The Plight of Bear Stearns

justfortherecor

I was stunned yet again yesterday to read the news story on emergency funding for Bear Stearns. It effectively amounts to a bail-out of one of the stalwarts of Wall Street by the Fed. Share price plummets over 50% to under 30$ in a half hour of trading on Friday morning?!

I thought we were starting to see a stabilizing of the banking sector with all the recent disclosures etc, but this throws everything up in the air again.

Anyone think we could see some major casualties on Wall Street in the coming weeks, and even some major shakeups in the Irish banking sector as well?

Really exposes the fecklessness of financial institutions and ratings agencies over the last couple of years.

A Random Walk

News and rumours travel too quick these days. In the past the Central Bank authorities could control the newsflow, but in our 24x7 Internet world we've seen Northern Rock and Bear lose the confidence of their clients in the space of 24 hours.

Add to that the loss of trust the public have in authority in general and the recipe is still there for bad, and some good, banks to go bust. I don't think the authorities realise this.

xebec

It's a bit of a strange one. It's very different to the Rock as it's the hedge funds pulling money out of Bear Stearns as opposed to retail bankers. But it is definitely troubling that this should happen in the banking system. The hedge fund managers obviously got a inkling of something wrong in BS and decided to pull out en masse. I'm not sure if its because of their sub-prime exposure - as far as I know they've less than other IBs - but I really don't know what else it could be...

portomar

socialism for the rich, thats what the recent bailouts amount to.

justfortherecor

BBC Newsnight analyse the story

Part 1
Part 2

dowtchaboy

JPMorgan To Buy Bear Stearns For $2 A Share
2008-03-17 02:51:49 (2 hours ago)
Posted By: Intellpuke
(Read 21 times || 0 comments) Submit to Digg
The deal, valued at $236 million, marks a stunning collapse for one of the world's largest investment banks.

Banking giant JPMorgan Chase & Co. said Sunday that it would buy struggling brokerage Bear Stearns Cos., in a fire-sale deal clearly aimed at stemming broader panic in global financial markets.

The rescue announcement failed to stop a further slide in the dollar's value, which sank to a 12-year low of 97.01 Japanese yen in Asian trading Monday afternoon, from 99.21 on Friday. Asian stock markets also tumbled, although they were recovering somewhat late in the session, with the Nikkei-225 index in Tokyo down 3.1% at about 9:45 p.m. PDT.

The once-vaunted Bear Stearns, which last week neared collapse as some nervous investors and banks pulled their business away from the firm, is valued at a mere $2 a share under the stock-swap agreement with JPMorgan.

The company's stock closed at $30 a share on Friday. It was trading at $158 last April.
(story continues below)



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The firm's rapid demise shows the fragility of the financial system as the credit crunch rooted in the housing market debacle has worsened in recent months.

Minutes after the deal was announced at about 4 p.m. PDT, the Federal Reserve took fresh steps to make more capital available to banks and brokerages that are squeezed for financing.

The Fed said it would create a new lending program to channel money from major securities dealers "to participants in securitization markets." The effort is apparently another move toward trying to stabilize the plummeting prices of bonds backed by home mortgages, as loan delinquencies continue to surge and housing prices continue to fall.

The Fed, which did not put a dollar amount on the new lending program, said it would "be in place for at least six months and may be extended as conditions warrant."

The new lending program will begin on Monday, the Fed said. It also said it cut its discount rate, the rate at which it lends money to financial institutions, from 3.5% to 3.25% effective immediately.

Policymakers are expected to cut their most important short-term rate, the federal funds rate, from 3% to at least 2.5% at the Fed's regularly scheduled meeting on Tuesday.

A takeover of Bear Stearns by JPMorgan had been rumored since Friday, when the bank agreed to be the conduit for an emergency loan of undisclosed size from the Fed to Bear Stearns.

In a shocking disclosure early Friday, Bear Stearns said its ability to finance its operations had "significantly deteriorated" in the preceding 24 hours as other financial institutions cut off credit to the firm.

