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My friend David usually posts happy hiking pictures, not topical comentary, but... - A Suburbs Boy Living a Country Life [Pete and Pam's pages (photos and some commentary)] [Pam's journal] [Our company] [My Flickr Photos] [Arisia]
March 17th, 2008
10:48 pm

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My friend David usually posts happy hiking pictures, not topical comentary, but...
...in this post he links to a snippet from a WSJ opinion article that I think everyone should read.
A quote from today's Wall Street Journal Opinion page:

Millions of Americans have negative equity in their homes, but did not bite off more mortgage than their incomes could support. These people are still paying their mortgages and never imagined doing anything else. Millions of others have positive equity in their homes despite seeing painful declines in their home value. Now all these homeowners are to be taxed to benefit more irresponsible borrowers?

Even worse, the government is rushing to bail out the banks and mortgage institutions that helped get the country into the current mess. Yesterday, the Fed guaranteed a $30 billion credit line to help JPMorgan Chase buy out the collapsing Bear Stearns. And guess who is ultimately guaranteeing that loan? That would be us, the US taxpayers.

If Pam and I aren't in negative equity at the moment, we are darned close--but after everything we put in to build this place, there's no way we'd just walk away. That said, it wouldn't take too much in additional taxes to make our home unaffordable. It is conceivably possible that we could be forced by additional taxation from the "struggling homeowners" column into the "foreclosure crisis victim" column by taxes that bail out homeowners and lenders who took on loans that they never should have.
Whenever society condones a "redistributive" tax program--even those that are intended to "soak the rich," they invariably will negatively impact people who are right on the borderline. This is a great cycle--the government takes your wealth, thereby forcing you into a disadvantaged state. At least you then have the privilege to ask them permission to get some of your own money back. If you're really lucky, you'll even get a bit of someone else's money, too!

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From:scruffycritter
Date:March 18th, 2008 03:28 am (UTC)
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To be precise: It's not a $30B "Credit Line". It's a partial guarantee for the Bmortage backed assets that Chase bought in the deal. If they turn out to be worthless, Chase won't eat all of it. I'm not sure how much of them have to evaporate before this would kick in.

And normally I'd agree, but this is an extreme case. If Bear Stearns would go under, it would cause a run on other (solvent) investment houses who normally wouldn't need to liquidate assets to cover the run, and that liquidation would then cause another run that...you get the idea.

Our govt rarely does this and I really believe the Fed's heart is where it's head is. They made it clearr that it's not about saving Bear. It's about preventing a financial cascade failure.
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From:happypete
Date:March 18th, 2008 10:43 am (UTC)

It's fine to agree...

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...when it's not potentially your home, credit standing, and standard of living on the line.

A "run on the bank" is surely possible--it's happened before--but I bank with USAA. They're one of the most [fiscally] conservative "reciprocal associations" around.

Personally, I'd rather see a "run" that "cleaned house" on the firms that recklessly ran up the mortgage market. A few "solvent" banks might fold--but I doubt any "innocent" ones would.
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From:scruffycritter
Date:March 18th, 2008 01:56 pm (UTC)

Re: It's fine to agree...

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Well to be sure "banks" aren't the issue right now. They're federally insured deposits. We're talking investment houses, some of whom screwed up to varying degrees by investing in mortgage backed securities (Note: THEY DID NOT MAKE THE BAD LOANS THEMSELVES).

I agree that in a perfect world Bear Stearns should go under and JP Morgan who is relatively unscathed in the mortgage debacle) should not (note that I didn't say Chase, the banking side of JP Morgan/Chase).

What would suck is if confidence in the system dropped to the point solvent institutions got hurt. If people needed to get their money out of USAA to the point it couldn't function because their money in Bear Stearns went poof, you might feel differently I suspect.

Edited at 2008-03-18 01:56 pm (UTC)
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From:c1
Date:March 18th, 2008 04:07 am (UTC)
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On the one hand, if Bear Stearns folds, the global economy will feel that pinch, and life (in an economic sense) will suck pretty heavily. I had a chat with one of the economists today, and he's thinking the recovery will be a few years long (in one flavour or another) and another bank or three might fold before it's through (not necessarily a US bank.)
OTOH, if JP Morgan Chase experiences a bad case scenario, they just sell the midtown real-estate they picked up for a song (the B-S purchase was for the company, assumed debt guaranteed by the Fed to the tune of $30B, and the $1.2B high-rise) and still come out up by about $750M for their trouble.
I can understand wanting to keep as many people employed as possible (because it's not just the 14k employees of B-S, but everyone else who does business with them-- deliverymen and such) but this seems to have brought the concept of a golden parachute to new heights.
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From:scruffycritter
Date:March 18th, 2008 01:59 pm (UTC)
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I don't suppose you don't happen to know how much of the mortgage assets were guaranteed?

I know the Fed guaranteed $30B worth, but I'm told that's not all of it. I'm curious what sort of risk JPM/Chaase is taking here.
From:(Anonymous)
Date:August 3rd, 2008 07:42 am (UTC)

I should say

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Thank you
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From:happypete
Date:September 24th, 2008 03:12 am (UTC)

You're welcome...

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Who do I know in Houston?
From:(Anonymous)
Date:September 23rd, 2008 08:28 pm (UTC)

Amazing post!

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nice work, brother
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From:happypete
Date:September 24th, 2008 03:13 am (UTC)

Thank you.

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