The Fed Bails Out Bear Stearns

a1bion · Post by **a1bion** » Fri Mar 14, 2008 1:10 pm

Socialism at its finest.

March 14 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke invoked a law last used four decades ago to keep Bear Stearns Co. from collapsing after the securities firm approached the central bank for emergency funding.

The loan to Bear Stearns required a vote today by the Fed's Board of Governors because the company isn't a bank, Fed staff officials said. The central bank is taking on the credit risk from Bear Stearns collateral, lending the funds through JPMorgan Chase & Co. because it's operationally simpler to accomplish than a direct loan, the staff said on condition of anonymity.

Bernanke took advantage of little-used parts of Fed law, added in the 1930s and last utilized in the 1960s, that allows it to loan to corporations and private partnerships with a special Board vote. The Fed chief probably sought to stave off a deeper blow to the financial system from a Bear Stearns collapse, former Fed researcher Keith Hembre said.

``The Fed really doesn't have any obligation to help a non- bank aside from its role or responsibility to keep the financial markets functioning,'' said Hembre, who helps oversee $107 billion as chief economist at FAF Advisors Inc. in Minneapolis. ``They made a judgment, probably an accurate one, that they're not going to function very well if you've got a full-blown crisis with a major Wall Street firm.''

http://www.bloomberg.com/apps/news?pid= ... refer=home

annarborgator · Post by **annarborgator** » Fri Mar 14, 2008 1:20 pm

I always did want to visit China. Didn't even have to leave my desk!

radbag · Post by **radbag** » Fri Mar 14, 2008 2:10 pm

DJIA down -247

bear stearns down 23.47 at 33.71 on 157MM traded

just so you know, bear stearns was trading at 131.58 on 10/5/07

a1bion · Post by **a1bion** » Fri Mar 14, 2008 2:55 pm

Somebody holding BSC puts today just made a lot of money.

radbag · Post by **radbag** » Fri Mar 14, 2008 3:05 pm

closes at 30 on the dot... [img]{SMILIES_PATH}/icon_lmao.gif[/img]

i bet it closes next week at 20

a1bion · Post by **a1bion** » Fri Mar 14, 2008 3:20 pm

I was out running errands earlier and on my way out the door, I heard them say one of the Wall St firms now had a prediction out for a 1% interest rate cut next week. I thought I heard them say earlier today that just yesterday, there was zero odds of a full 1% rate cut priced into the futures.

Crazy week and another crazy one ahead.

Toothy · Post by **Toothy** » Fri Mar 14, 2008 3:21 pm

Hmm. Maybe I'll wait another week on that refinance.

radbag · Post by **radbag** » Fri Mar 14, 2008 3:23 pm

with the 300BLN cash infusion, 1% is out of the question...there was chat about that prior and chat about a 50bp move intermeeting then another 50bp move AT the meeting.

the street is split between 75 and 50 right now...i'm w/75

a1bion · Post by **a1bion** » Fri Mar 14, 2008 3:25 pm

Turns out, it was CitiGroup calling for the 1% cut. Prolly more wishful thinking on their part more than anything, since they're pretty well fucked, just like Bear.

Welshgator · Post by **Welshgator** » Fri Mar 14, 2008 4:52 pm

Hmm. Maybe I'll wait another week on that refinance.

Seems to me mortgage rates are not dropping in conjunction with the Fed interest rate cuts. I take it this is not a good economic sign.

a1bion · Post by **a1bion** » Sun Mar 16, 2008 2:23 pm

Skimmed through an article this morning that seems to indicate Bear has exposure of up to 10 trillion dollars in derivatives. JP Morgan and JP Flowers apparently are scrambling to bail them out.

Lehman apparently has similar issues.

Fuck, I'm a little depressed now.

a1bion · Post by **a1bion** » Sun Mar 16, 2008 8:37 pm

I go out to dinner and this is what I come back to:

March 16 (Bloomberg) -- JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for about $240 million, less than a 10th of its value last week, after a run on the company ended 85 years of independence for Wall Street's fifth-largest securities firm.

Shareholders of New York-based Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the two companies said in a statement today. The U.S. Federal Reserve will provide financing for the transaction, including support for as much as $30 billion of Bear Stearns's ``less-liquid assets.''

http://www.bloomberg.com/apps/news?pid= ... refer=home

Your tax dollars at work.

a1bion · Post by **a1bion** » Sun Mar 16, 2008 8:43 pm

And on a related note, the Fed also cut interest rates another 25 basis points and the dollar is down overnight against the Yen again.

Tipmoose · Post by **Tipmoose** » Mon Mar 17, 2008 8:13 pm

Its not going to be long before the various central banks get together and start to prop up that dollar. This is just insane.

TTBHG · Post by **TTBHG** » Tue Mar 18, 2008 11:34 am

No shock, lawsuits start flying over the $2/share sell price.

radbag · Post by **radbag** » Tue Mar 18, 2008 11:53 am

No shock, lawsuits start flying over the $2/share sell price.

came across the tape yesterday at around 4ish that the first class action lawsuit had been filed in NY already claiming that the bear stearns officials were negligent in reporting the state of the companys books and/or misrepresenting it to the shareholders.

the fact that they had a 'contingency fund' of over 32BLN to assist in future litigations tells me they were prepared to dole it out.

a1bion · Post by **a1bion** » Tue Mar 18, 2008 8:46 pm

[img]http://g.photos.cx/ebaydone-da.jpg[/img]

Stolen from the Minyanville website.