Bear Stearns is heavily exposed to faltering securities tied to sub-prime mortgages, and as credit markets seized up in recent weeks, confidence waned that the company could make good on its own obligations.

Early Sunday, JPMorgan and Bear executives were said to be rushing to complete a deal before Asian stock markets opened, as a way to bolster confidence in the financial system. There was fear that a dive in Asian markets could set off another downward spiral for markets around the globe.

Yet confidence remained in short supply. As the dollar tumbled the price of gold rocketed to a record $1,021 an ounce in futures trading this evening, from $998.10 on Friday.

JPMorgan, which has assets of $1.6 trillion, said it was "immediately" guaranteeing the trading obligations of Bear Stearns and its subsidiaries.

"JPMorgan Chase stands behind Bear Stearns," Jamie Dimon, the bank's chief executive, said in the deal announcement. "Bear Stearns' clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns' counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner."

Counterparty risk refers to transactions between financial companies and the ability of a firm to make good on its contracts and promises.

JPMorgan also said the Fed would provide "special financing in connection with this transaction." The central bank agreed to fund "up to $30 billion of Bear Stearns' less liquid assets," the announcement said, without elaborating.

Alan Schwartz, chief executive of Bear Stearns, said in a statement: "The past week has been an incredibly difficult time for Bear Stearns. This transaction represents the best outcome for all of our constituencies based upon the current circumstances."

JPMorgan was to hold a conference call with investors at 5 p.m. PDT Sunday.

The transaction will be a stock swap. JPMorgan Chase will exchange 0.05473 of its shares for each share of Bear Stearns. Based on JPMorgan's closing price of $36.54 on Friday the deal would have a value of about $2 a share, or $240 million in total.

The price is at a level that would have been unthinkable even a few weeks ago for a franchise as storied as Bear Stearns. The 85-year-old firm was long regarded as one of the savviest trading operations and risk managers on Wall Street.

Monday should be an interesting day...... Fed already dropped interest rates (on Sunday) by .25%, and the dollar and sterling has also dropped. All last week Bear Stearns were telling investors why their shares were worth $80 ... except they obviously were not! St Patrick's Day Massacre, anybody?

db.

Idu

From Bloomberg on Bear Stearns former CEO and President James Cayne:

"Cayne ranked as Wall Street's richest CEO, with $1.3 billion of assets, according to Forbes magazine's 2007 billionaire survey. His stake in the firm approached $1 billion last year when the shares reached their peak price of $170. Under terms of the JPMorgan takeover, his holdings are now worth about $12 million."

portomar

the $200 price jpmorgan paid is less than 1 percent of bs' value in january and is less than the value of its manhattan headquarters

pjproby

if you are feeling bad, remember Joe Lewis who has lost at least $900 million
on Bear Stearns shares.


http://www.telegraph.co.uk/sport/main.jhtml?view=DETAILS&grid=A1YourView&xml=/sport/2008/03/17/ufntot117.xml

Diarmuid

pjproby wrote: »

if you are feeling bad, remember Joe Lewis who has lost at least $900 million
on Bear Stearns shares.

Poor guy, I guess he will have to downgrade to a 40m yacht.

Maskhadov

is the market going to crash ?? doesnt look good.

portomar

Maskhadov wrote: »

is the market going to crash ?? doesnt look good.

yes. or its a double bottom. this to fro stuff is utter madnes, its close to unprecedented. if you hold irish shares, look at the thread on anglo irish for some grim reading.

IrishMike

Good synopsis of what actually happened.
In case anyone doesnt know Lehman brothers and Citigroup are in a very VERY similiar precarious position at the minute.
Both of these are much bigger than Bear Sterns and there isnt enough liquidity in the
world market to bail them out should they go down no matter what soverign fund
gives them.
Very close to the edge and if we go over then its the end of the current banking system

Let's Get Real About Bear
By John Mauldin

This week's Outside the Box is going to be a little different. I am going to write about the extraordinary action by the NY Fed to foster the Bear Stearns deal with JP Morgan, and give you three brief notes from Michael Lewitt of Harch Capital Management and Bob Eisenbeis (former executive vice-president of the Federal Reserve of Atlanta) of Cumberland Advisors.

