Friday, March 14, 2008

Bear in the Big Outhouse

When one heard on the radio that investment bank Bear Stearns is now worth less on paper than either Black and Decker or Hasbro, you realize the US economy is really in the toilet. Rival JP Morgan and the New York City branch of the Federal Reserve has had to bail out Bear to avoid a "liquidity crisis." Other big banks in the States -- BofA and Citigroup -- have also had a run on their book value today.

This on top of the Reserve Board's $200 billion bailout of the banks, the second in a quarter, finally forced Bush to admit today that there are "warning signs." He still thinks, though, that the housing market should be left alone to work out its own vices on the premise that first time home buyers may be shut out of a rare opportunity to buy quality homes on the cheap.

The problem with that theory is that foreclosure auctions are nearly monopolized by home flippers who buy the distressed mortgages then sell them really fast to new buyers in the regular market at the original market price, gaining a huge profit. First timers are totally shut out of the market; just like us regular folks who have to buy concert and sports tickets on the secondary market because brokers have found ways to circumvent security systems that are supposed to stop the brokers.

One wonders where the shoe will drop here in Canada. Which of the Big Six found itself too overexposed to the much riskier US markets? Actually, I suggest it's all of them. They've already taken big writedowns to reflect the subprime scandal and it's only a matter of time before the Superintendant of Financial Institutions pulls the plug on one or more of them. When all is said and done, we'll be left with three or four -- and even less less choice and higher interest rates.

All because some wise guy or girl had the idea to extend credit to someone who couldn't afford it, then kept writing more and more of those ticking time bombs.

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