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Posts Tagged ‘Bear Sterns

One mayor of a municipality I covered for a small newspaper told me that no one new on council ever asked questions about the budget. Budgets for the municipality were under $30 million. Sure enough, budget time rolled around and the new councillors looked thoughtful, listened to the debate, but asked no questions.

Why?

There really is too much to ask. When you have volumes of pages of budget line items in binders on your desk and it’s the first time you’ve dealt with these matters, you have so many basic questions that diving into details more complex is a few episodes ahead. So you sit on your hands and try to learn. The learning curve is steep.

The same thing may be happening in the United States. Americans are faced with landmark financial institutions that have been wiped out overnight, face mergers or have been propped up by their federal government. Reportedly $900 billion has been spent in all including direct buyouts and that figure may include the January prime-the-pump cheques to Americans to spend.

Now the U.S. government has a plan to spend $700 billion more in a single plan to remove the bad debt from the system. It’s necessary and an auction should have been set up months ago to do it.

The media has a job to do in explaining this issue to Americans who have never in their lives wondered about a day in the life of Wall Street brokers. It will be a steep learning curve.

The subprime crisis was on the radar for a while.

Subprime lending refers to borrowers who were not “prime”, that is, not ideal. A glitch in their credit history could get them turned away from traditional loans from the local bank. But if they couldn’t afford a car or a house or credit card, there were avenues to take that were outside the traditional lending practice guidelines. The initial rates may have been attractive. But the fine print in subprime lending tightens if you are late in a payment, interest rates can skyrocket. But the rising prices in the real estate market – a bull boom from 2000 to 2006- made it tempting to get into the market for many with these available mortgages.

Already there were problems in subprime. The United States had a spike in credit card defaults in 2002. That could have raised alarm bells.

The subprime market is foreign here. Canada doesn’t have it. That’s why our banks are relatively unaffected by the American banking crisis. We do have some of this subprime market, though. Look at some of those advertisments for cars in the Sun newspaper chain. Bad credit history? No problem. Buy a car from us anyway. That’s subprime. You’ll pay through the nose in interest because you have risky credit.

Money brokers need a boom and the American home buying binge was certainly one. Even we saw the ads late at night. Buy a house with no money down, flip it, buy another. It seemed the U.S. had gone crazy over house purchasing. Sure, it was all a risk for average men and women, but if it’s a chance to own that nice house, why not?

The problem isn’t with Mr. and Mrs. Average American. The problem was with the money brokers.

The mind-boggling issue in all of this is not that warning signals for upcoming trouble were not heeded, it’s more than that. They were actually ignored as investment banks leveraged themselves into serious debt to lend even more because profits were so good in the subprime market.

I’ve written about this before- some investment banks were lending over $30 in borrowed money for each dollar of shareholders money. It’s no wonder when the crunch came that it all became a house of cards. There was no money anywhere.

That’s why the United States Federal Reserve, the Treasury department and the Congress are now considering the biggest bailout in history, that could cost a trillion dollars to prime the money-starved banks and separate the bad debt from the system.

Investment bank Bear Sterns was first. It’s history included weathering the crash of 1929 when it was just a six-year-old trading house. By 2007 it had over 15,000 employees, $350 billion in assets. In July 2007 two subprime hedge funds evaporated and the company then had to face over $1 billion in write-downs. The loss of confidence in the investment banking giant was swift and caused a melt-down in its stock price from a high of $172 in 2007 to just $2 by March, 2008. J.P. Morgan Chase swallowed Bear Sterns whole for $10 a share, bumping up its offer from $2 to add the worth of its newly-built New York office tower.

But it was this past week that was history making.

To begin last week the news was already surprising and grim with the federal government takeover of two corporations, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) that backed five to six trillion dollars worth of the $10 to $12 trillion mortgages in the United States.

On Monday, September 15, Lehman brothers, founded in 1850, and with assets of $639 billion, filed for bankruptcy under crushing debt. By Wednesday the prized LEH stock offering was taken off the roster of stocks traded on the New York stock exchange. Barclays bought the Lehman building and much of its trading operations. There is no choice about the bankruptcy as it is made clear there will be no bailout by the federal government. Bank of America buys Merrill Lynch.

On Tuesday, with Wall Street reeling from the news of the Lehman Brothers bankruptcy, more hard news followed. AIG, the 18th largest corporation in the world, faced a similar fate. The company had underwritten much of the subprime mortgage affair. It now needed tens of billions to continue operating. Deemed too big to fail, a federal loan bailed it out, but at the cost of 80 per cent control of the company.

Wednesday. Treasury bills paid almost zero as the flight of capital sought safety as the Wall Street everyone knew seemed to be crumbling.

Thursday. The rate banks lend money to each other at is relatively high, indicating there is little trust or willingness between banks to lend money. The U.S. Federal Reserve, helped by foreign banks, pump billions into the system to thaw frozen capital. The rate comes down.

On Friday the U.S. Treasury Department announces a plan to buy up all the bad debt out of the system. The rescue plan is estimated to cost $700 billion.

The U.S. Congress about to debate the measure. The clock is ticking. The debate will be interesting. There will be members of Congress who will be learning as they go. They will not ask questions. They will give the proper sound bites, say they are studying the issue, in meetings over it, but like that mayor I spoke to said, some issues are so complex you don’t want to look stupid, even if you are the one voting on the measure. Expect the matter to pass spiced with just the right amount of sound bite grumbles on behalf of the American taxpayer who is going to have to pay for the whole thing.