* Let's Get Real About Bear*

I already have a slew of emails from people upset about what they see as a bailout of a big bank, decrying the lack of "moral hazard." And I can understand the sentiment, as it appears that tax-payer money may have been used to bail out a big Wall Street bank that acted recklessly in the subprime mortgage markets.

But that is not what has happened. This is not a bailout. The shareholders at Bear have been essentially wiped out. Note that a third of the shares of Bear were owned by Bear employees. Many of them have seen a lifetime of work and savings wiped out, and their jobs may be at risk, even if they had no connection with the actual events which caused the crisis at Bear. Don't tell them there was no moral hazard.

For all intents and purposes, Bear would have been bankrupt this morning.
The $2 a share offer is simply to keep Bear from having to declare bankruptcy which would mean a long, drawn out process and would have precipitated a crisis of unimaginable proportions. Cue the lawyers.

As I understand this morning, JP Morgan will take a $6 billion write down, which is essentially what they are paying for Bear. The Fed is taking $30 billion dollars in a variety of assets. They may ultimately take a loss of a few billion dollars over time, although they may actually make a profit.
When you look at the assets, much of it is in paper that will likely get close to par over time, and the good paper will pay premiums mitigating the potential loss. The problem is, as the essays below point out, no one is prepared to take that risk today.

If it was 2005, Bear would have been allowed to collapse, as the system back then could deal with it, as it did with REFCO. But it is not 2005. We are in a credit crisis, a perfect storm, which is of unprecedented proportions. If Bear had not been put into sounds hands and provided solvency and liquidity, the credit markets would simply have frozen this morning. As in ground to a halt. Hit the wall. The end of the world, impossible to fathom how to get out of it type of event.

The stock market would have crashed by 20% or more, maybe a lot more. It would have made Black Monday in 1987 look like a picnic. We would have seen tens of trillions of dollars wiped out in equity holdings all over the world.

As I have been writing, the Fed gets it. Their action today is actually re-assuring. I have been writing for a long time that they would do whatever it takes to keep the system intact. As one of the notes below points out, this was the NY Fed stepping in, not the FOMC. The NY Fed is responsible for market integrity, not monetary policy, and they did their job. And you can count on other actions. They are going to change the rules on how assets can be kept on the books of banks. Mortgage bail-outs? Possibly. The list will grow.

Yes, tax-payers may eventually have to cover a few billion here or there on the Bear action. But the time to worry about moral hazard was two years ago when the various authorities allowed institutions to make subprime loans to people with no jobs and no income and no means to repay and then sold them to institutions all over the world as AAA assets. And we can worry in the near future when we will need to do a complete re-write of the rules to prevent this from happening again.

But for now, we need to bail the water out the boat and see if we can plug the leaks. Allowing the boat to sink is not an option. And get this. You are in the boat, whether you realize it or not. You and your friends and neighbors and families. Whether you are in Europe or in Asia, you would have been hurt by a failure to act by the Fed. Everything is connected in a globalized world. Without the actions taken by the Fed, the soft depression that many have thought would be the eventual outcome of the huge build-up of debt would in fact become a reality. And more quickly than you could imagine.

As I have repeatedly said, recessions are part of the business cycle. There is nothing we can do to prevent them. But depressions are caused by massive policy mistakes on the part of central banks and governments. And it would have been a massive failure indeed to let Bear collapse. I should note that this was not just a Fed action. Both President Bush and Secretary Paulson signed off on this.

The Fed risking a few billion here and there to keep the boat afloat is the best trade possible today. Their action saved trillions in losses for investors all over the world. It is a relatively small price. If you want to be outraged, think about the multiple billions in subsidies for ethanol and the hundreds of billions of so-called earmarks over the past few years to build bridges to nowhere. And think of the billions in lost tax revenue that would result from the ensuing crisis. I repeat, this was a good trade from almost any perspective, unless you are from the hair-shirt, cut-your-nose-off-to-spite-your-face camp of economics.

