THANKS, TARP:

Report Details Wall Street Crisis (CARRICK MOLLENKAMP, AARON LUCCHETTI and SERENA NG , 1/28/11, WSJ)

"As a scholar of the Great Depression, I honestly believe that September and October of 2008 was the worst financial crisis in global history, including the Great Depression," Mr. Bernanke said, according to the commission's report.

Of the 13 most important U.S. financial institutions, "12 were at risk of failure within a period of a week or two," the report quoted Mr. Bernanke as saying.

Mr. Bernanke declined to comment through a spokeswoman.

The list of potential failures included Goldman Sachs Group Inc., people familiar with the report said. The only major financial institution not at risk at the time was J.P. Morgan Chase.

Spokesmen for J.P. Morgan Chase and Goldman Sachs declined to comment on the report.

After regulators let Lehman Brothers Holdings Inc. collapse in September 2008, one of the most vulnerable banks was Morgan Stanley, the report notes.

Hedge funds pulled $86 billion in assets from the investment bank in the week following the Sept. 15 Lehman bankruptcy filing, stemming from concerns about Morgan Stanley's viability, according to a Morgan Stanley email at the time to the New York Federal Reserve titled "Liquidity Landscape."

"Many of our sophisticated clients started to liquefy," Morgan Stanley Treasurer David Wong told the commission in October. A Morgan Stanley spokeswoman declined to comment.

The report also provided clarity about the number of hedge funds gambling homeowners couldn't pay their mortgages.

In an interview with the commission, former Deutsche Bank AG trader Greg Lippmann—who played a key role in facilitating short bets—told the commission that in 2006 and 2007 he handled trades for at least 50 hedge funds and "maybe as many as 100" betting that mortgage-backed securities would fall.

An FCIC survey of some hedge funds found they had a total of $45 billion of short bets, which easily outweighed roughly $25 billion of bullish positions they had on mortgages.

The panel also scrutinized the conflicts of interest—involving Wall Street banks, hedge funds and investors—created by the pools of mortgage debt known as collateralized debt obligations.

The crisis panel cited a $1.5 billion CDO called "Norma," underwritten by Merrill Lynch & Co. in 2007. The assets backing the CDOs were to be selected and overseen by a third-party "collateral" manager called NIR Capital Management.

As Norma's value crumbled, some investors and others complained that Magnetar Capital—a hedge fund that had placed bearish and bullish bets on the Norma CDO—played an active role in helping to select Norma's assets.

Imagine if W got as much credit for avoiding a Great Depression as Hoover gets blame for causing one? Imagine if the Right understood what TARP did?

Posted by Orrin Judd at January 28, 2011 7:16 AM