Bear Stearns likely goes bankrupt

[Astronuc]

Wall Street watches Lehman walk on thin ice

NEW YORK (MarketWatch) -- Analysts who cover broker Lehman Brothers Holdings Inc. are watching closely from the sidelines Monday, loath to add to market speculation that the firm may be the next major brokerage to falter.

. . . .

Options traders are making big bets that Lehman stock will drop an additional 24% by Thursday, when March options expire, Dow Jones Newswires reported. Traders also are betting that the shares will continue to plummet over the next month.

 

[Poop-Loops]

No, I'm saying that if the operator of a Ponzi scheme talks you into running a Ponzi scheme of your own, then you should suffer the consequences of your own actions.

Sure, but you just said that if someone talks you into making a bad investment (i.e. borrowing money from a bank at huge rates because the bank talked you into it) should be fine because it's your fault.

That's not like someone talking you into starting a Ponzi scheme, that's like someone telling you to participate in one, because you'll get a huge profit.

 

[edward]

BEAR'S DEMISE: JPMorgan purchased Bear for an astounding $2 a share or about $ 236 million. The investment giant had a stock market value of $20 billion in January 2007. The purchase also was make only after Federal Reserve agreed to accept as collateral up to $30 billion in Bear Stearns market positions.

http://money.cnn.com/news/newsfeeds/articles/djf500/200803171418DOWJONESDJONLINE000731_FORTUNE5.htm

$30 billion in Bear Stearns market positions? Is that another way of saying debt?



There is a lot of behind closed doors wheeling and dealing going on.

EDIT: Such as,

March 17 (Bloomberg) -- JPMorgan Chase & Co.'s $240 million buyout of Bear Stearns Cos. includes a six-year-old midtown Manhattan tower worth $1.5 billion that may make JPMorgan back out of its commitment to build at the World Trade Center site.

 

[Jimmy Snyder]

That's not like someone talking you into starting a Ponzi scheme, that's like someone telling you to participate in one, because you'll get a huge profit.

Participating in a Ponzi scheme is no different than running one yourself. You are doing to the next guy exactly what the previous guy is doing to you.

People bought homes that they could not afford because they were told that the price of houses would increase. The prices didn't go up, so the public is asked to shore up their investment. That's socialization of risk. If it works out, they get to keep the house. That's privatization of profit.

 

[russ_watters]

$30 billion in Bear Stearns market positions? Is that another way of saying debt?

No, a "market position" is the current value of an investment. It means that that's money that hasn't been lost...yet. It's a guarantee against future losses.

 

[russ_watters]

That's something that the neo-cons don't get, Russ. They are deathly afraid to let market forces and competition play out in downturns. If they profess to believe in the value of a free-market economy, why do they fear allowing the market to operate? If Bear Stearns failed, there are a lot of enterprising individuals and groups willing to sweep in and pick up the pieces. If Morgan ends up owning Bear Stearns with taxpayer-funded guarantees, it will only consolidate risks and expose us to more dramatic failures.

Real conservatives would understand these concepts, Russ. There are few real conservatives in the Republican leadership anymore, and they are shouted down by the radicals who are bent on looting the US treasury.

There is a catch-22 here, though, turbo: for those who think that the US is headed for a major meltdown, then there is such a thing as "too big to fail".

 

[russ_watters]

Participating in a Ponzi scheme is no different than running one yourself. You are doing to the next guy exactly what the previous guy is doing to you.

People bought homes that they could not afford because they were told that the price of houses would increase. The prices didn't go up, so the public is asked to shore up their investment. That's socialization of risk. If it works out, they get to keep the house. That's privatization of profit.

Sorta related, one thing about the S&L crisis was that those investments (unlike these) were government insured right from the start. I don't know if/when the experts knew that those investments were flawed, but for the average-Joe investor, there was no reason not to invest in an S&L.

 

[turbo]

There is a catch-22 here, though, turbo: for those who think that the US is headed for a major meltdown, then there is such a thing as "too big to fail".

Why is it permissible for the Federal government to guarantee that Morgan will suffer no losses from assuming the riskiest $30B of Bear Stearn's debts? That is corporate welfare at its worst, encouraging and abetting risky investments and perhaps criminality involving insider trading. The government is not going to help you or me if we buy stuff on speculation and lose money.

