Wall Street Powerhouse Bear Stearns Hits the Wall [Updated Again]
The Liquidity Crisis Deepens
By blackhedd Posted in Crisis | Economy — Comments (99) / Email this page » / Leave a comment »
As you've doubtless heard, the Bear Stearns Companies, one of Wall Street's Big Five broker-dealers, has hit a severe liquidity problem. Bear's top management have been denying rumors of a cash shortage for a whole week now, but this morning they came clean.
At the same time, they announced an emergency liquidity plan involving the Federal Reserve and J.P. Morgan Chase, intended to keep the company afloat and trading. (This would also have the felicitous effect of preventing a global financial meltdown.)
Details are sketchy. I have some additional information below the fold, and will update this thread as events warrant.
Update: Bear Stearns will hold a conference call at 12:30pm EDT today.
Update 2: About 2pm EDT, the Standard & Poor's rating agency has cut Bear Stearn's "long-term counterparty" credit rating by three levels. This is a nail in the coffin, because it will raise Bear's cost of capital sharply and make it impossible for them to compete for business. An acquisition of the company at a sharply depressed valuation is now probably inevitable.
You know you want to read on...
The Federal Reserve is being very quiet about this. So far, all they've said officially is:
The Federal Reserve is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system. The Board voted unanimously to approve the arrangement announced by JPMorgan Chase and Bear Stearns this morning.
What appears to have happened is that the Fed has entered into a 28-day repurchase agreement with Bear Stearns. I have no information on what securities are involved in the swap. As a 100% pure SWAG, it might be mortgage-backed securities in return for Treasury bonds. Again, I have no information to back that up.
Bear apparently arranged to use a credit facilities from JP Morgan Chase to guarantee the swap. Under the circumstances, this seems like an unusual but not extraordinary transaction for the Fed. This is not a taxpayer-funded bailout.
Wall Street is all jittery this morning as the situation develops, but at this moment there is no evidence that any important trading desks are refusing to trade with Bear Stearns. There's no meltdown, not at this point in time anyway.
I think it's a reasonable expectation that Bear Stearns will not survive as an independent entity, and will probably be acquired by JP Morgan Chase.
If I were a current equityholder in Bear Stearns (I'm not, although I have been in the past), I wouldn't be terribly hopeful.
It will be interesting to see what happens to the people involved in recent transactions to add capital to Bear Stearns. Among them are British billionaire John Lewis, and the government of China.
Stay tuned.
-Francis Cianfrocca ("blackhedd")
Wall Street Powerhouse Bear Stearns Hits the Wall [Updated Again] 99 Comments (0 topical, 99 editorial, 0 hidden) Post a comment »
Believe me when I say this: you do not want to see Bear Stearns collapse. They're going to become part of another company, and a lot of their people will take a big financial hit.
But please give the Fed a chance to do their job and insure that this happens in an orderly way. If every desk in the world cuts Bear off this afternoon, the question you'll be asking on Monday will be "do I still have a job?"
I know for a fact that the top guys at Bear Stearns (Ace, Jimmy, Schwartz, the now-fired Warren Spector, others) all have huge personal ownership of Bear Stearns common stock. It was over $150 last summer, today it's at $30, and it will probably go to zero before this ends. They're not going to be making millions in a "bailout."
Will the Fed be able to maintain? Two times in the past week propping up financial powerhouses...how many more are left that will need propping up to calm the jittery markets?
Erik
Japan Part Deux, which is where Bernanke appears to be taking us. The credit market is still frozen (its back to the levels in August) and no one wants to touch the MBS's for fear of further lowering their values. All Bernanke is doing is by bailing out Bear is dragging out the inevitable and its going to make the recession (and yes it's already here) worse and longer than it has to be.
Lets borrow a few hundred billion dollars more from foreign governments and give it to the rich Americans.
But lets hide it off the official budget so congress can't see what is really causing the dollar to crash.
The REPUBLICAN RECESSION is going to leave a mark.
This recession has happened only when the Democrats got their meathooks into the budget and the minimum wage, fella.
Besides, I thought you were one of us?
Goodbye moby, blam.
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what is your best estimation for the asset base of Bear Stearns? In other words, how much in assets is the company sitting on? The reason that I am curious is that should put this crisis into perspective. I am guessing it is several hundred billion in assets. If that is the case, this crisis is going to get really ugly.