The Fed is to be applauded for taking the actions they did. And they may have to do it again, as there are rumors that another major investment bank is on the ropes. I hope that is not the case, and will not add to the rumors in print, but I am glad the Fed is there if we need them.

It is precisely because the Fed is willing to take such actions that I am modestly optimistic that we will "only" go through a rather longish recession and slow recovery and not the soft depression that would happen otherwise.

I got a very sad letter today from a lady whose husband is in the construction business an hour from Atlanta. He has had no work for four months and they are rapidly going through their savings. The jobs he can get require them to spend more in gas to drive to than he would make. He is sadly part of the construction industry which everyone knows is taking a major hit.

But without the Fed action, that story would have multiplied many times over, as the contagion of the debt crisis would have spread to sectors of the economy that so far have seen only a relatively small impact.
Unemployment would have sky-rocketed over the next year and many more families would have been devastated like the family above. It would have touched every corner of the US and the globe.

Bailing out the big guys? No, the Fed does not care about the big guys, and only mildly pays attention to the stock market, despite what conspiracy theorists think. In the last few years, I have had the privilege of meeting at length with a number of Fed economists and those who have their ear. They are far more focused on the economy, their mandates for stable inflation and keeping unemployment as possible.

No one who owned Bear stock was protected. This was to protect the small guys who don't even realize they were at risk. To decry this deal means you just don't get how dire a mess we were almost in. It is all well and good to be rich or a theoretical purist and talk about how the Fed should let the system collapse so that we can have a "cathartic" pricing event. Or that the Fed should just leave well enough alone. But the pain to the little guy in the streets who did nothing wrong would simply be too much. The Fed and other regulatory authorities leaving well enough alone is part of the reason we are where we are. First, get the water out of the boat and fix the leaks, and then make sure we never get here again.

And yes, I know there are lots of implications for the dollar, commodities, markets, interest rates, etc. But we will get into that in later letters.

For now, let's go to the essays from my friends and then a quick note about the stock market.

John Mauldin, Editor
Outside the Box

Maskhadov

does anyone know the story behind bear stearns ? Its the states trying to get rid of a big bile, they had one of these stories back in the ninties. they were doing something dirty to keep their other ones going. They have to unload the bile to someone or the whole market over there is going to crash.

Bear stearns goes belly up, JPMorgan &Chase "White knight" take the package offered at $2/share($240million dollars). Bear Stears sharholders get $2 equilivant worth of JPMorgan Shares. Basically JPMorgan &Chase swapping 0.05473 for 1 of bear stearns shares.

The fed (guarantor) who has been pushing this deal backs the the JPMorgan & Chase with $30 billion dollars and JPMorgan & Chase have to sort out Bear Stearns less-liquid assets in the next 28 days. The Fed will continue to finance the assets should they decline in value.

how are JPMorgan going to deal with the mess ?

Idu

think the article posted above sums up why the deal was made. What JP Morgan need to do is continue their own business and hope that confidence in the banking sector returns. Lehmann brothers and Goldmann's both had good earnings announcements today which has seen a boost in the banking sector. If they can ride out the credit storm they will probably view the acquisition of Bear Sterns as a nice bit of business on their part

SimpleSam06

The extent of the carnage here is really unbelievable. I first became aware of it when several asian currencies I was keeping an eye on went into freefall over the weekend. The shock to the confidence of the global financial system is extending to the instruments available in emerging economies. Terrifying and awesome to watch at the same time, more so because it is happening so quickly.

Maskhadov

who is going to take JPmorgans offer after this one ? the market cant support this , it has to crash.

Idu

the market doesnt have to do anything and who's to say that the market hasn't already crashed. Are you looking for the market to cease to exist?

Maskhadov

the market doesnt have to do anything but someone has to cover up the stinking dead body


Is Lehman Brothers the next Bear Stearns ?

daveirl

This post has been deleted.

