US second Great Depression is near You!
- From: muto2100 <maniekxxx@xxxxxxxxx>
- Date: Mon, 17 Mar 2008 04:46:23 -0700 (PDT)
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The Federal Reserve Board on Friday took emergency action to prevent
the collapse of Bear Stearns, the fifth largest US investment bank and
one of the world's largest finance and brokerage houses.
Invoking a little-used provision added to the Federal Reserve Act in
1932, at the height of the Great Depression, the US central bank
agreed to allow the Federal Reserve Bank of New York to insure an
infusion of credit to Bear Stearns by JP Morgan Chase. Under the terms
of the "secured loan facility," to extend for up to 28 days, the risk
of a default by Bear Stearns will be borne by the Federal Reserve Bank
of New York, not JP Morgan Chase. The latter will serve essentially as
a conduit for the cash provided by the US central bank.
This mechanism was used because only commercial banks, so-called
depository institutions, can borrow directly from the Fed's discount
window. Bear Stearns is not a depository bank, and hence the Fed was
obliged to invoke a provision of the 1932 amendment to the Federal
Reserve Act that applies when "unusual and exigent circumstances exist
and the borrower is unable to secure adequate credit accommodations
from other sources."
The announcement of the Fed bailout sent shivers through Wall Street
and shook financial markets around the world. It confirmed rumors that
had been mounting over the past week that Bear Stearns, the second
largest US underwriter of mortgage bonds, did not have the cash to
meet claims by its creditors. The rescue operation came one day after
the collapse of Carlyle Capital Corporation, a $22 billion publicly
traded investment fund controlled by the Carlyle Group, long one of
the most profitable and well-connected private equity firms in the US.
With the de facto collapse of Bear Stearns, however, the housing and
credit market collapse has claimed one of the titans of Wall Street.
Founded in 1923 and employing some 15,500 people worldwide, Bear
Stearns was one of the "big five" Wall Street investment banks. In
2005-2007, Bear Stearns was recognized as the "Most Admired"
securities firm in Fortune magazine's "America's Most Admired
Companies" survey.
Last July, the collapse of two Bear Stearns hedge funds as a result of
the bursting of the US housing bubble sparked a crisis of confidence
in the credit system that has gathered steam and expanded in scope to
threaten the viability of some of the biggest banks and financial
institutions in the world. The worsening credit crunch has deepened
the crisis in the housing market and the economy in general, plunging
the US into a recession and wreaking havoc with the economies of
Europe and Japan.
The news of the bailout sent share prices tumbling on Wall Street. The
Dow Jones Industrial Average fell 194.65 points, a drop of 1.6
percent. The Standard & Poor's 500 Index fared even worse, giving up
27.34 points (2.1 percent), while the Nasdaq Composite Index fell
51.12 points, or 2.3 percent.
Nine stocks fell for every one that rose, and the fears that other
financial houses could follow Bear's demise was reflected in a 4.1
percent fall in the Standard & Poor's Financial Index. All 92 members
of the index lost ground during the trading day.
Bear Stearns stock plunged $27, or 47 percent, to end the day at $30.
Coming on the heels of a months-long slide in the bank's stock price,
yesterday's panic sell-off reduced Bear Stearns's market valuation to
$4.1 billion, less than one-fifth the size of Lehman Brothers.
Indicative of the broader reverberations from the Bear Stearns
collapse, the share price of Ambac Financial Group, the world's second-
largest bond insurer, fell 93 percent, on widespread fears that the
company will not have sufficient capital to meet claims from its
creditors.
The US dollar hit new lows against the euro and other currencies.
The Fed action on Friday confirmed speculation that its extraordinary
announcement three days earlier that it would loan $200 billion in
Treasury bonds to investment banks and brokerages and accept as
collateral privately issued mortgage-backed securities--whose market
value has plummeted--was a desperation measure aimed at forestalling
the failure of a major Wall Street finance house.
Speaking of Friday's Fed rescue operations, the Wall Street Journal
Online wrote: "The timing of the move made its urgency clear: If Bear
could have held out until March 27, it could have borrowed directly
from the Fed itself under a new program announced just Tuesday."