Was it over when the Germans bombed Pearl Harbor
On balance-sheet, they show $230 billion in long-term liabilities, give or take. ($266 billion in cash and equivalents.)
But there's all the hedge funds and other vehicles they run. Not transparent.
I do have a problem with the premise of your question, assuming I understand it correctly.
A cash shortage in a broker-dealer doesn't mean that all of their assets have suddenly become impaired or will be sold off.
It does mean they are in danger of having all their counterparties stop trading with them. And they are big enough that that would cause a global disaster.
It's a crisis of confidence more than a crisis of solvency. If we can get past the next few days, it ought to be very possible to clean the situation up nicely.
And a whole batch of Wall St. firms have an incentive to do exactly that, because they stand to pick up a big fat pile of assets on the cheap.
If a company sitting on hundreds of billions in assets can face insolvence, then, as you intuitively put it, that is a crisis of confidence. In other words, if they can go under anyone and anything can go under.
Was it over when the Germans bombed Pearl Harbor
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Their financial reports indicate Bear has ~ $400 billion of assets. This is supported by ~ $12 billion of shareholder equity.
Agree 100% that if this is truly a Fed bailout of Bear Sterns then this is really outrageous.
But if it ends as BH alludes to- with JPM or someone else taking over Bear, most importanly with Bear's equity holders getting $0 value, and the Fed's action was just done to allow for time for an orderly transfer of ownership of Bear's assets, instead of a complete trainwreck with a massive ripple effect, I could live with that.
But first and foremost, if Bear can't function on its own, its equity holders need to be completely wiped out.
your own money you are Bailing out with who cares-or so they think. Just think, the same brainiacs in Washington have given us:
7 Trillion in un-funded Social Security liabilites
9 Trillion in un-funded Medicare/Medicade/Drug plan liabilites
2 Trillion in projected War on Terror expenses
1 Trillion in Home Mortgage/Securities paper-taxpayers paying
2 Trillion in Trade Deficits-thanks to Free Trade Deals
3 Trillion in Intrastructure Repairs needed
Hey! They are sending us $1,200 in tax rebates to help us get through this non-downturn downturn.
I have an MBA, Masters in Finance, and Economics. These guys could not save a Garage Sale from going under much less the US Economy.
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If it were just Bear Stearns about burn in the hellfires, I'd be fine with it. It's not. it's every business they extand a line of credit to, and every investor who owns any investment vehicel taht Bear and Stearns touches. That includes every 401K retirement plan that happens to invest in a mutual fund that owns some equity Bear Stearns has a close relationship with.
Millions would be hurt who were not as stupid and disengenuous as the mortgage securities desk jockies at Bear and Stearns. It reminds me of both the unions and the execs in Detroit. They run their perspective aspects of the American auto industry so poorly that they teeter on the brink. Then they remind us of how many billions of unfunded liabilities the tax payers have to eat if they go down hard.
Bear Stearns is standing close to too many innocent people. We can't let that suicide bomb go off.
"I believe we must adjourn this meeting to some other place." - The last recorded words of Adam Smith.
Not true. Most funds and 401k plans are not at risk unless you own a fund whose manager had no clue what he was buying. Most funds are a little smarter than that. This is more about CDO vehicles, which only specialized funds invested in.
Richie Rich
becomes more valid. Why care at all if Bear Stearns employees sleep under a bridge somewhere in NYC?
"I believe we must adjourn this meeting to some other place." - The last recorded words of Adam Smith.
Why care at all if Bear Stearns employees sleep under a bridge somewhere in NYC?
***************
I dunno...maybe because Jesus said you should. Seems like a pretty good reason to me. In fact I'll go out on a limb here and say it's especially true if the person had no control the issue. Guess you'll have ask the steno pool why they didn't prevent the collapse.
And yes I know there probably isn't a "steno pool" at BS. It's more representative of the average support staff that's gonna lose big time because somebody much higher decided that making .01% on $250B was worth the risk of making an safe .009% $100B.
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Mr. Schwartz made in the neighborhood of $35m cash in 2007 and has about $50m in stock. I fear his stock may not keep its value, but that is the reason the CEO's make the big bucks. Great management, cutting edge paradigms and other features of leadership that most Americans can not understand.
While is not a "tax-payer funded bailout," it most certainly could be. If Bear puts up some of their worthless MBS for treasuries, and then defaults, who ends up eating those MBS's. One Wachovia "AAA" rated MBS has 60% of the underlying mortgages in default. It's sad that this is probably a necessary action. What does happen if they default? I'm no expert.
