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| 7/13 |
| 2008/3/14-17 [Finance/Banking, Finance/Investment] UID:49457 Activity:high |
3/14 Fed provides emergency financing to BSC via JPM as other banks refuse
to lend to BSC at fed funds target
Fed to take on all credit risk for BSC collateral used to obtain
financing
http://online.wsj.com/article/SB120550108028136579.html
On Monday, BSC said in a statement, "there is absolutely no truth to
the rumors of liquidity problems"
http://www.bloomberg.com/apps/news?pid=20601087&sid=aa874wpC8wcg
\_ Someone please translate this to plain English?
\_ You went to Cal?
\_ Read the WSJ article. WSJ = Wall Street Journal. If you have
q's, come back.
\_ The wsj article seems reasonable clear. In any event, here is
my understanding:
Bear Stearns Co. (BSC), a large NY investment bank, may not
have enough money to meet its obligations. J.P. Morgan (JPM)
has borrowed money from the Federal Reserve Bank (Fed) and
loaned it to BSC to ensure that BSC has enough money to meet
its obligations. JPM, unlike BSC, is not technically an
investment bank, and therefore it may borrow money directly
from the Fed.
JPM is merely acting as a conduit for the Fed's loan to BSC.
BSC has pleged its assets to the Fed as security for the
loan. If BSC's asserts drop in value, then the Fed, and the
loan. If BSC's assets drop in value, then the Fed, and the
taxpayers, will take the loss; JPM is not taking on any risk.
\_ Why would we care? I mean, we're already borrowing a lot
of money and our deficit is huge, why can't we just borrow
more? I mean, if you owe the bank $1 million dollars,
the bank owns you. But if you owe the bank $100 trillion
dollars, then you own the bank.
\_ Which is why the dollar is doing oh so well on the
international market right now.
\_ 99 yen to 1 dollar!
\_ Personally I am concerned about the level of debt the
government takes on. I do not know if bailing out BSC
is better than the alternative, which is to let if fail.
I guess we have to trust that the Fed knows what it is
doing.
\_ The Fed is in panic mode:
"The Fed's role in the deal suggests federal officials
fear a systemic collapse of the U.S. financial system
were Bear Stearns to fail. The fear stems from Bear
central role in a multitrillion-dollar web of
interconnecting derivative contracts."
\_ Probably. Something about this situation reminds me
of the LTCM fiasco a few years back.
\- I dunno how old you were in 1998, but the funny
part of this is Bear Stearns is the banks that
part of this is Bear Stearns is the bank that
refused to play ball ... the scrappy outsider...
during the "genteel" bailout of LTCM. It's also
amazing to read about the arrogance of the LTCM
insiders dictating terms of the bailout. Just
unfucking believable.
\- I dunno how old you were when LTCM happened, but
the funny part of this is Bear Stearns is the
bank that refused to play ball ... the scrappy
outsider ... during the "genteel" bailout of
LTCM. It's also amazing to read about the
arrogance of the LTCM insiders dictating terms
of the bailout. Just unfucking believable.
\_ I didn't remember that BSC was one of the
hold outs during the LTCM bailout. That is
so ironic.
Re arrogance of LTCM insiders - Being a
nobel prize winner and 'furd prof goes to
some people heads.
\- it's not just merton and scholes.
YMWTR: http://tinyurl.com/rcrv8
\_ Deregulating the financial system was a mistake.
\_ Libural socialist rant! Why do you hate America?
\_ Yeah, me and FDR. Known America haters.
\_ FDR hated America, not only did he
sell out this country at Yalta, he
also instigated the New Deal which
was pratically communist.
was practically communist.
\_ Whoa! When the did the Birchers show up
on the motd?!
\_ Time to return to a gold and/or silver standard!
-rpaul
\_ Time to put Glass-Stiegel back in place.
