22 June 2007

Fed sees "significant risks'' in the leveraged-buyout boom

In my youth when the Fed issued a statement denying the likelihood of a given condition or event I assumed that it was likely. Now that Bernanke is outlining significant risks in the leveraged buy out boom, I can only agree. Fortunately he's going to crack down on sub prime lending abuse later this summer, unfortunately the horse is not only out of the barn but he's been trampling the corn field since last year.

The argument here is not so much about curbing lending abuse -- declining home prices, imploding mortgage lenders, and rising/resetting mortgage interest rates are already enforcing some discipline there. The question is whose going to take the blame, and the losses. Suddenly the leveraged private equity investors who profited from the collateralized debt markets that financed the housing bubble believe that fault lies with inadequate oversight and regulation, a lack of due diligence, by credit rating agencies. Imagine that.

The short CNBC video on this page "Avoiding a Falling Knife in the U.S. Mortgage Market" will give you some sense of the issues that lie behind Ben's comments below.

Bernanke Says Subprime Curbs to Hurt Housing Market (Update6)

May 17 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke issued a double-barreled warning on the U.S. economy, saying the housing market will continue to struggle and the Fed sees ``significant risks'' in the leveraged-buyout boom.

Bernanke, speaking at a conference in Chicago today, said curbs on subprime lending ``are expected to be a source of some restraint on home purchases and residential investment in coming quarters.'' And he said the Fed is ``beginning to look at'' what he called ``the risks that are associated with working with private-equity firms.''

The Fed chief's comments suggest the central bank has raised its guard against a second credit bubble emerging in the form of leveraged buyouts at a time when the U.S. economy is dealing with the mortgage bust. Lawmakers and consumer advocates have blamed the Fed and other regulators for lax enforcement while lenders wrote a record $2.8 trillion in mortgages from 2004 to 2006."

Democratic Senator Charles Schumer of New York said in a statement today that ``it's good news that Chairman Bernanke and the Fed may finally be cracking down on abusive lending in the housing market later this summer.''

1 comment:

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