Maskhadov

there is another bank to go with bear sterns, i think its Lehman brothers, the market will soon drop over there after they get over the interest rate cut.

justfortherecor

No, as daveirl said, Lehman posted better-than-expected results yesterday along with Goldman Sachs. This was one of the main reasons for the rise in stocks yesterday, also assisted by the Fed cut.

Not sure which other bank you are thinking of, possibly Citibank? I think they announce their quarterly results soon enough as well.

dunkamania

Lehman was defnitely next in line, however its looking like they will dodge the bullet.

Minder

John Mauldin wrote:

As I have repeatedly said, recessions are part of the business cycle. There is nothing we can do to prevent them. But depressions are caused by massive policy mistakes on the part of central banks and governments. And it would have been a massive failure indeed to let Bear collapse. I should note that this was not just a Fed action. Both President Bush and Secretary Paulson

While I don't decry the actions of the Federal Reserve in saving the financial system from the collapse of Bear Stearns, Mauldin contradicts himself - the loose monetary policy, lack of regulation and overt greed have lead to a situation where the system must be saved. It would be a massive policy mistake by central banks and govts to allow the system to fail without intervention, but what of the policy mistakes that have lead to the situation in the first place?

Without a serious dislocation in the financial system, is there any will to change the regulations. No. Steagall Glass Act was made law after the Great Depression to separate the roles of banks and brokerage firms. That stood until 1996, it has taken all of 12 years without those provisions to bring us back to the brink of financial disaster.

portomar

Minder wrote: »

While I don't decry the actions of the Federal Reserve in saving the financial system from the collapse of Bear Stearns, Mauldin contradicts himself - the loose monetary policy, lack of regulation and overt greed have lead to a situation where the system must be saved. It would be a massive policy mistake by central banks and govts to allow the system to fail without intervention, but what of the policy mistakes that have lead to the situation in the first place?

Without a serious dislocation in the financial system, is there any will to change the regulations. No. Steagall Glass Act was made law after the Great Depression to separate the roles of banks and brokerage firms. That stood until 1996, it has taken all of 12 years without those provisions to bring us back to the brink of financial disaster.

What "system" is failing in your opinion?? an investment bank so reliant on overnight money it goes bang at the first sign of trouble? the financial system isn't failing, just some banks. and they should be allowed to.

Afuera

portomar wrote: »

What "system" is failing in your opinion?? an investment bank so reliant on overnight money it goes bang at the first sign of trouble? the financial system isn't failing, just some banks. and they should be allowed to.

Good point. Who, besides the shareholders and employees, would have been hurt if Bear Stearns investment bank had gone up in smoke without a rescue? If the system is that fragile, that one single weak point is enough to cause it all to unraval, then serious questions needs to be asked about whether there is any point in trying to prop it up.

Minder

portomar wrote: »

What "system" is failing in your opinion?? an investment bank so reliant on overnight money it goes bang at the first sign of trouble? the financial system isn't failing, just some banks. and they should be allowed to.

I posted in response to John Mauldin's piece in a post from IrishMike. Mauldin suggests that the alternative to bailing out Bear Stearns and saving the financial system (his words) is a 1929 style depression. Read the piece.

I am pointing out the apparent contradiction in his piece. That the policy mistakes and loose monetary regulation will not be reviewed if the banking system is not subject to a systemic shock. Business as usual will be restored shortly.

Your point that BSC (the fifth largest Wall St bank) are so reliant on overnight money ignores the possibility that other banks are in the same position. Remember that the Fed also announced a new primary loan facility on Sunday night - the same night as the rescue package for BSC. All Wall St banks are experiencing liquidity problems - there have been a raft of emergency loan facilities set up by the Fed in three weeks. Your contention that it's only some banks is either flippant or demonstrates a lack of understanding of the problem.

kincsem

1. Accumulation Phase
This phase occurs after the market has bottomed and the innovators (corporate insiders and a few value investors) and early adopters (smart money managers and experienced traders) begin to buy, figuring that the worst is over. Valuations are very attractive. General market sentiment is still bearish. Articles in the media preach doom and gloom, and those who were long through the worst of the bear market have recently capitulated, that is, given up and sold the rest of their holdings in disgust. But in the accumulation phase, prices have flattened and for every seller throwing in the towel, someone is there to pick it up at a healthy discount. Overall market sentiment begins to switch from negative to neutral.