MinGator · Post by **MinGator** » Tue Mar 18, 2008 9:13 pm

[img]{SMILIES_PATH}/icon_lmao.gif[/img]

IHateUGAlyDawgs · Post by **IHateUGAlyDawgs** » Thu Mar 20, 2008 10:25 am

Bear Stearns a sacrificial lamb?

a1bion · Post by **a1bion** » Thu Mar 20, 2008 11:12 am

Kudlow's an idiot. He was trying to make that argument the other night. One of his guests pointed out the obvious and said that the reason Bear went down was because they leveraged up their balance sheets with a lot of garbage. Pure and simple.

Nonetheless, it is funny how hot and heavy Larry was getting for a government intervention in the free market.

IHateUGAlyDawgs · Post by **IHateUGAlyDawgs** » Thu Mar 20, 2008 11:16 am

for the record, I wasn't throwing that article up as an extension of my views, but moreso as another thing to discuss...carry on.

radbag · Post by **radbag** » Thu Mar 20, 2008 12:44 pm

i agree w/kudlows last 4 paragraphs...

a1bion · Post by **a1bion** » Thu Mar 20, 2008 2:39 pm

My man Barry Ritholtz was the guest who told Kudlow the other night that Bear failed because they fucked up. He's got a piece up on Esquire's website today:

Bear didn't manage their risk properly. They were the most aggressive purchaser and underwriter of mortgage-based securities. They chased the fast money, the hot returns. When you take on that kind of risk, there's always the chance you'll fail. It's like when a weatherman says it's going to be a nice day with just a 10 percent chance of rain. Then thunderstorms come and people say, "Gee, this weatherman really sucks." No, what happened was the low probability event just came up.

With Bear Stearns, guess what? It rained. There were plenty of warnings, but no one brought their umbrellas.

I know plenty of people who were happy they blew up. Not quite Eliot Spitzer happy -- people weren't high-fiving -- but somebody taped a $2 bill to the front door of Bear Stearns , right over the logo, took a photo and sent it around to all the trading desks. Man, that’s just cold

(...)

We saw a complete abdication of responsibility by the regulatory supervisors who oversee banking and lending institutions. Think about it: How on Earth was a strawberry-picker in California making $15,000 a year able to qualify for a no money down loan on a $720,000 mortgage? That is just unconscionable. And that basically tells you that the mortgage industry was saying, “Fuck it! We don’t care. Make Money!” There was no supervision, no leadership. No one performed any kind of due diligence. Imagine if the Super Bowl were played with no referees on the field -- that’s what this was like.

The mortgage industry built their entire business on ass-backwards, shit-kicking, dumb-fuck assumptions. The housing market couldn't just go up forever. Yes, that was part of their “models.” You just have to be alive for 15 years to know that these things cycle. People who said that real estate prices weren’t ever going to go down should be beaten over the head with piles and piles of foreclosed mortgages. Idiots.

And, lots of people got quite rich off of it. The guys running the homebuilders were telling the world that everything was great, they were building homes as fast as they could -- and selling their stock like their was no tomorrow. Like Angelo Mozilo, the founder of the biggest mortgage company in the U.S. He's the poster boy for inside sales. The guy sold $400 million in stock. That's a red flag that way too many people missed.

But it didn't pay to get upset about it. Mortgage brokers -- some of these guys can’t walk and chew gum at the same time -- were pulling in $3 million dollars a year. All of sudden, real estate agents were driving new Lexuses. Home Depot and Lowe's insiders got rich. There’s a whole infrastructure that went along with the real estate boom and that included everybody from contractors and builders to developers and brokers. Northern Trust had a study, I think from 2005, that showed 41 percent of new job creation was real-estate complex related. Typically, it’s 8-to-10 percent. Another red flag that was mostly ignored.

People still don't get it, though. I really wish more folks understood the concept of MEW, or Mortgage Equity Withdrawal. A few years ago, lots of people looked at the value of their home and said, "Gee, I bought this for $90,000 in 1995 -- and now it's worth $300,000!" And so they took out $175,000 in a home equity loan and bought cars and vacations and plasma screens. They financed their lifestyle with what has always been a savings vehicle. It's one thing if they used the money for “improvements” -- fix the driveway or remodel the kitchen. That adds value. But they didn't -- they ate their seed corn.

You're supposed to raise your standard of living by working harder, being clever, earning more income -- not by using your long-term savings. And now this current generation is pretty much fucked. When push comes to shove and they go to take money out of their houses at retirement time, they’re going to find out that there ain’t a whole lot there. They better pray that Social Security is still around in 20 years -– not exactly a sure thing.

Read the whole thing here: http://www.esquire.com/the-side/opinion ... ar-stearns

TheTodd · Post by **TheTodd** » Thu Mar 20, 2008 2:54 pm

He threw down the hammer and hit the nail perfectly.

G8rMom7 · Post by **G8rMom7** » Thu Mar 20, 2008 8:38 pm

AT least he says if you make improvements its not so bad. That makes me feel better about taking a loan for improvements.