The money launderers, by gimleteye

A week ago, on the day President Bush disavowed government intervention in financial markets, the Federal Reserve announced the fruit of its weekend labor: essentially guaranteeing hundreds of billions in toxic financial derivatives owned by banks. Money laundering has become the de facto standard of Federal Reserve policy.

The financial press has been filled with praise for the US government rescue of Bear Stearns, one of the worst offenders of reason and logic in the issuance of securitized mortgage debt. You have to turn to blogs to get a sense of the malfeasance.

Excerpt from the Hussman Funds' Weekly Market Comment (3/24/08) regarding the Fed's involvement on JPMorgan's (JPM) deal to buy out Bear Stearns (BSC):

In effect, the Federal Reserve decided last week to overstep its legal boundaries – going beyond providing liquidity to the banking system and attempting to ensure the solvency of a non-bank entity. Specifically, the Fed agreed to provide a $30 billion “non-recourse loan” to J.P. Morgan, secured only by the worst tranche of Bear Stearns' mortgage debt. But the bank – J.P. Morgan – was in no financial trouble. Instead, it was effectively offered a subsidy by the Fed at public expense. Rick Santelli of CNBC is exactly right. If this is how the U.S. government is going to operate in a democratic, free-market society, “we might as well put a hammer and sickle on the flag.”
What is a “non-recourse loan”? Put simply, if the homeowners underlying that weak tranche of debt go into foreclosure, they will lose their homes, and the public will lose as well. But J.P. Morgan will not lose, nor will Bear Stearns' bondholders. This will be an outrageous outcome if it is allowed to stand.
In my view, the deal would be palatable if J.P. Morgan was to remain fully responsible for any losses on the “collateral” provided to the Federal Reserve, assuming shareholders were to consent to the buyout. As it stands, Congress should quickly step in to bust the existing deal and demand an alternate resolution, by clearly insisting that the Fed's action was not legal.
The Fed did not act to save a bank, but to enrich one. Congress has the power to appropriate resources for such a deal by the representative will of the people – the Fed does not, even under Depression era banking laws. The “loan” falls outside of Section 13-3 of the Federal Reserve Act, because it is not in fact a loan to either Bear Stearns or J.P. Morgan. Bear Stearns is no longer a business entity under this agreement. And if the fiction that this is a “loan” to J.P. Morgan was true, then the only point at which the “collateral” would become an issue would be in the event that J.P. Morgan itself was to fail. No, this is not a loan. It is a put option granted by the Fed to J.P. Morgan on a basket of toxic securities. And it is not legal.
The deal was made under duress, to the benefit of a private company, on the basis of financial assurances that the bureaucrats involved had no business making. The Federal Reserve is going to put up public assets and accept default risk so that Bear Stearns' own bondholders are effectively immunized?! That's not sound monetary policy – it's a picnic for insiders, bought and paid for through the abuse of public funds by government officials too unprincipled even to recognize the abuse. The only good thing about this deal is that it buys time while principled ways of busting and restructuring it can be settled.

At a moment in history when the US treasury is hemorraging ($5000 per second in Iraq), the money launderers in the Bush White House are setting up to do something that can be understood only through a corrective lens that takes every sighting and reverses it: the party of laissez faire, "free markets", of minimal regulation is about to support the most expensive nationalization of industry in US economic history.

Last week, in addition to rescuing Bear Stearns, the shadow financial system intervened in metals and commodity markets-- beating down anxiety indexes more sharply than at any time in the past half century. At the same time, the coordinated release of quarterly reports whose numbers ever so slightly "exceeded expectations" was enough justification--along with massive buying by US government operations that can only be faintly glimpsed--to send world stock markets back upwards.

Various metaphors have been used to describe US government intervention in the markets, like band-aid solutions to cure a gaping wound. Better to observe that investor anxiety at the observable financial disarray amplified by government intervention is like a deep-burning coal fire being fought at the surface with chemical foam.

This is from Bloomberg this morning:

March 24 (Bloomberg) -- Forget lower interest rates. For the Federal Reserve to keep the financial markets from imploding it needs to buy troubled mortgage bonds from banks and securities firms, say the world's biggest Treasury investors.
Even after cutting rates by 3 percentage points since September, expanding the range of securities it accepts as collateral for loans and giving dealers access to its discount window, the Fed has been unable to promote confidence. The difference between what the government and banks pay for three- month loans doubled in the past month to 1.92 percentage points.
The only tool left may be for the Fed to help facilitate a Resolution Trust Corp.-type agency that would buy bonds backed by home loans, said Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. While purchasing some of the $6 trillion mortgage securities outstanding would take problem debt off the balance sheets of banks and alleviate the cause of the credit crunch, it would put taxpayers at risk.

The US taxpayer is about to be force fed trillions in bad mortgage debt-- created by Wall Street where incomes average $387,000 (NY Times, March 24, 2008 "With Economy Tied to Wall St. New York Braces for Job Cuts") and fostered by a culture of corruption rippling all the way down through mortgage brokers, appraisers, and local zoning officials for whom the hard currency of fraud is as likely Bahamian poker chips as dollars.

For more than a year, Eyeonmiami has been observing the meltdown of housing markets in South Florida, the place that mothered the world wide credit crisis because the origins of the boom was right here-- rooted in the South Florida politics of suburban sprawl.

We've lived through it and kept observing despite the absence of coverage by the mainstream media, more anxious to retain advertising base than readers. It is our understanding of how the housing boom was triggered that makes us doubt any good will come of the desperate effort to prop up failed business models that have done massive damage to consumers, spreading income inequality throughout the nation and collateral damage to the environment. Social and economic justice?

Poor America.

And an editorial worth reading.