Moral hazard tossed out as Fed saves Bear Stearns

NEW YORK: What are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences in the United States be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms for the past year? Or all of the above? Stick around, because we'll soon find out. And it's not going to be pretty. Agreeing to guarantee a 28-day credit line to Bear Stearns, by way of JPMorgan Chase, the Federal Reserve Bank of New York conceded Friday that no sizable firm with a book of mortgage securities or loans out to mortgage issuers could be allowed to fail right now. It was the most explicit sign yet of the Fed's "Rescues 'R' Us" doctrine that has already helped to force the marriage of Bank of America and Countrywide. But why save Bear Stearns? The beneficiary of this bailout, remember, has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach. Until regulators came along in 1996, Bear Stearns was happy to provide its balance sheet and imprimatur to bucket-shop brokerages like Stratton Oakmont and A.R. Baron, clearing dubious stock trades. And as one of the biggest players in the mortgage securities business on Wall Street, Bear provided munificent lines of credit to public-spirited subprime lenders like New Century (now bankrupt). It is also the owner of EMC Mortgage Servicing, one of the most aggressive subprime mortgage servicers out there. Bear's default rates on so-called Alt-A mortgages that it underwrote also indicates that its lending practices were especially lax during the real estate boom. As of February, according to Bloomberg data, 15 percent of these loans

The hysteria over the subprime mess is annoying. In particular, I am distressed by the demagoguery on both sides of the political spectrum.

Following is from a speech by Countrywide’s chairman in 2003. Its basic premise was “We should be dealing out mortgages to unqualified people, especially minorities, with special ‘intro periods’ in which their loan balance increases.”

This bookends nicely with what Sam Zell is saying (cf. http://www.cnbc.com/id/23350846/site/14081545). The subprime crisis has its roots in politics, basically: bankers financing homes that the borrowers couldn’t afford, ignoring traditional green-eyeshade/sharp-pencil calculations in favor of political correctness and wishful thinking. Classic self-correcting problem. Welcome to the correction, now. It’ll pass.

—— http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/02-04-2003/0001885208&EDATE=

Countrywide’s Chairman Mozilo Delivers John T. Dunlop Lecture

- Leader Calls on Mortgage and Housing Industries to Address Homeownership Gap -

WASHINGTON, Feb. 4 /PRNewswire-FirstCall/ — Angelo R. Mozilo, chairman, CEO and president of Countrywide Financial Corporation, Inc., (NYSE: CFC), urged mortgage professionals, housing experts and others to address the obstacles that create an “intolerably wide” gap between minority and lower-income homeownership and what is classified as white homeownership. Mozilo delivered the John T. Dunlop Lecture sponsored by the Joint Center for Housing Studies of Harvard University and the National Housing Endowment on Tuesday night.

In his presentation entitled “The American Dream of Homeownership: From Cliche to Mission,” Mozilo told his audience, “Expanding the American dream of homeownership must continue to be our mission, not solely for the purpose of benefiting Corporate America, but more importantly, to make our country a better place.” He went on to outline bold suggestions that the mortgage industry and others should consider to overcome barriers to homeownership.

These include elimination of mortgage down payment requirements, educational efforts to make the home loan process easier to comprehend, and reduction and streamlining of loan application documentation.

Mozilo drew upon his 50 years of experience in the mortgage industry and cited Countrywide’s successful efforts to increase homeownership opportunities for minority and lower-income borrowers. From these perspectives, he identified and commented on several structural obstacles within residential finance business practices that adversely impact home-buying among these constituencies:

— The loan underwriting process: “We must look for ways to capture ‘alternative’ payment histories and to properly factor in cultural differences in credit, income and spending habits, so that we can say ‘yes’ to borrowers who have the ability and willingness to make their mortgage payments. Credit scores must not be the dominant factor for assessing risk. Non-traditional factors such as rent and utility payment history should be imbedded in the automated underwriting process.”

— Loan performance measurement: “Let’s focus on the majority of people who are successfully managing their loans and living their dream. Let’s not be obsessed by the few that fail, but instead be encouraged by the vast majority who succeed. Let’s look for every possible reason to approve applicants, not to reject them.”

— Counter-productive regulatory efforts: “With respect to predatory lending, enough of the mania. Let’s be mindful that reputable lenders cannot operate under hundreds of laws that only have one thing in common — the word ‘predatory.’ Subprime lending and predatory lending are not the same thing. Brushing them with one broad stroke only wipes out the opportunities for homeownership for too many deserving low-income and minority home buyers.”

