Some housing bubble news from Wall Street and Washington. Bloomberg, “JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for $240 million, about 90 percent less than its value last week, after a run on the company ended 85 years of independence for Wall Street’s fifth-largest securities firm. The Federal Reserve is providing financial backing to JPMorgan, the second-biggest U.S. bank, and also cut the rate on direct loans to banks in its first emergency weekend action in almost three decades to stave off a broader market panic.”

“JPMorgan Chief Executive Officer Jamie Dimon bought Bear Stearns, once the biggest underwriter of U.S. mortgage bonds, for less than the value of its real estate after clients, alarmed by speculation about a cash shortage, withdrew $17 billion in two days.”

The New York Times. “Investors remain fearful that a panic in the credit markets, which threw Bear Stearns to the brink of bankruptcy and forced a sale to JPMorgan Chase, could spread to other big brokerage firms with extensive exposure to toxic mortgage-backed securities.”

“‘The problem is bigger than the Fed,’ said Meredith A. Whitney, an Oppenheimer financial services analyst. ‘Trillions of dollars of securities were underwritten on the false assumption house prices could never go down on a national basis. That falsehood has put the entire financial system in a tailspin.’”

“Federal Reserve Chairman Ben S. Bernanke may be facing something worse than a loss of personal credibility on Wall Street and in Washington: waning faith in the ability of the institution he leads to turn around the economy and the financial markets anytime soon.”

“‘The Fed has been playing the equivalent of Whac-A-Mole as financial turmoil keeps cropping up in new and unexpected places,’ says former Fed Vice Chairman Alan Blinder, referring to the arcade game where players try to hammer down plastic critters that randomly pop out of holes. ‘Yet many of the problems facing us are beyond its reach.’”

“Home buyers are unlikely to put down offers on houses that they think will lose value — no matter how much the Fed does to lower mortgage costs. Banks with mounting loan losses will shy away from lending to borrowers they think might go bust — no matter how much money the Fed pumps into the financial system.”

“Falling asset prices erode borrowers’ net worth and make lenders even more reluctant to give them money. Countrywide Financial Corp., the biggest U.S. mortgage lender, made no subprime loans last month, down from $2.6 billion in February 2007.”

“Investors have become gloomier about the outlook for house prices since the start of the year, according to trading in futures based on the 10-city S&P/Case-Shiller price index. Traders see prices tracked by the index falling 13-1/2 percent by November, more than double the drop foreseen in early January.”

“‘It’s not showing any signs of letting up,’ economist Robert Shiller, one of the creators of the index, told Bloomberg Television Feb. 27. ‘If anything, it’s accelerating downwards.’”

From Reuters. “A lot of people lost a lot of money: Entrepreneur Joseph Lewis, a reclusive Englishman who made a fortune trading currencies, bought a stake of about 10 percent in Bear and stands to lose around $1 billion.”

“The jittery mood means even well positioned banks may be reluctant to take advantage of acquisition opportunities, bankers and analysts said.”

“‘I think M&A is too difficult now,’ a London banker said. ‘This is about catching a falling chainsaw. It’s not just about cutting yourself if you get it wrong, it’s about losing a limb.’”

“Lewis, a former currencies trader who was born in an apartment above a pub in London’s East End, declined to comment through a spokesman. The loss is almost half his $2.5 billion fortune, as estimated by Forbes magazine in its 2007 survey.”

“Mutual funds run by investment bank Morgan Stanley were the third-largest Bear Stearns holder with a 5.4 percent stake and may have lost about $546 million since Dec. 31. Bear’s fifth-largest shareholder, Baltimore-based Legg Mason Capital Management, a unit of Legg Mason Inc. run by Bill Miller, may be down $493 million.”

“‘This was done in the market’s best interests,’ said David Hendler, an analyst at a financial-research firm in New York. ‘Unfortunately Bear Stearns shareholders are at the short end of the stick and they only got this token payment.’”

“James Cayne, Bear’s former CEO and fourth-largest holder with a 4.9 percent stake, saw the value of his holding drop by $504 million.”

“Warren Spector, the former bond chief who calculated complex securities trades by hand…shared a passion for bridge with Bear’s CEO, Jimmy Cayne. Both men lost their jobs after bets on subprime mortgage bonds soured. They were at a bridge tournament in Detroit last week, as Alan Schwartz, the CEO for two months, fought a run on Bear’s cash brought on by widening subprime losses.”

“‘The people who did this are Jimmy Cayne and Warren Spector,’ said Richard Bove, an analyst at Punk, Ziegel & Co.”

“Last month, Cayne paid $27.5 million for two adjacent 14th-floor condominiums at New York’s Plaza Hotel overlooking Central Park, according to city property records. The new digs may not insulate him from scrutiny as regulators try to determine who’s at fault for the expanding credit crunch, Bove said.”

“‘It will be interesting to see what kind of iron doors Cayne puts on his new apartment,’ he said.”