The maximum size of the loan is not predetermined, but is limited by
how much collateral Bear Stearns can provide to satisfy the Fed's
requirements, officials said. The loan by no means assures Bear
Stearns's survival. More likely, it was granted in the hope that it
would buy time for a more orderly disposition of the firm's fate and
head off a panic response by bankers and investors to its demise.
As the Wall Street Journal Online noted, "The developments could mean
the end of independence for Bear, founded in 1923. JP Morgan said it
is 'working closely with Bear Stearns on securing permanent financing
or other alternatives for the company'--Wall Street lingo for a sale of
other strategic-level change--and CNBC reported that the bank is
'actively being shopped' to potential buyers."
Officials at Standard & Poor's and Moody's Investor Services met
Friday to discuss whether to downgrade Bear Stearns's credit rating,
and if so, by how much.
In its own statement on the bailout, Bear Stearns said, "The company
can make no assurance that any strategic alternatives will be
successfully completed."
Carl Lantz, a strategist at Credit Suisse, said the intervention by
the New York Fed and JP Morgan showed that Bear "didn't have enough
money to turn the light on this morning."
Geoffrey Yu of UBS said, "I don't think the market has seen anything
of this magnitude before, such a big bank."
Wall Street Journal columnist Peter A. McKay wrote: "For investors,
the arrival of the Federal Reserve and JP Morgan Chase with a
financial life raft for troubled Bear Stearns served primarily as a
reminder of how murky and deep the waters of Wall Street's credit
crisis remain, with other market participants possibly drowning below
the surface."
The immediate fear motivating the Federal Reserve, the Treasury
Department and Wall Street banks was the danger that an uncontrolled
collapse of Bear Stearns would have a domino effect on already
turbulent financial markets. Were Bear Stearns forced to sell off
assets at fire-sale prices to raise cash needed to meet creditors'
demands, the value of untold billions in assets held by other
financial institutions would drop, leading to more margin calls from
creditors, further institutional collapses, more panic selling of debt
and securities--a vicious spiral to the bottom with the potential of a
breakdown in the entire capitalist financial system.
The temporary reprieve for Bear Stearns does not eliminate the
potential for just such a scenario in the near future.
The underlying problem is the vast credit bubble that was inflated on
the basis of reckless and intrinsically unviable home loans and other
forms of speculation, including leveraged buyouts and a vast expansion
in unregulated credit markets that delivered unsustainably high
returns on investment. The immense fortunes amassed by the uppermost
echelons of the US population on the basis of such parasitic financial
operations have created, as their consequence, a social and economic
disaster of historical proportions, threatening tens of millions of
Americans, and hundreds of millions more people around the world, with
pauperization.
President Bush, perhaps the consummate political personification of
the social layer that benefited from the now-imploded speculative
bubble, spoke Friday before the Economic Club of New York, only hours
after the rescue of Bear Stearns had been announced. Moving from
platitude to platitude, he declared the US economy "the envy of the
world," referred to the financial crisis as a "rough patch," and
reassured his audience that "in a free market, there's going to be
good times and bad times. That's how markets work."
The only substance of his remarks was opposition to any resurrection
of government regulation of the banks, denunciation of proposals, such
as the timid half-measures being advanced by congressional Democrats,
to contain the growing wave of home foreclosures, and a restatement of
the demand that his tax cuts for the wealthy be made permanent.
His speech did nothing to reassure the financial markets, which are
too mired in crisis to buy into the fool's paradise "optimism" of the
commander in chief. Martin Feldstein, a conservative Republican who
served for a time as Ronald Reagan's chief economic adviser, summed up
the growing sentiment in a speech to a conference in Florida. "I
believe," he said, "the US economy is now in recession. The situation
is bad, it's getting worse and the risks are that the situation could
be very bad."
http://depression2.tv/d2/node/42
http://www.independent.co.uk/news/business/news/wall-street-fears-for-next-great-depression-796428.html
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