Confidence, Mortgage Debacle & Fed Loans

Even though the Euro is on top of the world monetarily, European confidence is reported to be at the lowest level in 5 years. Whose confidence is being measured? There is no telling, but the guess would be the bankers, economists and investors. Because of the wonder of the mortgage securities debacle, the plight of many professionals globally in banking and investment circles is less money and fear of money trouble. Its all based on the outlook of growth, not only of collective economies, but of the financial system at large. Growth is a question mark on many fronts coupled with inflationary pressures.

Curiously, The Federal Reserve Bank of New York extended a $28.82 billion loan to JPMorgan Chase for the acquisition of Bear Stearns made in March. The Fed also released the minutes of two meetings on March 14 and March 16 that involve that loan. You would think that JPMorgan is prosperous enough to be able to cover that loan entirely after 90 days instead of having taxpayers float the loan for the credit, which is the reality of the situation. While JP Morgan is paying modest interest, the U.S. taxpayer is paying for interest put against the national debt. The Fed is collecting from both sides on money that they created from thin air.

The line of credit extended is based on collateral provided by a $28.8 billion portfolio of bonds and other fixed-income products that are likely largely junk. The claim is that most of the collateral is backed by government-sponsored enterprises such as Fannie Mae. The remainder are held to consist of asset-backed securities including sub-prime mortgage bonds, complete with adjustable-rate mortgages, commercial mortgage-backed securities, and collateralized bond obligations. These bonds were held by Bear Stearns before it collapsed in March.

Upping the ante toward prosecuting banker corruption in the mortgage debacle, regulators filed civil fraud charges against UBS Financial Services for selling investments that were known to be extremely risky, but portrayed as safe. Banking customers have now discovered that they have been blindsided by the very people who were supposed to have their best interests at heart.

The complaint alleges that even though executives were calling the program an “albatross” and knew their program was near collapse early this year, UBS continued to sell the securities to individual investors. It presented them as a good value, in order to reduce its own inventory. Investors were never told the auctions weren’t true auctions. UBS stepped in when buyers abandoned the auction program to underwrite the products and set the interest rate so the program wouldn’t fail. That sounds like fraud clean and clear.

Citigroup, the global bank holding company, is being pounded by running investors. Goldman Sachs has recommended to its clients that clients sell their shares of Citibank in light of huge continued write-offs. The news today is that 175,000 financial sector jobs will be lost in the U.S. over the next year. Life is gloomy indeed for the banking and finance community.

In the meantime, investors and banker types should lower their expectations along with the remainder of the U.S. and global economy. After all, U.S. mortgage and finance professionals have only themselves to blame in large measure. The world is paying the piper.