Bear Stearns collapses

Akrasia

Bear Stearns used to be the 5th biggest investment bank on Wall Street. This morning it was 'bought out' for 2% of it's former value along with a massive sweetener package from the U.S. Federal Reserve ($30bn in loans and a reduced inter bank loan rate)

This is being reported as a 'buy out' or a 'rescue' of the 85 year old company but it's nothing less than a complete collapse. JP Morgan Chase made the acquisition for just over $200m. In january 2007, the company was worth more than $11.8bn.

The level of the federal reserve bailout here is phenomenal. They are widely expected to drop the base rate by another 1% this afternoon and have announced intentions to provide essentially limitless emergency credit to bankers for at least the next 6 months in order to protect the stability of the U.S. financial system.
(this doesn't extend to protecting the stability of the U.S. dollar or the value of the savings for ordinary american citizens)

This is another example of pure capitalism eating itself and requiring bail outs from the ordinary working citizens. As usual, when times are prosperous, enormous profits are made for a small percentage of individuals off the back of everyone else, and when the capitalists make a mess out of things, they come crying for assistance.

There was a huge amount of corruption in the international financial sector that has led to this crisis. Not one person will be charged for this fraud unless they're a designated 'rogue trader' scapegoat

http://news.bbc.co.uk/2/hi/business/7299938.stm
http://www.ft.com/cms/s/e2206ed2-f380-11dc-b6bc-0000779fd2ac.html

Dave 2008

Bear closed on Friday at $30 a share, it traded near $170 in Jan 2007, and yesterday it was "sold" for $2 (yes two) Dollars a share......incredible.

the_syco

Excellent. This will prevent something like the Wall Street crash, hopefully.

Look at Sweden (or some nordic country) who did this sort of thing in the 80's (nationaling the bank) and survived nicely (bank was privatised again after it was all stable again).

is_that_so

Markets down today, ISEQ down over 4% again, dollar at 1.58. And while we would all love a quick end to it, it seems a way away just yet. No-one seems to know how far the sub-prime nightmare goes. Think we can expect more record oil and gold prices, dollar lows and more misery in the US economy and worldwide stock market turmoil.
This piece also on BBC suggests it could all end in tears.

http://news.bbc.co.uk/2/hi/business/7300182.stm

Time Magazine

Akrasia wrote: »

This is another example of pure capitalism eating itself and requiring bail outs from the ordinary working citizens.

How are ordinary working citizens bailing Bears out?

There was a huge amount of corruption in the international financial sector that has led to this crisis.

Link? Are you calling miscalculated risk corruption?

Not one person will be charged for this fraud unless they're a designated 'rogue trader' scapegoat

So you're assuming that the rogue traders (and I don't put that in quotes because that's what they were, there's no conspiracy here ) who are currently being prosecuted are scapegoats? Have you any evidence for this? Do you want to see rogue traders prosecuted to the fullest extent of the law, or do you not have faith in the legal system to do this job either? In the same sentence you complain that nobody will be charged. Had these "scapegoats" not been arrested, would you have simply made all that claim all the louder?

Thomas_S_Hunterson

This is an example of the fact that SH1T HAPPENS in the real world Akrasia. Nothing to do with capitalism. It could occur under any political or economic ideology, be it socialism, anarchism, fascism or whatever.

It's a statistical certainty that as time progresses very big bad things will happen, despite all provisions to deal with such bad things.

Akrasia

Ibid wrote: »

How are ordinary working citizens bailing Bears out?

The U.S. have decided that they're going to inflate their way out of this crisis. This means the wages and savings of ordinary people are collapsing in value. You can;t just introduce hundreds of billions of dollars into the banking system out of thin air and not expect there to be consequences.

Link? Are you calling miscalculated risk corruption?

It is when you lie about it and misrepresent the value of your assets.
CDOs were manipulated to give them the appearance of being safe investments. They were given AAA ratings and sold to pension funds even though the banks marketing them KNEW that they weren't as solid as they were making them out to be. The entire CDO system was developed as a way to get their junk debt off their balance sheet to make their figures look better than they really were. They were 'insured' against losses to give them high ratings but the banks knew that there was no way the insurers could cover the losses if too many of the debts defaulted. (as many of them certainly would given the nature of this junk debt to begin with)

So you're assuming that the rogue traders (and I don't put that in quotes because that's what they were, there's no conspiracy here ) who are currently being prosecuted are scapegoats? Have you any evidence for this? Do you want to see rogue traders prosecuted to the fullest extent of the law, or do you not have faith in the legal system to do this job either? In the same sentence you complain that nobody will be charged. Had these "scapegoats" not been arrested, would you have simply made all that claim all the louder?