As I said to someone else today, such bail-outs do not address the underlying problems that are responsible for the failure of investment banks, like engaging in investments with 1:30 cash:debt ratios, high-risk investments, irrational executive salaries, etc. Bailing them out is like putting a band-aid on a cancerous lesion and expecting that the patient will be cured. Neo-cons just don't get it, and until we manage to get some real fiscal conservatives in positions of power in our government, the myth of a "free market" will continue its mythological status.

 

[Jimmy Snyder]

I am a hard man with no pity for those less fortunate than myself.

The story you are about to hear is true. Only the names have been changed to protect the innocent, the guilty and everyone in between.

I am a frugal man and over the years was able to build up a downpayment on a house. I got a 30 year fixed mortgage and have been living here for 10 years. My colleague at work makes more money than I, but was a spendthrift. He went bankrupt years ago, but that's forgotten now. Other people, myself included indirectly, paid his debts. More recently, he bought a house. It was a house that I myself could not have afforded. How could he make the down payment, he had no money, just credit card debt. Easy, he used creative financing. He payed nothing down and got an adjustable rate mortgage. The low rate was good for two years. He, and everyone else figured the market for houses was hot, the value of the house would go up, and he could refinance at the end of the grace period. However, he bought at the height of the market and now his house is not worth as much as he owes on it. He can't refinance and there is simply no way that he can keep the house. He will have to go to foreclosure. But wait, no. Pity has overwhelmed otherwise sober people. They have figured out a way to take my money and use it to save his house. Hooray for pity. Here's how it works. You take my money and you give it to him so he can keep his house. Public risk, private profit. End of story. Well not quite. Next year he is going to go bankrupt again and I will have to pay for that too. And of course, he gets to keep the house.

Meanwhile, I lost money on a stock market investment. I too bought at the top of the market. But no one here is in any mood to bail out investors. Who is going to bail me out? What, no pity? You are hard, people, hard.

 

[russ_watters]

Why is it permissible for the Federal government to guarantee that Morgan will suffer no losses from assuming the riskiest $30B of Bear Stearn's debts?

I didn't say it was. Once again, I don't think we are headed for a major meltdown. My point was that there is a potential for hypocrisy in people who think we are headed for a major meltdown if they don't also believe that a Bear Sterns type is "too big to fail".

And it seems to me that there are a lot of people -- and they are typically liberal -- holding those contradictory positions. They want it both ways.

That is corporate welfare at its worst, encouraging and abetting risky investments and perhaps criminality involving insider trading. The government is not going to help you or me if we buy stuff on speculation and lose money.

That isn't true - plenty of average Joe investors made a ton of money off the S&L scandal.

 

[Astronuc]

No, a "market position" is the current value of an investment. It means that that's money that hasn't been lost...yet. It's a guarantee against future losses.

Certainly. If the "market position" was debt, then it would not be accepted as collateral. On the other hand, the "market position" is not necessarily money, but assets, and those assets have a market position. If however, those assets had to be sold for cash, in the current market, BSC would probably have gotten a lot less than $30 billion - hence the liquidity crisis.

Citibank is selling off assets, and other stressed companies are probably doing the same.


Nevertheless, Bear Stearns did fail, but rather than go into bankruptcy, it was bought for pennies on the dollar by a larger rival.

 

[edward]

If the $30 billion (market positions) were not debt, then why did JP Morgan insist that the FED be responsible for them. The biggest solid asset BSC had was their building.

This deal was cut behind closed doors ,in the back room, and probably under the table.

 

[Astronuc]

If the $30 billion (market positions) were not debt, then why did JP Morgan insist that the FED be responsible for them. The biggest solid asset BSC had was their building.

No the FED is not responsible for the market positions, but rather the FED had to accept the $30 billion as collateral for the financing that the FED gave to JP Morgan to take on the risk of assuming Bear Stearns. It's just like my house and the money I've paid the bank is the collateral on the unpaid balance of my mortgage.

This deal was cut behind closed doors, in the back room, and probably under the table.

Most (if not all) deals involving the private sector are done behind closed doors.

 

[Greg Bernhardt]

I didn't say it was. Once again, I don't think we are headed for a major meltdown. My point was that there is a potential for hypocrisy in people who think we are headed for a major meltdown if they don't also believe that a Bear Sterns type is "too big to fail".

"Alan Greenspan, former chair of the U.S. Federal Reserve, writing for The Financial Times on Monday, said that market conditions were "the most wrenching since the end of the second world war." - CNN

 

[edward]

No the FED is not responsible for the market positions.

