This is not so much a blog entry as just a public dumping of some private notes that I accumulated during the Bear Stearns debacle. With the latest debacle at AIG, I went back and reviewed my notes. I'm sure there is a good blog article in there, but personally I find looking at my raw notes quite revealing. I realize the links aren't properly linked and its impossible to tell what parts are original and what parts are quoted from articles.
So without further ado and without apology I present...
Save the Billionaires
No disaster is too great to be an opportunity to help out some of Bush's Billionaire friends.Forget saving the whales, let's save the billionaires. According to Bear Stearns CEO Alan Schwartz, “we here are a collective victim of violence”. And you thought the baby seals had it tough.
Bear was a Wall Street institution that had it easy for a long time. It made big profits from trading mortgages and serving hedge funds in the housing and credit securities boom. For years, the Fed gave by keeping interest rates low and fuelling markets with cheap money.
Joe Lewis, the British billionaire who has lost almost $1 billion (£505 million) on his investment in Bear Stearns, is confident that he will be able to block the takeover of the stricken investment bank by JPMorgan Chase before the deal is completed in three months.
The purchases began on July 20 — around the time that Bear Stearns disclosed that two of its hedge funds had imploded, leaving investors in those funds with nearly nothing — and continued through last Friday. The average purchase price was about $106 per share, but Mr. Lewis paid as much as $150 per Bear Stearns share in July.
In the past decade, as global financial markets have boomed, hedge funds and private equity firms have proliferated and investment bankers’ traditional half-share of all the money their banks earn has produced annual bonuses reaching into the tens of millions, the rest of the world has looked on with envy and not a little financial resentment.
The taxpayer has had to stand behind institutions that acted as gigantic slot machines for those who worked there. Rightly, people outside the gilded class do not think this is fair.
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http://www.nytimes.com/2008/03/24/business/24deal.html?em&ex=1206504000&en=b9a23db3c4146e50&ei=5087%0A
A new deal could raise even more questions about the Fed’s involvement in the negotiations. As part of the original deal, the Fed guaranteed to take on $30 billion of Bear’s most toxic assets. The central bank also directed JPMorgan to pay no more than $2 a share for Bear to assure that it would not appear that the Bear shareholders were being rescued, according to people involved in the negotiations.
JPMorgan Chase was in talks on Sunday night for a deal that would quintuple its offer for Bear Stearns, the beleaguered investment bank, in an effort to pacify angry Bear shareholders, according to people involved in the negotiations.
Under the terms being discussed, JPMorgan would pay $10 a share in stock for Bear, up from its initial offer of $2 a share
If the price is increased, however, some critics could have more ammunition to complain that taxpayers are helping to bail out a Wall Street firm that should be responsible for its own risky behavior. That is one reason the Fed was hesitant on Sunday night to approve the transaction at $10 a share, people briefed on the talks said.
A spokesman for the Federal Reserve would not comment on the central bank’s involvement in the negotiations and denied that it had directed the original sale price.
Even after JPMorgan announced that it would acquire Bear for $2 a share, investors bid up the stock to close at $5.96 on Friday in anticipation that a better deal would be reached.
On September 10, 2007, he was in the news for paying $860.4 million in an all-cash purchase of a 7 percent stake in Bear Stearns. By December of 2007 Lewis had raised his stake at the brokerage firm to 9.4%, a total of 11 million shares, for which he paid an average price of $107 apiece
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http://dealbook.blogs.nytimes.com/2007/09/10/british-billionaire-takes-bear-stearns-stake/index.html?8au&emc=au
British Billionaire Takes Bear Stearns Stake
September 10, 2007
The purchases began on July 20 — around the time that Bear Stearns disclosed that two of its hedge funds had imploded, leaving investors in those funds with nearly nothing — and continued through last Friday. The average purchase price was about $106 per share, but Mr. Lewis paid as much as $150 per Bear Stearns share in July.
