Get Ready for the Second Wave of Writedowns, Defaults, and Invsolvencies

This week is the end of the first quarter, and so the Wall Street carneys are taking Uncle Sam's easy money and are whitewashing the fences, putting lipstick on the pigs, dressing the windows, and painting the tape.

But make no mistake, this is far from over and Bear Stearns was just the first shoe to drop.

Wall Street May Face $460 Billion Credit Losses, Goldman Says
By Zhao Yidi

March 25 (Bloomberg) -- Wall Street banks, brokerages and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market, or almost four times the amount already disclosed, according to Goldman Sachs Group Inc. Profits will continue to wane, other analysts said. (Note: this is for the subprime piece - Jesse)

``There is light at the end of the tunnel, but it is still rather dim,'' Goldman analysts including New York-based Andrew Tilton said in a note to investors today. They estimated that residential mortgage losses will account for half the total, and commercial mortgages as much as 20 percent.

Earnings and share prices at U.S. financial institutions tumbled in the past year as fallout from the mortgage crisis spread to other markets. Demand for mortgage-backed securities evaporated, leading to the collapse of Bear Stearns Cos., once that market's largest underwriter, and a Federal Reserve-led bailout by JPMorgan Chase & Co. earlier this month.

Goldman's own share-price estimate was cut 3.7 percent to $210 at Fox-Pitt Kelton Cochran Caronia Waller. The research firm also reduced its profit estimates for the world's biggest securities firm for the rest of this year and all of 2009.

Merrill Lynch & Co. had its 2008 profit estimates cut by 45 percent at JPMorgan on concern the third-largest U.S. securities firm by market value may disclose further writedowns on subprime mortgages. Merrill may report a total of $5 billion in additional losses on collateralized debt obligations, so-called Alt-A mortgages and commercial mortgages, New York-based analyst Kenneth Worthington said.

Bank of America Corp., the second-biggest U.S. bank by assets, was downgraded to ``sell'' from ``neutral'' at Merrill Lynch. The company, based in Charlotte, North Carolina, also had its earnings-per-share estimate lowered to $3.30 from $3.50 in 2008 and to $4.00 from $4.40 in 2009, analysts including New York-based Edward Najarian wrote in a note to clients today.

Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, had its share-price forecast cut 16 percent to $70 at Fox-Pitt. The brokerage's 2008 and 2009 profit estimates were also reduced.

Goldman said the $460 billion in credit losses it foresees may ``result in a substantial tightening in credit conditions as these institutions pull back on lending to preserve their reduced capital and to maintain statutory capital adequacy ratios.''

Credit-card loans, auto loans, commercial and industrial lending and non-financial corporate bonds make up the rest of the $460 billion in credit losses.

Goldman, which has lost 17 percent this year on the New York Stock Exchange, rose 36 cents to $179.24 in composite trading at 11:50 a.m. Merrill fell $1.13 to $47.25, Lehman declined $2.16 to $44.48 and Bank of America dropped $1.47 to $40.98.

To contact the reporter on this story: Zhao Yidi in New York at at yzhao7@bloomberg.net.
Last Updated: March 25, 2008 12:02 EDT

The Failure of Croney Capitalism

Count on the British press to provide a realistic alternative analysis, as compared to the sychophants in the mainstream corporate media and academia in the States.

We differ a bit in prescription for a cure, but the diagnosis could not be more clear or more correct.

THE RED MENACE
The world's markets gambled on financial alchemy. They lost.
By Iain MacWhirter

COME BACK Karl Marx, all is forgiven. Just when everyone thought that the German philosopher's critique of capitalism had been buried with the Soviet Union, suddenly capitalism reverts to type. It has laid a colossal, global egg and plunged the world economy into precisely the kind of crisis he forecast.

The irony, though, is that this time it isn't the working classes who are demanding that the state should take over, but the banks. The capitalists are throwing themselves on the mercy of government, demanding subsidies and protection from the capitalist market - it's socialism for the banks. Hedge fund managers of the world unite, you have nothing to lose but your bonuses.