My mistake then, but that was how it was explained on CNBC this morning. In a CNBC interview an economist explained that the Fed would be liable for the $30 billion should the sale fail to resolve the BSC problem.

If BSC had $30 billion worth of market positions or bananas , would they have been facing impending bankruptcy? OK so they could probably have sold the bananas but not much else... Right??

Most (if not all) deals involving the private sector are done behind closed doors.

I realize this, but the FED was heavily involved in the entire process. Unless of course CNBC had it wrong again.

The Fed extended JP Morgan Chase a $30 billion credit line to help it buy rival Bear Stearns

Yet the purchase price was much lower than $ 30 billion. It sounds more like the credit was extended to JP Morgan to bail out the entire BSC situation.

JP Morgan is getting Bear Stearns for the rock-bottom price of about $2 a share — or about $236 million. That's a stunningly low price when one considers that Bear Stearns' shares were trading at $30 each on Friday, and that its company headquarters building in New York is valued at $1 billion by itself.

I would imagine that some of the major BSC shareholders may not give in without a legal battle.

But the deal effectively wipes out most of Bear Stearns' shareholder wealth, and it's not clear whether it will win shareholders' approval.

Quotes from:

http://www.npr.org/templates/story/story.php?storyId=88402829

 

[Astronuc]

Financial Crisis of 2008

Is the Fed Doing Enough to Help Sagging Economy?
http://www.npr.org/templates/story/story.php?storyId=88460819

Morning Edition, March 18, 2008 · The Federal Reserve swooped in quickly to prevent Wall Street titan Bear Stearns from going bust and triggering a panic. It's not a bailout in the sense of a taxpayer rescue of a corporation. But it is part of a more activist approach to the credit crisis by both the Fed and the Bush administration's economic team.

Some observers praise the Fed for its aggressive moves to prevent a broader meltdown in financial markets. But others say it isn't doing enough to address the underlying problem.

Now the people being bailed out want the government off their backs, but when they get into trouble because of irresponsible and reckless speculative investing, they want the government (tax-payers) to bail them out. So much for the free market philosophy.

Bear Stearns Collapse Costly to Many
http://www.npr.org/templates/story/story.php?storyId=88415073

All Things Considered, March 17, 2008 · Many people lost big money as Bear Stearns collapsed, among them British billionaire Joseph Lewis and Dallas-based money manager James Barrow. But employees may take the biggest hit. Collectively, they owned a huge stake in the bank.

Edit: Update - Lehman, Goldman Profits Fall, but Beat Estimates

Two of Wall Street's top investment banks reported earnings well below the heights of last year, yet still beating analyst expecations at a time when the financial sector is on edge following the collapse of Bear Stearns.

Lehman Brothers, whose stock fell 19 percent Monday following the announcement of Bear Stearns' sale, reported $489 million in profit for its first quarter this year. The earnings, which amount to 89 cents a share on $3.5 billion in revenue, are down 57 percent over the same time last year. Analysts surveyed by Bloomberg News had expected profit of 72 cents a share.

Meanwhile, Goldman Sachs reported $1.51 billion in profit for its first quarter of 2008. Goldman's earnings of $3.23 per share on $8.34 billion in revenue is less than half of the $6.67 per share it earned in 2007. Analysts had expected $2.57 a share on $7.3 billion, according to Reuters.

So now might be a good time to buy LEH.

 

[Greg Bernhardt]

BSC now up 63%. Market manipulation is incredible.

 

[Astronuc]

BSC now up 63%. Market manipulation is incredible.

If the stockholders reject JPMorgan's overture, then perhaps BSC can recover!

Basically, the story I heard this morning is that BSC is overleveraged, and the problem last week was that other financial institutions stopped loaning money to BSC, such that it could not meet obligations (i.e. liquidity crisis). Apparently the entire financial structure in the US and globally is in this situation. The financial markets are relying heavily on foreign sovereign funds and government treasuries for liquidity - and that is a recipe for instability when the market is over-leveraged.

I'm surprised the average home owner (and taxpayer), who has a mortgage interest rate of 5+%, is not thoroughly outraged that these financial speculators get 3% interest rates on the money they borrow to gamble, even after they have lost money.

Here's another perspective on the BSC matter.

Saving Wall St. (For Now
http://www.nytimes.com/2008/03/18/business/18sorkin.html

The whispers began on Wednesday, and by Sunday it was all over.