Bear Stearns’s stock fell sharply over the summer as the rapid downturn in the subprime mortgage market forced two of its hedge funds to seek bankruptcy protection. The stock decline ignited speculation that the firm could become a takeover target, although some suggested that a sale of a minority stake was more likely..
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http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3607753.ece
Joe Lewis, the British billionaire who has lost almost $1 billion (£505 million) on his investment in Bear Stearns, is confident that he will be able to block the takeover of the stricken investment bank by JPMorgan Chase before the deal is completed in three months.
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http://www.ft.com/cms/s/0/6fc94f48-f76d-11dc-ac40-000077b07658.html?nclick_check=1
When the US Federal Reserve, the nation’s central bank, engineered the takeover of Bear Stearns by JPMorgan Chase, it endorsed the virtual wiping out of Bear’s shares, a third of which are held by Bear’s 14,000 employees. Jamie Dimon, JPMorgan’s chief executive, offered $2 a share, or about $237m, for a bank that was worth $20bn at its peak and $9.5bn only three weeks ago.
In the past decade, as global financial markets have boomed, hedge funds and private equity firms have proliferated and investment bankers’ traditional half-share of all the money their banks earn has produced annual bonuses reaching into the tens of millions, the rest of the world has looked on with envy and not a little financial resentment.
The taxpayer has had to stand behind institutions that acted as gigantic slot machines for those who worked there. Rightly, people outside the gilded class do not think this is fair.
Like other investment banks, Bear paid most of its employees’ annual bonuses in deferred stock. A trader might get a $1m bonus but a lot of that was paid in shares that only vested after three years.
After the Fed rescued Bear to head off a firesale of mortgage securities, it encouraged JPMorgan to make such a low bid that almost all deferred compensation was wiped out.
In the space of three weeks, the stake owned by Jimmy Cayne, Bear’s wayward chairman and former chief executive, went from being worth $500m to $12m (at the peak, he was a billionaire). A swathe of employees lost millions and about half are likely to lose their jobs once JPMorgan swallows up their bank and its building on Madison Avenue.
The prevailing mood at Bear is a mix of despair and anger. Mr Dimon walked over to Bear on Wednesday to address 400 shattered Bear executives. Alongside him was Alan Schwartz, Bear’s chief executive, who was quoted in The New York Times telling the group that “we here are a collective victim of violence”.
Mr Schwartz’s beef seems to be that Bear collapsed because hedge funds and other banks withdrew their business and credit lines last week, making it insolvent. Joe Lewis, the British-born financier who holds an 8 per cent stake, is so disgusted that he has publicly rejected JPMorgan’s offer and Bear’s shares rose well above the JPMorgan offer price this week on hopes of a higher bid.
The JPMorgan deal went through because the Fed agreed to fund $30bn of Bear’s balance sheet and the central bank would probably block any alternative that gave the shareholders more by withdrawing its support and pushing Bear into insolvency.
Bear was a Wall Street institution that had it easy for a long time. It made big profits from trading mortgages and serving hedge funds in the housing and credit securities boom. For years, the Fed gave by keeping interest rates low and fuelling markets with cheap money.
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http://www.responsiblelending.org/press/releases/calhoun-statement-on-bear-sterns-bailout.html
The most dramatic action, however, came last weekend as the Federal Reserve orchestrated a bailout of Bear Stearns, one of the main financial firms responsible for causing this subprime mortgage mess in the first place.
Bear Stearns has been one of the most aggressive funders and servicers of the abusive, unfair subprime mortgages that are now pushing the country to the brink of recession.
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In the latest groundbreaking move from the central bank, the New York Federal Reserve Bank will manage and dispose of the high-risk securities that helped push Bear Stearns Cos. (BSC:11.25, +5.29, +88.8%) over the brink and into
the arms of J.P. Morgan (JPM:46.55, +0.58, +1.3%) .
If the securities, valued at $30 billion on March 14, sell for more than $30 billion, the Fed will take the profit. If they sell for less, J.P. Morgan will assume the first $1 billion in losses, with the Fed on the hook for the remaining $29 billion.
