Fed goes where no man has gone before
What the Fed has done in the last week — throwing open its window to investment banks & brokers, and giving JPM $30 billion in non-recourse loans to cover potential losses on Bear Stearns mortgage bonds — finds precedent only in the 30s.
It turns all the Reagan era wisdoms on their heads.
1. If the Fed had made the move on Thursday, instead of Sunday, Bear Stearns would be whole. And if the move hadn’t been made on Sunday, Lehman Brothers yesterday might well have gone under.
Now, the remaining four big Wall Street greed mills (plus a list of about 15 others) are golden — able any day to draw credit from the Fed.
And what do you know, after announcing quarterly results and putting on showmanlike conference calls this morning, Goldman and Lehman each went to the Fed after the close this afternoon and filled up.
One feels grateful that the global system didn’t melt yesterday (not because I like the system, but because I think it’s the working class that would be crushed by the melt, not the rich, who may be eaten).
But the idea of giving almost bottomless credit to so-called investment bankers to play with at 30 to 1 leverage … It seems a recipe for disaster, long-term.
Thus, the Fed did the right thing over the weekend. But one hopes that:
– JPM’s sweetheart deal, taking Bear for cab fare, falls apart, or gets modified to more fairly reflect reality for the Bear shareholders, 30% of whom are employees, from secretaries to the erstwhile big brains.
– the window closes on these hustlers as soon as the crisis has passed. Six months or a year, maybe.
2. It now remains to further thump the Free Marketeers by buying something like $50 or $100 billion in wounded mortgage bonds.
Everyone is now talking about this — from Barney Frank in Congress to the managing director of the biggest bond investor (PIMCO) in the country, who advised same in a Financial Times op-ed piece this morning — while a billionaire from Texas took out a full page ad in the NY Times begging Boom Boom Bernanke not to “fill the Federal Reserve with Garbage.”
One would think the Treasury or Fannie Mae and Freddie Mac (issuers of about half the mortgage bonds outstanding) are the entitties to do the buying. But they seem paralyzed — ideologically and economically — by their baby Bush reaganism.
Thus, it’s beginning to smell as if the Fed — again — is going to be the one to act. To go out and buy wounded mortgage bonds. Blowing the Free Marketeer’s mind. Think of him as a frog in cool water coming to a boil:
– A week ago the Fed shocked people by saying it would give banks etc golden (knock on wood) Treasury bonds in exchange for wounded s-f bonds (including mortgage bonds) for 28 days.
– Then, on Sunday, as the Bear Stearns steal was inked, the Fed agreed to make the same swap — any “investment grade” security — for 60 days.
And presumably these loans could be rolled over.
Seems to blur the distinction between a loan and a purchase.
Somebody governmental buying a ton of mortgage bonds like this — perhaps at 94 cents on the dollar (?) — will put the financing end of the housing debacle on solid ground. Which will help prices begin to stabilize.
