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Guy Berger

From the Economist: Bear Stearns / Stripped Bear

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This shit scares me

Bear Stearns

Stripped Bear

Mar 14th 2008 | NEW YORK

From Economist.com

Rescuing a Wall Street bank

AP

Bears.jpg

A CENTURY after John Pierpont Morgan bailed out Wall Street, his bank is at it again. In a dramatic move on Friday March 14th, the Federal Reserve Bank of New York and JPMorgan Chase made emergency funding available to Bear Stearns after other market players lost confidence in the beleaguered investment bank as a trading partner. As the credit crunch has deepened and broadened, the worst fear of many on Wall Street has been the collapse or forced rescue of a big bank or broker. That moment is now upon them.

JPMorgan Chase is Bear’s clearing bank and will act as a conduit for Fed funding. In a special vote, the central bank’s governors chose to allow JP Morgan Chase to bring collateral from Bear, including mortgage assets, to the Fed discount window in return for 28-day loans. Bear does not have direct access to the window because it is not a depository institution. The Fed has agreed not to hold JPMorgan Chase liable for any losses on the collateral posted. The central bank has resorted to such an arrangement only twice before, in the depression of the 1930s and in the 1960s.

The meltdown at Bear, which began last summer when two of its hedge funds blew up, is a classic example of how liquidity problems and ebbing confidence can quickly turn into a solvency crisis, especially for investment banks, which are more reliant on short-term funding than commercial banks. Bear has spent much of the last year strengthening its funding structure. But in the past week doubts grew over its ability to meet its obligations. Other banks refused to step in as counterparties to Bear in credit-derivatives contracts. Bear’s boss, Alan Schwartz, admitted that his bank had struggled to dispel rumours and “parse fact from fiction”, and that its liquidity position was thus deteriorating at an alarming pace.

Bear’s shares initially jumped on news of the bail-out but crashed after the market opened on Friday. At one point, half of its market value had been wiped out—an unprecedented one-day fall for a big Wall Street firm in modern times. According to reports, clients were desperately trying to pull assets out of Bear on Friday. But the bank insisted that its capital ratios remained strong. It also said it would bring its first-quarter earnings announcement forward to March 17th.

The Fed’s concern is understandable. If it had failed to intervene on Friday, few doubt that Bear would have gone down the tubes. The timing of the move shows just how desperate the situation had become at Bear. If the bank could have held on until March 27th it would have been able to borrow directly from the central bank under a new facility announced earlier this week.

Though Bear is the smallest of the “big five” Wall Street investment banks, it is the most exposed to credit markets, particularly mortgages, relative to its size. Its larger peers can take comfort in being more diversified, but they too are largely at the mercy of short-term funding markets and the confidence of counterparties. Others will be losing sleep, too. Bear’s woes will only exacerbate worries about highly-leveraged hedge funds, an increasing number of which are finding it hard to stay afloat as their prime brokers jack up margin calls. A fund affiliated with Carlyle Group, a big private-equity firm, crashed this week.

Bear’s fate now hangs in the balance. It said on Friday that it was in talks with JPMorgan Chase over “permanent” financing, but that there could be “no assurance that any strategic alternatives will be successfully completed”—a possible reference to a takeover. And Bear was reportedly shopping itself to competitors with the help of another bank. The Fed and other regulators will work hard to ensure that Bear ends up under the wing of a stronger rival.

But would-be buyers have reason to be wary. Bear’s books are stuffed with complex “structured” mortgage-related assets, the value of which is hard to calculate. As a result, so is the value of Bear’s equity. A full-blown collapse cannot be ruled out if the value of its collateral—to whose credit risk the Fed is now exposed—continues to fall.

Ironically, the intervention came a day after Standard & Poor’s, a rating agency, said that the worst of banks’ write-downs related to subprime mortgages—Bear’s biggest weakness—may soon be over. But if the extraordinary events of the past day demonstrate anything, it is that investment banks are black boxes, and what really matters is not what sits in them but what their counterparties fear may be lurking inside. If others find themselves in Bear’s awful predicament, there will be little the Fed can do to forestall a rout.

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:lol:

These boys are gonna fuck us all.

Not my fault will be all the answers.

Greedy fuckers.

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Don't be surprise if some of the value mutual funds in your IRAs and 401ks aren't holding some Bear in their portfolio. I checked the prospectus of the VanKampen Common Stock fund, which is a well-regarded value fund. As of December 07, it held approximately 0.50% of the fund in Bear Stearns. Well, I never was great in math, but if 0.5% of the portfolio declined today 50% then the collapse in the share price of Bear Stearns equates to a 0.25% drop in this mutual fund. Many 12-b-1 fees are greater than that! It shows the power of diversification.

Of course, this doesn't take into account any losses due to sympathy drops within the investment banking sector itself.

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:lol:

These boys are gonna fuck us all.

Not my fault will be all the answers.

Greedy fuckers.

I don't care what they will say... I do think it's bad that these guys will not bear the full consequences of their actions.

I think some serious re-regulation of the financial services industry (which will unfortunately include plenty of bad/foolish/knee-jerk aspects) is absolutely necessary - unfortunately it's a little too late for the current patient.

Guy

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So apparently BS is worth a fraction of the value of the building that serves as their midtown headquarters.

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