On Friday, the heads of the big five British banks demanded - and got - another £5 billion in "emergency liquidity" from the Bank of England to add to the £5bn they received earlier in the week. But like militant shop stewards they complained it wasn't enough. "Look how much the banks are getting in Europe and America," they whinged. Hundreds of billions of dollars and euros are being thrown at banks in an attempt to save them from themselves.

The quaint idea that loss-making companies should fail, to ensure the health and vitality of the capitalist system, has quietly been discarded. The banks, we are told, are "too big to fail", which means that they have to be taken into public ownership - like Northern Rock - or have their debts underwritten by government, like Bear Stearns, which comes to much the same thing. The central banks are also cutting interest rates to try to boost banking profits, and this is making currencies such as the dollar increasingly unstable.

Which takes us back to Marx. The crisis that is rocking the world is a classic example of the kind of shocks and dislocations that Marx said were an essential feature of a competitive capitalist economy. The falling rate of profit that results from too much investment piling into new technologies and commodities forces capital to engage in a constant search for profit. (Personally the shocks we are seeing are not the result of functioning free markets, but the result of gross imbalances introduced by the corruption that croney capitalism through protracted malinvestment fostered by Greenspan's outrrageously obvious credit bubble and promotion of the degradation of safeguards and regulation. - Jesse)

As it becomes harder and harder to make money out of making things - just look at the collapse in prices of computers over the last decade - so exotic financial derivatives have been created to boost wealth without engaging in recognisable economic activity. Speculation takes over. British manufacturing has collapsed to a fraction of what it was 20 years ago, and a vast financial services sector has grown up in its place making money largely out of inflation in house prices, ie debt.

Moreover, with globalisation, trillions of dollars have been washing around the world markets looking for a home. This has created a monster: the market in financial derivatives; a Pandora's box of inscrutable financial instruments governed by supposedly failsafe mathematical formulae. Collateralised debt obligations - implicated in the subprime mortgage crisis - are at least rooted in nominal house prices, but they have been detached from the actual mortgages and sold as commodities in the securities market.

Credit default swaps have created a $45 trillion global industry based on nothing at all, merely speculating on the movements of currencies and commodity prices. A credit default swap is a kind of insurance contract taken out between two bankers who bet on the price of an asset. They don't need to own the asset, and there is no actual loss if the default happens. But the contracts can be traded, allowing the swappers to create value out of nothing but their own agreement.

According to the Bank for International Settlement in Basel, the global derivatives market is worth some $516 trillion - 10 times the value of all the world's stock markets put together. And much of it is based on very little but leveraged optimism; pieces of paper theoretically based on the price of an empty house in Cleveland, Ohio.

Billions have been magicked out of nothing by this financial alchemy, but in the end, there is no way of turning dross into gold, and the reckoning had to come. And someone had to pay - which is where we, the people, come in.

As happened in the 1930s, the whole system is collapsing. We are faced with the choice of colossal bank defaults or hyper inflation: saving the banks or saving our savings. The central bankers decided that they would rather save the banks. So our governments are using public money to bolster banking balance sheets and allowing inflation to rip so that the banks' losses will be devalued, along with the pound in your pocket.

So what happens now? Or as Lenin said, What Is To Be Done? Well, not Communism for a start. Central control and outright state ownership along Soviet lines is no longer a viable political option - an undemocratic public monopoly is almost as bad as a private one. The fact that the banks are currently in league with western governments to create a kind of financial communism is doubly disturbing.

Instead of just propping up bankrupt banks, the governments should be democratising them - mobilising their assets to stimulate the productive economy, repairing infrastructure, researching and developing new markets, and refitting western economies to combat climate change. It needs a kind of green New Deal - an update on Roosevelt's imaginative policies of the 1930s fought tooth and nail by the banks.

They want unlimited access to public money to save themselves from the consequences of their own actions; welfare for the wealthy. This is above all a political, not an economic problem. There needs to be a political mobilisation of public opinion to force the banks and the government to bring the people into the equation. Unfortunately, the party that used to perform this function, Labour, has largely been bought out by the banks. They have privatised the government, even as they have socialised the financial markets.

