Foreclosures mount into the millions, and Republicans tell us that the market has to be allowed to work. That only applies to little people, however. When it's Bear Sterns, the government goes into action on a Sunday(!) to save them. I am certain the management of Bear Sterns isn't suffering. They should be made to suffer. I want to see them all lose their Park Ave apartments and houses in the Hamptons, make them have to move to a housing development in New Jersey (with lots of abandoned, foreclosed houses in it) and take their kids out of private school. Then all the proceeds should be distributed to the laid-off employees. If we could somehow make that the price of these bailouts, at least justice would be served.
It is not right for rich wall street brokers to be able to take huge risks knowing that if they win, they keep all the profits, but if they lose, the taxpayers will bail them out. Thank goodness for the securities laws that will probably cost the management of Bear Sterns lots of money in legal fees. Thousands of brokers who only did what they were told will lose their jobs, and maybe their houses, but the CEO and directors will find another country club to crawl into. As you can tell, this makes me ill. The hypocrisy of it all! If we're going to bail out investment banks, we can damned well start by requiring all (primary residence) mortgages to be re-adjusted to a fixed 5% interest rate, with unpaid interest capitalized and no late penalties assessed.
Although the constitution forbids impairment of obligation of contracts or deprivation of property without just compensation, bankruptcy is a constitutional exception to all that. So we could just pass a new bankruptcy statute permitting any ordinary person to file and get serious relief. Chapter 11 has also been used for the past 10 years to void union contracts; now let it void golden parachutes and executive compensation. A new statute could be passed stating that any company that files for chapter 11 must, during reorganization, void all stock options in management, require them to repay their salaries for 2 years, void all other compensation arrangements with them, and require that the companies get new management. They can go on welfare and see if they can become the welfare queens that the GOP says all welfare recipients are. God damn the fed and the Republican party for taking MY tax dollars to ensure that Messrs. Bear and Sterns can keep their luxury mansions in West Egg! (or is it East Egg, I forget).
Tuesday, March 18, 2008
Save the Rich!
Posted by The Law Talking Guy at 9:31 AM
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9 comments:
Hear, hear! I am tired of hearing about the liquidity crises among major investment banks. What about the "liquidity crises" faced by millions of Americans that is costing them their homes? Why does the Fed lend hundreds of billions of dollars to the big guys at low rates, while American taxpayers get no more than a $600 check in the mail? (Of course, I'm not asking why, really. We all know why. It's part of the hypocrisy LTG spoke of.) And it won't help the economy as a whole anyhow. You can't put out a hotel fire just by hosing down the penthouses.
Even if we cannot adjust the interest rates as dramatically as LTG suggests, we should consider legislation to place a moratorium on foreclosures for a while. Some candidates have proposed a freeze on interest rates as well. Bush is sounding positively Hoover-esque in his speeches these days. What's next, a chicken in every pot? If there is any relief to be handed out here, give it to the guys who have lost their jobs, to the families who are losing their houses, to the people who are literally dying because they cannot afford health care anymore.
I don't blame the Fed for trying to bail out the capital markets. That's their job. In fact, I applaud Ben Bernanke. All the stuffy Friedman-esque economists say the government can only harm the market by interfering, but Bernanke puts the lie to that. It is galling that, even in the most abstract of economic systems, the financial sector, Bernanke can spur the Fed to take historic efforts to save individual companies and the capital markets as a whole--but Congress will do nothing to help individual homeowners or small businesses. I say the Fed and the government get together and offer to accept anyone's sub-prime securities as collateral for better loans, but only on the condition that they enact the fantastic mortgage reforms LTG proposed. Or something like that.
Forgive me if I've got this wrong, but I don't believe Bear is getting bailed out (certainly no golden parachutes). The intervention by The Fed is simply to ensure that the market continues to operate, given that Bear Stearns had a hand in so many contractual negotiations. Checking The Economist: "Bear is a counter-party to some ten trillion of over-the-counter swaps. With the broker's collapse, the fear that these and other contracts would no longer be honoured have infected the world's derivatives markets." So the actions there are to ensure that the system runs, not to bail out anyone, which is a different matter.