Somehow, in the space of about 100 hours, the value of a share of Bear Stearns, one of the nation’s most storied investment banks, skidded from about $67 to a bargain-basement $2. On Monday, just to twist the knife, some wit taped a $2 bill to the glass doors of Bear’s headquarters.

How could this happen?

It is hard to say it was an accident. Bear Stearns’s stunning downfall and subsequent sale to JPMorgan Chase on Sunday was orchestrated by some of the most powerful people on Wall Street and in Washington. It will go down either as a heroic rescue of the financial system or grand theft, Wall Street style. Maybe it was a bit of both.

Make no mistake: this was one of the greatest corporate euthanizations of all time. And Wall Street played its own gleeful role in it.

On Friday morning, when there still seemed to be a glimmer of hope that the stricken Bear might survive, William C. Repko, former chairman of JPMorgan’s restructuring group and now senior managing director at Evercore Partners, was already writing Bear’s obituary.

“Bear failed,” Mr. Repko was telling me. “Bear is gone.” He seemed so sure. “This is a run on the bank,” he said. “It’s what happened to Enron.” Bear’s demise, it seemed, was a foregone conclusion.

So this is a repeat of the Enron situation? Why was this allowed to happen - again?

 

[Astronuc]

OK - here's what's going on -

U.S. stocks surge on expectations of Fed rate cut
Dow jumps more than 250 points after Goldman, Lehman report earnings

12:31pm 03/18/2008

Off the Dow, shares of Goldman (GS:Goldman Sachs Group, Inc, 170.33, +19.31, +12.8%) and Lehman (LEH:Lehman Brothers Holdings Inc, 42.91, +11.16, +35.2%) both gained, with Goldman up 17.9% and Lehman advancing 31%. The large investment firms reported before market open that their respective profits fell less than analysts had forecast.

The time to buy LEH was yesterday just before closing, or fist thing this morning. But it could go the other way if LEH follows BSC.

OK - now that stocks have recovered, the Fed should not cut rates but sit tight and let the market resolve itself.

Edit (Update): Further reason the Fed should sit tight and not continue to cut rates at present.

Bear shareholders may try to get higher offer
Stock price suggests J.P. Morgan bid may be put off until market calms down

SAN FRANCISCO (MarketWatch) -- During a conference call held by J.P. Morgan Chase & Co. Sunday to discuss its offer to buy Bear Stearns Cos., an individual investor in the beleaguered brokerage firm announced that he would vote against the fire-sale deal.

The comment by a person identifying himself as Brian Firestone was followed by a brief silence. Then J.P. Morgan (JPM:JPMorgan Chase & Co (1:28pm 03/18/2008) 42.36, +2.05, +5.1%) executives moved on to the next question.

But the prospect that Bear Stearns investors may reject the bank's offer of $2 a share -- at least for a few months -- is now being priced into the market, analysts said Monday.

J.P. Morgan's offer is worth more than $2 a share because the bank's stock (the currency it's using to try to purchase Bear) climbed 10% on Monday. Bear shares closed at $4.81 -- roughly double the value of the bid.
Indeed, Joseph Lewis, one of Bear Stearns' largest shareholders, told CNBC on Monday that J.P. Morgan's offer was "derisory." The currency-trading billionaire owns almost 10% of the brokerage firm, having built a stake since September when the shares were trading at more than $100.

A week ago, the DOW jumped 400 points when the Fed injected $200 billion and reduced interest rates, and then the DOW subsequently lost more than 90% of that gain. Now again the FED intervenes and the DOW jumps 300 points. The FED needs to stop intervening like this and let the markets settle to the natural level. IMO, the FED is simply rewarding irresponsible behavior and harmful practices to the deteriment of the future economic security of millions of people.

 

[turbo]

I'm surprised the average home owner (and taxpayer), who has a mortgage interest rate of 5+%, is not thoroughly outraged that these financial speculators get 3% interest rates on the money they borrow to gamble, even after they have lost money.

Even worse, the speculators make fortunes when they guess right, and they run with that money, and get bail-outs when they guess wrong. The cheap money thrown around by the Fed is so attractive that we private savers/investors cannot compete. It's very difficult to find a fair interest rate on our savings because of these constant Fed rate-cuts designed to prop up the investment firms on Wall Street. When I say "fair" I mean "marginal" because the constant cheapening of our currency coupled with soaring prices for food, fuel, etc, make it impossible to break even with any available savings/money-market interest rates.

As long as the Fed continues to cut rates, they will price savings-oriented people out of any chance to get reasonable interest rates. This is a back-door transfer of wealth from private citizens to big business.

