Subprime

Over the weekend, the government provided liquid assets to Bear Stearns and held $30bn of Bear's most questionable assets - mortgaged backed securities. In addition, the Fed opened the discount window to include investment banks and dropped interest rates by another 75bp. These signs indicate that the Fed has pulled out all the stops to provide stability to financial markets. To date, the Fed has made $650bn available. But, there is also an implicit guarantee that the Fed will provide more money to other struggling financial institutions. Had these measures not been taken, the financial system may have become completely crippled and had disastrous effects on the "real economy."

Snapshot asks, should tax payers, who will ultimately pay for these losses, support this rescue?

It is unclear what response, if any, will right the U.S. economy. Chairman of the Federal Reserve, Ben Bernanke, gave a speech today calling for "a vigorous response" to the mortgage crisis and suggested reinvigorating government-sponsored enterprises, like Fannie Mae and Freddie Mac, with increased regulation and possibly writing down the principal on home mortgages. Treasury Secretary Henry Paulson said in a speech yesterday, "Let me be clear: I oppose any bailout." It appears policy makers, officials, and economists still cannot agree on appropriate solutions to the mortgage crisis.

Snapshot asks, what policy will get the U.S. economy out of its current slump and not threaten long run growth?

If you are following the spread of the subprime contagion around the world, this event I hosted yesterday here at the New America Foundation is required viewing. Steffen Kampeter, CDU/CSU spokesman for the Budget Committee in the German Bundestag is a man in the subprime trenches. Kampeter's advice: focus on managing the unwinding of the crisis so it does not get any worse and only then go back and put in place the voluntary and if necessary, regulatory safeguards so this never happens again. A big thank you to the Konrad Adenauer Foundation for making it happen.

U.S. housing prices are down 5-10% from their peak and many analysts predict prices will grind down another 20%. If this is the case, 10 million homeowners will have negative home equity and 2 million homeowners will be forced to foreclose on their homes.

Snapshot asks, should the Federal government bail out the housing market and if so, what bailout plan would be most beneficial to the U.S. economy?

Bond insurer FGIC, the third-largest insurer of both municipal bonds and structured securities composed of subprime mortgages, was forced to split these two parts of its business after being stripped of its AAA rating by Moody’s and not receiving a government or private bailout.

New York Governor Elliot Spitzer gave all bond insurers 3-5 days to save the profitable municipal bond portfolio of bond insurers and to isolate the heavy losses due to subprime mortgages. Snapshot asks: what will happen to the business of insuring structured securities?

Eric Danillo New York State Insurance Comissioner – Testimony Feb 14, 2008
Financial Times – Bond Insurer FGIC Tells Regulator It will Split
Wall Street Journal – Spitzer Warns Bond Insurers
Bloomberg – Muni Regulators Seek Disclosure on Auction-Rate Bonds
Financial Times – FGIC Downgraded by Moody’s
Bloomberg – Muni Regulators Seek Disclosure on Auction-Rate Bonds