So JP Morgan has agreed to buy Bear Stearns at $2 a share. As others have already pointed out, this is, from the point of view of the shareholders, just barely better than bankruptcy. Talk of a bailout of the bank is silly--this wasn't a bailout; it was an orderly winding-up of business.
This was always the most likely outcome--of the American bulge brackets, JP Morgan has the largest balance sheet and access to the Federal Reserve's discount window. Now that it's happened, we can breathe a sigh of relief that one gigantic disaster has been averted. Libertarians and liberals arguing against the Fed's role in all this sound to me either ignorant or psychotic. The credit markets are already badly malfunctioning (yes, I was wrong). Bear Stearns is the counterparty to a huge number of transactions. Allowing it to fail would have been like throwing a hand grenade into a burning pool of gasoline; bankruptcy proceedings are time-consuming and uncertain. JP Morgan has the ability to assume their risks without any danger of going under themselves; that's very good for the markets, and by extension, us.
Yes, this is creating moral hazard that we'll have to deal with, probably unpleasantly, down the road. But whatever the moral hazard, it is hard to see how it could be worse than the full-blown financial crisis the Fed is trying to avert.
There's an argument, of course, that successive Fed interventions, starting with the Russian bond crisis, have turned bankers into ever-greater risk takers, making each crisis bigger and more expensive than the last. The thinking goes that we need to draw the line here, whatever the cost, because if we let the financiers go on their merry way, eventually they'll create a wave that will swamp the Fed's power to intervene. Possibly so, but from what I hear, the people on Wall Street are pretty much scared right down to the tips of their Gordon Gekko underoos.
In some sense, right now it's the Fed's job to manage that fear--to scare them enough to ratchet back their risk profile, without scaring them so badly that they hunker down inside their weekend house and refuse to buy or sell anything. That's very tricky, and since in the long run we'll all be dead, I'd rather the Fed err slightly on the side of cheering them up. Perhaps Helicopter Ben should start pumping anti-depressants into the Wall Street water supply.
Because while we have, as I say, averted one gigantic disaster, there are still plenty of potential other ones waiting in the wings. The Bear buyout sends reassurance about the fate of its trades--but the Bear collapse, for all that it has been rumored for months, could send a fresh wave of fear through the markets. In the very short term, I'd imagine the buyout will improve matters in our markets (though Asian bank stocks are trading down), but as the week and the month unfold? Well, I'm glad I'm not in the prediction business.
From my semi-literate layman's position, it looks to me like the Fed will eventually become the largest mortgage lender in the history of the world. Having taken the worst of Bear's mortgage backed securities, won't other investment banks follow suit, leaving the Fed as the holder of a vast, unsaleable portfolio of mortgages that will, eventually, pay off once the foreclosures and walkaways are done?
We had irrational exuberance in tech stocks, real estate and now commodities. We’ve seen the tech bust and the real estate bust, when will we see the commodities bust?
What, you say, this time it’s different? China and India and peak oil, this time it’s different.
Sure, different this time.
Talk of a bailout of the bank is silly--this wasn't a bailout; it was an orderly winding-up of business.
It was still the heavy hand of government interfering with the free market, no? Come, libertarians, it's time to fall on your swords.
Allowing it to fail would have been like throwing a hand grenade into a burning pool of gasoline...
*Snaps fingers* Damn, I wish it had happened. Financial catastrophe, free-falling markets, Larry Kudlow's head exploding. Would have been fun.
Curse you, Ben Bernanke, for robbing me of my immoral pleasures!
So what do you think of this new 6 month (and possibly more) window when 'anyone' can get the Fed discount rate, as well as, it seems to me at least, the same deal that BSC got - but eliminating the JPM middle man?
I can agree with a single 'bailout' - or even a serial one where the fed governors need to sign off on every transaction. But how does allowing all comers regardless of their specific situation help things?
"In some sense, right now it's the Fed's job to manage that fear--to scare them enough to ratchet back their risk profile, without scaring them so badly that they hunker down inside their weekend house and refuse to buy or sell anything."