 

[Astronuc]

Bush Backs Fed’s Actions, but Critics Quickly Find Fault
http://www.nytimes.com/2008/03/18/business/18bush.html

WASHINGTON — President Bush on Monday welcomed the Federal Reserve’s sweeping intervention in the nation’s financial markets as his administration faced accusations that it had supported the bailout of a prestigious investment bank while doing little to address the hardships of Americans facing foreclosures on their homes.

Meeting with his economic aides at the White House in the morning in the first of two meetings on the economy, Mr. Bush again sought to project optimism at a time of financial turbulence after the Fed’s brokering of the takeover of Bear Stearns by JPMorgan Chase.

Mr. Bush singled out Treasury Secretary Henry M. Paulson Jr. for praise, saying he had shown “the country and the world that the United States is on top of the situation,” an assertion that was broadly disputed by the president’s critics.

“I want to thank you, Mr. Secretary, for working over the weekend,” Mr. Bush said in brief remarks in the Roosevelt Room.

The president’s remarks and his schedule underscored the growing political concern about the economy on a day that would otherwise have been devoted to traditional St. Patrick’s Day meetings and events.

The issue also spilled into the presidential campaign, drawing reactions from both Democratic contenders and the presumptive Republican candidate, underscoring how much the economy has overshadowed the war in Iraq, even as the fifth anniversary of the start of that war approaches on Wednesday.

. . . .

 

[Astronuc]

Stocks surge after broker earnings, Fed rate cut
Dow industrials score largest single-day point gain in more than 5 years

The Fed should not have cut the interest rate, because they are rewarding the folks who created the crisis in the first place. Why should speculators not gamble when the Bush administration rescues them?


I think these execs and officers should return their bonuses for last year.

Fed cuts rates by 75 basis points
Two dissents show disagreement on board

WASHINGTON (MarketWatch) -- Battling Wall Street's biggest crisis since the Depression, the Federal Reserve slashed its key lending rate by 75 basis points Tuesday to jump-start the sagging economy and boost confidence in the U.S. financial system.

The central bank's action, which drops the federal funds rate target down to 2.25% from 3% -- its lowest level since December 2004 -- was the latest in a series of extraordinary moves carried out by the Fed in the last week against a background of turmoil and crisis.

In its official statement on the decision, the rate-setting panel said the size of the cut was enough to promote growth, but left the door open to future cuts. Wall Street had expected the Fed to cut rates by a full percentage point, which would have been the largest cut since 1982.

"Today's policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity," the Fed's statement said.

Meanwhile -

FBI Mortgage Probe Examining 17 Large Firms
http://www.foxnews.com/story/0,2933,339009,00.html
Tuesday, March 18, 2008

Airlines focus on cutting costs, finding new revenue
Industry trims fleets and workforce, raises fares to offset higher fuel prices

NEW YORK (MarketWatch) -- Airlines are under pressure to find ways to offset skyrocketing jet fuel expenses, including finding new sources of revenue, grounding parts of their fleet and cutting back their workforce.

Delta Air Lines (DAL: 10.09, +0.86, +9.3%) said Tuesday it approached 30,000 employees with voluntary layoff packages in hopes at least 2,000, or about 4% of its workforce, will take the offer. The carrier hopes to reduce its "frontline" staff by about 1,300 and its administrators and management personnel by 700.

 

[russ_watters]

Nevertheless, Bear Stearns did fail, but rather than go into bankruptcy, it was bought for pennies on the dollar by a larger rival.

Yes, true - the Fed and JP Morgan attempted to prevent the failure (or did they...?), but it happened anyway.

 

[russ_watters]

If the $30 billion (market positions) were not debt, then why did JP Morgan insist that the FED be responsible for them. Because of the risk of not getting paid back.

The biggest solid asset BSC had was their building. [/quote] Which, ironically, was worth more than the company was sold for.

This deal was cut behind closed doors ,in the back room, and probably under the table.

All deals happen in conference rooms, but generally they are sitting in chairs. It's easier to see your notepad that way.

 

[russ_watters]

My mistake then, but that was how it was explained on CNBC this morning. In a CNBC interview an economist explained that the Fed would be liable for the $30 billion should the sale fail to resolve the BSC problem.

That's true - you just missed what that actually means.

If BSC had $30 billion worth of market positions or bananas , would they have been facing impending bankruptcy? OK so they could probably have sold the bananas but not much else... Right??