Mozilo spoke of the importance of homeownership to families, communities and the nation. “In addition to increasing personal wealth and adding to our national economy, creating more homeownership opportunities and narrowing the homeownership gap increases social capital. In other words, it ties families, neighborhoods and communities together,” he explained.

Citing several studies, he noted that children living in owned homes have higher math and reading achievement levels, and homeowners are more likely than renters to belong to civic groups, such as parent-teacher organizations.

In conclusion, Mozilo said, “Housing is critical to our nation’s welfare and to our communities’ well-being. Let’s make sure that the American dream of Homeownership is never a cliche, and always our cause, and always our steadfast mission. We have the resources. Together, as partners, let’s show the will.”

The John T. Dunlop Lecture was held at the National Housing Center in Washington, DC. The Dunlop Lecture series honors a distinguished member of the Harvard community in recognizing the contributions of emeritus professor John T. Dunlop and his distinguished career at the University, in government, and in the private sector. Dunlop played a key role in establishing the Policy Advisory Board of the Joint Center for Housing Studies. Mozilo serves on that board, as well as the Board of Trustees of the National Housing Endowment, and has been inducted into the National Association of Home Builders Hall of Fame.

Founded in 1969, Countrywide Financial Corporation, Inc. (formerly Countrywide Credit Industries, Inc.) is a member of the S&P 500, Fortune 500 and Forbes 500. Countrywide, through its family of companies, provides mortgage banking and diversified financial services in domestic and international markets. Consumer businesses include mortgages, insurance and other financial products. Business-to-business activities encompass capital markets, transaction processing and insurance. The company is headquartered in Calabasas, California, and has 30,000 employees with more than 500 offices nationwide. For more information about the company, visit Countrywide’s Web site at http://www.countrywide.com

“For the government to print money at the expense of taxpayers as opposed to requiring or going about a receivership and wind-down of any insolvent institutions should be troubling to taxpayers and regulators alike,” said Josh Rosner, an analyst at Graham Fisher and an expert on mortgage securities. “The Fed has now crossed the line in a very clear way on ‘moral hazard,’ because they have opened the door to the view that they are required to save almost any institution through nonrecourse loans - except the government doesn’t have the money and it destroys the U.S.’s reputation as the broadest, deepest, most transparent and properly regulated capital market in the world.”

And here is the unfortunate refrain: Investors, already mistrusting many corporate and government leaders, were once again assured that nothing was wrong - right up until the very end. So is it any wonder investors react to every market rumor of an impending failure with the certainty that it is true? In too many cases, the rumors turned out to be true, notwithstanding the attempts at reassurance by executives and policy makers.

Only last Monday, for example, Bear put out a press release saying, “There is absolutely no truth to the rumors of liquidity problems that circulated today in the market.” The next day, Christopher Cox, the chairman of the U.S. Securities and Exchange Commission, said he was comfortable that the major Wall Street firms were resting on satisfactory “capital cushions.”

Three days later, it was bailout time for Bear.

Based on the latest NY Times story,...Bear Stearns was a very Big player in the whole subprime mess...good to see them taken out....

Rescue Me: A Fed Bailout Crosses a Line

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WHAT are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms for the past year?

Or all of the above?

Stick around, because we’ll soon find out. And it’s not going to be pretty.

Agreeing to guarantee a 28-day credit line to Bear Stearns, by way of JPMorgan Chase, the Federal Reserve Bank of New York conceded last Friday that no sizable firm with a book of mortgage securities or loans out to mortgage issuers could be allowed to fail right now. It was the most explicit sign yet of the Fed’s “Rescues ‘R’ Us” doctrine that already helped to force the marriage of Bank of America and Countrywide.

But why save Bear Stearns? The beneficiary of this bailout, remember, has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach. Until regulators came along in 1996, Bear Stearns was happy to provide its balance sheet and imprimatur to bucket-shop brokerages like Stratton Oakmont and A. R. Baron, clearing dubious stock trades.

And as one of the biggest players in the mortgage securities business on Wall Street, Bear provided munificent lines of credit to public-spirited subprime lenders like New Century (now bankrupt). It is also the owner of EMC Mortgage Servicing, one of the most aggressive subprime mortgage servicers out there.

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