Wednesday, March 19, 2008

Not Working; The Market

The 3/4% drop in its lending rate by the Fed didn't do it. The free money to lenders like JPMorgan to help buy depreciated Bear Stearns didn't do it. Half a trillion the Fed pumped into the financial system didn't do it. The stock market dived blithely 293 points, nearly giving up its 5 year high gains of yesterday.

More trouble is still ahead.

Thornburg Mortgage has said it is trying to raise almost $1bn (£500m) in extra capital to avert a possible bankruptcy filing.

The lender, which specialises in big home loans, also plans to offer its lenders a 27% stake in the company.

The measures will significantly dilute the stakes of existing shareholders and the company's shares fell 47%.

Thornburg said that without the new capital it may be forced to seek bankruptcy protection.

Jumbo loans

In a filing with the Securities and Exchange Commission, the company warned that bankruptcy would be a possibility because it would have to sell off the rest of its mortgage assets at depressed prices.

Thornburg specialises in so-called jumbo loans of more than $417,000, which means that until recently they were not eligible for funding from the government-sponsored mortgage agencies Fannie Mae and Freddie Mac.

This is not a subprime lender. It bought erroneously - based on inaccurate AAA ratings awarded to worthless loans.

At the SEC, a few more rules are being broken.

Usually the SEC stays mum about investigations until it files a lawsuit or issues a no action letter. In the The Bear Stearns Companies, Inc. (NYSE: BSC) case, the commission is making an exception.

In a press release given the clever headline typical of government organizations -- Answers to Frequently Asked Investor Questions Regarding The Bear Stearns Companies, Inc. -- the commission said that it had "declined to provide assurances about possible future enforcement actions" to JPMorgan Chase & Co. (NYSE: JPM) as part of the buyout talks, which the SEC said it was in "close contact" with during the deal negotiations.

The SEC also said it is looking at possible improper trading by "market participants" who may have knowledge of the looming collapse.

A few things are interesting here. Nearly every press release put out by a public company contains a "safe harbor for forward looking statments" disclaimer that says, in summary, "What we are saying wildly optimistic and may even be borderline dishonest. You can't sue us if we're wrong, so na-na-boo-boo."

But the Bear Stearns statement, in which the company "stated that there is absolutely no truth to the rumors of liquidity problems that circulated today in the market," contained no such disclaimer -- one of the few cases where the safe harbor statement would have been more than just boilerplate!
(Emphasis added.)

Does anyone reading this remember how many times the administration flunkies have 'refused to comment on ongoing litigation'?

The exception here reminds me of cowboy practices in the past, of 'heading them off at the pass'. Seems the SEC, that body that not so many years ago failed to oversee Enron activities, isn't going to act to protect investors in Bear Stearns, any more than the Fed did.

The mortgage industry is in huge trouble. The stock market, falling today after all efforts to prop it up, shows that faith is gone. It was sacrificed when the appointees of the worst administration in history refused to enforce the laws that were meant to protect us. The working out is in progress. That isn't the 'market working', it's the consequences of lawbreaking.

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