The Associated Press. “Bond Insurer FGIC Corp., which is owned by mortgage insurer PMI Group Inc., said Monday it lost nearly $2 billion in the fourth quarter and continues to seek a reorganization of its insurance operations and to raise capital to shore up its financial position.”

“The loss resulted primarily from writing down the value of securities guaranteed by FGIC that are backed by subprime and second-lien mortgages, the company said. The company said it stopped writing new financial guaranty business for now in order to hold onto capital.”

The LA Daily News. “It’s become clear that financial shenanigans are partly to blame for bogging down the mortgage industry. Interthinx, an Agoura Hills-based company that provides risk-mitigation and regulatory-compliance tools for the financial-services industry, says the hole is pretty deep.”

“Company analysts found that in the last half of 2007, about 42,000 mortgage applications for property valued at $11 billion misrepresented the borrowers’ earned income.”

“‘For the first time, the industry is getting a real-time look at the scope of mortgage fraud, and these numbers are staggering,’ said a statement by Kevin Coop, president of Interthinx, which has about 1,400 clients nationwide, including 15 of the top-20 mortgage lenders and three of the five largest financial institutions.”

“Interthinx VP Jeff Moyer said the analysis was generated using an ‘income alert,’ a software program that warns when a borrower submits multiple applications in which his or her reported income jumps by at least 15 percent. Moyer said he was surprised by the number of alerts the program flagged. ‘It should not be that high.’”

“The problem spiked as the market boiled over in the early 2000s and then exploded starting in the latter part of 2005. The company found that 24.4 percent of home loans examined in the third quarter of 2007 were deemed to have a high risk of fraud.”

“‘What you are hearing is that there was a significant amount of (loan application) misrepresentations,’ said Jack Kyser, chief economist at the Los Angeles County Economic Development Corp. ‘The joke was, if you had a pulse you could get a home loan.’”

The LA Times. “Freelance financial watchdogs who examined the paperwork on sub-prime home loans being sold to Wall Street had an inside view of the boom in easy-money lending this decade.”

“The reviewers say they raised plenty of red flags about flaws so serious that mortgages should have been rejected outright…but the problems were glossed over, ignored or stricken from reports.”

“In interviews with The Times, eight experienced loan reviewers said that as marginal lending increased, quantity took precedence over quality. Squads of 10 to 15 veteran loan checkers gave way, they said, to packs of 40 to 50 mostly novice reviewers posted at or near sub-prime factories such as now-defunct Orange County lenders New Century Financial Corp. and Ameriquest Mortgage Co.”

“Loan reviewer Jana Lujan recalled showing a file to a supervisor in 2004, during a check of sub-prime mortgages made by a Brea bank that regulators later cited for unsound lending. A title report showed a tax lien on the property.”

“‘I said we needed evidence it had been paid off and released,’ to ensure against foreclosure, Lujan said. ‘And he said: ‘Just go ahead. Assume it’s being taken care of.’”

“The biggest problems, the reviewers said, were appraisals that looked inflated and ‘liar’s loans.’ ‘You can’t tell me a Kmart or a Wal-Mart or a Target floor worker is making $5,000 a month, or a house cleaner is making $10,000,’ said former loan reviewer Irma Aninger of Palm Desert, a 40-year financial services industry veteran.”

“Aninger, who did work for Clayton and Bohan, said she tried repeatedly to have such loans marked as unacceptable but was overruled by supervisors, who were known as project leads. ‘The lead would say, ‘You can’t do that. You can’t call these people liars,’ Aninger said.”

“One such supervisor was Clayton’s Ed Peek. He denied discouraging the rejection of ’stated income’ loans. ‘Many, many, many stated income loans were rejected,’ he said, but the loan buyers often bought the rejected mortgages anyway.”

“From his perch, Peek said, he could see the deterioration of overall standards. ‘I had been looking at sub-prime mortgages since the beginning,’ he said. ‘When it started, you couldn’t get a sub-prime loan for over 80%’ of a property’s value.”

“‘But the guidelines loosen, and the investors would still buy,’ Peek said. ‘They loosen up some more, and investors still buy,’ until highly risky loans for 100% of a home’s value were pushed through.”

“‘Everyone knew this was a bubble that couldn’t last,’ he said. ‘We all could see this coming.’”

The Financial Times. “‘The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the Second World War,’ former US Federal Reserve chairman Alan Greenspan said in a Financial Times commentary published on Monday.”

“‘Particularly hard hit will be much of today’s financial risk-valuation system, significant parts of which failed under stress,’ said Greenspan, who some have criticised for contributing at least in part to the current crisis by being too lax on monetary policy whilst head of the Fed. ‘The crisis will leave many casualties.’”

“‘It will end eventually when home prices stabilise and with them the value of equity in homes supporting troubled mortgage securities,’ he said.”

“‘In the current crisis, as in past crises, we can learn much, and policy in the future will be informed by these lessons. But we cannot hope to anticipate the specifics of future crises with any degree of confidence,’ he said.”

“‘Thus it is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulations not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition.’”