The whole banking sector was a rogue trader. They were taking risks that they should never have contemplated because there were enormous profits to be made. There are official rogue traders who lose a few billion, and there are rogue institutions who lose hundreds of billions. The individual will go to jail for a very long time, the heads of the institutions will probably get a golden handshake. (meanwhile tens of thousands of front line staff lose their jobs and will be lucky if they get statutory redundency.

Time Magazine

How is the Fed - which isn't a public body - giving a firm $2 a share hurting the footsoldier? Surely it would be worse if this was public money? Surely it would be worse to see the company fall to the ground?

Please back your claims that quants were aware of the risks of their instruments.

You claim that the US is using inflation to get out of this, which may well be true, but then also bemoan "tens of thousands of front line staff [losing] their jobs." What's your view on the trade-off between low inflation and low unemployment? Which would you choose? What "optimal" levels would you aim for?

Akrasia

Sean_K wrote: »

This is an example of the fact that SH1T HAPPENS in the real world Akrasia. Nothing to do with capitalism. It could occur under any political or economic ideology, be it socialism, anarchism, fascism or whatever.

It's a statistical certainty that as time progresses very big bad things will happen, despite all provisions to deal with such bad things.

Oh come on, you can't just say 'bad stuff happens, quit whining about it'

This is a very specific incident that could only have happened under the conditions created by ultra rampant capital accumulation built on a soggy foundation of usury debt.

this kind of thing was morally repugnant for the majority of human civilisation. Charging interest is banned by most religions because it is morally indistinguishable from theft.

Thomas_S_Hunterson

Akrasia wrote: »

Oh come on, you can't just say 'bad stuff happens, quit whining about it'

By all means whine about it. The banks will put better risk managment structures in place reducing the chance of another disaster, but disasters will still happen.

Akrasia wrote: »

This is a very specific incident that could only have happened under the conditions created by ultra rampant capital accumulation built on a soggy foundation of usury debt.

It's hardly a specific incident. Credit default is a fact of life.

Akrasia wrote: »

this kind of thing was morally repugnant for the majority of human civilisation. Charging interest is banned by most religions because it is morally indistinguishable from theft.

You're taking the piss right?

Akrasia

Ibid wrote: »

How is the Fed - which isn't a public body - giving a firm $2 a share hurting the footsoldier? Surely it would be worse if this was public money? Surely it would be worse to see the company fall to the ground?

The Fed isn't giving them $2 a share, JP Morgan are. The Fed are giving them 30bn in 'loans' to cover their broken assets. Where are they getting that money? They're pulling it out of their asses. The ordinary mortgage holders are still getting thrown out of their homes if they can't pay their loans, why aren't they getting federal loans and rescue deals? Because that would destabilise the mortgage market, and they are doing everything they can to prop up this failing system instead of taking the opportunity to completely reform the system.

It would be a lot better if the U.S. government simply nationalised the bank, and then put into place measures to prevent mortgage holders from losing their homes.

Please back your claims that quants were aware of the risks of their instruments.

of course they were aware of the risks. They were packaging sub prime mortgages as AAA rated investments. They were operating in a climate of 100% mortgages where applicants didn't even have to prove their own income, where the mortgage brokers didn't give a damn whether or not the customers had an ability to pay, they still got their commission, and bore none of the risk.

You claim that the US is using inflation to get out of this, which may well be true, but then also bemoan "tens of thousands of front line staff [losing] their jobs." What's your view on the trade-off between low inflation and low unemployment? Which would you choose? What "optimal" levels would you aim for?

Thats not what this crisis is about. It's not a matter of balancing inflation with employment, it's a matter of the U.S. banking sector and the Fed reserve acting recklessly for a decade, and when they can't afford to pay their bills, they just print more money. It's a robert mugabe fiscal policy.

Akrasia

Sean_K wrote: »

It's hardly a specific incident. Credit default is a fact of life.

You're saying this as though this credit crisis was just an unfortunate and unavoidable accident. This was predictable from the start and it could not have ended any other way.

OhNoYouDidn't

Ibid wrote: »

How is the Fed - which isn't a public body - giving a firm $2 a share hurting the footsoldier? Surely it would be worse if this was public money?

