Today's podcast from The Wharton School covers the past week's news developments on Wall Street and features a video interview with Professor Jeremy Siegel, as well as the usual audio versions. The Slatin Report also has a good read on it from a bit more of a NYC real estate perspective in Bear Bites Bear

Jeremy Siegel on Bear Stearns, Rate Cuts and the Looming Threat of Inflation

The ongoing credit crisis in U.S. financial markets has claimed a huge and high-profile victim: Bear Stearns, the Wall Street investment bank and securities brokerage firm. After being slammed by what amounted to a run on the bank during the week of March 10, Bear Stearns was pushed to the brink of bankruptcy and then agreed to be acquired -- for $2 a share -- by JP Morgan Chase over the weekend. Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson played an active role in the transaction, largely because of the potential impact that a major bankruptcy might have on confidence in the financial markets. That same day, the Federal Reserve lowered interest rates -- as it did again on March 18, by three-quarters of a percentage point.

As the credit crisis shows no signs of easing, are other Wall Street firms likely to follow Bear Stearns into oblivion? Will the Federal Reserve's efforts help to boost confidence in the financial system among U.S. and international investors? Finance professor Jeremy Siegel, author of The Future for Investors, discussed these questions and more with Knowledge@Wharton.

A transcript of the conversation follows:

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The strength of an economy comes, fundamentally, from what it can produce. Can America still produce homes? Yes. Can America still produce desirable urban and suburban areas that people are willing to pay a fortune to live in? Yes.

It was a stormy week of news that rattled the financial markets, beginning with the collapse and buyout of Bear Sterns for a stunningly low $2 per share by J.P. Morgan-Chase. It sparked a crisis of confidence and some extreme volatility with triple digit swings in the Dow averages. After more rate cuts from the Fed, which also financed the bailout of the Bear, and some moves aimed at adding liquidity to the markets, the week ended with the them looking like they might be finally getting their legs back; with a couple of days of triple digit gains, and commodities like oil and gold dropping.

The confidence level of Wall Street investors may be shored up for the moment, yet it seems fragile too— like the next bit of bad news will once again have the potential to panic the market. The coming week will be telling. The bag of tricks that the Fed may have to quell the economic roller coaster is thinning, and is almost bound to backlash in this election year as the public sees aid for investment bankers as a high priority and ultimately a cost borne by the U.S. Treasury and taxpayers; while help for people who's home investments are underwater, is anemic at best.

Amid all of the dire economic news, there were also a couple of articles which offered some unconventional wisdom abut the credit crisis and housing. They talked common sense rather than fear. One of them was Can’t Grasp Credit Crisis? Join the Club by David Leonhardt in the New York Times who writes: "...the overwhelming majority of homeowners are doing just fine. So how is it that a mess concentrated in one part of the mortgage business — subprime loans — has frozen the credit markets, sent stock markets gyrating, caused the collapse of Bear Stearns, left the economy on the brink of the worst recession in a generation and forced the Federal Reserve to take its boldest action since the Depression?...I’m here to urge you not to feel sheepish. This may not be entirely comforting, but your confusion is shared by many people who are in the middle of the crisis." The theory being that confusion can lead to panic, can lead to an economic meltdown. The Fed did a good job of averting a panic this week, but the lack of transparency in the Bear deal was likely more of a factor in sending the markets sharply down. How was it that their share price went so quickly from $80, to $30, to almost worthless? What else is not being disclosed on the Street? After all the metrics are digested and debated, could it be as simple as that markets are profoundly psychological instruments? According to Mr. Leonhardt, Wall Street has been shell-shocked into an ultra conservative lending mode.

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Today's podcast about the credit crisis is from our friends at the Wharton School of Business. Despite the negative news about the national housing market, Manhattan's is still quite healthy. Agents at my office are reporting terrific turnouts at open houses, available inventory is shrinking, sales volume is roughly on par with a year ago, and I personally participated in a 'best and final' bidding on a property this week; which sold at over asking price. In contrast to that, the housing market as whole in our country is experiencing pain. As insulated as Manhattan's housing market seems, we still need to keep an eye on the market forces shaping the national economy surrounding our island. The podcast and transcript below, talk about what the most fair and effective approaches might be for government policy, to help relieve the pain.

Does the mortgage crisis demand a government bailout?

A year ago, most experts thought not. Sad as the situation was for some homeowners, many experts felt the problem would be confined to those who had gambled on risky loans with eyes open -- borrowers who chose adjustable-rate loans sure to require higher payments later, lenders who invented exotic loans likely to suffer high default rates, hedge funds and other big investors who had lusted after high-yielding mortgage-backed securities.

But things have changed. The mortgage crisis is behind a nationwide drop in home values and a crisis in confidence that is impeding all types of lending. People who did not choose to take risks are suffering, and more and more experts now say some sort of government response is necessary to avert a deep and prolonged recession.

"Now it's our problem, and it isn't getting any better. As we speak, it is getting worse," says Wharton finance and real estate professor Susan M. Wachter, who warned a year ago that the subprime mess could push the economy into recession. She favors new legislation or regulation to give trusts that control mortgage-backed securities incentives to work with homeowners.

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I recently sent a first time buyer that I'm working with, a purchase application for a co-op apartment that we have an accepted offer on. The buyer asked for clarification about the difference between the purchase agreement and the co-op's purchase application. It served as a reminder to me that every individual's real estate transaction is a very unique, important, and sometimes confusing experience. As a broker it is important to relay the basics for those who may have never been through it before. I took the time to explain in probably greater than necessary detail, and thought an excerpt of my response might be useful for those contemplating their first co-op purchase:

In effect, in buying a Manhattan co-op there are two hurdles, first to reach agreement with the sellers; then to reach an approval by the Board of Directors of the co-op corporation.

"The 'purchase agreement' is commonly referred to as the 'contract' of sale with the sellers, and is an element included in the Board package. It controls the process by which you and the sellers have agreed to transfer the shares of the corporation in their name. It dictates the essential terms of the sale including price, closing date, inclusions, exclusions, contingencies, etc... It is not binding on the co-op and its Board of Directors. Purchasers of Manhattan cooperatives must seek the approval of the Board to buy-in, and complete the transaction. The Board has the final say in accepting or rejecting an applicant. That process begins with the purchase application.

The 'purchase application' is made with the co-op corporation, to become a shareholder of a company that owns the building, and issues you a proprietary lease to occupy the apartment; in much the same way as a landlord does in a rental building. In this case the rent is called 'maintenance'. The Purchase Application outlines the documentation that the Board requires for review, to transfer the stock and lease to a new shareholder. It contains the required forms and disclosures by the co-op corporation and is the beginning of your prospective relationship as a shareholder in the company. As your broker, it is my job to assemble the documents that are asked for in the purchase application into an easy to understand 'Board package' that I'll then submit to the building's manager for distribution to the members of the Board. The process usually leads up to a face to face interview; and ends with an approval, or rejection, of the applicant. An approval is a green light to schedule a closing where the stock and lease will be transferred, after reviewing and signing a mind-numbing amount of legal papers."

In effect, in buying a Manhattan co-op there are two hurdles, first to reach agreement with the sellers; then to reach an approval by the Board of Directors of the co-op corporation. The process is rigorous, but the extra layer of oversight that co-op boards have imposed in NYC is one of the reasons why we still have a stable housing market here. It has created fiscal scrutiny and owner equity requirements that exceed most lender's underwriting guidelines. Many co-op owners come to really appreciate the control, along with their neighbors, over their common interest in their buildings, which this form of ownership governs.