The recent actions of the Federal Reserve seem to have calmed the financial markets, while Countrywide Financial Corp has received a $2 billion infusion of capital.
Bank of America Corp. announced late Wednesday it will invest the money into the nation’s largest mortgage lender to help it better weather problems with defaulting subprime loans. The investment was seen as a way to not only prop up Countrywide, but also prevent any further losses at the mortgage lender from hurting the underlying economy. Countrywide’s CEO Angelo Mozilo expressed his optimism about the deal in an interview on CNBC, but when asked if the housing slump could cause a recession, he agreed.
Though Bank of America’s move was reassuring to investors, a number of major banks and home lenders still face difficulties. On Wednesday, Lehman Brothers Holdings Inc. said it would close its BNC Mortgage unit and slash 1,200 jobs; HSBC Holdings PLC and Accredited Home Lenders Holding Co. also said they would eliminate jobs.
Mortgage industry job losses have topped 40,000 and some are calling for Bush to bailout homeowners with mortgage problems.
The CEO of Countrywide says the mortgage problems will push the country into a recession.
Some say that it’s time for Bush to bailout mortgage holders.
Famed bond fund manager Bill Gross said the White House should bail out the millions of American homeowners who face the dreaded prospect of foreclosure this year.
“If we can bail out Chrysler, why can’t we support the American homeowner?” Gross wrote in his monthly investment outlook on PIMCO’s Web site.
With nearly 2 million homeowners at risk of losing their homes this year and with housing prices rapidly receding, Gross said President Bush, not the Federal Reserve, is the best hope for “almost homeless homeowners.”
“This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard-working Americans whose recent hours have become ones of frantic desperation,” said Gross, a founder of the fixed-income investment firm PIMCO and a columnist for Fortune.
“Write some checks, bail ‘em out, prevent a destructive housing deflation that (Fed Chairman) Ben Bernanke is unable to do. After all ‘W’, you’re ‘the Decider,’ aren’t you?” Gross wrote.
That would also bailout banks that have engaged in reckless lending practices as well as many other guilty parties in the real estate industry. While Bush has said he won’t provide grants to those facing foreclosure, he doesn’t usually pass up opportunities to help the rich hang onto their wealth.
Banks have also increased their borrowing from the Fed since the discount rate was lowered. The Fed is considered the lender of last resort.
Whether the government is bailing out hedge funds, banks or small homeowners, there is a moral hazard involved. They run the risk of enabling and encouraging the same practices that put us here in the first place and that doesn’t make the market a safe place for investors or consumers in the long run.