-freedom
...credit facility to guarantee the transaction. This is still preliminary information subject to confirmation.
but Yahoo news said the same thing as you. http://biz.yahoo.com/ap/080314/bear_stearns.html
Am I correct in assuming that all of this easing of the liquidity crisis, will put pressure on inflation...
Was it over when the Germans bombed Pearl Harbor
...loaned funds to Bear Stearns through a facility presented by JPMorgan Chase.
The Fed will indeed take exposure to credit risk from the collateral presented by Bear Stearns. It's a bailout after all.
No clue how large the loan was. Everyone's clammed up about that.
Bear's conference call is going well. The stock has risen from $30 to $36.50 during the call.
no more loan bailouts. The Fed should be buying all this MBS paper directly from the banks, which would free up the credit market, but it would do so at the expense of the big firms.
in different clothes. If the Feds buy all of this worthless paper, who pays when the Feds lose in buying it? Furthermore, what are they buying it for? The problem now is that no one will take on the paper because no matter how discounted it is, the buyers are still not convinced it is enough because they don't know just how much of it is tied to bad loans. Will it be for 70 cents, 50 cents, on the dollar? How much will it be for?
I think we are in the beginnings of finding out just how much of a crisis this crisis is.
Was it over when the Germans bombed Pearl Harbor
instead of wasting their juice on these one-shots. They could actually have an effect by saying we will buy $400 billion in MBS at 70 cents on the dollar. This would free up the credit markets (assuming the Fed coupled this with a statement that they would not be loaning any more money) and in the end, the Fed would benefit, as most of these MBS do in fact have a positive return. The problem is the investment banks don't want to take a loss on this stuff, because it could be worth a lot more in the future.
right now, With the sale (570 sold at 70% =400= 170 loss) you would hae to take the hit today, if you wait long enough the Fed will but at 100% and save us from the loss. wont happen you say, Thats what they did in the past, by at 100% what no one else will buy at any price.
I can see it now. I get my new mortgage coupon book and the coupons say make your mortgage payable to the US Treasury ;)
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Just what is the Fed going to do with all that paper when everyone sells to the Fed? At what price? And just where is the Fed going to come up with all that money to purchase all the world's MBS paper?
And who will pay for the cleanup of all the bodies on the streets following their failed human-powered flying lessons?
All we want to do here is prevent a meltdown, which would happen if Bear has to stop trading. It doesn't mean (yet) that the Fed will end up owning all the mortgage paper in the world.
One crisis at a time.
that the Fed start "buying MBS paper directly from the banks". I would think that once they started buying, that would blow Pandora's Box wide open.
I'm reserving judgment on the Bear Stearns arrangement.
And that problem is that they will distort the market by setting a price artificially. In all of their interventions to date, they have scrupulously avoided screwing up the market's normal process of price discovery.
The Fed has no business setting prices for MBS. But they do have the responsibility to make sure that disorder in the MBS market doesn't cause the rest of the financial system to seize up.
however if the Feds only buy it back at ridiculously low levels, let's say 50 cents or less on the dollar, that isn't actually going to help the liquidity crisis...
Was it over when the Germans bombed Pearl Harbor
you don't have to argue for the sake of arguing, because we are on our own way saying the same thing.
Was it over when the Germans bombed Pearl Harbor
bowrrower never pays you back and you collateral is worth less than you paid. In my business we call it a "CHARGE OFF LOAN", which is Paid for out of Current earnings or pulled from Capitol Reserves-at least until they are gone-then we become a Liquidation by FED.
this is frankly rearranging the deck chairs on the titanic. The problem is that this paper is worthless. The fed can't actually fix that. If they buy it at what it is actually worth, then that won't do anything for the liquidity crisis. If they overpay then the Fed will need a bailout.
Once again, all the powers that be refuse to see the real problem. You have all sorts of folks in loans that they should never have gotten. You can't solve that problem, and all these other solutions are merely rearranging the deck chairs on the titanic.
Was it over when the Germans bombed Pearl Harbor
is negative. Mortgage rates are all re adjusting upwards. Obviously, it isn't clear if the two are directly correlated, however there is no other news...
Was it over when the Germans bombed Pearl Harbor
however the last three days they have been falling, and rates are re adjusting inter day. That doesn't happen unless something is happening that is extreme during the day.