The details announced Monday are slightly more favorable to the Fed than the arrangement announced a week earlier, but, for many critics, the changes don't amount to much more than putting lipstick on a pig.
The changes to the Fed's role were announced shortly after J.P. Morgan raised its buyout offer for Bear to $10 a share from the previously announced $2 in an effort to appease irate shareholders and head off lawsuits. See full story.
"This action is being taken by the Federal Reserve, with the support of the Treasury Department, to bolster market liquidity and promote orderly market functioning," the New York Fed said in a statement.
J.P. Morgan will finance $1 billion on the debts. Financing on the other $29 billion will be extended by the Fed to J.P. Morgan at the discount rate, which is currently 2.5%.
Repayment of the Fed's loan should begin in two years, the Fed said.
For many analysts, the fundamentals of the transaction remain unchanged: gains on Wall Street are privatized while losses are socialized.
"In other words, would J.P. Morgan be willing to make the deal without the guarantee?" he asked.
The Bush administration has been downplaying its role in the bailout by stressing that the funds come from the Fed. But Ely said there is no functional difference: It is being made on behalf of the U.S. government. "Whether it is the Fed or the Treasury, it is the right hand or the left hand," Ely said.
Treasury may be constrained by statute from making the loan, Ely said, but there are also political advantages because President Bush has pledged that there will be no government bailouts in the financial and housing market turmoil.
But members of Congress see right through this façade, Ely said. "They will be all over this thing. There are lots of grandstanding opportunities."
"In keeping Bear Stearns solvent, the Federal Reserve acted to avert a domino effect it feared could spark a wider financial market meltdown. But if a firm that's partially to blame for this crisis warrants help, then surely so do millions of ordinary families who are struggling to keep their homes," said the Center for Responsible Lending, in a statement on its website.
The Fed is traditionally been wary of getting into the middle of political battles for fear of losing its political independence, but extraordinary times forced the bank to act, analysts said.
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Wikipedia - Bear Stearns
During the week of July 16, 2007, Bear Stearns disclosed that the two subprime hedge funds had lost nearly all of their value amid a rapid decline in the market for subprime mortgages.
On August 1, 2007, investors in the two funds took action against Bear Stearns and its top management. The law firms of Jake Zamansky & Associates and Rich & Intelisano both filed arbitration claims with the National Association of Securities Dealers alleging that Bear Stearns misled investors about its exposure to the funds. This was the first legal action made against Bear Stearns, though there have been several others since then.[7] Co-President Warren Spector was forced to resign on August 5, 2007, as a result of errant trades that led to the collapse of two hedge funds backed primarily by subprime loans. A September 20 report in the New York Times noted that Bear Stearns posted a 61 percent drop in net profits due to their hedge fund losses.[citation needed] With Samuel Molinaro's November 15 revelation that Bear Stearns were writing down a further $1.2 billion in mortgage-related securities and would face their first loss in 83 years, Standard & Poor's downgraded their credit rating from AA to A.[8]
On March 16, 2008, the company signed a merger agreement with JP Morgan Chase for $2 per share of its own stock.
The merger agreement, which refers to JPMorgan as "Parent," contained certain clauses designed to lock the agreement in, preventing any decision by the shareholders to the contrary. Notably, clause 6.10 provides that if the shareholders of Bear Stearns ("Company") vote against this two-dollar deal, "each of the parties shall in good faith use its reasonable best efforts to negotiate a restructuring of the transaction provided for herein ... and to resubmit the transaction to Company's shareholders for approval, with the timing of such resubmission to be determined at the reasonable request of Parent."
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http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/23/ccfed123.xml
Bear Stearns had total positions of $13.4 trillion. This is greater than the US national income, or equal to a quarter of world GDP - at least in "notional" terms. The contracts were described as "swaps", "swaptions", "caps", "collars" and "floors". This heady edifice of new-fangled instruments was built on an asset base of $80bn at best.
