Monday, March 17, 2008

Wall Street - Who's Next? Who Pays?

The financial mess with the sub-prime mortgage crisis has produced another fatality.
Bear Stearns.
It is reported that "Bear Stearns was the most exposed to risky bets on the loans; it is now the first major bank to be undone by that market's collapse."
"This is going to go down in very historic terms," said Peter Dunay, chief investment strategist for New York-based Meridian Equity Partners. "This is about credit being overextended, and how bad it is for major financial institutions and for individuals. This is why we're probably heading into a recession."
Financial Times says this:
With Bear now in the hands of JPMorgan, following emergency funding from the Federal Reserve and JPMorgan on Friday, the hunt is on for the next piece to fall in Wall Street’s shaky domino line.

“The most pressing question on investors’ minds: who’s next?” said Jeffrey Rosenberg, head of credit strategy at Banc of America Securities. Analysts expect US banks to report some $50bn in additional losses in the first half of this year – in addition to the $100bn-plus in writedowns announced so far – as key markets such as leveraged loans, home equity and real estate continued to deteriorate.
This all does not bode well at all in a investment sector that has already been beaten up badly by huge losses.

All I can say is that these banks did it to themselves. They offered and gave loans to people who clearly could not afford them. What did they expect? And now who is going to pay for this incredible mess?

We are.

We will as taxpayers have to bail out companies and our economy will suffer the consequences in its wake.

Of course Congressman, and presidential candidate, Ron Paul predicted this would happen. He has repeatedly warned people about this and also warned about how the taxpayer will be the ones to pay for this mess:
In 2005, Mr. Paul introduced an amendment in Congress to end the implicit taxpayer guarantee backing Fannie's and Freddie's debt. He said at the time: "I hope my colleagues join me in protecting taxpayers from having to bail out Fannie Mae and Freddie Mac when the housing bubble bursts."
Source: Option ARMageddon

But why would anyone listen to Ron Paul - he's just an old lunatic who talks about having sound money and eliminating the Federal Reserve.... - and he just happens to be right.

ARMageddon also reports on the impending problem that lurks within Freddie Mac and Fannie Mae.
Freddie Mac has a few hundred billion dollars of high-risk loans in its $2.1 trillion book of mortgages. And Freddie's capital cushion is a meager $40 billion.

Each has reported billions in losses, and they will report billions more as foreclosures accelerate across the country. What happens if their problem loans fall so far in value that their capital is wiped out? There's only one bank large enough to take over Fannie's and Freddie's debts: the U.S. Treasury. Taxpayers.
So while this is an opportunity for JP Morgan to snap up a company like Bear for $2 a share, the real story may be how you and I will ultimately pay a much bigger price.


Rational Jenn said...

Yes, we taxpayers are the ones left standing when the music stops. It's absolutely shameful that those of us who have been careful about our finances will be paying for the financial mistakes of others--and we have no choice about it, either.

Elisheva Hannah Levin said...

It's pretty darn frightening. Our politicians lie to us with impunity, cooking the books to make it look like the economy is doing well--and even as we watch the mess we hear that the economy is "fundamentally sound."
Maybe we are starting to wake up, but oh, the coffee is going to be bitter! And I doubt we will be able to afford cream and sugar...
Still, it's probably better to face the music (how's that for mixing metaphors) sooner than later.