After several days of rumors suggesting that Wall Street brokerage firm Bear Stearns faces liquidity problems, matters apparently deteriorated sharply overnight last night.  We don't know exactly what the trouble is, but a reasonable guess is that Bear Stearns is stuck with a large volume of mortgage-backed securities, which it has had increasing difficulty funding.  Some sources, including the FT article, suggest that Bear may have ended up holding the mortgage securities as the result of the collapse of Carlyle Capital.  The likely scenario is that Carlyle had financed a large portfolio through Bear.  Carlyle failed when the value of those holding fell far enough to trigger margin calls, which it couldn't meet.  In this scenario, Bear would then have seized the collateral -- but then had trouble funding the exposure itself.

Early this morning, JP Morgan Chase said that it had entered into a funding deal, supporting Bear Stearns.  The announcement includes an unusual feature -- the participation of the New York Federal Reserve.

For some ridiculous reason, to which, however,
I have no desire to be disloyal
Some person in authority, I don’t know who,
Very likely the Astronomer Royal
Has decided that although for such a beastly month as February
Twenty-eight days as a rule are plenty
One year in every four, his days shall be numbered as nine-and-twenty
Due to some singular coincidence
I shouldn’t be surprised if it were owing to the agency of an ill-natured fairy
You are the victim of this clumsy arrangement,
Having been born in Leap Year, on the twenty-ninth of February
And so, by a simple arithmetical process you will easily discover
That though you’ve lived twenty-one years, yet if you go by birthdays,
You’re only five and a little bit over (Ha Ha Ha Ha Ha Ha Ha Ha)

- Gilbert & Sullivan, The Pirates of Penzance

Yes, it’s that time again, time for that quadrennial spectacle – not the US Presidential elections, or even the Summer Olympics, but that other event that occurs only in years divisible by four:  February 29.  For more bissextile fun, follow me below the fold…

As the strike by members of the Writers' Guild of America continues, keeping many programs off the air or in perpetual reruns, many Americans find themselves changing their television viewing habits.  Among those hit hardest are late-night viewers, who rely on a steady diet of topical humor, written on a daily basis.

The effect has been particularly profound on viewers of Comedy Central's The Daily Show with Jon Stewart.  Many TDS viewers can read, and some have even chosen to do so.  But a larger number, many suffering classic symptoms of fake-news withdrawal, have begun to migrate to F*x News Channel.

I've been writing on and off about the subprime mortgage mess for a couple of months now.  At first I felt a sense of urgency, because I wanted to air an important issue while it was still hot.  Now, though, it's becoming more and more clear that this mess will be the gift that keeps on giving.

Losses related to subprime mortgage securities have popped up all over the place.  At first, the afflicted institutions were hedge funds, along with a handful of financial institutions, ranging from American Home Mortgage in the US; to Sachsen LB, a German Landesbank; to Northern Rock in the UK.  Then the quarterly earnings reports from big banks and brokerage firms started to roll in, and it became clear that the losses to these institutions would be in the tens, or possibly hundreds, of billions of dollars.  More such reports   are still rolling in.

Now subprime losses are popping up in money market funds.  But before you jump out the window, follow me across the jump for a bit of background and analysis.

The Bush Administration turned up the rhetoric another notch in their ongoing campaign to at least fire up the hate machine aimed at Iran.  Secretary Rice announced that the administration, in its wisdom, has determined that Iran's Revolutionary Guards are "supporters of terrorism" (yawn) and "proliferators of weapons of mass destruction."  (uh-oh)

Treasury Secretary Hank Paulson, one of the few administration officials still retaining a shred of credibility, then stepped up and announced new sanctions against Iran and the Revolutionary Guards.  Naturally, the best coverage, with some depth, is at BBC.

On September 18, investors worried about the fallout from the sub-prime mortgage mess relaxed a bit as the Federal Open Market Committee lowered its target Fed Funds rate by 0.50% to 4.75%.  At about the same time, financial authorities in the UK announced that they would stand behind deposits at Northern Rock and, by extension, other UK banks.  In response, depositors in UK banks stopped lining queuing up to take their money out, and US stock market investors went back into rally mode, pushing the Dow Jones index briefly to new record highs early this week.  