But JP Morgan is already up to its neck in this soup, with $77 trillion of contracts. It will now have $90 trillion on its books, a sixth of the global market.
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http://www.jsmineset.com/
Again and again we hear the pleading cries from the shills of Wall Street, “but if the Fed does not intervene, the implications for the US financial system are too awful to contemplate”. How many times in the past have we heard the EXACT SAME line coming from Wall Street after they have enriched themselves with commissions pedaling their poison to the rest of the world and then having the audacity to shroud their narcissistic pleas for bailouts under the guise of the common good? That is the very reason that we experience this same destructive practice among Wall Street banks time and time again. They know full well that they will be rescued over and over again. I do not know which is more depressing, the fact that this sort of thing repeats with increasingly regularity among the big banks or that the investing community stands there as the chief cheer-leader urging the central planners to get involved.
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http://www.reuters.com/article/topNews/idUSBNG8809620080325
Including the planned share issue by Bear Stearns, most analysts estimated that the new offer valued Bear at about $2.1 billion. The original offer valued Bear at about $236 million.
"Bear Stearns is a deeply troubled company which would have no value if the Federal Reserve had not stepped in to bail it out," Bove wrote.
Keefe, Bruyette and Woods said it expected the deal to go through at the revised terms. Some investors, however, appeared to be expecting a higher offer as Bear shares surged 76 percent to close Monday at $11.25.
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http://www.fool.com/investing/dividends-income/2008/03/25/youre-being-taken-to-the-cleaners.aspx
Slightly more than a week ago, we were told that the entire financial market was about to implode because Bear Stearns (NYSE: BSC) was unable to meet a margin call. As a result of that so-called crisis, The Federal Reserve arranged and agreed to subsidize a bailout of Bear Stearns by JPMorgan Chase (NYSE JPM). If that weren't bad enough, as part of the crisis response, the Fed also voted itself special emergency powers to lend directly to certain securities dealers as well as banks.
If there's really five times as much value in Bear Stearns than we were led to believe just a week ago, then why:
Is the Fed still guaranteeing $29 billion of the $30 billion it kicked in to seal the deal?
Hasn't the Fed closed the new window that lets it lend to securities brokers?
It would seem that either the Fed panicked again and doesn't want to admit its newest misstep, or that it's more interested in providing welfare payments to billionaires than doing its real job. Either way, as things stand now, you and I are subsidizing the risks that JPMorgan and Bear Stearns are taking, and their shareholders and managers are receiving the rewards.
Here's how ugly this raw deal looks. The special window the Fed has opened lets prime brokers borrow at 25 basis points above the current Federal Funds rate. Since the Federal Funds rate is now at 2.25%, they're able to borrow money at 2.5%. In this market, it doesn't take a genius to see how they can essentially print money with loans that cheap. They simply need to borrow at 2.5% and buy stocks with higher yields. Those with politically privileged access to federal cash can clean up on a fairly generous yield spread, even with well-known firms such as these:
In other words, just like with JPMorgan and Bear Stearns, you'll pay the bill if their plans fail, but they'll reap the rewards if they succeed.
Enough is enough. Either drop the subsidy to scuttle the deal, or close the emergency window, or both. But for heaven's sake, stop destroying the entire financial system just to help a few billionaires get richer at taxpayer expense.
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http://www.fool.com/investing/dividends-income/2008/03/20/ben-bernanke-is-destroying-our-financial-system.aspx
And no, Bear Stearns' prior shareholders weren't the victims of this theft. Their stakes were well on the way to becoming worthless, thanks to Bear Stearns' overleveraged positions. They should be writing Bernanke personal thank-you letters and pledging their undying loyalty to him for handing them a little something along the way. I'm talking about Bear Stearns' bondholders. The people who should most immediately feel victimized by this theft are the ones who held the $65.7 billion in long-term debt that Bear Stearns had borrowed.
When a company fails to meet its debt obligations, it goes bankrupt. Its bondholders get first dibs on the assets -- not some bank that has a powerful politician in its pocket. For those of us watching this particular horror unfold on the sidelines, that may seem like an academic distinction. But it matters. A lot.