Was it over when the Germans bombed Pearl Harbor
Bear Stearns... aren't they the sole owner of EMC Mortgage Corp? That's one of the more notorious subprime, and predatory, lenders out there. In fact I think I remember a bunch of subpoenaes issued by the feds concerning their lending practices early last year.
I'm not sure what kind of exposure BS has as the owner of EMC and if that is impacting them right now, but they certainly knew what they were getting into regarding the risks associated with these loans...
What has happened is that Bear Stearns was given access to the Fed's "discount window," the facility normally used to provide credit to banks.
Since Bear is a broker-dealer rather than a correspondent bank, they normally have no access to the Fed discount window.
Additionally, loans from the discount window are generally made by the regional Federal Reserve Banks, not by the Federal Reserve Board. They had to vote on whether to invoke an extraordinary power to do the loan through the Board.
JPMorgan Chase, which is a bank and thus qualified to borrow at the discount window, facilitated the transaction. They borrowed the money and passed it through to Bear. The Fed agreed to assume the entire credit risk of the collateral, so Morgan has no exposure.
Have you ever negotiated a venture-capital bridge loan? I have. I'm just imagining that in return for doing this, Morgan is going to get a claim on all of Bear's equity. That's what I would have asked for.
If you thought Mafia loan sharks were tough: they're amateurs.
If Morgan has no exposure to credit risk, what risk are they taking that would entitle them to get a claim to Bear's equity (which for the sake of arguement let's say has value)?
Shouldn't the party assuming the risk- apparently the Fed- be the one getting the claim? From your description, JPM just sounds like the middleman here.
Like the tollbooth on the Dulles Greenway. Only slightly more expensive.
"I believe we must adjourn this meeting to some other place." - The last recorded words of Adam Smith.
...goodness of their hearts. Whenever you meet someone who has to take the trade you're offering, the price will always be breathtaking.
To be less flip about it, consider the risk to Morgan's reputation. In banking and finance, nothing matters more.
My guess is that Morgan agreed to do this in return for a chance to basically take over Bear without paying the stockholders a penny. Again, that's just my guess.
What has happened is that Bear Stearns was given access to the Fed's "discount window," the facility normally used to provide credit to banks.
How has it come to pass that Jim Cramer (someone I usually like, but still) is now apparently -- and with good evidence to back it up -- widely recognized as the smartest man in the world? I remember in the days after his meltdown on MSNBC the academic economists poo-poohing his hysterics, saying that he didn't know jack, essentially.
Boy are those dipweeds laughing now, or what?
I'm getting really sick of these people. All of them.
Having to go to loansharks to avoid a global meltdown? What a shame. You know, I have to say, and this is a pure gut-level reaction of disgust: I don't feel sorry for them. I'm being forced to take equipment leases at 20%+ per year to stay alive here because of their idiotic decisions and perfidious security lashups. They can suck my left one.
Which is much better than it would have been this morning.
But to add insult to injury, I still have to pay capital gains on my (greatly decreased) capital gains.
Oh well- it's only money. I'm sitting here in my living room on a beautiful Friday afternoon, the pear and cherry trees are blooming and it's the weekend!
Note to file - find private equity fund which is relaunching Emperors Club VIP: stable demand, guaranteed profitability and apparently a beneficiary of gloablization.
I have a brokerage account with Bear Stearns. Hopefully nothing bad happens to my account or I am scr*w*d... :(
The insurance doesn't cover the market value of the securities themselves, but you have protection for your account contents against B/S going under. Of course, if you're holding B/S stock, that's another story...
The insurance doesn't cover the market value of the securities themselves, but you have protection for your account contents against B/S going under. Of course, if you're holding B/S stock, that's another story...
accounts should not be affected, as Bear only acts as custodian. It is possible that after merger/reorg, the new entity will bear the Bear Stearns name.
Your account is also protected by SIPC. However, I'm such a small fish that I've never looked into the scope of that.
Blackhedd et al, who follow the markets professionally, may have more insight. As he says, the Bear equity holders are in for a rough ride in all likelihood.
The Fed is really not taking risk in the transaction. It might be providing liquidity by offering money in exchange for AAA rated securities, similar to what it did earlier this week with the 28-day Loan Facility. But I think JPM is probably providing more of the capital required and/or assumed counterparty risk.
But not to worry - these guys are grownups and will not take any real risk. They will be highly secured by assets. But regardless, the Fed won't bail out shareholders; it merely wants the company to stay in tact to provide liquidity for many of the securities it trades (and the counterparty insurance, ie. swaps, it has already written).