So does that mean the sub-prime emergency is over?  The stock market seems to be expressing optimism that the long-term economic picture isn't too bad, but are those hopes well-founded?  And while credit conditions are improving in much of the market, have they improved enough that we're out of the woods?  I'm not so sure.  Please follow me across the fold for my reasoning.

Some days the stock market seems to operate in sort of a looking-glass world.  Let's take a look at today's business and economic news:

US home foreclosures rose 36% in August from July, and more than doubled from a year ago.  Actual bank repossession also more than doubled from a year ago.

As depositor nervousness looked set to spread from Northern Rock to other UK mortgage lenders, the British government stepped in with what amounted to a blanket deposit guarantee for customers of Northern Rock -- and any other lender that ran into trouble.

The Producer Price Index fell by -1.4%, but that includes a big drop in food and energy.

The Federal Open Market Committee lowered its target for the Fed Funds rate by 1/2 percent, to 4.75%.  It also lowered the Fed discount rate to 5.25%.

The subprime mortgage mess, and the liquidity crunch that goes with it, has hit another financial institution, this one in the UK.  The Bank of England has stepped in to provide liquidity support to the colorfully- (I guess that's colourfully)-named Northern Rock, a Newcastle-based bank that is also one of the UK's leading mortgage lenders.  

Although Jim Cramer described Northern Rock as the Countrywide of England, the analogy isn't quite accurate.  The big difference is that Northern Rock is really a bank, and takes customer deposits, whereas Countrywide doesn't (aren't you glad?)  But Northern Rock has had trouble attracting funding, leaving it to bring cash in the back door from the UK's central bank, while its depositors line up to take cash out the front door.

At the same time, Countrywide itself has managed to secure another $12 billion in funding from its banks.  For more, follow me across the pond...

Japanese Prime Minister Shinzo Abe announced his resignation on Wednesday.  Mr. Abe managed to hang on for more than a month after his Liberal Democratic Party suffered an embarrassing defeat (also here) in elections July 29 for seats in the upper house of the Japanese Parliament.  Since the LDP still controls the lower house, which chooses the Prime Minister, Mr. Abe was under no legal obligation to resign, but political opposition and a series of Republican-like scandals finally made his position untenable.

Act II of the credit contraction associated with the subprime lending fiasco opened this week.  In Act I, subprime mortgage lending and its funding came to an abrupt halt.  The resulting disruption hit the stock market, a number of hedge funds, mortgage lenders (including American Home Mortgage, now in bankruptcy, and Countrywide Financial, which has drawn down outside funding in eleven figures), homebuilders, residential construction workers, and who knows how many homeowners.

As the curtain opens on Act II, credit continues to contract, with rates on offshore interbank lending rising, and the off-balance sheet funding that has supported so much of the subprime market drying up. This means that commercial banks are beginning to have to step up to replace capital market funding for many billions in loans, bringing them back onto the banks' own balance sheets.  If it ties up too much bank capital, overall bank credit could slow down substantially.

Join me below the fold for the adventures of Citigroup, Barclays, and the aptly named Cairn Capital.

It's ok, that is, unless you own a house, need credit, pay for health care, could use a wage increase, or are hoping for lower interest rates.  

The Federal Reserve Wednesday released its latest Beige Book, the document it publishes eight times a year describing economic conditions nationwide and in the twelve districts into which the Federal Reserve System divides the US.  The Beige Book covers a variety of economic sectors, and details conditions across regions, all in reasonably plain English.  

Markets often don't pay much attention when the Beige Book comes out.  But in light of the credit difficulties that have arisen in the wake of the unraveling of the sub-prime mortgage market, traders were looking to this edition for hints about whether the Fed is likely to lower its target Fed Funds rate at its next meeting, two weeks from now.  The current edition covers data that Fed analysts gathered as late as August 27, so the information should be pretty current.  Traders didn't much like what they saw -- the news wasn't bad enough to make a rate cut a complete no-brainer.

