Bear Stearns’ Bailout: How it Relates to Foreclosures
Last week, Bear Stearns, an investment bank and securities trading and brokerage firm on Wall Street, was famously offered a government-backed bailout to rescue it after a "textbook" bank run caused investor worries about its liquidity.
So what does that all mean?
Bear Stearns, like many other investment banks on Wall Street, invested in lots of subprime mortgage debt during the housing boom. In fact, according to Market Watch, Bear Stearns was the second largest underwriter of mortgage-backed securities, meaning that it basically assured investors that buying subprime debt was a safe bet, despite its inherently risky nature.
Plus, as sources note, Bear Stearns owned a subprime lender and participated in the packaging of loans - in other words, it contributed not only to the problem of foreclosure but to the problem of speculative and risky investment.
Perhaps because of the company's prominent contributions to the subprime mortgage crisis, many news sources are reporting anger and frustration from homeowners and consumer advocates around the country. The question everyone seems to be asking is why was the Bush administration willing to help out a major investment bank but not the American people?
One professor of law reportedly noted that helping the people fighting foreclosure - whether through funding, programming or legislation - would address the problems faced at the investor level, since the loss of revenue from defaulted loans and foreclosures lies at the root of many banks' current problems.
AZCentral.com notes that Boston-based Neighborhood Assistance Corporation of America, a nonprofit consumer advocacy and homeownership organization, is organizing a demonstration this week to protest the government's role in helping Bear Stearns while millions of homeowners continue to struggle with their mortgages.
But, as sources point out, refusing to help Bear Stearns could have led to bigger problems, since the effect of such a major investment bank going under could have caused far-reaching ripples of financial disaster. And, according to the New York Times, the federal bailout had the effect of increasing investors' confidence.
Shortly after JP Morgan Chase's federally backed offer of $2 per share of Bear Stearns stock, the stock was apparently valued at $10 per share.
But the fact that Bear Stearns needed outside help in the first place, according to some consumer advocates, shows a need for new legislation regulating lending and mortgage brokering. And certain practices within the company - like high-ranking executives allegedly getting millions of dollars in bonuses despite financial troubles - also suggest a need for regulation or reassessment.
Hopefully, legislators will take the Bear Stearns crisis as a wake-up call and begin addressing the foreclosure-related problems of the American people more aggressively in coming months.