Federal Reserve: It's finished! LTCM-Type Emergency Bail-Out of Entire Mortgage Market.
April 22 (EIRNS)--Stepping back and reflecting on the pattern of the past week, it is clear that the Federal Reserve Board of Governors, in coordination with the Plunge Protection Team, is attempting to whip together and coordinate a huge bail-out of the subprime mortgage market, in order to save the entire $16.7 trillion U.S. mortgage bubble. Such a bailout will end in disaster. Lyndon LaRouche stated April 22, "The only thing to do is to freeze all the problem mortgages and to stop the foreclosures, as I've already said. We have to prevent massive evictions. If what I propose is not done, we are entering a phase in which what is occurring will blow out the entire financial system."
There has been an intense two weeks of panicked private and public meetings. On Monday April 16, a 7 hour meeting was held behind closed doors, at the Washington, DC headquarters of the Federal Deposit Insurance Coporation, involving the heads of the FDIC, Fannie Mae, Freddie Mac, very likely officials from the Fed, as well as leaders of banks, lending institutions and consumer groups. According to statements released afterward, those at the meeting "agreed on a goal of keeping deserving borrowers with high-risk mortgages in their homes."
The next day, April 17, the Federal Reserve Board of Governors released a joint statement, entitled "Statement on Working with Mortgage Borrowers," which had been drawn up in coordination with, and signed by the Federal Reserve; the U.S. Department of Housing and Urban Development (HUD); the FDIC; the National Credit Union Administration; the Office of the Comptroller of the Currency; and the Office of Thrift Supervision. The statement read in part:
"The federal financial institutions regulatory agencies encourage financial institutions to work constructively with residential borrowers who are financially unable to make their contractual payment obligations on their home loans. Prudent workout arrangements that are consistent with safe and sound lending practices are generally in the long-term best interest of both the financial institution and the borrower.
"Many residential borrowers may face significant payment increases when their adjustable rate mortgage (ARM) loans reset in the coming months. These borrowers may not have sufficient financial capacity to service a higher debt load, especially if they were qualified based on a low introductory payment....
"The [supervisory] agencies will continue to examine and supervise financial institutions according to existing standards. The agencies will not penalize financial institutions that pursue reasonable workout arrangements with borrowers who have encountered financial problems. Further, existing supervisory guidance and applicable accounting standards do not require institutions to immediately foreclose on the collateral underlying a loan when the borrower exhibits repayment difficulties. Institutions should identify and report credit risk, maintain an adequate allowance for loan losses, and recognize credit losses in a timely manner." (emphasis added)
The highlighted sentence will be remembered from the 1989-92 period, when in 1991, the Federal Reserve and other regulatory agencies issued a directive to bank examiners that urged "leniency" and "wide discretion" in deciding what a bad loan is. An emergency meeting was held Nov. 7, 1991 in Baltimore, Maryland to emphasize that point. At that moment, Citibank, America's largest bank, and other banks, had their books full of bad loans, and were hanging by a thread. The Fed feared a strict interpretation would push Citibank et al over the edge.
- Bringing in the Wall of Money Bailout -
On April 17, 2007, in accordance with the Federal Reserve's and other supervisory agencies' statement of the same day, "Statement on Working with Mortgage Borrowers," a wall of money policy was launched. Daniel H. Mudd, the chief executive officer of Fannie Mae, testified before the House Financial Services Committee, that Fannie Mae was altering its lending standards so that it "could help the subprime market through this turmoil," adding, "We are concerned about a liquidity crunch in the subprime segment." Mudd announced that Fannie Mae, the giant secondary housing market agency, was starting a new program, "Operation Home Stay," that would funnel funds into the subprime market. While he did not give a dollar funding figure, press reports have placed the funding level at between $5 and $20 billion.
On April 18, Freddie Mac, the other giant secondary housing market agency, announced that it will commit $20 billion to buy fixed-rate and adjustable rate mortgage (ARM) products, in an effort to provide mortgage-lending institutions with more "choices" to offer subprime lenders. Also on April 18, the Seattle-based Washington Mutual, one of the nation's largest mortgage lenders, announced a $2 billion program to help subprime borrowers. As well, on April 18-19, Citigroup Inc. and Bank of America Corp., announced that they would provide $1 billion in mortgage refinancing to the nonprofit, Boston-based Neighborhood Assistance Corporation of America to help those with subprime loans.
Thus, in a 96 hour period, the Federal Reserve and Plunge Protection Team had organized Fannie Mae, Freddie Mac, and the large money center banks to commit to a wall of money: thus far, between $28 and $43 billion in bail-out funding. This sum is between seven and ten times the size of the bail-out that the Fed organized in September, 1998, to save the LTCM hedge fund. The overriding interest of the Federal Reserve and the City of London and New York financier oligarchy, has nothing to do with the individual home-owner. They are trying to save their bankrupted system. It is evident to all that the full rupture of the $1.2 trillion market in subprime mortgages would be the trigger to bring down the multi-trillion U.S. housing bubble, and with it, the systemic breakdown of the world financial system.
On April 20, LaRouche stated even hundreds of billions of dollars of bail-outs would not be sufficient, it doesn't take account of the real scope of the problem. Now is the time to freeze troubled mortgages, and keep people in their homes.