First, there's the minor matter that Bernanke's actions severely perverted the market's natural checks and balances by socializing risk and privatizing profit. If ever there was a signal to other large banks and investment houses to take unwarranted and unwise risks in the future, this would be it.
Why should they and their shareholders be punished for behaving prudently? And yes, they're suffering from Bernanke's bailouts, just like the rest of us. Keeping the more poorly managed banks from failing makes it much tougher for the companies that should survive to take market share. That directly rewards failure, punishes success, and damages the market's ability to cleanse itself through such bankruptcies.
Third and finally, lost amidst all of Bernanke's heavy-handed government intervention is the fact that, if left alone, the markets still work. If there's still some semblance of real value in a failing institution, someone will step in and buy it, without sticking taxpayers with the risk. Just look at Bank of America (NYSE: BAC) and its proposed buyout of Countrywide (NYSE: CFC). The last time I checked, that offer was made without the Federal Reserve kicking in $30 billion in guarantees.
Whether he wants to admit it or not, Bernanke's actions are:
- crowding out private money, thus exacerbating the lending crisis;
- rewarding failure, thus assuring more and bigger shenanigans later; and
- signaling that there are no (immediate) consequences to making bad financial decision
If the Federal Reserve keeps bailing out failures, the only limit to the size of the risks will be based on the willingness of people around the world to accept the dollar as currency.
Or in other words, if you think things are bad now, you ain't seen nothing yet.
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http://www.atimes.com/atimes/Global_Economy/JC15Dj02.html
Walter Bagehot, the patron saint of central bankers, suggestedthe following basic principles for central banks to help the banks under their supervision to avoid liquidity runs.
A. Only lend against good collateral to avoid losses for taxpayers at a later date.
B. Lend at extremely high interest rates to avoid the facility being used willy-nilly by greedy bankers.
C. Make public the availability of such facilities, so as to prevent doubts and suspicions in the minds of depositors and other creditors.
This week's announcement by the Fed violates EVERY one of those principles. Firstly, the collateral being accepted by the Fed is tainted as the market’s complete lack of appetite (at any price) for the securities shows. By providing the ability to liquefy these securities, the Fed has effectively signaled that it would accept just about any junk.
Secondly, the cost of borrowing is not punitive; indeed it is agreeably low for anyone who cares to fill out a couple of forms. Thirdly, this facility was not used previously; therefore the market has been in some doubt about really how useful it could be.
In essence, this is a US$200 billion facility that is being misapplied to rescue a specific part of the financial system at a preferential rate, and without any disclosure required on usage. Given all this, it is impossible for anyone to expect that the ultimate cost of this facility will not be borne by US taxpayers.
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Jim Rogers: 'Abolish the Fed'
http://www.cnbc.com/id/23588079
"Listen, investment banks have been going bankrupt since the beginning of time. If people make mistakes -- if you bail out every investment bank that gets in trouble, that's not capitalism, that's socialism for the rich," he said.
The weakest financial institution is Fannie Mae, in Rogers' opinion, "but all of them have problems."
"Buy agriculture. Agriculture is one of the few places where you're going to make a fortune in the next years," Rogers said.
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Bush's Financial Katrina
http://www.washingtonpost.com/wp-dyn/content/blog/2008/03/18/BL2008031801445.html
What's the equivalent of the broken levees this time around? "[S]ome economists and lawmakers said that the administration had too strongly resisted efforts to regulate either the mortgage industry or Wall Street's new mortgage-backed securities out of a misplaced faith in free markets," Reynolds and Hook write.
"Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, said he had been trying to get the administration to tighten the rules for mortgage lenders for more than a year -- to little avail.
"'They could have done a lot of things over the last year, in my view, to make a difference and refused to do so,' Dodd said. 'They are lagging in terms of their response to all of this. Had steps been taken over the last year, we could have avoided a lot of this.'"