Thank you for reading Aardvarkcola

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If you thought Bear Sterns and Lehman Brothers on the ropes was a big deal, prepare yourself.

American International Group, the insurance company you know as AIG, is teetering.

Why is that important news in bank crisis?

AIG is the largest insurance company on the planet, the 18th largest company of any kind in the world, with a reported $1 trillion in assets. AIG is a component of the Dow itself. It has also been the back-stop insurance agency of a lot of American banks who are finding billions in subprime mortgage paper is worth less and less daily. So much less, banking giants are actually failing. If American banks need an insurance back-stop and the insurance company happens to fail, then a lot of those very same banks will be even more vulnerable than they are now.

The American federal reserve let Lehman Brothers, as big as it is, die. Lehman declared bankruptcy yesterday, the biggest bankruptcy in American history.

The latest news on AIG- I picked this up from a news flash at the end of tonight’s Squeezeplay ( my favourite television show of all time) on the Business News Network, is that AIG has hired a law firm to draw up bankruptcy papers, if needed, repeat, if needed, for tomorrow (Wednesday), a deadline day if it undergoes such a process.

On October 9, 2007 the AIG stock price was $70.11. It’s been sliding a little since then. It lost 18 per cent of its value in one day last month, on August 7, 2008, after AIG reported a loss for the quarter of $5.4 billion. In the last three quarters AIG has lost $18 billion. Today the price closed at $3.95 a share on the New York Stock Exhange. That’s actually an improvement from a low today of $1.25 after an opening price of $1.85.

Where did that bit of confidence come from to push the share price up?

The federal reserve, it appears, has deemed AIG too important to fail. Tammy Luhbi of CNN Money reports the federal reserve has guaranteed AIG an $85 billion loan. However, as she reports, a downgrade of AIG’s rating by Moody’s and Standard and Poor makes it necessary for the insurance firm to raise more collateral, as much as $13 billion, which will make the federal loan come in handy.

How did this become as big a problem as it has? Those back-stop guaratees of AIG are referred to as a Credit Default Swap (you’ll likely hear the word “swap” on the news when referring to this) or a Collateralized Debt Obligation (CDO). A good article explaining those is from Time Magazine in March. A very good basic explanation on what swaps are is from this transcript of an interview on Market Place on April 1. A good story on what has happened today is this, from the New York Times, written by three of their writers.

The swap market deals with what should be solid investments, but are unregulated. They are deals made almost automatically, not between two people, but as a sort of sign-here guesture for things like municipal bonds.

Now a word about regulation and deregulation about the banking industry.

After the 1929 crash, President Franklin Roosevelt’s administration and the Congress of the time put into place some serious regulations for the American financial sector. One of those, out of Congress, was what became known as the Glass-Steagal Act. That 1933 law prevented commercial banks from risking depositor investments in the stock market. After the act came into effect, there were two different kinds of banks in the United States- commercial banks and investment banks.

Much of the banking regulations made then have unravelled. Who did the unravelling?

Here is an interesting story from Mother Jones, a magazine I hadn’t heard of until tonight. ( I live such a sheltered life.) A damn good magazine from the look of it. Anyway, this next story is a good way to end this post. It scared me more than the news of AIG having this much trouble. The story, written by David Corn, author of George W. Bush, Mastering the Politics of Deception, points out a key McCain advisor, Phil Gramm is the man who may have to take some responsibility for this whole subprime mortgage mess by encouraging deregulation of the banking industry as a United States senator from Texas. (If you’ve haven’t heard of him, you may have heard some quotes of his this year, saying America has become a nation of whiners and that American is undergoing a “mental recession”.) Until July Gramm was a co-chair of John McCain’s national campaign for the United States presidency. That interesting factoid should help unfog your glasses as you admire your Sarah Palin poster. Have a read.

Thank you for reading AardvarkCola

Looking for a video lead for this post. Found the best one on Aljazeera, of all places.

Fed moves to deal with financial crisis, from Associated Press

From Bloomberg.com http://www.bloomberg.com/news/index.html

Headlines from Reuters include “Struggling to Survive” and “Wall Street mauled by Lehman bankruptcy, AIG fears”

Problems at Lehman spill over into several Canadian companies” (the damage is minor) Canadian Press story from CanadianBusiness.com which includes quotes:

“…Lehman Brothers collapsed under weight of $60 billion in soured real estate holdings…”
“Sun Life said Monday it holds US$334 million worth of Lehman bond securities and about $15 million in Lehman derivative instruments.”

Diane Francis, of the National Post, in her story today “Wall Street Gamblers Out,” she quotes James Grant, of Grant’s Interest Rate Observer, saying last year: “Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich.”

Think it can’t happen here in Canada? Think again.
Here is a link to a story headlined: “Steeper drop in Canada’s existing home prices” by Garry Marr
of the Financial Post

Canadian markets feel U.S.’s pain by Eoin Callan, Financial Post.

Markets crumble on financial woes by Steve Ladurantaye, The Globe and Mail

CEO’s talk  Bank of America Meryl Lynch deal on video, below:

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  • wordbeeps: No, he doesn't deserve an apology. Who tweets during a funeral? If you do, expect feedback. I didn't say the mourners were faking it. I think they we
  • Holly Stick: Look you fuckwit, are you too stupid to realise that Ghomeshi was an actual friend of Layton's, when you tweeted to him that the mourners were faking
  • aardvarkcola: Thank you. I see the rest of your message now. i'm honoured to to have your words on my blog. That alone is a delight. Lawrence

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