Ali’s blog

Mostly quant stuff with occasional digressions

US taxpayer foots the bill (as usual)

Posted by alifinmath on March 17, 2008

Informative article. in the NYT:

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 in its underwritten securities were delinquent by more than 60 days or in foreclosure. That compares with an industry average of 8.4 percent.

Let’s not forget that Bear Stearns lost billions for its clients last summer, when two hedge funds investing heavily in mortgage securities collapsed. And the firm tried to dump toxic mortgage securities it held in its own vaults onto the public last summer in an initial public offering of a financial company called Everquest Financial. Thankfully, that deal never got done.

Why save these scumbags? They took the risks, now pay the price. If little guys like me take risks (playing with dice that are loaded against me, mind), I have to pay the price. Why not them? Why socialism for the rich? Why a government of the rich, by the rich, for the rich? This is as bad as the Gilded Age. Call this a democracy?

As of last Nov. 30, Bear Stearns had on its books approximately $46 billion of mortgages, mortgage-backed and asset-backed securities. Jettisoning such a portfolio onto a mortgage market that is not operative would, it is plain to see, be a disaster.

But, who knows what those mortgages are really worth? According to Bear Stearns’s annual report, $29 billion of them were valued using computer models “derived from” or “supported by” some kind of observable market data. The value of the remaining $17 billion is an estimate based on “internally developed models or methodologies utilizing significant inputs that are generally less readily observable.”

In other words, your guess is as good as mine.

Quant work at its best. Quants and what they do are both going to take a massive beating in their crediblity.

“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 & Company 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 non-recourse 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.”

Regulators must do whatever they can to keep the markets open and operating, and much of that relies upon the confidence of investors. But by offering to backstop firms like Bear, who were the very architects of their own — and the market’s — current problems, overseers like the Fed undermine a little bit more of that confidence.

Another worry? How many well-capitalized institutions remain at the ready to take over those firms that may encounter turbulence in the future? Banks just do not have the capital that is needed to rescue troubled firms.

That will leave the taxpayer, alas. As usual.

Amen to all the above. This is another shameful and disgraceful episode in US history, similar to the unwarranted invasion of Iraq, and which represents another milestone on the way down as the US becomes another second-rate corrupt and venal oligarchy.

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3 Responses to “US taxpayer foots the bill (as usual)”

  1. Anonym said

    Grim humor at Bear Stearns. Meanwhile, Alan Greenspan lets on that we’ve been had.

    I agree that current/aspiring MFEs will be scapegoated/scrutinized to a large degree in the aftermath of the current financial downturn. But what of the drivers of this mess? If pressure was exerted on quants (in the form of employment status or gains) to take on huge risks in order to garner huge short-term returns, then ethics should be questioned all around. When the White House strong-armed various intelligence agencies to cook the books on Iraq’s WMD and Al Qaeda ties, sensible individuals didn’t rush to discredit the future existence of the State Department, CIA, NSA etc. but sought instead to restore breached checks and balances. Of course the Bush admin. cynically scapegoated those same agencies upon which they brought enormous pressure. Let’s not let quantitative analysis be thrown under the bus in the same fashion by those who may have exerted enormous pressure on quants to let go of rigor and ethics in the cooking of the financial books.

  2. alifinmath said

    You make valid points. But I think the lay public is going to realise the extent to which it has been hoodwinked by abstruse equations leading to misleading numbers. Many of the risks and calculated worths are turning out to be specious — and I’m not sure that arm-twisting is the sole culprit. It’s a point I’ve long wanted to make: the foundations of quant analysis are weak and unreliable. Quant work, as we all know isn’t classical or quantum mechanics, with it’s precise and verifiable predictions. But this is my humble opinion, and perhaps a mistaken one.

  3. Chris Prouty said

    You honestly believe that the public will have the slightest understanding of how risk measures failed? No way. This will be spun by politicans and that is the truth the public will believe. The democrats will say “we need to get these Wall Street fat cats under control and tax them more!” The republicans will say “these damn democratic regulations have once again brought our economy to its knees!” Nothing will change, no meaningful regulation will be enacted.

    Really, I’m quite happy that it won’t be. For those who can make objective observations on the economy and have the guts to express their opinions in markets, events like these are a gravy train.

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