What is the Federal Reserve (Fed) and why are they helping Bear Stearns?

April 3, 2008 at 3:07 pm Leave a comment

We hear about the Fed continually now as the credit crisis continues.  The Fed is on all the TV shows and in every newspaper, but no one tells us what the Fed is and what it is supposed to do.  The Fed was established by the US congress in 1913 to provide stability and liquidity to charter banks.  These banks are members of the Fed and they must meet certain requirements including keeping capital reserves and insuring their deposits (FDIC members) in order to protect the people who put money into the banks.  These banks are regulated closely and forced to provide safety to their clients (you and me).  The Fed also lends money to the member banks in order to provide liquidity and keep commerce moving.  They make changes to the interest rate they charge the member banks as a tool to provide liquidity and stability.   They are not charter to help non-member businesses.  They can not lend money to any organization that is not a member bank.   Bear Stearns is an investment bank, a big time gambler in the investment world and the biggest player in the mortgage security market over the past five years.   What is the mortgage security market?  This is the way the mortgage security market works.  Banks (BofA, WAMU, etc), mortgage companies (Countrywide, etc) and loan brokers (Get it Fast and Run, Etc) write loans and they sell these to Bear Stearns (BS) and others.  Yes there is some irony in the BS part of this story.  Many of these mortgages were what the lenders called “liar loans”, loans that were going to go bad from day one.  It is clear that lender gave mortgages to people who were not qualified because the lenders knew they were going to sell these bad loan to others and not have to suffer any loss themselves.  BS then packaged these loans some good loans and many bad loans (liar loans) up into a security and sold them to pension funds and other investors, sometimes to other banks.  Investment banks by their nature assume risk and they get paid a very high return for that risk.  The people who run BS made hundreds of millions of dollars for packing loans and selling them.  But BS was very greedy and they continued to run this game too long and got caught with a lot of liar loans in-house in their inventory.  In the capitalists system when investors make bad decisions they lose money.  If you or I did the same thing we would lose money. But keep in mind we now have to add the players involved in the Fed Bear Stearns fraud.  Yes I said fraud.  Enter the Secretary of the US Treasury – Henry Paulson, former partner of Goldman Sachs, and a personal friend of the president of BS, Alan Schwartz.  We might reconstruct how this happened by saying Alan call Henry and Henry called Ben Bernenke, head of the Fed.  So we have Alan, Henry and Ben all old buddies on the phone discussing the bale-out of BS.  Alan and Henry are the riches of the rich in this country with a net worth of over half a billion each and they don’t want to lose a dime of that if the taxpayers can bale them out.  Ben tells them he can’t help a non-member especially one that helped create this mess like BS.  Ben also tells Alan and Henry that the market creates winners and losers and sometime BS has to lose especially after making really bad decisions.  But something magical happens in this conversation and these three men decide that BS can’t be allowed to fail or the entire US economy of $14 trillion dollars will fail.  So you and I have guaranteed BS will not go under, Alan will continue to make hundreds of millions and Henry didn’t have to see a personal friend unconvinced by failure.  I’m absolutely sure the millions of unemployed workers think this is the right move. So we had a little fun with this, but what really happened?  What usually happens; the rich get baled-out and the poor lose their homes.  The Fed broke the law but the Bush administration says so what?  Bush is so use to this it hardly matters anymore. The Republicans in Congress who claim to be for free markets are all for baling out BS and any other investment bank, when they make bad decisions.  You and I are guaranteeing $30 billion in bad debt so Alan and his buddies at BS don’t’ have to face their dishonest behavior in the marketplace.                     Finally, Ben has set the model to bale out more investments banks in the future with our money.  Ben wants to lend them our money right now (at rates you and I can’t get) and he doesn’t care if they are members of the Fed system, take actions to protect their clients, keep responsible capital reserves or join the FDIC to insure we will not lose our money.  If I were at any of the investment banks I would ramp up the next scam knowing full well the Fed will bale them out, with taxpayer money, when the scam goes bad, as all scams do. 

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Entry filed under: Rants.

No bale-out for dishonest borrowers and dishonest lenders Buyers Beware!

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