Yet the purchase price was much lower than $ 30 billion. It sounds more like the credit was extended to JP Morgan to bail out the entire BSC situation.

What the economists were saying is that BS went down because of a run on the bank. That means people lost confidence in the bank and went to pull their money out, and BS didn't have the ready-cash to pay them right away.

The value of the company and the value of the fundes in their care are two completely separate things. The money in the bank isn't the bank's money. The money lent to BS wasn't for them to use to pay their own rent and electric bills, it was to cover BS's clients when they wanted to pull their money out. The catch, with any bank, is that the bank uses the cash you give them to make investments -- that's why they give you interest. They don't just throw the cash into the vault and then hand the same cash back to you when you go to withdraw it.

That's why a few people compared this to the start of the Great Depression. A drop in the stock market sucks, but a liquidity crisis utterly destroys economic institutions and wipes-out money that on your balance sheet you still have.

 

[russ_watters]

If the stockholders reject JPMorgan's overture, then perhaps BSC can recover!

That would be an interesting twist. I don't know what to make of that possibility.

So this is a repeat of the Enron situation? Why was this allowed to happen - again?

No, what they are describing is nothing like Enron. What they are saying is that JP Morgan may have orchestrated BS's demise. It may have all been a takeover ploy. The liquidity crisis was triggered in part by banks not lending BS money like they usually do. Some of that may have been retaliation for BS not playing ball when others needed loans. But JP Morgan may have thought - hey, if we can rock these guys a little, they might collapse temporarily and we can pick them up before they bounce back (figuring the FED wouldn't let them actually fail).

But that isn't to say there weren't some illegal activities going on either at BS or by JP Morgan. What makes that possibility more interesting than ENRON is that when ENRON died, they just locked the doors and everyone went home. With BS, the company still exists and functions. If there was any kind of fraud in the takeover, the crime is ongoing. But what could the SEC do after the fact? I'm not sure you can un-merge the companies if the takeover was found to be illegal.

Other potential illegalities are what Greg mentioned - some people seemed to know this was coming and made money off that information. And, of course, the sub-prime mess itself still needs to be figured out. I tend to doubt (like with the S&L's) that much crime will be uncovered, just flaws in the way the industry works. Ie, the comment made in an article about BS's CEO being asleep at the wheel.

 

[Astronuc]

That would be an interesting twist. I don't know what to make of that possibility. No, what they are describing is nothing like Enron. What they are saying is that JP Morgan may have orchestrated BS's demise. It may have all been a takeover ploy.

Apparently some folks are comparing what happened with BSC (and possibly other places) with Enron, i.e. the financial shenanigans.

Here is a good overview of what happened at BSC. JPM and Fed stepped in after the fact. Now, the question is - did folks at JPM (or others) initiate rumors in the hopes of causing the failure of BSC - a rival?

The Week That Shook Wall Street:
Inside the Demise of Bear Stearns
http://online.wsj.com/article/SB120580966534444395.html (period of availability unknown)
By ROBIN SIDEL, GREG IP, MICHAEL M. PHILLIPS and KATE KELLY
March 18, 2008; Page A1

The past six days have shaken American capitalism.

Between Tuesday, when financial markets began turning against Bear Stearns Cos., and Sunday night, when the bank disappeared into the arms of J.P. Morgan Chase & Co., Washington policy makers, federal regulators and Wall Street bankers struggled to keep the trouble from tanking financial markets and exacerbating the country's deep economic uncertainty.

The mood changed daily, as did the apparent scope of the problem. On Friday, Treasury Secretary Henry Paulson thought markets would be calmed by the announcement that the Federal Reserve had agreed to help bail out Bear Stearns. President Bush gave a reassuring speech that day about the fundamental soundness of the U.S. economy. By Saturday, however, Mr. Paulson had become convinced that a definitive agreement to sell Bear Stearns had to be inked before markets opened yesterday.

Bear Stearns's board of directors was whipsawed by the rapidly unfolding events, in particular by the pressure from Washington to clinch a deal, says one person familiar with their deliberations.

"We thought they gave us 28 days," this person says, in reference to the terms of the Fed's bailout financing. "Then they gave us 24 hours."

In the end, Washington more or less threw its rule book out the window. The Fed, which has been at the forefront of the government response, made a number of unprecedented moves. Among other things, it agreed to temporarily remove from circulation a big chunk of difficult-to-trade securities and to offer direct loans to Wall Street investment banks for the first time.

