over $60 per share last week and over $100 per share late last year.
The Federal Reserve also announced additional measures to provide liquidity to the market. It lowered the discount rate by 0.25% to 3.25%, reducing the discount window penalty to 0.25% from 0.50%. It also established a lending facility for primary dealers directly as opposed to through banks.
What do we make of all this? The Fed has established that it will not allow the system to fail. It understands the risk that a bankruptcy from a major bank or brokerage firm would cause and will not allow this to occur. This could cause a breakdown of the financial system on a global scale. A similar credit crisis occurred after the Crash of 1987.
On the other hand, this seems to indicate that shareholders will not receive a bailout. The Fed is essentially saying to a non-bank player, such as Bear Stearns, if you get into trouble which endangers the financial system, we will arrange for an orderly pre-packaged bankruptcy. Our concern is the financial system, not your survival. In essence, if you come to us, we are concerned that death occurs in an orderly manner.
This is very similar to the Fed takeover of Continental Illinois in the mid 1980's. This bank was considered too large to fail. The Fed took over, and shareholder value was eliminated.
Any actual bailout will probably be limited to banks that are regulated by the Fed. However, there will be no free lunch. The Fed is concerned with market stabilization now. In the future since these institutions are under the regulation of the Fed, the costs of this bailout will then be accessed on them. If you want to look at precedent for such a situation, the early Chrysler bailout is a good example.
The Fed has indicated that it will not allow the system to fail. However, the penalty for those who put the system in danger will be severe, quite possibly fatal.
Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.
It was clear yesterday from the stock price action that The Bear Stearns Companies (NYSE: BSC) was facing some pain. The stock plunged yesterday to a five-year low on liquidity concerns, according to Bloomberg News. Bear rolled out its executives in an attempt to alleviate those concerns.
But today's news of a bailout to ease a liquidity squeeze is a major shock. The Wall Street Journal reports that JPMorgan Chase & Co (NYSE: JPM) and the Federal Reserve Bank of New York are arranging financing for Bear Stearns. Bear's stock is down more than 15% in early trading on the news. And the Dow is down 234 points.
The Journal reports that Bear Stearns CEO Alan Schwartz, in noting the liquidity rumors, said in a separate statement that "amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations."
This move raises many questions: How much money is being raised? Why is the Fed getting involved instead of private investors? How bad is the problem really? How much of Schwartz's comments are covering up for a really bad situation? Is this a government bailout for Bear Stearns's bad decisions?
There has been a chorus of critics emerging of late with a simple message for Alan Greenspan: Shut up.
His latest interview on This Week With George Stephanopoulos will probably do little to stifle that criticism. He told the ABC program that the government should provide direct financial assistance to homeowners having trouble making their mortgage payments. While he concedes that would create short-term budget problems, he believes it will be more effective than the a rate freeze.
Let me get this straight: In the midst of huge budget deficits, we should use taxpayer money to bailout people who are having trouble making mortgage payments because they were sold houses they couldn't afford.
Sheila Bair, chairman of the Federal Deposit Insurance Corp., is suggesting that some critics of President Bush's subprime bailout plan may not exactly have the most altruistic motives.
Ms. Bair, who was appointed by President Bush in 2006, told the Wall Street Journal (subscription required) that "I do worry that some of the investors have taken short positions on the ABX," an index based on subprime-mortgage-backed securities.
Well isn't that enlightened. A lot of people have spoken out with intelligent reason in opposition the President's bailout plan. And now the chairman of the FDIC is saying, utterly without evidence, that some of these people have nefarious ulterior motives.
Here's the problem with Bair's "worrying": This issue should be decided on the merits, regardless of the motives of the individuals behind the arguments. Short-sellers will always be criticized for "bashing." But they're usually right. And if the critics of the bailout are making reasonable arguments, who cares if they're short?
It's a really sad commentary on how low the debate has fallen when the chairman of the FDIC is resorting to what is essentially name calling, rather than defending a position on its merits. Happily, some of our bloggers have made cases on the merits -- without resorting to name calling, and they mostly oppose the bailout.
What ever happened to personal responsibility? Apparently, in an election year, it doesn't exist. President Bush's plan to help out homeowners who took adjustable rate mortgages is to freeze interest payments on hundreds of thousands of adjustable-rate mortgages for three to five years. Why should these people be bailed out? What is missing in this whole sub-prime issue is that these mortgages were introduced for individuals who wouldn't otherwise qualify for a more traditional mortgage. This hi-risk mortgage was created for people to reach the American dream of owning their own homes. Over about 90% of those who took these mortgages are still paying them back. Why are we bending over backwards to bailout out this small minority of people, who for the most part, couldn't get a normal mortgage because of their financial situation? Isn't this teaching them that they do not need to be fiscally responsible for anything they do because politicians will "take care" of them to get their votes?