The Red Menace - Sunday Herald - UK

Bailing Out the Fed: Aid to Dependent Pigmen

How Can We Help to Finance the 29 Billion in Risk the Fed is Taking for Bear Stearns and JPM?

How do we insulate the Federal Reserve from absorbing any of those losses, even though they will be passed along to all holders of the US dollar?

By all means let's "Stop Those Rebate Checks."

But this time let's start by stopping the checks to the small elite of wealthiest US citizens that have been going out for the past eight years.

The depths of Wall Street venality knows no bounds. They cannot stop. These are serial Pigmen.

March 24, 2008
Op-Ed Contributor
Stop Those Checks
By BRUCE BARTLETT
Great Falls, Va.

WITH unusual speed and cooperation last month, George W. Bush and Democrats in Congress agreed to a tax rebate set to be paid out beginning in May. Families will get checks for $300 to $1200 or more, and it is assumed that they will all rush out to spend this money immediately, giving retailers a boost that will raise economic growth.

Despite the bipartisan support for the rebate, few economists have supported the idea. They note that we have tried rebates in the past — most recently in 2001 — and there is no evidence that they have meaningfully stimulated either consumption or growth. By and large, people saved the money they received or paid bills (which is the same thing); very few used their rebates to increase spending.

The true reason why the current rebate has been so popular in Washington is that giving away free money in an election year is good for politicians of both parties. Superficially, it looks as if Washington is responding to a real problem with decisive action. After all, if there is a recession the Democrats who control Congress will be held just as accountable as the Republicans who control the executive branch.

But in the almost six weeks since the rebate legislation was signed into law, the economic situation has changed. The meltdown in financial markets is much more serious than it looked in February. At its root are bad mortgages and other debts that are like toxic waste spreading throughout the financial system.

The solution, therefore, is not to drop $100 bills from helicopters — which is essentially what the rebate would do. Rather, what we need is a mortgage Superfund that can clean up the toxic waste. If we can cleanse the financial system of at least some of the bad debts, it will do far more to restore the economy to health than anything that could be accomplished by the rebate — even if the rebate were to work as it is supposed to.

We all know that the government is eventually going to get stuck with a lot of the bad debts, just as it did in the early 1990s when a previous housing bubble burst and bankrupt savings and loans had to be rescued. That bailout cost taxpayers $160 billion. The next one will probably cost more because the problem is bigger and the economy is larger.

At the same time, there are increasing demands for targeted relief for homeowners facing foreclosure. It looks to many people as if Washington cares more about fat-cat bankers than working families in hard times. At some point, Congress is going to respond with additional aid for people caught in the mortgage mess, and this relief will come on top of the $117 billion cost of the rebate.

We need to stop and ask whether we can afford to spend $117 billion that the Treasury Department does not have on a program of dubious effectiveness. It simply makes no sense to send out checks to people who have no need for it as some kind of election-year bribe to vote for incumbents of both parties. That money would go a long way toward cleaning up the mortgages that are poisoning the financial sector.

Congress should immediately repeal the rebate and redirect the money that has been budgeted into a package of measures that would help the housing sector and those people who actually need assistance. The Treasury might use some of the money, for example, to enable Fannie Mae and Freddie Mac, the government-sponsored housing agencies, to buy up some of the bad mortgages, get them off bank balance sheets and help homeowners refinance them.

My gut tells me that the vast majority of Americans would happily give up their rebate if they knew that the money would be used instead to help families in need and start the process of cleaning up the bad debts in the housing sector. Everyone knows that we will have to spend the money eventually and that the sooner the financial sector goes through detox the better it will be for everyone.

This is a proposal that both Republicans and Democrats should embrace. It involves no increase in the deficit. We would simply redirect already appropriated money into other channels that are much more likely to help the economy.

The checks haven’t gone out yet so no one has to give anything back. Congress could pass a repeal bill in a day if it wanted to. At a minimum, hearings should be held on this proposal in light of the country’s deteriorating financial situation.

Bruce Bartlett, the author of “Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy,” was an official under Presidents Ronald Reagan and George H. W. Bush.

