One down, plenty to follow ...
Bear Stearns Gets Emergency Funds From JPMorgan, Fed (Update1)
Bear Stearns Cos. obtained emergency funding from JPMorgan Chase & Co. and the New York Federal Reserve as the securities firm said its cash position had "significantly deteriorated."
Only two days ago Bear Stearns CEO was on CNBC and denied any cash problems:
"We don't see any pressure on our liquidity, let alone a liquidity crisis," [Alan Schwartz] said.
Bear finished fiscal 2007 with $17 billion of cash sitting at the parent company level as a "liquidity cushion," he said.
"That cushion has been virtually unchanged. We have $17 billion or so excess cash on the balance sheet," he said.
If two days ago Bear Stearns had $17 billion in cash, where did that money go?
Today:
The New York Fed will "provide non-recourse, back-to-back" financing for up to 28 days, JPMorgan said in a statement today.
"non-recourse, back-to-back" means that the Fed will give a cash loan to JPMorgan and JPMorgan will hand the same amount to Bear Stearns. This is a technical process as Bear Stearns is not allowed to borrow directly through the Fed's discount window. If Bear Stearns can not pay back the loan, JPMorgan will have no obligations. The whole risk of this loan is with the Fed or, in the end, the taxpayer. Socialized losses ...
Bear Stearns plummeted $21, or a record 37 percent, to $36 at 10:08 a.m. in New York Stock Exchange composite trading, the lowest level in more than eight years. The shares fell to as low as $26.85 earlier today.
...
"The issue now is whether Bear Stearns customers will stick around," said Bruce Foerster, president of South Beach Capital Markets and a former Wall Street executive. "Some others have gotten through the same kind of troubles, some ended up being shut down or sold. I'm hoping Bear can get past it."
Well, if I would own money to Bear Stearns I would stick around with them. If Bear Stearns would own money to me, I'd grab it as fast as I can and leave immediately.
The bank is toast so to say ... and it will not be the last one in this downturn.
Posted by b on March 14, 2008 at 14:59 UTC | Permalink
Hmmm - who would buy a place that overnight loses some 18 billion? This when all other big banks are in trouble too?
TGIF Countdown: In 312 days we can start fixing this tattered, broken thing called the economy. George Bush will no longer be doing Herbert Hoover imitations like the one he tried out on the Economics Club of New York today.
But the Democrats need to start tying our growing economic debacle to our ill-conceived wars that we refuse to pay for -- or they'll be ones getting blamed for the meltdown after they take office in January.
Posted by: Madison Guy | Mar 14 2008 23:00 utc | 3
Remember NBER- National Bureau of Economic Research that is tasked with calling (identifying) recessions? Its former president has spoken. He doesn't think the US is in a recession. He thinks it is in a severe recession.
That was news proper. Now to pass the rumor, on the econ blogs that had been talking about Bear's imminent fall the last few days, the new names currently whispered are Citi and Lehman Brothers.
Posted by: Alamet | Mar 15 2008 0:08 utc | 4
CNBC has already noted high levels of "graveyard" puts (puts at prices far below market price for options expiring next week) on Lehman Brothers, so there may be your next victim.
Posted by: Brian J. | Mar 15 2008 2:58 utc | 6
Will we be loaning money to Lehman through JP Morgan too? It reminds me of the off-balance sheet funding of the war. This is an off-the-balance sheet government bailout. Yipee.
Posted by: jeff in chicago | Mar 15 2008 4:08 utc | 7
The Australian's Business section has two articles concerning the US economy's downward spiral:
Exposure to the escalating housing crisis prompted Moody's Investors Service to downgrade the debt of Washington Mutual to one notch above junk status.
Goes hand in hand with:
THE US economy lost the title of "world's biggest" to the euro zone this week as the value of the US dollar slumped in currency markets.
Taking the gross domestic product of both economies in 2007, the combined GDP of the 15 countries which use the euro overtook that of the US when the European currency surged to a record high of more than $1.56 per euro overnight.
Posted by: Juan Moment | Mar 15 2008 4:32 utc | 8
Juan Moment,
We're - not - number one?
Impeach the bastard!
Posted by: citizen | Mar 15 2008 4:54 utc | 9
[T]oday the first one of these large broker dealers - Bear Stearns - in on the verge of bankruptcy. Let us be clear: given its massive exposure to toxic MBS and ABS product Bear Stearns is insolvent; the decision by the NY Fed to try to bail out Bear Stearns would make sense if this firm was only illiquid; the trouble that it is insolvent and thus such attempted bailout is altogether inappropriate. It is true that Bear is a large broker dealer; but its systemic importance is much smaller than that of much larger institutions. The world and financial market can survive if Bear disappears.So the only possible justification for such Fed action is to engineer an orderly rather than a disorderly shutdown of this institution. But unfortunately the Fed is behaving as if Bear Stearns is illiquid but solvent. That is delusional and the official sector support of an otherwise insolvent institution will end up - like many other recent Fed actions - being paid for by the US tax-payer.
...
So the question is: if Bear Stearns screwed up big time - as it did - with huge leverage, reckless investments, lousy risk management and massive underestimation of liquidity risk why should the US taxpayer bail out this firm and its shareholders? First fully wipe out those shareholders, then fire all the senior management and have the government take over such a bankrupt institution before a penny of public money is wasted in bailing it out. Instead now the use of public money to bail out financial institutions is spreading from banking ones to non banking ones. The Fed should at least give a clear and public explanation of why such extremely exceptional - and almost never used - intervention was justified.