Richie Rich
It would be a big mistake to let a Primary Dealer fail – this is not LTCM, I say give Bear time. The direct and indirect (market) ramifications are not inconsequential both to investors, the overall financial industry and economy. Plus, what is the real cost to us?
While I am sympathetic to the point they made huge bets and reaped substantial profits, having them continue productively over the long term is a better intellectually grounded economic decision.
The focus should be on trying to ensure sensible regulatory mitigation exists to warn institutions once they cross a certain leverage threshold these types of moves will not be an option. This is of course also followed by a very long instrument valuation and rating discussion.
Overall, I believe the entire MBS/CDO market is completely undervalued right now. Trading in the secondary market for these instruments is substantial and volume is not completely linked to liquidity. There are actually institutions taking substantial positions and betting a windfall is in the future if they can hold long enough, especially for prime.
On subprime there are certainly some real issues. However it appears more workouts are happening than originally projected. Selective opportunities? I don’t know, but some very good institutions seem to think so.
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yesterday. Of course, we can debate whether or not mortgage bonds are or are not undervalued, but the point of the article is that Fed Action actually makes the market players believe the bottom hasn't come. The article points out, correctly in my opinion, that the only way to end the crisis is to get the market players back into the market. That won't happen until the Fed stops propping companies up. In other words, whether or not these bonds are in fact undervalued, the Fed action today gives the impression they are not...
Here is the article...
http://online.wsj.com/article/SB120528077518628769.html?mod=todays_colum...
Was it over when the Germans bombed Pearl Harbor
There has indeed been some significant leadership in acquiring distressed mortgage assets. But the leadership has not yet translated into followership.
As soon as it does, this entire financial crisis will resolve, probably over the course of a few days. It will probably take credible and sustained signs that the US recession is ending before that can happen, though.
S&P took them down 3 notches on the LTC rating. That will make their liquidity issues more complex. I heard JPM, ML, BarCap and HSBC are looking at whatever is left (desks and real estate?).
Monday will be an interesting chapter in this saga. Most importantly IMO if a buyer moves in we potentially may see some overall stabilization, if they go down what's next?
"Nec Aspera Terrent"
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from making huge gambles, and the government doesn't allow them to fail - then why shouldn't everyone take huge gambles?
It's true that there's a chance that this way, the bailout won't cost anything. I'm just not sure that's worth the long-term damage such intervention does to the market. I'd rather have the government put money into the economy as a whole.
The idea that regulation is going to stop future occurences doesn't sway me. It implies that government can regulate faster than Wall Street can create risky financial products. I'll bet on private industry here, everytime. And that's making the huge presumption that regulations would be competent, and not unduly damaging.
If Blackhedd and others are right, the alternative to creating this kind of moral hazard is the thread of millions of Americans losing their jobs.
Life is full of tradeoffs. Do you really want to take your stand here?
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It's an incredible dilemnia to have. I can't fathom the results of letting them die. But at the same time, you're essentially telling any company that has signifigant impact on American lives that they can risk whatever they want and they will always be bailed out.
is the best way to stave off a recession. By the time I'm writing this, the OP now declares that Bear Stearns can't survive as a company anyway, because the market doesn't believe in its reliability anymore. So what did this accomplish in the long term?
It was to allow Bear Stearns to die without defaulting on all of their obligations to clients and counterparties. If that had happened, then a lot of perfectly sound firms would have died too.
The 28-day funding allows Bear to operate near-normal while someone else does the due diligence for an acquisition. (That's about how long it takes, too.)
Think of it this way: you never want to pull the trigger until you know exactly where the body is going to fall.
burden of the SIPC having to pay claims for ruined brokerage accounts that fall within the scope of its protection.
An anecdote. In the early 90's, when the northeastern banks were in an especially precarious state, I had to pose this question to trust counsel on new proposals: what happens if we close on a financing and the bank fails while proceeds are flowing through the Fed system. I received lots of assurances but no guarantees. I couldn't award the business to that bank.
Bear was in a similar situation.
Government DOES have a responsibility to ensure orderly, calm markets. That is not doing a bailout. Once calmed, orderly markets are quite good at doling out pain to the deserving.
This would be a standard simple measure of their liquidity and associated valuation perhaps under FAS.
The focus here is Primary Dealers so it would be a very public mano a mano discussion down on Nassau Street once the point of no return was in sight. The goal would be getting everyone ahead of any potential over leveraged position especially when valuation starts to be an issue.
