Housing Market Tracker - Subprime Takes Out Bear Stearns

Quotes of the Day

"It is a serious extension of putting the Federal Reserve's balance sheet in harm's way. That's got to tell you the economy is in a pretty precarious state.'' - Vincent Reinhart, former director of the Division of Monetary Affairs at the Fed and now a scholar at the American Enterprise Institute in Washington. Over the weekend, the Fed cut the discount rate on direct loans to banks to 3.25% and became lender of last resort to the 20 firms that buy Treasury securities directly from it. (Bloomberg, Mar. 17th)

"The public has never fully understood how leveraged these institutions are. 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.” - Samuel L. Hayes, a professor of investment banking at Harvard Business School, who says Bear Stearns borrowed more than 30 times the value of its [then] $11 billion equity base. (NY Times, Mar. 15th)

Subprime Fallout

JPMorgan Agrees to Buy Bear Stearns for $240 Million. "JPMorgan Chase (JPM) agreed to buy Bear Stearns (BSC) for $240 million, about 90% less than its value last week, after a run on the company ended 85 years of independence for Wall Street's fifth-largest securities firm. Shareholders of Bear Stearns will get stock in JPMorgan equivalent to about $2/share... The Federal Reserve is providing financial backing to JPMorgan... JPMorgan CEO Jamie Dimon bought BSC, once the biggest underwriter of U.S. mortgage bonds, for less than the value of its real estate after clients, alarmed by speculation about a cash shortage, withdrew $17 billion in two days.". (Bloomberg, Mar. 17th)

Money-Market Rates Soar; Fed Signals Depth of Crisis. "The cost of borrowing in dollars overnight rose by the most in at least seven years after the Federal Reserve's emergency cut in the discount interest rate stoked concern that credit losses are deepening. In its first weekend action in three decades, the Fed cut the rate on direct loans to banks... Money-market rates are rising as banks hoard cash after at least $195 billion in losses and writedowns since the start of 2007." (Bloomberg, Mar. 17th)

Despite Fed Cuts, Mortgage Interest Rates Creeping Up. "Consumer interest in refinancing is likely to continue because the Fed is widely expected to cut rates for the sixth time since September when its board meets Tuesday. Mortgage Bankers Association: Nationwide, refinancing applications spiked 135% from last November through the end of January. While applications slowed last week, they're still up 6% compared with a year ago... Although the Fed has cut rates, mortgage rates for 30-year fixed-rate loans actually have risen the past two weeks. Freddie Mac, the mortgage company, reported last week that 30-year fixed-rate mortgages averaged 6.13%, up from 6.03% the previous week." (South Florida Sun-Sentinel, Mar. 17th)

Billionaire Lewis Loses $1.16B on Bear Stakes. "Joseph Lewis, the billionaire investor who bought 9.4% of Bear Stearns Cos. last year, lost $1.16 billion on his stake after JPMorgan Chase & Co. agreed to buy the securities firm for $2/share. Lewis, the New York-based firm's second-largest holder, paid an average of about $107 apiece for 11 million shares, according to a SEC filing last year. The stake has plunged 98% in value since the purchases. Bear's biggest investor at year-end was money manager Barrow Hanley Mewhinney & Strauss Inc., whose 9.7% holding has fallen by $991 million." (Huffington Post, Mar. 17th)

Carlyle Managers Set To Lose $135m After Collapse. "Senior managers at private equity giant Carlyle face personal losses of $135m following last week's collapse of its mortgage-backed security fund Carlyle Capital Corporation. Carlyle employees held 15% of the $22bn fund, which was worth $900m when it IPO'd... The CCC fund borrowed $31 for every $1 of its own: a vivid insight into the hugely leveraged and arcane debt markets that are now rapidly unraveling... Carlyle bought 51 firms last year across America, Europe and Asia, [many] in the real estate sector, which has suffered serious falls in value. Corporate defaults are anticipated this autumn [as a result] of the current market malaise." (Guardian UK, Mar. 16th)

