Eleven Year Anniversary

On this day in history only eleven short years ago the Federal Reserve held its first emergency weekend meeting in 30 years. A few days later the Fed announced that it would guarantee all of the bad loans found in the $10 trillion dollars of securities held by Bear Stearns.  Additionally, pressure was brought to bear on JP Morgan to purchase Bear and prevent a looming bankruptcy.  It was feared that if Bear Stearns failed those securities would become worthless overnight and the global financial system would be brought to the brink of collapse. 

On March 18 federal regulators agreed to allow Fannie Mae and Freddie Mac to purchase an additional $200 billion of subprime (junk) mortgages from struggling American banks.  These secondary market purchases would then be repackaged into mortgage-backed securities and sold back into the investment markets.  If it turned out that the mortgages were sound – no big deal.  If the repackaged mortgages were bad then Fannie and Freddie would be liable for the debt.  The Federal Housing Finance Board also authorized the regional Federal Home Loan Banks to purchase $100 billion in subprime mortgages.  These would also be guaranteed by Fannie Mae and Freddie Mac.   

This house of cards constructed by Fed Chair Ben Bernanke and U.S. Treasury Secretary Hank Paulson was thought to solve the problem and avert any continuation of the crisis.  What Bernanke and Paulson did not know was the enormity and pervasiveness of the subprime mortgage problem.  Their actions actually were a contributing factor to a serious destabilization of the Fannie and Freddie.

Just like a hurricane increases in force over open water - the gathering shit storm continued to grow in force.  Nobody knew what was about to happen when it made landfall.......