The Fed is already involved in this market. We are talking about the financial engine underlying our entire economy. I can therefore think of very few other places to "put money into the economy" where the payback will be bigger.
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Excellent points. However, IMHO you are overlooking one important aspect...human capital. My youngest SIL is a research analyst at BS..well respected..and inside the firm, they already think it is DOA. Resumes are flooding the street, buyt who's hiring expect for the top brains...so BS can't survive..it will self-decapitate. It will be sold for next to nothing...and most employees will be out on the street..
Sprung an info leak?
http://www.thestreet.com/_yahoo/newsanalysis/optionsfutures/10407812.htm...
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http://www.reuters.com/article/businessNews/idUSN1217286920080312
How can a CEO say this just 2 days ago when he was talking to JP about a bailout loan?
Ask not what I can do for my country, ask what my country can do for me. Washington Elected Elite
Blackhedd, first I want to say thank you. It is so nice to be able to read an informative analysis without any of the spin we see from the media or company officials.
Now I've read through almost everything here and I still can't really get what your thoughts are on it. You seem to be opposed to a bailout (which this seems to be essentially, just hidden well), but you also seem to think it's necessary. Now I personally hate bailouts, I think it's against everything the economy should stand for. But I also understand that alloweing Bear Stearns to eat it, likely means a lot of people in this country are hurt signifigantly. I somewhat lean toward not bailing out because I feel that companies need to be more responsible (as well as investors). This would be an expensive lesson, but a lesson nonetheless. If we keep creatively bailing out these companies, they seem to bear little risk when they make dangerous financial decisions.
My other question is whether you think this is just the tip of the iceberg. Will we be seeing more companies do this? Considering Bear Stearns CEO blatantly lied to people the other day, should everyone be worried about what ball is about to drop next?
I was a little surprised at the aggressiveness of the Fed's move.
A broker-dealer depends on their good reputation and on other people's confidence that they have enough cash to settle their trades and clear their clients's trades on any given night.
Bear got into trouble because of an apparent cash shortage. This has been rumored for weeks now. It was probably disingenuous for the company to insist, as they did this morning, that the shortage only became critical over the last 24 hours.
My guess is that they spent a good part of the week making this deal with Morgan and the Fed, and they did what they could to keep it from blowing up before they were ready. But this is rank speculation.
I did hear after the close that someone purchased an outrageously large position in the BSC March 30 put option yesterday afternoon, which was far out of the money at the time. Now someone will hopefully go to jail for this flagrantly illegal trade. But it also means the situation really did deteriorate late yesterday, at least in the view of the insiders.
The only aspect of this that constitutes a bailout is that the Fed will assume the credit risk of the collateral that Bear Stearns presented.
I've been able to find out absolutely nothing authoritative about three key aspects of the Fed's loan:
1) How much;
2) What was the collateral;
3) How big was the haircut.
Without that information, this is very hard to evaluate.
If you wanted to be sober-minded about it, you could say that this is a standard discount window transaction like any other. The only unusual features are that the correspondent (Bear Stearns) is not a bank; and that the loan was made by the Fed Board itself, rather than the New York Fed Bank.
I have no reason to believe the credit risk being assumed in this transaction by the Fed is extraordinary or dangerous.
How do I feel about the situation? Well, it depends on which situation you're talking about.
Bear Stearns is dead meat. They will not survive as an independent entity. That's just what it is. But the Fed took decisive action to ensure that the death of Bear Stearns didn't take a whole batch of others with it. I applaud the Fed for having taken this action.
What about the broader credit crisis? Different question. I've already said that the Fed must not interfere with the process by which the market sets prices for mortgage-backed securities. Therefore I would be strongly against any attempt by the Fed to buy up any of these securities in the open market.
On the other hand, the markets are extremely fragile now, and the Fed's job is to keep panic from taking down good companies as well as bad ones. There will probably be more situations like today.
And what about the broader economy? That's the most important question of all. Sadly, I do not believe the Fed's interest rate cuts will do much to pull us out of recession. But that's a different discussion.
Tip of the iceberg: at this point in time, Friday evening in New York, I believe the answer is no. I haven't heard rumors of cash shortages on any other trading desk except at Bear Stearns. However, everyone is nervous and jittery, and it won't take much to start some new rumors.