Are you for real? The US central bank is not a 'public body'? :eek:

As it happens I agree with the Fed on this one, but to say it isn't the state interfering in the market to keep a badly run bank afloat with public money is deliberatly being mischevious.

OhNoYouDidn't

Sean_K wrote: »

It's hardly a specific incident. Credit default is a fact of life.?

Rubbish. It was badly placed risk and the inevitible happened.

Sean_K wrote: »

You're taking the piss right?

Most religions in theory ban urusry. Hence Islamic banking works on the basis of 'commision' rather than interest. The only people Jesus used violence against were moneylenders. Application varies however.

Minder

From here http://www.financialnews-us.com/?age=ushome&contentid=2450072278

The collapse of Bear Stearns means its 14,150 staff (who own a high proportion of the bank than any other Wall Street firm) will be particularly hard hit.

According to filings, the Bear Stearns Companies 2008 Trust owns 27.3m shares on behalf of employees. These will be worth just $55m under the terms of the sale, compared with $2.7bn just a few months ago.

Staff at Bear Stearns have lost more than $5.2bn on their holdings in the company. The sale price of $2 p/s is 98.7% below where the shares were trading as recently as April last year.

Insiders at Bear Stearns, including directors and employees, own 38.7% of the bank's shares according to Thomson Financial. They will receive around $90m for their shares under the terms of the acquisition by JP Morgan Chase, compared with $5.3bn when the shares were trading at $100 in December last year.

Other big losers from the collapse of Bear Stearns...include Joe Lewis, the secretive British billionaire, who has lost an estimated $1.16bn on the stake he built up in Bear Stearns last year. He bought 11 million shares last year at an average price of $107m, worth $1.18bn, according to regulatory filings. His stake will be worth just $22m under the terms of the sale.

James Cayne, chairman of Bear Stearns (Cayne owns 5.6m shares... according to regulatory filings) has lost $550m from the collapse, compared with a share price of $100 per share, and as much as $883m based on the 52 week high for the shares of $159.36 in April last year.

Alan Schwartz, chief executive of Bear Stearns, has seen $100m wiped off the value of his 1.03m shares in the past three months, and has lost $162m in the past year. Institutional investors who have been hit by the collapse – based on regulatory filings as of the end of December 2007

Other losers include:

Morgan Stanley with 5.4%, Legg Mason with 4.8%, Private Capital Management with 4.7%, Barclays Global Investors with 3.6% and State Street Global Investors with 3.0%.

Minder

http://www.sec.gov/news/press/2008/2008-44.htm

"As of its most recent capital calculation as of the end of February 2008, Bear Stearns' holding company capital exceeded relevant regulatory standards. According to the information supplied to the SEC by Bear Stearns as of Tuesday, March 11, the holding company had a substantial capital cushion. In addition, as of March 11, the firm had over $17 billion in cash and unencumbered liquid assets.

"Beginning on that day, however, and increasingly throughout the week, lenders and customers of Bear Stearns began to remove funds from the firm, despite its stable capital position. As a result, Bear Stearns' excess liquidity rapidly eroded.

---

Bear Stearns was highly leveraged, but quite liquid as of the Tuesday 11th March. What happened to change that? Why were those deposits suddenly withdrawn? BSC had the rug pulled from under them - unable to meet margin calls on unwinding leveraged positions, the company was on the verge of bankruptcy as of Friday last.

Then the rescue package from JP Morgan Chase - along with a $30B nonrecourse financing arrangement from the Federal Reserve on Sunday. With the acquisition (bailout) completed, the Federal Reserve also announced an additional primary lending facility. Had that been in place last week, BSC would be just another Wall St bank instead of the biggest news event this year.

There is the smallest possibility that these events are slightly more orchestrated than the random panic event that it appears to be on the surface. Isn't it strange that BSC - the only bank not to take part in the bailout of LTCM is the only victim of the credit crunch? Time will tell.

silverharp

OhNoYouDidn't wrote: »

Most religions in theory ban urusry. Hence Islamic banking works on the basis of 'commision' rather than interest. The only people Jesus used violence against were moneylenders. Application varies however.

remember though these were 0 growth societies living with marginal resources, so banning interest on debt stopped a winner takes all outcome. The only problem here is interest rates are manipulated for political reasons. The Austian school of economics would do away with central banks and let the market set interest rates, this would have avoided the housing mess in the US.

portomar

the ordinary person is the victim in this beacuse, as said, the US is inflating its way out of the problem. inflation punishes savers, rewards borrowers, makes the entrepeneur suffer and the incumbent prosper.