2. Mark-Up Phase
At this stage, the market has been stable for a while and is beginning to move higher. The early majority are getting on the bandwagon. This group includes technicians who, seeing that the market is putting in higher lows and higher highs, recognize that market direction and sentiment have changed. Media stories begin to discuss the possibility that the worst is over, but unemployment continues to rise, as do reports of layoffs in many sectors. As this phase matures, more investors jump on the bandwagon as fear of being in the market is supplanted by greed and the fear of being left out.

As this phase begins to come to an end, the late majority jump in and market volumes begin to increase substantially. At this point, the greater fool theory prevails. Valuations climb well beyond historic norms, and logic and reason take a back seat to greed. While the late majority are getting in, the smart money and insiders are unloading. But as prices begin to level off, or as the rise slows down, those laggards who have been sitting on the sidelines see this as a buying opportunity and jump in en masse. Prices make one last parabolic move, known in technical analysis as a selling climax, when the largest gains in the shortest periods often occur. But the cycle is nearing the top of the bubble. Sentiment moves from neutral to bullish to downright euphoric during this phase.

3. Distribution Phase
In the third phase of the market cycle, sellers begin to dominate. This part of the cycle is identified by a period in which the bullish sentiment of the previous phase turns into a mixed sentiment. Prices can often stay locked in a trading range that can last a few weeks or even months. For example, when the Dow Jones Industrial Average peaked in Jan 2000, it traded down to the vicinity of its prior peak and stayed there over a period of more than 18 months. But the distribution phase can come and go quickly: for the Nasdaq Composite, the distribution phase was less than a month long, as it peaked in Mar 2000 and then retreated quickly. When this phase is over, the market reverses direction. Classic patterns like double and triple tops, as well as head and shoulders top patterns, are examples of movements that occur during the distribution phase.

The distribution phase is a very emotional time for the markets, as investors are gripped by periods of complete fear, interspersed with hope and even greed as the market may at times appear to be taking off again. Valuations are extreme in many issues and value investors have long been sitting on the sidelines. Sentiment slowly but surely begins to change, but this transition can happen quickly if accelerated by a strongly negative geopolitical event or extremely bad economic news. Those who are unable to sell for a profit settle for a breakeven or a small loss.

4. Mark-Down Phase
The fourth and final phase in the cycle is the most painful for those who still hold positions. Many hang on because their investment has fallen below what they paid for it, behaving like the pirate who falls overboard clutching a bar of gold, refusing to let go in the vain hope of being rescued. It is only when the market has plunged 50% or more that the laggards, many of whom bought during the distribution or early mark-down phase, give up or capitulate. Unfortunately, this is a buy signal for early innovators and a sign that a bottom is imminent. But alas, it is new investors who will buy the depreciated investment during the next accumulation phase and enjoy the next mark-up.

My guess is we are in the Distribution Phase.

An interesting article from 02/2007.
http://www.marketoracle.co.uk/Article383.html

Maskhadov

yesterday was a bear market rally, it CANT be sustained....

the other bank the states is trying to offload must be Morgan Stanely, profits fell by 42%

http://news.bbc.co.uk/2/hi/business/7304764.stm

damnyanks

Banks constantly take out multi billion dollar syndicates to cover keep things ticking over. Bear was just in the ****ter , all the crap about citi and lehmans was just talk to push the prices down. Same thing happened today with halifax and hbos.


Bear are going to get sued big time. A lot of people seemed to know about bears troubles before the markets did which will also cause concern.

MS did pretty well today. They didnt continue with the record earnings from 1Q last year thats the only difference.

dunkamania

Lets be clear, what happened at Bear was an old fashioned run on a bank. Depositers fearing the worst withdrew their cash causing the worst outcome to be realised. This lack of confidence in bank stability is infectious and if no regulatory intervention had been taken then other banks would have failed by now.