Bear Stearns's assets will be acquired and it will cease to exist, possibly as early as Monday. What Wall Street will need after that is time. If things hold steady for the next few days and weeks, we'll all breathe easier.
and one is starting to be built on UBS. WM is looking scary, and the BAC / CFC deal is at risk.
Without the uptick rule, the automated programs just kept dumping millions of shares this morning - real panic for a bit - the system couldn't keep up.
====
"Enlightened statesmen will not always be at the helm." -- James Madison
are driven by models. Models tend to malfunction in times of turmoil.
Then you have trading momentum. Once the trading sharks start smelling blood, it doesn't matter what the models say or how fact-based their conclusions are. The nosedive will accelerate.
Did the CEO lie? I will give him the benefit of the doubt. Maybe he did some spinning. But the situation may simply have ran faster than he could. And the turmoil in Bear's top management surely didn't help. And who knows how clued-in their board was.
"My other question is whether you think this is just the tip of the iceberg. Will we be seeing more companies do this? Considering Bear Stearns CEO blatantly lied to people the other day, should everyone be worried about what ball is about to drop next"?
Great point sturner. This is the crux of the entire matter. This bubble was inflated by massive amounts of deception by all parties. And now the only thing that truly keeps markets viable, that being trust not cash, is gone.
"THE HOUSING MARKET IS WHERE YOU CAN MAKE YOUR FORTUNE...LEARN HOW TO FLIP HOUSES TO RICHES!"
"NO MONEY DOWN! USE YOUR EQUITY TO TAKE A VACATION! REFINANCE AT A LOW FIXED RATE"
"WE DO NOT HAVE A BUBBLE IN HOUSING...A LITTLE FROTHY...BUT NO WIDESPREAD BUBBLE." (Greenspan)
"WE WILL NOT HAVE A RECESSION"....(Bernanke)
"JIM CRAMER IS A NO-NOTHING BLOW HARD!" (Wall St. Pinheads)
"WE WILL NOT HAVE A RECESSION"....(Bush)
"WE DO NOT FEEL THE NEED TO INTERVENE AT THIS TIME WITH A RATE CUT. WE ARE MORE CONCERNED WITH INFLATION." (Bernanke)
"OUR ECONOMY IS STRONG AND THE FUNDEMENTALS ARE SOUND!" (Bush)
"WE DON'T HAVE A LIQUIDITY PROBLEM!" (Mortgage and Bond Insurers)
"YES THE ECONOMY IS SLOWING BUT WE DON'T FORECAST A RECESSION!" (Paulson)
"WE UNDERSTAND THE ECONOMY IS SLOWING BUT IT IS SOUND....WHICH IS WHY WE ARE GIVING AWAY $150 BILLION DOLLARS TO EVERYONE!" (Bush)
"WE FORECAST THE ECONOMY TO GROW AT 0.2% IN FEB." (ECONOMISTS)...OOPS...IT FELL 0.6%
"WE HAVE NO LIQUIDITY PROBLEMS!" (Bear Sterns Last Week)
"PLEASE SAVE US UNCLE SAM"!!!!!! (Bear Sterns Today)
The Banks do not trust the people who need loans.
The people do not trust the Government
The investors do not trust the banks.
Every where we have turned we are confronted by hard economic data that everyone has lied, are lying still or are just plain incompetent....or a lot of all three mixed together. And the Fed can cut all it wants...Bush can throw billions more of our tax money back at us and it will not make a difference. Until our business leaders and our politicians come clean and admit we are on the verge of an economic catastrophe the likes we have not seen since the Great Depression, then trust which is the foundation of a well functioning free market will not come back anytime soon.
And even if it does....then just wait until 2009-2010, when all of this rate cutting and bailing out has us in the grips of inflation the likes we have not seen since the 1970's. Let's see....$4.00 gasoline (even if we do not have a hurricane or a blow up in the Middle East), $6.00 milk, $4.00 bread, $5.00 deisel for the truckers, etc, etc...
When deception rules your economy and is then revealed, then you are damned if you do (let the banks fail) and damned if you don't (bail them out, lower rates, drive inflation through the roof).
Jim Rogers is correct...sell your dollars and buy agriculture!
What do you expect, he is the sitting President. What possible incentive would he have to talk down the economy at a point when the recession would probably last the rest of his remaining days in office?
Fighting for conservatism one day at a time.
"What do you expect, he is the sitting President. What possible incentive would he have to talk down the economy at a point when the recession would probably last the rest of his remaining days in office?"
How about being different than all the liberals out there.
