Foreclosure Drama

Posted in Foreclosures, June 13th, 2008 |

The long arms of foreclosures have spread its tentacles to embrace Bears Stearns into the drama taking place. Foreclosures are reaching out globally – a plague of a curse.

In Brazil the stock markets crashed as fear spread about an international credit catastrophe akin to that which humbled Bears Stearns. Likewise in Europe and Asia fear left its mark on the bourses – all having its roots in the foreclosure drama played out in mighty America.

On 21st March 2008 the Federal Reserve’s dramatic measures reassured the investment community by bailing out Bear Stearns. The latter is one of Walls Street’s giant banks with a history going back 85 years.

The Federal Reserve granted JP Morgan Chase a credit of $30 billion to allow it to buy its one time rival, Bears Stearns. Due to problems arising from the foreclosure tsunami lashing the housing market, Bears Stearns was on the verge of collapse. It had incurred huge losses in the mortgage market. JP Morgan offered Bears Stearns peanuts - $2 per share amounting to $236 million. It raises eyebrows because on that Friday, shares were being sold for $30. The property itself, housing the headquarters of the bank is valued at $1 billion.

Bears Stearns had no alternative but to accept the offer. On Friday it faced major liquidity problems with investors willy-nilly withdrawing money. The bank ran short of cash. The only way it could keep running was to allow to be sold. But the deal cleans out the wealth of the shareholders and whether they will approve of it is a big question.

Against the foreclosure background customers are becoming shaky. The customers of Bears Stearns will automatically become that of JP Morgan Chase. Individually they will not have to bestir themselves.

Apart from having its own assets Bears Stearns works as’counterparty’. This means it acts as a middleman for transactions involving billions of dollars. It includes retirement funds of working people. Smaller banks as well as ‘hedge funds’ could trade in stocks and securities through Bears Stearns. The role of ‘hedge funds’ in the foreclosure crisis is not unknown to anyone studying the situation closely.

Another word making the rounds in this foreclosure crisis is ‘bankruptcy’. If Bears Stearns had been allowed to go bankrupt a long legal process would have been triggered off freezing money of thousands – from retirees to giant hedge fund holders.