IrishMike

Akrasia wrote: »

The Fed isn't giving them $2 a share, JP Morgan are. The Fed are giving them 30bn in 'loans' to cover their broken assets. Where are they getting that money?

You do realise that the ECB has been doing the same since last summer to
basically anyone that wants it. They are doing it because if they dont and
the banking system collapses which it will without intervention, then pension
funds, investments, mortgages etc will all fall apart and the ordinary joe soap
on the street will be ****ed.
You are criticising something you obviously dont understand.
Banks and stock markets create wealth, they dont redistribute it like you are implying.

Time Magazine

Akrasia wrote: »

The Fed isn't giving them $2 a share, JP Morgan are. The Fed are giving them 30bn in 'loans' to cover their broken assets.

You're right; I read that wrong. I thought the loan equalled $2 a share when spread out.

Where are they getting that money? They're pulling it out of their asses.

Suggesting the printing of money is pulling it out of their ass is ignorant of the realities of economics. They set the interest rates in accordance with what the economy needs to keep motoring along. It's not that they're pulling it out of their arses, the Central Banks just charge less interest for leveraging. Please don't try turn this into another conspiracy-driven rant about fractional reserve.

The ordinary mortgage holders are still getting thrown out of their homes if they can't pay their loans, why aren't they getting federal loans and rescue deals?

Inflation devalues debt. So does a lowering of the interest rate (assuming you're not on a fixed-rate). The Fed aren't getting into one-on-one cases with individual homeowners for obvious reasons but they are most certainly helping homeowners. They are lowering the risk of the loss of a home hugely by increasing money supply.

Because that would destabilise the mortgage market, and they are doing everything they can to prop up this failing system instead of taking the opportunity to completely reform the system.

It's not failing. One firm has fallen. Come back to me when there are thousands of people who have lost their deposits. Until this happens, you can't claim the system is failing and have even a modicrum of respect.

It would be a lot better if the U.S. government simply nationalised the bank, and then put into place measures to prevent mortgage holders from losing their homes.

Government intervention can work sometimes but more often than not gets very messy.

If you're so anti-inflation (and I'm not saying that's a bad thing) are you not concerned about the undeniable correlation between government control of monetary policy (aka lack of CB independence) and inflation?

of course they were aware of the risks.

Saying "of course it's true" isn't backing something up. Trillions of dollars of value has been wiped off international markets. Many of the much-bemoaned "rich and powerful" lost big. Some lost just about everything. Do you not think, just for a moment, that maybe this isn't all a cunning plan and people just lost out on investments? If you're being so curt and dismissive of financial investors that lost all this money (consider shareholders who've lost 99% of the value of their B-S stock), why are you not so dismissive of households that took up mortgages without detailing every risk? It's a two-way game.

Thats not what this crisis is about. It's not a matter of balancing inflation with employment, it's a matter of the U.S. banking sector and the Fed reserve acting recklessly for a decade, and when they can't afford to pay their bills, they just print more money.

If it's not a matter of output or inflation, then stop complaining simulatenously about unemployment, inflation and foreclosure. The three are not complementary, at least not over a medium horizon. Personally, I think the least undesirable is inflation. Go inflation.

If your intention is to simply shout from the rooftops without suggesting any real policy measures, then I'm done. Shouting from the rooftops can be fun but it doesn't help anyone or add anything.

It's a robert mugabe fiscal policy.

There are a couple of problems with this statement. First of all, reposession rates are still relatively low in absolute terms, delinquency at its highest since 1985 (which is bad, but not exactly 1929 here). In contrast, inflation in Zimbabwe has gotten so bad they can't even count it. We're talking in terms of millions of percent. Comparing the Fed to Mugabe is like comparing the Gardaí to the SS, or comparing Waterford's lack of a university as akin to apartheid.

Also, we're not talking about fiscal policy at all.

OhNoYouDidn't wrote: »

Are you for real? The US central bank is not a 'public body'? :eek:

Would you prefer the Competition Authority to have "feck all independence" or "lots of independence"? The intuition is the same with banks.

As it happens I agree with the Fed on this one, but to say it isn't the state interfering in the market to keep a badly run bank afloat with public money is deliberatly being mischevious.

No it's not. The Fed is not run by the state.

Minder

There seems to be some debate as to whether the money being loaned by the Federal Reserve is new money or already exists in cash reserves held by the Fed. I believe it is the latter, but the Fed does not have sufficient funds to support the US banking system in the event of a systemic failure.