Afuera

dunkamania wrote: »

This lack of confidence in bank stability is infectious and if no regulatory intervention had been taken then other banks would have failed by now.

And why should they not have been let fail?

Giving all banks a "carte blanche" to take as much risks as they want sounds like a very slippery slope. If a few banks are let go to the wall it forces the remaining ones to excercise due caution in their business models.

It just sounds like the Fed are fighting the inevitable and will prolong the length of time it takes the market to recover.

Minder

dunkamania wrote: »

Lets be clear, what happened at Bear was an old fashioned run on a bank.

Strange that the SEC don't see the situation in the same way. They have announced an investigation into what they believe could be a bear raid on the Bear.

dunkamania

Afuera wrote: »

And why should they not have been let fail?

Giving all banks a "carte blanche" to take as much risks as they want sounds like a very slippery slope. If a few banks are let go to the wall it forces the remaining ones to excercise due caution in their business models.

It just sounds like the Fed are fighting the inevitable and will prolong the length of time it takes the market to recover.

Bear Stearns was sound except that its depositers were worried and withdrew funds, it had $30bn in liquidity at start of last week but client withdrawals wiped it out. There is a morale hazard in propping up banks that get themselves into trouble through poor risk management, but as I mentioned before, this is an old fashioned bank run. Ensuring the stability of the financial network is a primary function of regulators, so they had to intervene.

Minder wrote:

Strange that the SEC don't see the situation in the same way. They have announced an investigation into what they believe could be a bear raid on the Bear.

The reason clients were worried about Bear was due to the huge volume of false rumours doing the rounds. Spreading false rumours and shorting stock is market manipulation, hence the investigation. I am confused why you think this detracts from my point. Banks dont fail because their stock price drops, their stock price drops because they fail.

Afuera

dunkamania wrote: »

Ensuring the stability of the financial network is a primary function of regulators, so they had to intervene.

Has it ensured the long term stability of the system by intervening in this way though?

dunkamania

These are short term measures, and could potentially set up the next credit crisis 5 years down the road

Afuera

Interesting article here pointing out how the "pay for performance" model may have contributed to Bear Stearns bad management. Since the management are rewarded so handsomely for achieving high growth these mechanisms of payment can often lead to companies going in a direction that is not sustainable. Worrying, when you think that most of the financial industry works like this.
http://www.msnbc.msn.com/id/23711023/

Afuera

dunkamania wrote: »

These are short term measures, and could potentially set up the next credit crisis 5 years down the road

Has it actually solved the current crises though? It appears that there is still a lot of junk out there and nobody is admitting who is holding on to it. Until that is resolved I can't see the market improving much tbh.

dunkamania

The problem is more that banks wont lend to each other, there will be more asset writedowns, but most of it is already priced in.

Minder

dunkamania wrote: »

I am confused why you think this detracts from my point. Banks dont fail because their stock price drops, their stock price drops because they fail.

Your original point was that Bear Stearns suffered from an old fashioned run on a bank. The SEC believes there is a case to answer for a Bear Raid - which as you have pointed out - is an illegal act of market manipulation. They are not the same thing.

Minder

Afuera wrote: »

And why should they not have been let fail?

Bernanke is a student of the Great Depression - an expert, some would argue. The following extract may give you some insight into the possibilities should a Wall St bank be allowed to fail. Whatever you believe, you can be certain that the actions of the Federal Reserve and Ben Bernanke are unprecedented - America is not trying to avoid a recession, America is in recession. These measures should scare the crap out of everyone, because if they are not successful, the outlook is very bleak.

Debt
Macroeconomists including Ben Bernanke the current chairman of the U.S. Federal Reserve Bank, have revived the debt-deflation view of the Great Depression originated by Arthur Cecil Pigou and Irving Fisher: in the 1920s, American consumers and businesses relied on cheap credit, the former to purchase consumer goods such as automobiles and furniture and the later for capital investment to increase production. This fueled strong short-term growth but created consumer and commercial debt. People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.