Recently I heard the same explanation Spotted Handfish gave. Bear-Stearns managed to make itself indispensable to the world markets. This certainly helps explain why the usually conservative Fed considered the bail-out necessary. But I still call it a bail-out. Stock prices tumbled, and many employees who had their savings and pensions locked up in stock options have suffered. But lots of executives still have their jobs and their offices remain open... Unlike the homeowner who is kicked out onto the street with nothing, because he is dispensable. And for all we know, there may well be golden parachutes coming down the line when the media attention has moved off--there is certainly no guarantee that hefty severance packages will not be granted to disgraced executives by their cronies on the board. It certainly has happened before.
It regularly happens that the disgraced executives who drive companies like Bear Sterns into the ground get voted big golden parachutes, or at least get to keep their top 1% salaries. They don't ever suffer. If the point was just to keep the company going, the Fed should have bought Bear Sterns itself, rather than funded JP Morgan to do it, then canned all the jackasses post-haste. Instead, they bought all the liabilities (which you and I now own) and JP Morgan gets whatever upside there is.
Please excuse my possible naïvety here, but two questions seem obvious to me (and I say naïvety on the off-chance that the answers I'm not seeing are obvious to someone else):
1). Why should JP Morgan not get an upside? If they're willing to take on a spectacularly failing company in such a manner that the overall market continues to function, why not let them profit from it a little? And two sub-questions to that one: (a) do you seriously think that the Fed has the expertise/manpower to run Bear Stearns, and (b) how would you go about arranging a takeover of Bear Stearns which did not come with any upside for the purchaser?
2). A more general comment/question: why should anyone who has overstretched themselves financially get bailed out, whether they are a big fund or a 'little person'? In the case of Bear Stearns, the 'bail out' was required to keep the market functioning, so that's an easy answer. In the case of the 'little people' who've done things like buy houses or run up credit card bills that they can't really afford - why shouldn't they now have to take on responsibility for their financial actions?
Pombat, my responses:
1.
(A) The Fed agreed to assume all of Bear Sterns' liabilities, so JP Morgan is not "taking on" anything.
(B). JP Morgan is not using any manpower ot run Bear Sterns, it just "owns" the company which then functions as before. The Fed could own in this fashion, just as you or I could.
(C). If JP Morgan had to buy the liabilities (the downside) as well, it would then be fair for it to profit from the upside if it could be made to profit.
2.
My response to your second point:
I fully agree that personal resonsibility is normally the way to go. The housing and credit crisis is, I think, too big to be viewed as a series of individual failures; it is a collective problem. The costs of all the indivual failures are not confined to the individuals, but affect the rest of us. In California, there are many outlying towns now where every other house on the block is empty and under foreclosure. Vacant properties invite crime. Property values for the responsible borrowers in those neighborhoods likewise plummet. The effect of several million empty houses on the housing market nationwide would be a national crisis, and would devastate property values even for the good and responsible borrowers. It is in our self-interest (I am one such borrower) to ensure that our irresponsible neighbors are not "punished" by the market in such a way that all of us suffer. It is much better for me to bear a smaller cost now to help "bail out" my irresponsible neighbors than bear he crippling cost of my home losing 1/2 its value when if market tanks as a result of the sudden flood of empty houses and total loss of faith in the real estate market by all investors.
It is also true that some of the borrowers are less morally culpable than you might think. With housing prices, including rental prices, out of control, people were easily persuaded by mortgage brokers to take a leap of faith and invest in a house now, rather than lose the chance forever (as they saw it). People were getting desperate in 2003 and 2004 to do something lest the never be able to afford a house. And these people were sorely taken advantage of. The "responsible people" who owned houses already were not bystanders - they profited from the run-up in the value of their houses (often tripling in value in 8 years or so). Anyone who made money during that period has some moral responsibility for what took place.
That being said, some people can be asked to bear costs of their own recklessness without endangering me (such as asking the management of Bear Sterns to collectively commit hara-kiri with rusty butter knives) and that's fine by me.
I understand that bailing out Bear Sterns in some fashion may have been necessary to prevent larger harm to responsible people through bad market effects, but I do not think it had to be done in a way that saved these people's bacon.