You have no idea what you're talking about. It is not the Fed's job to scare sophisticated Wall Street investment banks like Bear Stearns into managing their risk better. These "banks" never properly managed their risk in the first place. How did Bear make its money? By borrowing short-term and lending out long-term, through subprime mortgages, and screwing around with these silly CDOs and SIVs and all the rest.
It's the banks themselves that won't trade with each other--the Fed has nothing to do with it. That's the cause of the liquidity crisis--the banks are already scared--they don't need the Fed to scare them more.
Bear Sterns was leveraged 30 to 1 in their subprime mortgage "investments." The Fed never could have "scared" Bear to reduce its "risk profile" in the first place. That's how Bear made it's money--you idiot.
Bear Stearns was a poorly run company that--like Enron--never made any real money. It never, ever did anything productive for this country, except paying out huge wealth to its moronic managers, who cared more about playing in bridge tournaments than running the company.
Um, I thought you were a libertarian?
Blake wrote: you idiot.
There's a "Preview..." function which gives you a second chance to edit out distracting and useless prose that might otherwise detract from an interesting comment, such as the distracting and useless prose quoted above. Check it out sometime.
The real moral hazard is that CEO’s and investment bankers can take outrageous risks with large pools of other people’s money. If these gambles pay off, they pay themselves vast, obscene sums. If, however, things do not work out they can still pay themselves vast, obscene amounts of money, which they do not have to give back. I say that all future rescues should be conditioned on clawbacks of at least five years “bonuses” and stock options.
Same for hedge funds that miss margin calls: Claw back all executive compensation for at least five years and make parent companies or sponsors of the funds exhaust all of their resources before taping the public till.
I have a question, what would happen if tomorrow the fed tied the dollar to gold (lets say 1 oz = 1000$). What would be the effect on the markets?? I mean isn't this the main suggestion of libertarians (Ron Paul and co.)??
So, Megan, if it's self-evident that the investment banks need rescue, then what about "responsibility?" Is that now quaint, like the Geneva Conventions?
I think Paul's position is that the Fed should not exist, and anyone with gold or silver should be allowed to take it to the mint to be stamped into coins. Those coins would be our money.
While I'm willing to demonize Paul for his apparent racism and anti-semitism, I wouldn't demonize the gold standard, or exalt the federal reserve system that replaced it, and did indeed result in inflation of perhaps 95% of the dollar's value. The 19th century's financial virtues of savings and general rectitude arose from the slow steady deflation - rewarding of savers over borrowers - that a gold standard created.
In these pursey times, Hamlet said, virtue itself of vice must pardon beg.
That's just the crack talking. Bear Stearns only made it into 2008 because of the Term Auction Facility. Thus the Fed has effectively subsidized, with the full faith and credit of the US government, $2 per share and Bear's year-end bonuses. Watch your mail: the bill to taxpayers is on its way.
That's just the crack talking. Bear Stearns only made it into 2008 because of the Term Auction Facility. Thus the Fed has effectively subsidized, with the full faith and credit of the US government, $2 per share and Bear's year-end bonuses. Watch your mail: the bill to taxpayers is on its way.
Posted by John F. | March 17, 2008 8:26 AM
I hope people figure out that he's not joking..
This deal is long from done. Shareholders must approve, and they will not. Not at $2, Jamie got greedy. Once the Fed made it clear he was bidding against himself the price dropped from 15 to 2 in an hour. Given that near every shareholder is 90% plus under water, who votes for this offer? The 5-10% of BSC employes who have a shot at keeping their jobs aside, the is no reason for any sane shareholder to support the transaction. They have far better chance of recovery forcing an orderly liquidation. Terms of the deal mandate that once voted down it must have a re vote in 12 months. That is a lot of time, as Don Ameche knows well, things change. We are a long way from done with this.
Agreeing to this merger was BSC management's latest failure. Are these guys the worst ever?
Let me make the rude and declasse observation that this is what ALWAYS happens when financial markets are inadequately regulated.