Massive layoffs occurred, resulting in unemployment rates of over 25%. (US) Banks which had financed this debt began to fail as debtors defaulted on debt and depositors became worried about their deposits and began massive withdrawals. Government guarantees and Federal Reserve banking regulations to prevent these types of panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets.

The debt became heavier, because prices and incomes fell 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By 1933, depositors had lost $140 billion in deposits. [5]

Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. [6] Banks built up their capital reserves, which intensified deflationary pressures. The vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 great depression.

Trade decline and the U.S. Smoot-Hawley Tariff Act
Many economists have argued that the sharp decline in international trade after 1930 helped to worsen the depression, especially for countries significantly dependent on foreign trade. Most historians and economists assign the American Smoot-Hawley Tariff Act (enacted June 17, 1930) part of the blame for worsening the depression by seriously reducing international trade and causing retaliatory tariffs (i.e., a tax increase) in other countries. Foreign trade was a small part of overall economic activity in the United States and was concentrated in a few businesses like farming; it was a much larger factor in many other countries. [7] The average ad valorem rate of duties on dutiable imports for 1921–1925 was 25.9% but under the new tariff it jumped to 50% in 1931–1935.

In dollar terms, American exports declined from about $5.2 billion in 1929 to $1.7 billion in 1933; but prices also fell, so the physical volume of exports only fell in half. Hardest hit were farm commodities such as wheat, cotton, tobacco, and lumber. According to this theory, the collapse of farm exports caused many American farmers to default on their loans leading to the bank runs on small rural banks that characterized the early years of the Great Depression.

U.S. Federal Reserve and money supply
Monetarists, including Milton Friedman and current Federal Reserve System chairman Ben Bernanke, argue that the Great Depression was caused by monetary contraction, which was the consequence of poor policy making by the American Federal Reserve System and continuous crisis in the banking system.[8] By not acting, the Federal Reserve allowed the money supply as measured by the M2 to shrink by one-third from 1929 to 1933. Friedman argued[9] the downward turn in the economy starting with the stock market crash would have been just another recession. The problem was that some large, public bank failures, particularly the Bank of the United States, produced panic and widespread runs on local banks, and that the Federal Reserve sat idly by while banks fell. He claimed if the Fed had provided emergency lending to these key banks, or simply bought government bonds on the open market to provide liquidity and increase the quantity of money after the key banks fell, all the rest of the banks would not have fallen after the large ones did and the money supply would not have fallen to the extent and at the speed that it did.[10] With significantly less money to go around, businessmen could not get new loans and could not even get their old loans renewed, forcing many to stop investing. This interpretation blames the Federal Reserve for inaction, especially the New York branch, which was owned and controlled by Wall Street bankers.[11]

The Federal Reserve, by design, is not controlled by the President or the U.S. Treasury; it is primarily controlled and owned by its member banks and the chairman of the Federal Reserve.[12]

One reason why the Federal Reserve did not act to limit the decline of the money supply was regulation. At that time the amount of credit that the Federal Reserve could issue was limited due to laws which required partial gold backing of that credit. By the late 1920's the Federal Reserve had almost hit the limit of allowable credit that could be backed by the gold in its possession. This credit was in the form of Federal Reserve demand notes. Since a "promise of gold" is not as good as "gold in the hand", during the bank panics a portion of those demand notes were redeemed for Federal Reserve gold. Since the Federal Reserve had hit its limit on allowable credit, any reduction in gold in its vaults had to be accompanied by a greater reduction in credit. Several years into the Great Depression the private ownership of gold was declared illegal and reduced the pressure on Federal Reserve gold.

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daveirl

This post has been deleted.

PDelux

Watch this::D
http://www.youtube.com/watch?v=gUkbdjetlY8

By the way short interest in Bear had shot up in Febuary(nearly doubled in one month!), maybe people knew this was about to happen???

Maskhadov

hillarious

portomar

jim cramer is building up a few of these terrible predictions.hate that guy