The terms of the Bear Stearns sale contained some highly unusual features. For one, J.P. Morgan retains the option to purchase Bear's valuable headquarters building in midtown Manhattan, even if Bear's board recommends a rival offer. Also, the Fed has taken responsibility for $30 billion in hard-to-trade securities on Bear Stearns's books, with potential for both profit and loss.

. . . .

Tuesday, March 11

On Tuesday, officials unveiled what they thought came close: a promise to lend up to $200 billion in Treasury bonds to investment banks for 28 days. In return, the Treasury would get securities backed by home mortgages, whose uncertain values helped spark the current crisis, and other hard-to-trade collateral. The first swap was scheduled for March 27. At first, the firms were elated. [This is action prompted the Dow to rise 400 pts]

. . . .

At Bear Stearns, Chief Financial Officer Samuel Molinaro, along with company lawyers and Treasurer Robert Upton, were trying to make sense of the situation. They felt comfortable with their capital base of roughly $17 billion and were looking forward to reporting Bear Stearns's first-quarter earnings, which had been respectable amid the market carnage.

One theory began developing internally: Hedge funds with short positions on Bear -- bets that the company's stock would fall -- were trying to speed the decline by spreading negative rumors.

. . . .

Thursday, March 13

On Thursday evening, after customers had continued to pull their money out of Bear Stearns, the bank reached out to J. P. Morgan, looking to discuss ways the Wall Street giant could help ease Bear's cash crunch.

By then, Bear Stearns's cash position had dwindled to just $2 billion. In a conference call at 7:30 p.m., officials at Bear Stearns and the Securities and Exchange Commission told Fed and Treasury officials that the firm saw little option other than to file for bankruptcy protection the next morning.

Bear Stearns's hope was that the Fed would make a loan from its discount window to provide several weeks of breathing room. That, the firm hoped, would perhaps halt a run on the bank by allowing it to swap bonds for the cash necessary to return to customers.

The Fed's standard preference in dealing with a troubled institution is to first seek a private-sector solution, such as a sale or financing agreement. But the possibility of a bankruptcy filing Friday morning created a hard deadline.

A trigger point was looming for Bear Stearns in the so-called repo market, where banks and securities firms extend and receive short-term loans, typically made overnight and backed by securities. At 7:30 a.m., Bear Stearns would have to begin paying back some of its billions of dollars in repo borrowings. If the firm didn't repay the money on time, its creditors could start selling the collateral Bear had pledged to them. The implications went well beyond Bear Stearns: If other investors questioned the safety of loans they made in the repo market, they could start to withhold funds from other investment banks and companies.

The $4.5 trillion repo market isn't a newfangled innovation like subprime-backed collateralized debt obligations. It is a decades-old, plain-vanilla market critical to the smooth functioning of capital markets. A default by a major counterparty would have been unprecedented, and could have had unpredictable consequences for the entire market.

. . . .

 

[edward]

There are a lot rumors about exactly who may have instigated the BSC problem. The article below ,among other things, points the finger at the FED itself.

For Bear, the final nail in the coffin came not from Wall Street, but from the government. After the Fed agreed to give Bear a lifeline on Friday, it became clear that the market still wasn’t prepared to do business with the firm.

The Fed was going to be on the hook Monday morning for untold billions, and it was already taking heat for using taxpayer money to backstop a private institution that had hardly been a model citizen. Bear deserved to be punished for its reckless behavior, some said. So the government, led by Henry M. Paulson, the Treasury secretary (and the former chief executive of Goldman Sachs, for you conspiracy theorists), put a gun to Bear’s head: take a deal with JPMorgan or file for bankruptcy. It was a perfect antidote to the “moral hazard” argument — Bear’s employees would lose their jobs, and shareholders would lose their shirts, but the financial markets would be saved, at least for another day.

http://www.nytimes.com/2008/03/18/b...em&ex=1205985600&en=b8d80fdeb9e67c71&ei=5087

 

[wildman]

That would be an interesting twist. I don't know what to make of that possibility. No, what they are describing is nothing like Enron. What they are saying is that JP Morgan may have orchestrated BS's demise.

Interesting idea... I know the BS was not very popular and many people enjoyed seeing it fall (well they would have enjoyed it if they weren't scared witless that is...).

 

[Astronuc]

The story continues

Commentary: Brokerage owes J.P. Morgan, not the other way around

. . . .