Stop Those Checks - NY Times

Opera Buffa: JPM Raises Bid for 39.5% of BSC to $10

JP Morgan Increases its offer on Bear Stearns to $10
but for a Minority Share
L'Opera Buffa On Wall Street

It is reported this morning that JP Morgan Chase is increasing its offer to buy Bear Stearns to $10 per share, but will only be buying 39.5% of the company.

In an amended deal, JP Morgan Chase will also be risking 1 billion dollars in losses in Bear Stearns.

The Federal Reserve (the public aka all holders of US dollars) will be taking the risk on the next $29 billion.

Without the Fed's guarantee, Bear Stearns would be in receivership todaywith the shares worth 'zero.' This is Aid to Dependent Pigmen.

Moral hazard reaches comedic proportions.

Text of Revised JPM-BSC Deal
March 24, 2008 10:02 a.m.
JPMorgan Chase and Bear Stearns Announce Amended Merger Agreement
and Agreement for JPMorgan Chase to Purchase 39.5% of Bear Stearns

NEW YORK-- March 24, 2008--

JPMorgan Chase & Co. (NYSE: JPM)
and The Bear Stearns Companies Inc. (NYSE: BSC) announced an amended merger agreement regarding JPMorgan Chase's acquisition of Bear Stearns.

Under the revised terms, each share of Bear Stearns common stock would be exchanged for 0.21753 shares of JPMorgan Chase common stock (up from 0.05473 shares), reflecting an implied value of approximately $10 per share of Bear Stearns common stock based on the closing price of JPMorgan Chase common stock on the New York Stock Exchange on March 20, 2008.

In addition, JPMorgan Chase and Bear Stearns entered into a share purchase agreement under which JPMorgan Chase will purchase 95 million newly issued shares of Bear Stearns common stock, or 39.5% of the outstanding Bear Stearns common stock after giving effect to the issuance, at the same price as provided in the amended merger agreement. As discussed below, the purchase of the 95 million shares is expected to be completed on or about April 8, 2008.

The Boards of Directors of both companies have approved the amended agreement and the purchase agreement. All of the members of the Bear Stearns Board of Directors have indicated that they intend to vote their shares held as of the record date in favor of the merger.

The JPMorgan Chase guaranty of Bear Stearns' trading obligations has also been significantly clarified and expanded. For more information, the guaranty agreement will be filed publicly and the parties will provide a Question and Answer document describing the guaranty in further detail on their respective websites. JPMorgan Chase has also agreed to guarantee Bear Stearns' borrowings from the Federal Reserve Bank of New York.

The Federal Reserve Bank of New York's $30 billion special financing associated with the transaction has also been amended so that JPMorgan Chase will bear the first $1
billion of any losses associated with the Bear Stearns assets being financed and the Fed will fund the remaining $29 billion on a non-recourse basis to JPMorgan Chase.

"We believe the amended terms are fair to all sides and reflect the value and risks of the Bear Stearns franchise," said Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan Chase, "and bring more certainty for our respective shareholders, clients, and the marketplace. We look forward to a prompt closing and being able to operate as one company."

"Our Board of Directors believes that the amended terms provide both significantly greater value to our shareholders, many of whom are Bear Stearns employees, and enhanced coverage and certainty for our customers, counterparties, and lenders," said Alan Schwartz, President and Chief Executive Officer of Bear Stearns. "The substantial share issuance to JPMorgan Chase was a necessary condition to obtain the full set of amended terms, which in turn, were essential to maintaining Bear Stearns' financial stability."

While the rules of the New York Stock Exchange (NYSE) generally require shareholder approval prior to the issuance of securities that are convertible into more than 20% of the outstanding shares of a listed company, the NYSE's Shareholder Approval Policy provides an exception in cases where the delay involved in securing shareholder approval for the issuance would seriously jeopardize the financial viability of the listed company.

In accordance with the NYSE rule providing that exception, the Audit Committee of Bear Stearns' Board of Directors has expressly approved, and the full Board of Directors has unanimously concurred with, Bear Stearns' intended use of the exception. The closing of the sale of the 95 million shares is expected to be completed upon the conclusion of a shareholder notice period required by the NYSE, which is expected to occur on or about April 8, 2008.