Category Archives: Econ & Money: Mortgage Mess

Recession: The Movie

This is seriously weird:

JPMorgan in Negotiations to Raise Bear Stearns Bid – New York Times

No, not that they're upping the price of the deal — it looked like a possible steal for JPM, and the market had already anticipated a tripling of the offer price, albeit not the quintupling that the NYT thinks is on the table.

The weird part is this:

JPMorgan and Bear were prompted to renegotiate after shareholders began threatening to block the deal and it emerged that several “mistakes” were included in the original, hastily written contract, according to people involved in the talks.

One sentence was “inadvertently included,” according to a person briefed on the talks, which requires JPMorgan to guarantee Bear’s trades even if shareholders voted down the deal. That provision could allow Bear’s shareholders to seek a higher bid while still forcing JPMorgan to honor its guarantee, these people said.

When the error was discovered, James Dimon, JPMorgan’s chief executive, who was described by one participant as “apoplectic,” began calling his lawyers at Wachtell, Lipton, Rosen & Katz to seek a way to have the sentence modified, these people said. Finger pointing over the mistakes in the contracts began as bankers blamed the lawyers and vice versa.

Is it possible that management didn't know about this at the time? I remember reading about it online, where it was described as something the Fed demanded as a condition of its guaranteeing such a large share of the most toxic securities.

I'd like to hear a lot more about this.

Calculated Risk, A Tale of Real Estate Predation deconstructs the Washington Post’s My House. My Dream. It Was All an Illusion.

Two days ago, Krugman said, “the one-month Treasury rate was 0.57; the three-month rate was 0.825” and he worried about a liquidity trap.

Then then Fed cut the discount rate 0.75%, to a low low 2.25 %. Would the T-rate crater? Apparently not.

This morning, Krugman says, the one-month T-bill rate is 0.539, the 3-month rate 0.728. Working the math out on my thumbs suggests that the change in the T-rate was a lot smaller than the cut in the discount rate.

I think this is actually sort of good news. It seems that although the Fed is running out of ammo, there's still a little elbow room left….

Update: for a gloomier view, see Calculated Risk, Financial Crisis: Third Wave Still Growing.

Back when I studied economics in college, a liquidity trap was something that happened (1) before the New Deal and/or (2) to small economies run by dorks. Of course, that was before the Japanese crisis.

And, almost, it's our turn. No wonder the Fed is freaking out.

Paul Krugman's Blog, How close are we to a liquidity trap?:

Here's one way to think about the liquidity trap — a situation in which conventional monetary policy loses all traction. When short-term interest rates are close to zero, open-market operations in which the central bank prints money and buys government debt don't do anything, because you're just swapping one more or less zero-interest rate asset for another. Alternatively, you can say that there's no incentive to lend out any increase in the monetary base, because the interest rate you get isn't enough to make it worth bothering.

…

As of 10:38 this morning, the one-month Treasury rate was 0.57; the three-month rate was 0.825.

Are we there yet? Pretty close.

Cf. Krugman, Thinking About the Liquidity Trap (1999).

Although my macro is very rusty — I always liked micro better — it seems to me that the large pre-existing deficit overhang puts some nasty limits on the government's ability to do stimulative fiscal policy: the expectation that paying it all back will be brutal acts as a nasty brake on the stimulative effects.

The sinking dollar, on the other hand, seems more of the mixed blessing. Foreign investment, good in the short run, not so good in the long run (as they lead to more fiscal outflows). Better would be increases in foreign demand. And how's that big mac index looking today?

Calculated Risk: Hedge Fund Humor

Who is this guy Margin that keeps calling me???