The problem with the Term Auction Facility and the new lending facility is that are supposed to be temporary - yet it is the Fed who will decide when the loan is called in. Since pulling the rug from under the banks that have liquidity problems would be counter productive, the loans are more or less permanent.

IrishMike

Bear sterns share price graph.
Very informative.

OhNoYouDidn't

Ibid wrote: »

No it's not. The Fed is not run by the state.

I never said it was. But you said which isn't a public body . Wrong. If you think that Central Banks are private entities, you can understand why I am treating the rest of your posts sceptically.

LouOB

Who is the biggest bank now that JP Morgan bought BS?

depends how you want to measure it..

easiest way to is to multply the number of shares by the price of the share.

I am in a rush at the moment but I if I get time I'll do a quick and dirty spreadsheet

daveirl

This post has been deleted.

leninbenjamin

daveirl wrote: »

This post has been deleted.

tbh all the current happenings are indicative of serious institutional flaws that need to be rectified. but the U.S. seem to afraid to confront the issue, and instead are constantly trying to allay the inevitable, only each time they do they are simply adding more water to the dam, so to speak.

portomar

Ibid wrote: »

Saying "of course it's true" isn't backing something up. Trillions of dollars of value has been wiped off international markets. Many of the much-bemoaned "rich and powerful" lost big. Some lost just about everything. Do you not think, just for a moment, that maybe this isn't all a cunning plan and people just lost out on investments? If you're being so curt and dismissive of financial investors that lost all this money (consider shareholders who've lost 99% of the value of their B-S stock), why are you not so dismissive of households that took up mortgages without detailing every risk? It's a two-way game.

How about the difference between a small or medium sized company going belly up because of bad investments and bear sterns? if we allow a situation where banks can become "too big to fail" so that they will be bailed out in these situations, they cant possibly be regulated the way they are now.

im not saying its a cunning plan but the fed is being highly selective about who it saves and who goes to the wall. 44 times leverage bear sterns had on many instruments, and the employees holding the shares, for the most part smart people will suddenly be up in arms because they'll feel hard done by. if you're entire net worth is in one share and you don't look at current market surrounding invesment banking and think "hmm.. not looking great, maybe ill sell some/all", you deserve to lose every cent just like the mortgage holder who could never afford his house.

Ekancone

I think regulation needs to be redrawn, i think Basel II laid incentive's for an increased need for securitisation.

Also, The Fed is quasi-governmental, it makes as much sense as the Holy Trinity.

Minder

daithifleming wrote: »

I think regulation needs to be redrawn, i think Basel II laid incentive's for an increased need for securitisation.

Also, The Fed is quasi-governmental, it makes as much sense as the Holy Trinity.

Rating agencies need to be overhauled - how can a rating agency be employed by the company selling the security?

It took nearly 80 years to dismantle the Steagall Glass Act, and all of 12 years to bring us to the brink of financial disaster. Will there be some soul searching after this event is over - I very much doubt it. The system survived - so no need for reform.

Minder

Minder wrote: »

There is the smallest possibility that these events are slightly more orchestrated than the random panic event that it appears to be on the surface. Isn't it strange that BSC - the only bank not to take part in the bailout of LTCM is the only victim of the credit crunch? Time will tell.

From Bloomberg today U.S. regulators are investigating whether traders illegally sought to force Bear Stearns Cos. shares into a tailspin last week by spreading false information about the firm's finances, two people familiar with the inquiry said yesterday.

Time Magazine

Some links:

"Not a bailout"

Paul Krugman on why nationalisation isn't always good.

Minder

JP Morgan now bidding at $10 per share for Bear Stearns

JP Morgan have also agreed to buy 39.5% of the shares of the company to prevent a share holder vote on the deal. In addition to the shares purchased, JPM will realise the first $1b in losses on the portfolio with the Fed carrying the risk on the rest.

From here

The New York Fed will take, through a limited liability company formed for this purpose, control of a portfolio of assets valued at $30 billion as of March 14, 2008. The assets will be pledged as security for $29 billion in term financing from the New York Fed at its primary credit rate.

JPMorgan Chase will bear the first $1 billion of any losses associated with the portfolio and any realized gains will accrue to the New York Fed. BlackRock Financial Management, Inc. will manage the portfolio under guidelines established by the New York Fed designed to minimize disruption to financial markets and maximize recovery value.