LTG mentioned bankruptcy reform as a possible way forward, and apparently Senator Durbin from Illinois is proposing something along those lines. His bill would change bankruptcy law to allow mortgage terms on primary residences to be altered by bankruptcy judges in individual cases.
Pombat... I have no problem with JP Morgan profiting from taking over Bear-Stearns. I support the Fed's move. I just think we need to extend that kind of relief lower down the food chain, to people who really need it. I think the argument for helping the little people is the same as for Bear Sterans. To keep the markets functioning. Even Wall Street executives are starting to call for this. The LA Times quotes one CIO of an investment firm as saying that, "If Washington gets off its high 'moral hazard' horse and moves to support housing prices, investors will return in a rush [to government-agency-backed mortgage-based securities]."
The root cause of the problem is a massive foreclosure rate, that is in turn destroying house prices across the sector. If legislation is written to keep people in their houses--for example, forcing settlements that lower interest rates and extend the length of the mortgates, but which keep people paying *something* on each loan!!--then we can alleviate the problem. Not only does it stop the obvious hardship of foreclosures, but it stops the economic impact of turning a valuable piece of real estate into an empty shell that produces no revenue stream for anyone, and indeed which drags down the market around it. If you want to stabilize the financial markets, stabilize the sub-prime market that is undermining it. To the extent that Bear Stearns was not a bail out, neither is this proposal. Everyone will still owe just as much as they did before--but the payment terms will be restructured to keep the payments coming and to keep the housing prices from plummeting. As an economy, we just cannot afford to let that whole sector continue to nosedive. We got over the "moral hazard" problem with Bear Stearns because we had to. Same thing applies here, I believe.
To comment on earlier comments, I find it interesting that everyone is assuming that the Executives of Bear Stearns are going to get golden parachutes. That is an assumption. The CEO lost over a billion so far with his shares dropping in value. Who cares if he gets a payout. Also JP Morgan did buy liabilities as part of the deal, without being able to complete due diligence. To quote The Economist again "JPMorgan has pledged to honour all of Bear's commitments, despite having had only two days for due diligence. Bear's gross mortgage exposure is still likely to be well over $10 billion after the Fed guarantees the least liquid stuff. And the bank faces piles of lawsuits over the hedge-fund collapses and, now, a takeover that wipes out almost all its perceived value."
With regard to the property market, though, there is no problem with the market functioning. The system still works. You only "lose" if you have to sell for less than the amount you paid. Yes, it is a problem when people have been preying on others' fears of never getting into the market. Maybe property values are plummeting because they were over inflated, and the way to get people back into the houses is to have properties valued at a more realistic level.
There is a lot of literature on the property market bubble that followed on from the dot com bust. The issue in the USA seems to be that The Fed does not try and adjust for perceived bubbles in the market and they, unlike other central banks, do not try and control inflation. Now they are having to mop up after another bubble burst, having ignored the inflation caused by housing going crazy. (Let's ignore that the Bush government has been printing money to fund tax cuts and the war.)
SH - yes, it's an assumption that mgmt will get payouts. But it's an assumption based on countless times in the past that inept or incompetent managers are given big payouts and golden parachutes to leave. Corporate directors look after their own.
Whether or not a CEO lost $1billion of book value is one thing. That's good. But I still care if they get a payout. Tons of Bear Sterns employees are going to lose their jobs and all their 401K invested in Bear Sterns stock. Any payout should go to them, at the direct expense of top brass. As in the Enron case, I would like to see the top brass prosecuted and relieved of their substantial estates.
To me, the lesson from all this is that crime does pay - even if you run a major company into the ground, threaten the whole economic system, and cost hundreds or thousands their jobs, you still end up with plenty of cash, so it's worth it. It shouldn't be.
My reaction is quite visceral, as you can tell, in part because I just paid my taxes. And because gasoline is now $4/gallon nearby. And because food prices have gone up by some 20-50% at the local grocery store since Christmas. So I'm feeling less economically secure than I have in five years or so, and all the government is concerned about, it seems, is making sure the richest people at big Wall Street firms don't have to move out of the Hamptons. Sigh. And the only political possibility of change - the Democratic party - is busy committing political suicide because the members of the last Democratic administration is pulling out all the stops to control the nomination this time, no matter what the cost.
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