Bernanke Discards Monetary History with Bear Stearns Bailout. "[The Fed] voted Friday to become creditors to Bear Stearns Cos., a securities firm that isn't a bank, by invoking a law that hasn't been used since the 1960s... Vincent Reinhart, former director of the Division of Monetary Affairs at the Board: "It's a re-drawing of the relationship of the Federal Reserve with the rest of the financial system." Risks of so-called moral hazard, where firms will now come to count on bailouts by a federal agency, "are considerable,'' Reinhart said. The cost of doing nothing may have been even greater, say other former Fed officials." (Bloomberg, Mar. 15th)

Thinking About the Bear Stearns Bailout. "Lehman got rescued privately during the LTCM crisis because they convinced creditors to support them. Bear Stearns walked out on the LTCM bailout, and it still leaves a bad taste in the mouth of Wall Street. Wall Street does have honor, in a twisted way. They remember who their friends were during tough times. Bear was not one of them." (David Merkel in Seeking Alpha, Mar. 15th)

Fed Efforts Foiled By Banks as Mortgage Rates Rise. "Mortgage Bankers Association: [Despite Fed cuts,] the interest rate on a 30- year fixed-rate mortgage has climbed to 6.37% from 5.5% since Jan. 24... Alan Nevin, chief economist, California Building Industry Association: "The mortgage rate isn't down as much as it should be because the banks are in desperate straits and they need to maintain a larger spread than they normally would... to generate income. [So] if they pay 3.5% and charge 6%, that's a lot of money.'' Over the past 10 years, the average spread between 10-year U.S. Treasuries and 30-year fixed-rate mortgages has been 1.75%. Last week, it 2.83%, pushing mortgage costs up." (Bloomberg, Mar. 15th)

Subprime Write-Downs More Than 50% Done? Write-Ups Coming Next? "Fed Chairman Bernanke [thinks] banks should allow home-owners who are upside down, to refinance at lower principal levels... [If] banks [don't] have to foreclose on homes, [they could] recognize the principal losses [and] get bad loans off their books... [Then] severity rates, which measure the principal loss realized during a foreclosure, may be lower than what the market has been using... Given all the action in Washington, it is very likely that Morgan Stanley's losses realized will be significantly less than what a 100% default rate with 100% severity would imply... Potentially billions of dollars of write-ups over the next 2-3 years." (Vikram Saxena in Seeking Alpha, Mar. 14th)

Fitch Dwngrs $85.8MM Sacramento County (California) COPs; Rates $1.1B Pension Oblig 'A+'. "Fitch Ratings assigns an 'A+' rating to the approximately $350.7 million County of Sacramento, California's (the county) taxable pension funding bonds, refunding series 2008. The bonds are scheduled to price on March 20 via negotiation led by Morgan Stanley. Fitch also assigns an 'A+' rating to the county's $747.9 million in outstanding taxable pension obligation bonds. Additionally, Fitch downgrades $85.8 million in outstanding certificates of participation (COPs), series 2006 and 2007 to 'A+' from 'AA-'. The Rating Outlook has been revised to Stable from Negative." (AD-HOC News, Mar. 13th)

S&P Says End in Sight for Writedowns on Subprime Debt. "Standard & Poor's, the ratings company criticized for missing the beginning of the mortgage collapse, now says the end of subprime writedowns is in sight. Writedowns from subprime-tied securities will probably rise to $285 billion, or $20B more than S&P forecast two months ago... More than $150B have been reported already by banks, brokers and insurers, the firm said. S&P raised its estimate as it assumes deeper losses on collateralized debt obligations. Tanya Azarchs, S&P's managing director for financial institutions: "There'll be plenty of trouble around this quarter, but it's just not going to be as much subprime trouble." (Bloomberg, Mar. 13th)

Get Seeking Alpha's housing market coverage by email -- it's free and takes only seconds to sign up.