I'm with Felix Salmon--Paul Krugman's unequivocal declaration that this is an insolvency problem seems borderline irresponsible. What insight does a Princeton trade economist have into bank balance sheets that almost all other observers lack? I'm not near Wall Street any more, so take this for what it's worth, but what I'm hearing is indignation that JP Morgan and the Fed got such a sweet deal out of Bear's shareholders, not worry that either one will take a bath.
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I don’t get the difference between having a liquidity problem and being fundamentally insolvent. If you can’t satisfy your debts with your assets on a given day, you are insolvent. Maybe its’ not fundamentally insolvent (if it makes you feel better). But you are still broke. That said I do think Krugman is being a bit alarmist. I think he can hardly hide his glee that his prognostication of gloom and doom has finally come true. Although I do hope that at the end of it all there is more gloom than doom.
Megan,
Why is it worse for a Princeton trade economist to say it's a solvency problem than for a financial journalist to tell us it's a liquidity problem? This seems like one of those cases where you don't like what's being said, so you complain that the person doesn't have the right credentials to say it. And in this case, it's a bit of a stretch, right? Yeah, he's only an economics professor at Princeton with his PhD in econ from MIT. What on Earth makes him think he has the right to an opinion, here?
Rum raisin: A liquidity problem means you have the assets but you can't convert them to cash in a timely manner.
I work as a consultant for the government but sometimes it can take them three months or loner to pay after I submit an invoice. So, every month the cash in my account goes down but Accounts Receivable goes up - so in theory I'm fine. However, if they take too long to pay I could end up in default on my mortgage.
I have assets - just not in cash. That's the definition of a liquidity crisis.
Take Lehman as an example - mark down 10% of their level 3 assets and you are already at negative equity. Bear's book was even worse and look at what the ABX has done since 12/31.
Everyone else who looked at BS reached the same conclusion - negative equity, no value.
Take Lehman as an example - mark down 10% of their level 3 assets and you are already at negative equity. Bear's book was even worse and look at what the ABX has done since 12/31.
Everyone else who looked at BS reached the same conclusion - negative equity, no value.
I do have to ask how long does a liquidity problem have to go on before it can be safely said to be an insolvency problem?
A liquidity problem means you have the assets but you can't convert them to cash in a timely manner
Jmo, I know what a liquidity problem is. But insolvency is what Bear faced. You can have all the assets in the world but if you can't convert them to cash or borrow against them to pay your immediate debts, then you are still technically insolvent. Sans the bailout, Bear would have had to declare bankruptcy.
I know what a liquidity problem is. But insolvency is what Bear faced. You can have all the assets in the world but if you can't convert them to cash or borrow against them to pay your immediate debts, then you are still technically insolvent. Sans the bailout, Bear would have had to declare bankruptcy.
That may be characterized as a bank run problem rather than an insvolvency problem. Insolvency has a recogtnized definition, and it isn't "they went bust during a bank run". Krugman clarifies as much in the referenced blog post, but then takes the more extreme position, which completely ignores the valuation of what assets Bear actually had, presumably because insolvency more correctly fits the Bad Republican! brand recessionary paradigm that Kruman brushes his teeth with each morning.
Someone thought it was smart for JPM: they're up 12-15 pct since Monday open.
It is also interesting that Bear is trading close to $6/share today.
I don't know if this means there are serious people that think JPM will have to pay more than the published $2/share. It could just be a lot of idiots buying something without any investigation.
Re: It could just be a lot of idiots buying something without any investigation.
Or Bears' creditors snapping up stock so they can weigh in for the sale to prevent other shareholders from nixing it. The alternative is Chapter 11 and many of creditors would get nothing, but if the sale goes through JPM inherits Bears obligations in full.