Saturday, March 15, 2008

The Run on the Bear

“The public has never fully understood how leveraged these institutions are,” said Samuel L. Hayes, a professor of investment banking at Harvard Business School. “But the market makers understand this inherent risk. This is a run on the bank, just like Long-Term Capital Management, Kidder and Drexel Burnham.”

-Run on Big Wall St. Bank Spurs Rescue Backed by U.S.

Fed Invokes Depression-Era Law for Bear Loan
The Fed can normally only lend through its discount window to banks. Under Section 13-3 of the Federal Reserve Act, added in 1932, it can lend to “individuals, partnerships, or corporations” with the approval of not less than five governors, provided “such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions.”

However, under Section 11(r)(3)(ii)(I), approval can be granted with fewer than five governors in office if the “available members unanimously determine that … unusual and exigent circumstances exist and the borrower is unable to secure adequate credit accommodations from other sources” and “despite the use of all means available (including all available telephonic, telegraphic, and other electronic means), the other members of the Board have not been able to be contacted on the matter.”

My friend TED

Economy Hammered by Toxic Blend of Ailments

Behind Bear Stearns Rescue Plan, a Wall St. Domino Theory

Is Fannie Mae the Next Government Bailout?
IT'S PERHAPS THE CRUELEST OF ironies that in the U.S. housing market's greatest hour of need, the major entity created during the Depression to bring liquidity to housing, Fannie Mae, may itself soon be in need of bailout.

Fannie, of course, occupies a curious middle ground between the public and private sector as a result of its privatization in 1968 as a Government Sponsored Enterprise, or GSE. While owned by its shareholders, Fannie is regulated by a government agency and is able to borrow money cheaply, thanks to an implicit guarantee by Uncle Sam. It uses those funds to buy and securitize home loans -- lots of them. At year end, the company owned in its portfolio or had packaged and guaranteed some $2.8 trillion of mortgages or 23% of all U.S. residential mortgage debt outstanding.

Betting the Bank- Krugman
Four years ago, an academic economist named Ben Bernanke co-authored a technical paper that could have been titled “Things the Federal Reserve Might Try if It’s Desperate” — although that may not have been obvious from its actual title, “Monetary Policy Alternatives at the Zero Bound: An Empirical Investigation.”

Today, the Fed is indeed desperate, and Mr. Bernanke, as its chairman, is putting some of the paper’s suggestions into effect. Unfortunately, however, the Bernanke Fed’s actions — even though they’re unprecedented in their scope — probably won’t be enough to halt the economy’s downward spiral.

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