Opening Bell: Hang On To That Bomb Shelter

Faith in Freddie and Fannie; commodity markets get hammered; Depression anyone? Etc.

The papers go big with the government making it easier for Fannie Mae and Freddie Mac to bolster mortgage lending—allowing them to buy $200 billion more of mortgage securities. The New York Times says on C1 that “the companies are being allowed to take billions of dollars that had been used as a reserve against possible further losses and invest that money now in the housing market.”

The Wall Street Journal says on A3 that the “U.S. Puts Faith in Fannie and Freddie” and reports that regulators are preparing to allow the regional Federal Home Loan banks to buy a $160 billion worth of mortgage-backed securities.

The moves could help keep interest rates low for home buyers. Rates on mortgages rise when investors in securities backed by such loans demand a premium to compensate for what they see as growing risks. Aggravating that problem, some financial institutions that hold mortgage securities have been dumping them to raise cash.

The Financial Times says both government-sponsored enterprises promised to raise new capital. That will enable them to buy even more mortgage securities in a bid to break the logjam in the market. The paper quotes analysts as being skeptical that the moves will make much difference.

Bailout watch

The NYT goes high in its story with critics saying the moves increase the likelihood of a big government bailout:

“I think it’s very dangerous and it’s a sign that people are very frightened,” said Thomas H. Stanton, an expert on the two companies who teaches a course on credit risk at Johns Hopkins University. “At a time in which finance companies are holding questionable assets and facing losses, regulators typically require more capital, not less.”

But the WSJ on C1 says that the Fed’s latest moves have already eased conditions in the mortgage markets. It notes, however, that may not mean much yet. Quote of the Day:

“There is no such thing as an all-clear siren at the moment,” Mr. Vogel said. “It’s too soon to say, ‘Dismantle your bomb shelter.’”

Schizo market

Stocks yesterday gave back about three-fourths of their big Tuesday gain, with the Dow dropping 293 points (2.3 percent). The WSJ leads its Business & Finance column on A1 with the news and says on C1 that “investors’ euphoria gave way to renewed worries that the broader economy hasn’t yet escaped the dangers of the credit crisis.”

Commodity prices got hammered even worse, with the FT saying gold and oil saw their “biggest daily falls in decades.” Bloomberg says a commodity index is down 9.3 percent since the end of February. (The NYT goes above the fold on A1 with the old, old news that the commodities markets are booming and risky, just as the WSJ says on C1 that the bubble may be popped.)

The FT’s Short View column says stocks may be ripe for a “bear-market rally.”

Rogue traders

Bloomberg reports this morning that Credit Suisse says the debt-pricing errors it reported last month were the result of intentional acts by some of its traders, which it has since fired.

Bloomberg and the FT report that the big bank says it will lose money this quarter, primarily because of losses this month.

Joseph Lewis wants his money

In Bear Stearns news, Bloomberg and the Journal report that the firm’s biggest shareholder, Joseph Lewis, will seek alternatives to JP Morgan’s $2 a share bailout. You’d seek alternatives, too, if you’d bought $1.3 billion in shares at an average cost of $104 each.

Stock markets are still pricing in the likelihood of somebody else bidding or JP Morgan being forced to up its price, but Bloomberg quotes a Columbia prof effectively saying “Dude, you lost a billion dollars”:

”If he gets others to vote with him he may be able to get some token increase in the price,” said John Coffee, a securities law professor at Columbia University in New York, referring to Lewis. “He’s not going to get a significantly higher bid because no one else can get the Fed’s support and the Fed’s financing.”

The Journal on its Money & Investing cover fronts unsurprising news that some hedge funds made millions by shorting Bear Stearns stock. A page later it says the SEC is investigating an abnormal surge in trading of contracts that bet on sharp price drops in Bear shares shortly before they plunged.

The FT on its cover says a UK regulator’s move to investigate false rumors that one of the country’s big banks is failing is similar to the one announced by the SEC regarding Bear Stearns.

New day on the Street?

David Wessel in his A2 “Capital” column in the WSJ says the politics of a homeowner bailout have transformed now that the government has bailed out a big Wall Street firm:

No matter the merits or intellectual distinctions, it is nearly impossible for a politician to explain the following: Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson were willing to risk as much as $30 billion of taxpayer money—without congressional approval—so that J.P. Morgan Chase could buy Bear Stearns cheap at an auction in which it was the sole bidder. But a taxpayer-backed rescue of homeowners whose mortgages are worth more than their homes is unwise and unwarranted.

He also says Wall Street should be regulated more heavily since “it’s getting harder to see the line that distinguishes banks and other financial entities… Securities firms today look an awful lot like banks: They, too, are susceptible to runs and, for the good of the system, they can now borrow directly from the Fed.”

The D-word rears its ugly head

The Los Angeles Times goes page one with a look at just how big the financial crisis is, in a story headlined “A New Great Depression? It’s Different This Time.”

Dysfunctional capital markets, frantic central banks, stressed-out consumers, fear and uncertainty—all are alarming echoes of the global economic cataclysm of the 1930s…
On the surface, there are disquieting parallels between economic conditions in the early 1930s and those of today. There is the popping of enormous asset bubbles—stocks then, housing now.

And, as in the Great Depression, the financial system is in disarray. It was symbolized back then by the failure of thousands of banks, mostly small, local outfits—2,300 in 1931 alone. The parallel today is the crippling of onetime giants such as Bear Stearns Cos., Countrywide Financial Corp. and Ameriquest Mortgage Co.

Very few expect an utter catastrophe like the Great Depression to occur, but the Times uses some faulty analogies to come to its conclusion that one is unlikely. It compares unemployment rates between now (4.8 percent) and 1933 (25 percent) without noting that back then it took four years from the start of the crisis to plunge to that level.

And it notes that the international economy was crippled in the 1930s, but is fine today. The problem with both of these points is that the effects of any financial crisis take some time to mature—the current one is still in the crib, having begun in earnest about seven months ago.

It also doesn’t mention the more-intriguing parallels between the current mess and what triggered the Japanese depression of the 1990s, which was much milder than the Great Depression but nasty enough that the country’s still struggling with its effects nearly twenty years after it began. The Nikkei stock average peaked at 38915.87 in 1989. It’s worth less than a third of that today, at 12,260.44.

The econony sucks, basically

In economic news, the WSJ fronts a story saying that U.S. airlines are facing another round of restructuring after rebounding in the last couple of years. The headwinds of high oil prices and a slowing economy will result in the industry losing a combined $1.5 billion this year. For the life of us we still can’t figure out why anyone would invest in the airline business.

The Journal also says on A2 that another struggling American industry—the auto business— is preparing for a “worsening slump.”

A Bloomberg poll of economists expects today’s report on economic leading indicators to be negative for the fifth-straight month, the longest such stretch since recessionary 1990.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.