Can we all get a grip. The actual value of the mortgage write-down -the actual bad underlying asset - is well known, and is what, $400 million or something similar. That's a done deal and well accounted for by the markets and well contained.
What we're seeing now is the fall-out of those that were holding those bad assets, and we're seeing their combined losses from their having leveraged so much to buy the mortgage securities. But the point everyone is missing is that those losses (perhaps 60 times over the assets) are matched by someone having taken a profit on the other side of those deals. In other words, they are not systemic losses across the economy, they are personal to the buyer/holder banks, and for every loss on leverage there is someone that won on that transaction.
And the reason we're hearing nothing but gloom and doom right now because the profit takers are keeping their mouths shut. It simply isn't good politics or good form to brag that you made a killing on selling mortgage backed securities when the buyers and holders are having to write down the investment. But those profit-takers are out there.
C above nails it.
The Fed's position (and I'm pretty sure McArdle's) is that Bear and other members of the shadow banking system don't need to be regulated. However they have to bailed out if they fail because of the consequences.
There is an obvious contradiction there.
Oh and a 30B Treasury guarantee looks like a bailout to me. Those things don't come for free.
Correct me if I'm misreading this, but it looks like JP Morgan gave shares valued at $236 million to buy out Bear, which held a portfolio valued at $33 billion, only $2 billion of which was subprime mortgages.
Seems too good to be true. So, I looked up Bear's balance sheet, which shows them with $395 billion in assets against $384 billion in liabilities, giving them a net book value of $10 billion, still a great deal for JP Morgan -- and quite a lesson in the importance of liquidity, since not meeting loans you have the assets to pay off means, in this case, being bought out for 11% of book value, or, as some people might say, "elevent cents on the dollar".
@anony_mouse_: are you making fun of the underscores my software adds to peoples names when I reference them?
I'm confused on the same point as dave: Are the shareholders really going to approve the $2/share, and if so, why?
The Fox article I saw claimed that both banks expected shareholder approval. But it doesn't make sense to me. First of all, even if it was financially rational, it's really tough to convince shareholders that they should sell last week's $50 stock for $2 today. But is it really financially rational?
Like Person says, even if they wrote the subprime mortgage stuff down to zero, don't they have some other assets worth more than $236 million? According to current trading, they're down to $5/share, but even that just means that *some* people are selling for that - not that every stockholder is happy to unload at that price.
What am I missing?
Maybe . . . but in the banking industry, "Don't fuck with the Fed" is a pretty good rule of thumb. Plus if the "orderly liquidation" throws the credit markets into a true panic, a lot of their assets could plummet fast.
You're wrong this time, too, kid.
You'll see.
The shareholders will vote in favor of $2 per share.
In an "orderly" liquidation they will receive nothing. Partially because in financial institution world, there is no such thing as orderly.
In fact, they should vote in favor of $0.01 per share, and my guess is Dimon offered $2 just so it wouldn't look too bad for them.
Further, the Fed can't allow these companies to end up in a bankruptcy, because the derivatives and swap markets survive only if all counterparties can net their positions. If one major counterparty can no longer net positions because of an insolvency, then the small net notional amounts become lethal large notional amounts, and all of a sudden, a whole bunch of other banks go poof.
BS stockholders have no room to complain in any event, and should be thankful they are getting anything at all.
By the way, the supply of dollars is finally shrinking rapidly (the days of alan the drunken sailor man being over). $70 a barrel oil by 9/30/08. What, you mean commodities markets can also have bubbles? no way dude.
At the moment, the fed's interest rate levels are irrelevant - credit, and therefore dollars, is/are vaporizing at fantastic rates right before your eyes. That fellow who put $1billion in BS recently? He now has $20 mill. Poof.
This deal is better than you thought.
Bear Stearns threw their headquarters building into the deal, a Manhattan skyscraper.
The building is valued at more than $1 billion.
So JPMorgan just got themselves a building at 1/4th its value.
- Allowing it to fail would have no effect, like a drop of water in an ocean, or
- Allowing it to fail would have a cataclysmically disastrous effect, like a spark in a coal mine.