In the late 90s, when the then Secretary of the Treasury Robert Rubin helped bail out Wall-Street firms during the Asian currency collapse, Wall-Street firms had a precedent that no matter how wrong, corrupt and just plain bad business they did and whatever risk they took upon themselves, it didn't matter because if there was going to be a blowup, the Federal Government will save the day. Perhaps they took this lesson to heart and the billions and billions of dollars being written off due to their exposure to subprime, CDOs, etc. is because they knew they could take a risk and ultimately would never have to pay the piper.
I am afraid that the small percentage of individuals who are currently being pandered too will learn the same lesson. Let's wait another decade and see what they end up doing and how they end up getting bailed out.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. Disclosure: Writer has no position in any stock mentioned as of 12/7/07.
The plan will have the government in cahoots with non-profit groups, but also various lenders and big banks, including Citigroup (NYSE: C) and Countrywide Financial (NYSE: CFC), both of which are in dire straits due to the subprime debacle. The idea is to "freeze" low-interest rates for certain homeowners to prevent them from going into foreclosure.
I thought the Republican party was about small government and fiscal conservatism. My bad.
Never mind the bureaucratic nightmare of administering this "plan." My question is this: Why bail out people who got mortgages they knew they wouldn't be able to afford when the rates reset? Is the argument that these people didn't *know* their rates would reset in a few years? Is it that they thought the speculative party would go on indefinitely, allowing them to refinance in a few years?
It didn't work out that way. The party was bound to end, and it has. The entire housing market has to correct itself (and the credit market too). People will lose their homes, which they couldn't apparently afford in the first place. And the credit crunch brought on by this orgy of speculation and easy credit will result in a recession of undetermined depth. It's in the cards. That's the way the grown-up world works. The government needs to stand back and let the marketplace correct itself.
Anyone else out there think this government-led bail-out is outrageous?
The New York Times reports that the recently announced Super SIV plan to buy out Structured Investment Vehicles (SIV) is a thinly disguised effort to bail Citigroup (NYSE: C) out of these poorly constructed off-balance sheet obligations (remember Enron?). It looks to me like the law of large borrowers is drawing the government in to delay Wall Street's inevitable reckoning for the subprime meltdown.
What is the law of large borrowers? If you borrow $100,000 from a bank and you can't pay it back, that's your problem. But if you borrow $5 billion and can't find the scratch, it's the bank's problem. How does this apply to Citigroup?
Citigroup is the biggest sponsor of SIVs, and now that nobody wants to buy the subprime mortgage-backed securities (MBSs) backing the SIV's Commercial Paper (CP), Citigroup can't afford to write down its capital to account accurately for the loss it faces when it is forced to buy back its deeply underwater SIVs.
Reuters reported that Countrywide Financial Corp. (NYSE: CFC), the nation's largest mortgage lender, received $12 billion in secured financing -- prompting the stock to rise 8%.
This reminds me of an old banking adage. If you owe a bank $100,000 and you can't repay the money, it's your problem. But if you owe the bank $50 billion and can't come up with the money, it's the bank's problem. In this case, the bank is the U.S. economy and Treasury Secretary Hank Paulson seems to have concluded that the U.S. cannot afford the problem of its biggest mortgage lender failing.
Is there less here than meets the eye? Countrywide stated that the $12 billion comes from new or existing credit lines. A credit line is the the option to borrow -- but it's not clear who the lenders are or the terms under which those credit lines can be drawn down. These questions matter because whoever is doing the lending had better have a clear idea of how they'll get paid back if Countrywide gets into further trouble.
How in the world did they get into such hot water? I mean, it takes real talent to lose this kind of money. Buying at the highs, over-leveraging and using poor investment disciplines. Why does it all sound so familiar?
I've had just about enough of this Federal Reserve dilution of dollars scheme. What's going on here? Our national economic team has gone mad I suppose. Reserve chairman Bernanke seems bent on flooding the world with greenbacks which are becoming increasingly useless. Am I the only one who sees this?
It was clear yesterday from the stock price action that 
There has been a chorus of critics emerging of late with a simple message for Alan Greenspan: Shut up.
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