In a word....HONEST!!!!!!!!!!
This recession is going to last his entire term no matters if he lies about it or is honest. So might as well be honest about it.
Yes....no? Trust me my friend, the best way to get a Democrat in office is to be a knee-jerk Republican. And BRUTAL honesty is what is needed to even begin to help this financial crisis abate.
But when your salary is tied to your stock options and your poltical life is tied to doing and saying whatever you have to get re-elected or your party re-elected, then honesty will be a very scairce commodity indeed. And this market will just further deteriorate, for it does not care about the lies....its truth will out.
Georgie W. sounds just like his father did in '91-'92.
"We are not in a recession."
And Clinton came into the White House under the banner, "IT'S THE ECONOMY STUPID!"
And because of the incompetence of this administration, you can all say "Hail To The Chief" to Hillary or Obama come November!
God knows I do not want this...but it will happen. And you can thank Bush and the Republican gang that can't shoot straight!
Why don't you try to sell your propery under the "glorious"
Carter" years of 21 and 22 percent interest and gasoline lines.
Maybe you are to young to remember, but I wrote real estate
contracts where the owner thought carrying 17% intrest benefeted every0ne....welcome to the Carter years
I have been reading RedState Blogs for a year plus, and have
gained so much respect for thoe those that post here. I hope
that you do not take my post as an affront.
I am 50 years old. Between me and my spouse we have been in the real estate and development business for a really long time.
I don't see it the way you see it. Just like in the 70's
and 80's we need an adjustment. Times are tough. They are
always going to come. You cannot live in the last four years
and expect an adjusment not to come.
However, in spite of the hard times, the american people are what makes this economy. Believe it or not, they want to buy
a home.....they whet want to plant grass, they want to raise their children in a safe environment, and will fight for it.
In spite of the Big Heads" on TV, just as George Bush believes, it is what the people do that makes the difference -
not the news.
waiting for the opportunity to buy some cheap real estate I did this in the nineteen 80's when our area was in a depression, and I made out like a bandit.
Been holding onto cash and just waiting.
"Nothing works like freedom, Nothing succeeds like liberty"
Kyle
kept at bay and the population is rising- they're not making any more of it.
And if the GW cult is right, there will be less!
Caveat emptor, but the trend's your friend (long term).
Banks are dying to get rid of properties I only could have dreamed of purchasing just 1 year ago.
You just need to make sure you live within your means, even in the good times. That's what I did, and I'm not really suffering (relatively speaking).
“.....women and minorities hardest hit”
It is not time yet...I Have been watching you guys...it is not
time...
If you have never been in business for yorself or lived in
a family that has risked their heart and soul to employ
and take care of their employeee's family, you will never understand how hard we will strive to overcome "the MSm doom
and gloom". This is what our children will become.
It is powerful....
Especially here in St. Louis. I know lots of very wealthy individuals that are licking their chops. They can't wait to start buying up some serious amounts of property at the depressed prices that are still to come.
Fighting for conservatism one day at a time.
Ahhh....the glories of being old and gray...patience...not many today will wait 20 years...that includes me...
gave me a laugh when he said we need a strong dollar. His Treasury/FED have done little to strengthen the dollar these past 5 years. They have let it free fall and now they are trying to catch a falling knife.
the huge debt, coupled with an unfavorable atmosphere for foreign investment is sinking the dollar. What we desperately need in this country we are not going to get, not until everything gets much much worse.
we need:
(1) low marginal rates especially corporate rates
(2) an actual reduction in the size of government, not just a slow down in growth
(3) entitlement reform
(4) restructure of the national debt
(5) heavy new infrastructure investment
(6) end all ag subsidies and ethanol
none of this is likely to happen, but we need it.
"Nothing works like freedom, Nothing succeeds like liberty"
Kyle
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"If we want to take this party back, and I think we can someday, let’s get to work." – Barry Goldwater
I am sorry, do you understand how will you explain "he" has
"that power".
Sorry about the bad english...my team was taking a beating
as I was posting....bad excuse, but I can spell....just cannot multitask....tis the season....
The fed needs to realize (and quickly) that the business cycle hasn't and cannot be ended and recessions are a necessary evil. This bailout of Bear is borderline insanity, as it makes a mockery or the new lending facility and is way too likely to fail anyways. Bear should have been left to fail (someone would have swept in and bought them). Also, and bad for us is that this is going to look real bad when all these Bear execs are still making millions while they get bailed out.