I don't think anything happens when you throw a grenade into a pool of burning gasoline: the grenade detonates (bloop!), and the gasoline keeps on burning. I guess it depends on whether 'pool' means 'puddle' or 'swimming pool'. In the latter case, I can't see the grenade having any major secondary effects.When the dust settles perhaps we can have fun with the EMH crowd.
Bear is a primary dealer. As such, it deals directly with the Fed and is an important cog in the machinery. E-trade will not be rescued by the Fed.
List of the Primary Government Securities Dealers:
BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Bear, Stearns & Co., Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Countrywide Securities Corporation
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Wasserstein Securities LLC.
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Lehman Brothers Inc.
Merrill Lynch Government Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.
November 30, 2007
Primary dealers defined:
Primary dealers are banks and securities broker-dealers that trade in U.S. Government securities with the Federal Reserve Bank of New York. On behalf of the Federal Reserve System, the New York Fed's Open Market Desk engages in the trades in order to implement monetary policy. The purchase of Government securities in the secondary market by the Open Market Desk adds reserves to the banking system; the sale of securities drains reserves.
The primary dealer system was established by the New York Fed in 1960 and began with 18 primary dealers. In 1988, the number of dealers grew to a peak of 46. From the mid 1990s to 2007, it declined to 20. The most important reason for the decreasing number of dealers is consolidation, as Government securities trading firms have merged or refocused their core lines of business.
There is NEVER just one cockroach.
My biggest fear is not that the deal will fall through or anything to do with JP Morgan or Bear Stearns.
No my fear is what Congress is going to do to "help" the credit market by adding regualtions, a la Sarbanes-Oxley. There are already rules and regulations in place on the mortgage market, adding another layer solves no one's problems.
This might have been based on empircal testing by "underage youths" or just my knowledge of chemistry and physics. Can't say which and I might just be a BS artist but:
Hand grenade submersed in deep pool of gas = big splash with gas evaporating. No ignition. Very disappointing.
Hand grenade into shallow pool of gas = ignition with small fire ball, pool remains and burns slowly. Disappointing.
Hand grenade in deep pool of burning gas = instant ignition of all the gas at once leading to giant fireball.
Megan has been a bad girl if she has this knowledge on a personal basis. However, if we didn't have people experiementing like this we would have a lot less rocket scientists, chem professors, and the like.
BTW, Totally inappropriate behavior for muslims. Sorry, you lost your privileges due to bad behavior on the part of others in your class. Yes you go to jail long term when non-muslims get slap on wrist.
I doubt that the BSC shareholders will approve, but they might. In any case, the offer puts a lower limit floor under Bear shares, and begins to stablize the free fall.
What happens if dollar rich Saudis or the Chinese start offering more? Will the Fed allow a higher hostile offer? $3, $5, $10?
(If not, why not?)
If I was a foreigner with too many soon to be worth much less US dollars, buying silly US corporations whose managers failed to keep enough liquidity would likely be an excellent way to swap inflation dollars for "assets". And most US corporations have a reasonable business organization asset.
Big inflation coming, to prop up the overpriced housing market.
New, low gov't/tax influenced housing policies would be welcome now. Maybe let Guest Workers into the US if they have some $10 000 or more in cash to invest in buying a new home?
Matt Johnson: No my fear is what Congress is going to do to "help" the credit market by adding regualtions, a la Sarbanes-Oxley. There are already rules and regulations in place on the mortgage market, adding another layer solves no one's problems.
Fuck the credit market. I want regulation to protect MY money -- my share, and your share, of that $30B bailout is... one HUNDRED dollars! And that's just the tip of the bailout moneys.
The financial markets have a tough choice: Allow the US Gummint to regulate you properly, or have it done for you by the sovereign wealth funds that are already starting to exert their influence. I'd rather be spanked by my father in the privacy of my own home than by the principal in front of the school assembly (if you get my tortured analogy) -- but then I would be the first to admit that I, Greedor of Wall Street, had fucked up.