Matt Spetalnick writes for Reuters: "Not since Hurricane Katrina devastated New Orleans and other parts of the U.S. Gulf Coast in 2005 has Bush faced so much criticism of a too-little, too-late government response in a national time of need."
Spetalnick writes that Bush's "penchant for understatement in the face of what some on Wall Street see as the worst threat to the world financial system since the Great Depression has again underscored questions about his ability to lead through a major crisis.
"Much of what we are watching feels like an emerging-market meltdown to top international financiers: runaway debt, a declining currency, imploding markets, failing political leadership and the urgent need for outside intervention to provide emergency stability. . . .
"International financiers . . . fault George W. Bush for having failed to realize that he has another Katrina on his hands, this time of a financial nature, for which private-sector solutions are useful but not sufficient to keep the levees in place. They believe he has to deploy greater government means to send a message to the financial world that he is drawing a line in the sand. . .
"'Now that the president has shown his willingness to bail out Wall Street at taxpayer expense, I hope he will drop his opposition to proposals designed to help ordinary homeowners,' Senator Harry Reid, Democrat of Nevada and the majority leader, said in a statement."
"'The administration seems to have no stomach for taking action,' Brusca told ABC News. 'This is a president that had no trouble intervening in Iraq, but does not want to intervene in the housing mess. It's as though we should worship the private sector even though it is what got us into this mess.'"
E. J. Dionne Jr. writes in his Washington Post opinion column: "The Wall Street titans have turned into a bunch of welfare clients. They are desperate to be bailed out by government from their own incompetence, and from the deregulatory regime for which they lobbied so hard. . . .
"It's just fine to make it harder for the average Joe to file for bankruptcy, as did that wretched bankruptcy bill passed by Congress in 2005 at the request of the credit card industry. But the big guys are 'too big to fail,' because they could bring us all down with them.
"'The United States is on top of the situation,' he declared Monday.
"It all has some people shaking their heads. Is there a disconnect here? Does the president get how this might feel to the little guy? Is there a different standard for the big financial community and the strapped homeowner facing foreclosure?"
"Hoover's reputation was built in part on remarks viewed as too rosy. 'The problem is not at all insurmountable in the long run,' he said on Oct. 6, 1930, as unemployment, poverty and desperation climbed."
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http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_kempe&sid=ajws3bPNlDx8
International financiers lack the confidence in Fed Chairman Ben Bernanke that they had in Alan Greenspan -- though they add that Greenspan helped fuel the subprime crisis by not raising interest rates when he should have.
``The current financial crisis in the U.S. is likely to be judged in retrospect as the most wrenching since the end of the Second World War,'' Greenspan wrote in Monday's Financial Times.
Some global financiers go further. They wonder whether Bear Stearns's implosion, the collapse late last week of a $22 billion Carlyle Group investment fund, and the fall of everything from the Dow Jones Industrial Average to the dollar signal a broader U.S. decline. A loss of influence was happening anyway as other powers rose. Bush's mistakes have accelerated the process.
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http://www.nytimes.com/2008/03/25/us/politics/25cnd-mccain.html?em&ex=1206590400&en=4a21f404ed736661&ei=5087%0A
Drawing a sharp distinction with the Democratic presidential candidates, Senator John McCain warned Tuesday against hasty government action to solve the mortgage crisis, saying “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.”
“Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy,” Mr. McCain said, speaking before a business group in Santa Ana, Calif.
“Some Americans bought homes they couldn’t afford, betting that rising prices would make it easier to refinance later at more affordable rates,” he said.
My comment to above - it's called making an investment. This is exactly what Bear Stearns did. Most people didn't have a choice because they couldn't afford the price of homes.
“Capital markets work best when there is both accountability and transparency,” he said. “In the case of our current crisis, both were lacking.”
My comment - how about enforcing existing regulations.
“Any assistance for borrowers should be focused solely on homeowners, not people who bought houses for speculative purposes, to rent or as second homes,” he said.
My comment - I totally agree with that. What about uber-speculators like Bear Stearns.
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