Here's what matters: on March 16 Alan Schwartz, the chief executive of Bear Stearns, faced the certainty that when the broker opened its doors the next day it would fail. Without the Federal Reserve's backing and J.P. Morgan's pledge, Bear Stearns today would be a case number in bankruptcy court.

Bear Stearns brought this upon itself, not J.P. Morgan.

That's the cold truth that the Bear Stearns board of directors, including Schwartz and Chairman Jimmy Cayne, faced a few days ago. Sure, the current environment seems rosier now, but that's because Bear already is part of J.P. Morgan.

Saving the jobs and livelihoods of thousands of Bear employees and paying anything at all for a broker that may have been wiped out in a day isn't enough for some.
Bondholders are reportedly buying Bear stock to sway the shareholder vote on the deal, according to reports. They want assurances from J.P. Morgan and the Fed that they will honor the debt.

Shareholders including Joseph Lewis who owned nearly 10% of Bear Stearns as recently as last year, can't be blamed for trying to get more. There are reports that some employees are trying to line up investors, and Lewis said he will vote against the deal. Another investor, Bruce Sherman, reportedly has complained to Bear officials about the deal. They want to renegotiate.

. . . . .

 

[Gokul43201]

Are they just pulling these numbers out of a hat?

NEW YORK (CNNMoney.com) -- Seeking to mollify angry shareholders and employees, JPMorgan Chase quintupled its offer for Bear Stearns to roughly $10 a share Monday.

http://money.cnn.com/2008/03/24/news/companies/bear/index.htm?cnn=yes

 

[russ_watters]

Are they just pulling these numbers out of a hat?

It's back-alley bargaining - you offer what you think you can get. But it definitely seems like JP Morgan made an offer that BS accepted out of duress and now that the panic moment has passed, the offer no longer seems reasonable.

Regarding Astronuc's article, I disagree very strongly with the premise (though not necessarily the conclusion - I don't know that we know enough about what happened yet): the events leading up to any big event always matter, whether we're talking history, economics, science, anything. Context is critical for evaluating what really happened. If JP Morgan orchestrated BS's collapse, the fact that they caught it before it hit the ground doesn't make them heroes, it still makes them villans.

 

[Astronuc]

I heard this morning that JPMC is apparently concerned about a rival offer. BSC is still down 90% from it's high, but $10/share is certainly better than $2/share.

 

[edward]

BSC stock went up almost immediatly after the original buyout offer. I would imagine that BSC stock will go up again now that the offer has been increased.

Bear Stearns shares jumped $5.29, or 89 percent, to $11.25, while JPMorgan rose 58 cents to $46.55.

http://www.msnbc.msn.com/id/3683270/

edit It appears that BSC stock has already gone up again.

 

[Astronuc]

Force fed by the Fed
Commentary: Bear Stearns 'bailout' may just save Main Street

NEW YORK (MarketWatch) -- If you're thinking about refinancing your mortgage, getting a loan to buy a new car, or switching to a lower-interest rate credit card, you can thank the Federal Reserve for your ability to do so.

You might also want to mention that the recent boost to your 401(k) portfolio is appreciated as well.

Though it may not be obvious, anyone who participates in the credit world -- and that's most of us -- owes the Fed a debt of gratitude for stepping in and helping to prevent the collapse of Bear Stearns Cos.

Populist class wars are convenient for politicians such Senate Majority Leader Harry Reid or anyone who claims this deal is for Wall Street fat cats. But class and privilege don't float as good explanations for the Fed's $30 billion bailout of Bear.

Alan Schwartz, the chief executive of Bear Stearns, replaced Jimmy Cayne apparently after Cayne was sacked for getting stoned and playing bridge while two of BSC's funds collapsed. Oooops! Cayne denied smoking pot.

James Cayne lashes back at WSJ report
Bear Stearns CEO played in bridge tournament, without phone or e-mail access, as Bear Stearns hedge fund collapse sparked credit crisis: report.
http://money.cnn.com/2007/11/01/news/companies/bearstearns_ceo/index.htm

The Jimmy Cayne Takedown
http://dealbook.blogs.nytimes.com/2007/11/01/the-jimmy-cayne-takedown/

Bear Stearns chief executive James Cayne is apt to be the talk of Wall Street on Thursday, as industry insiders gape over a long, unflattering and at times highly gossipy profile of him in The Wall Street Journal. The account, which tops 3,000 words and makes repeated use of unnamed sources, portrays him as an out-of-touch leader with a penchant for pot smoking who is more interested in his bridge and golf games than tending to his firm’s recent crises.