Today's Financial Times puts what for us must be a chilling slant on the recent departures of Karl Rove and Alberto Gonzales from the Bush administration.  Coupled with today's piece in the NYT suggesting that Condoleezza Rice's influence in the Bush Administration is waning, the FT article makes the case that while we've been celebrating the collapse of the Bush cabal, Mr. Cheney has been consolidating his power.  The story's lede says it all:

Dick Cheney once jokingly referred to himself as Darth Vader - such was his dark reputation with the mainstream US media. With the departure of Karl Rove on Friday, George W. Bush's electoral mastermind, the US vice-president is seen as "the last man standing" in the administration.

According to a handful of reports, Lehman Brothers has hired Jeb Bush as a high-profile door-opener for its private equity business.  The reports, in places like Investment Dealers Digest and "Private Equity Hub" (no link), do acknowledge that there isn't yet any announcement from Lehman Brothers itself.

Of course, the way this stuff works, the Jebster isn't really called a door-opener.  He's to be a member, the reports say, of Lehman's Private Equity advisory board.  In other words, his job is to help Lehman elbow their way into deals that would otherwise go to Carlyle Group.

Last night, when Barry Bonds hit his record-breaking, 756th career home run, everyone watching -- Bonds's fans and detractors alike -- also witnessed an inspiring act of leadership:  Hank Aaron's congratulatory statement.

Here it is:

I would like to offer my congratulations to Barry Bonds on becoming baseball's career home run leader. It is a great accomplishment which required skill, longevity and determination.

Throughout the past century, the home run has held a special place in baseball, and I have been privileged to hold this record for 33 of those years. I move over now and offer my best wishes to Barry and his family on this historic achievement.

My hope today, as it was on that April evening in 1974, is that the achievement of this record will inspire others to chase their own dreams.

With this simple statement, Mr. Aaron placed the weight of his achievements, stature, and character behind the legitimacy of Bonds's record.

As has been its custom for the last several years, the Federal Open Market Committee, the monetary policy arm of the US Federal Reserve, announced the principal results of its interest rate policy decision in a public statement issued shortly after 2pm Eastern.

To no one's surprise, the FOMC announced that it would leave its target for the short-term Fed Funds rate unchanged at 5.25%.  Most market participants seemed sure that the Committee would do so, but many sought a change in the tone of the language it used in announcing the decision, in response to the credit-related problems the markets have been experiencing in recent weeks.  While the statement acknowledged the difficulties, the FOMC seemed to maintain the bias toward tightening (further possible future increases in rates) it has expressed for the past several months.

I don't really mean acting like an idiot (well, maybe I do), or allowing the business with the vibrator to see the light of day (that might be intentional, but that's also a different kind of problem).  No, I mean, what if Bill O'Reilly is leaning hard on us, making inane comments, calling this a hate site, and treating his viewers to the Lieberman image (after cautioning them at some length that he'd only show it once, to make sure they all had time to get back to the couch for it) for a specific purpose?

It's been fun to laugh with kos and Atrios about Mr. Bill's legal problems, and there's certainly collective satisfacton in watching the man make an ass of himself.  But Bill-O is a window on the tactics of the far right, especially as they try to maintain their narrative of false Populism.  So it's worth a moment's thought, distasteful as it may be, to consider what O'Reilly might be trying to accomplish through these antics.  While many in his audience are dead-enders, some may not be, so observing the opposition's methods may pay us back.  And I'd argue that O'Reilly isn't really trying to make DailyKos look bad.  He's trying to make all the Democrats, especially the candidates, look bad in the eyes of his core audience.

I spent a few minutes this evening looking for news of how Japanese markets might be faring overnight in response to US weakness late last week, and was embarrassed to discover that I hadn't known that there was an election in Japan on Sunday.

Japan's election on Sunday was for seats in the upper house of the Japanese Parliament.  It appears that for the first time in half a century, Japan's Liberal Democratic Party no longer controls that house.  The relatively new Democratic Party of Japan dominated the election results.

The lower house of Parliament chooses Japan's Prime Minister, so it's not automatic that the incumbent, Shinzuo Abe, will lose his post.  Mr Abe, in fact, has said that he won't resign.

I try, I really do, Mr. Cheney, but I just can't do it.  It's not that there isn't plenty to worry about, because there is.  And it's not like I can't see how hard you're working to educate me all about all the things you want me to fear.  It's hard work, and I can appreciate that.  It's hard to keep track of it all, but I think I can remember most of it.  Let's see...