To answer Roubini's question, why should the US taxpayer bail out Bear's managers and shareholders?: If Bear collapses, there will be no stopping the process of cascading insolvencies. Merrill and Citi would be next, then the bulge bracket money center banks, then the Federal Reserve System itself. They only have enough balance sheet assets to save one or two small brokers the size of Bear Stearns. That's not what Bernanke will say to Congress, of course. He'll testify that Bear was a perfectly good company that was ruined by irresponsible rumor-mongering Cassandras like Prof. Roubini and wicked, unregulated short sellers.
Posted by: Wolf DeVoon | Mar 15 2008 12:45 utc | 11
New York Times:
“You get to where people can’t trade with each other,” said James L. Melcher, president of Balestra Capital, a hedge fund based in New York. “If the Fed hadn’t acted this morning and Bear did default on its obligations, then that could have triggered a very widespread panic and potentially a collapse of the financial system." Already, investors are considering whether another firm might face financial problems. The price for insuring Lehman Brothers’ debt jumped to $478 per $10,000 in bonds on Friday afternoon, from $385 in the morning, according to Thomson Financial.
AP via Globe & Mail:
Federal Reserve officials likely were worried about a domino effect if Bear Stearns were to fall into bankruptcy, leaving other companies who have lent money to the investment bank in the lurch. That could cause a chain reaction, potentially threatening the financial system. Indeed, fears have grown that other financial firms could be at risk. "It's the cockroach theory: There's never [just] one," said Joan McCullough, an analyst with East Shore Partners Inc. in New York.
Posted by: Wolf DeVoon | Mar 15 2008 14:22 utc | 12
how apt to speak of the cockroach theory and big banks in the same paragraph..
Posted by: dan of steele | Mar 15 2008 15:08 utc | 13
@6, Never heard of graveyard puts. Sounds like a melodramatic coinage for what are called out-of-the-money puts. Their price will change whenever the underlying changes, so buying puts like that is not a bet on ruin but on volatility, which is a safe, obvious bet. It doesn't imply catastrophizing buyers. Interesting, though, to see how fast CNBC dropped their wonted lunatic optimism for blind panic. I ♥ blind panic.
Posted by: ...---... | Mar 15 2008 15:30 utc | 14
Billy C abrogated the Glass-Steagall acts. So came into being these huge bank conglomerates. Maybe - I don’t have good overall insight - this mess will lead to their demise? That would be a tremendous step (perhaps the most important?) to getting back to some rational, even keel?
In Switzerland, the saying of ‘too big to fail’ - meaning the Gvmt. will stump up and costs are socialized while the bankers walk off with billions - is very strong. I have an account at the UBS and am becoming slightly worried.
Others are wiser: local, ‘cantonal’ banks have been making a killing. They have the reputation of being hyper conservative, they don’t invest in fancy stuff, don’t lend except under stringent conditions, and don’t offer much to depositors. Some are run on kind of co-op schemes, etc. None bought any sub-prime linked paper (afaik from press.) I have no numbers because there isn’t any round up - just news articles saying ‘we took in x millions in the last two weeks’, etc., and the big banks have been eerily silent. OK, the Swiss are most likely the the wolrd's no. 1 bank shoppers.
So little people are effecting with their feet Glass-Steagall, or trying to...
Posted by: Tangerine | Mar 15 2008 15:34 utc | 15
& again dan
brecht's dictum : on founding a bank & robbbin one - which is the more criminal ?
Posted by: remembereringgiap | Mar 15 2008 15:35 utc | 16
heh, so it is Clinton's fault....even this.
too many democrats still think WJC was a good president when in fact he was probably worse than baby bush.
thanks for pointing that out tangerine.
Posted by: dan of steele | Mar 15 2008 15:50 utc | 17
WSJ has a good report on the Bear Stearns issue Fed Races to Rescue Bear Stearns In Bid to Steady Financial System
Funny point - while all this happened the chairman of Bear Sterns was at a bridge competition in Detroit and one of the Fed governors was "unreachable" traveling in Europe ...
from a comment at Seeking Alpha:
This time, a poorly aimed public bullet has struck Wall Street right in its corrupt and unethical heart. This heart is cash liquidity. I have no heart for Wall Street. In rural Oklahoma we often say, "He needed killing."
Posted by: Wolf DeVoon | Mar 16 2008 0:56 utc | 19
I'm steamed over the fact that Bush browbeat Congress into passing his proposed budget for the current fiscal year last winter after repeatedly threatening to veto the Congressional version that added on $22 Billion or so in additional spending for domestic programs (environment, education, etc). He kept stating that he was upholding fiscal conservatism, the country couldn't afford the additional $22 B (on a nearly trillion dollar total, mind you), those big-spending liberals were going to ruin our economy, he would protect the taxpayers, etc. etc. And Congress took it and backed down.
On Friday, Bush's Fed chairman blithely set $200 B of our hard-working taxpayers' funds on fire, or the equivalent thereof by bailing out Bear Stearns, and nary a peep about fiscal conservatism, big-spending liberals, protecting the taxpayers, etc.
Posted by: Maxcrat | Mar 16 2008 13:49 utc | 20
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Banks don't go bankrupt, they get sold.
From CNBC :
Posted by: DharmaBum | Mar 14 2008 16:13 utc | 1