Though it is too late for this recession, at
least it will keep the next one from being
as bad. I fear we will see a New Deal style
nationalization of the banking system before
this is all said and done. |
| 7/13 |
|
| online.wsj.com/article/SB120550108028136579.html The move, after a week of persistent concerns about whether Bear could continue to meet its obligations, took the credit crisis to a new, more serious stage and was a reminder of how quickly an erosion of confidence can undermine even leading financial institutions. The involvement of the Fed -- coordinating with the Treasury Department and the Securities and Exchange Commission -- made clear authorities were concerned about the risks to the broader financial system. Bear is the smallest of Wall Street's big five investment banks, but it is a significant player in markets for debt, particularly for securities backed by mortgages. A sharp selloff in the bank's stock and demand for protection against a default on its debts showed the market isn't convinced the plan will stabilize the bank, which now faces the prospect of fighting to convince customers to stick around or finding a merger partner. Bear Stearns' problems built this week, as counterparties in the market grew extra cautious about entering deals with the bank. Executives tried all week to reassure markets that the bank's financial position was solid. But in a week that also saw the collapse of the $22 billion, mortgage-focused hedge fund Carlyle Capital, those reassurances went unheard, and Bear ultimately was forced to seek help. "We have tried to confront and dispel these rumors and parse fact from fiction," CEO Alan Schwartz said in a release. "Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations." Friday afternoon, Standard & Poor's cut its long-term credit rating on Bear Stearns by three notches to BBB and said further downgrades are likely, noting the company's liquidity squeeze. S&P said, "Bear has been experiencing significant stress in the past week because of concerns regarding its liquidity position. Although the firm's liquidity, at the beginning of the week, held steady with excess cash of $18 billion, ongoing pressure and anxiety in the markets resulted in significant cash outflows toward the week's end, leaving Bear with a significantly deteriorated liquidity position at end of business on Thursday." S&P said it current ratings "are based on our expectation that Bear will find an orderly solution to its funding problems. However, although we view the liquidity support to Bear as positive, we consider it a short-term solution to a longer term issue that does not entirely affect Bear's confidence crisis. We also remain concerned about Bear's ability to generate sustainable revenues in an ongoing volatile market environment." Moody's Investors Service cut its rating on Bear Stearns to Baa1, three levels above junk. Fed Steps In JP Morgan will borrow funds from the Fed's discount window and re-lend them to Bear Stearns for 28 days, with the Fed bearing the risk of any losses. The size isn't predetermined, but is limited by the available collateral. If Bear could have held out until March 27, it could have borrowed directly from the Fed itself under a new program announced just Tuesday. The developments could mean the end of independence for Bear, founded in 1923. JP Morgan is "working closely with Bear Stearns on securing permanent financing or other alternatives for the company" -- Wall Street lingo for a sale or other strategic-level change -- and CNBC reported that the bank is "actively being shopped" to potential buyers. Mr Schwartz said on a conference call that the bank is considering the full range of options. The cost of protecting investments in Bear Stearns debt against default jumped sharply, indicating growing concerns about Bear's creditworthiness. Similar protection for other financial companies also rose in value, a sign of rising worry in the markets. Bear's shares plunged, dropping by more than half at the day's low. The options market signaled a dim outlook, with contracts giving the right to sell Bear Stearns stock for $25 soaring in value. The shares have fallen by two-thirds in the past three months. The news also unnerved the broader markets, which just yesterday were cheering a report from Standard & Poor's that suggested the end might be in sight for write-downs related to subprime mortgages. The Dow Jones Industrial Average was down about 300 points at its low but closed down 195 points. US Treasurys surged, as investors sought a safe place for their money, and the dollar fell. "It's just pure fear across the board right now," said Geoffrey Yu of UBS. "All the promising news this past week has been undone over this Bear Stearns news. I don't think the market has seen anything of this magnitude before, such a big bank." Bear Stearns started this week with sufficient access to cash, but persistent rumors rattled lenders, clients and counterparties, prompting a run on the bank, Mr Schwartz said on the call. "We recognized that, at the pace things were going, there could be continued liquidity demands that would outstrip our liquidity resources." Lehman Parallels Analysts and investors say Bear's predicament has parallels to what Lehman Brothers went through during the late 1990s. During the credit crunch of 1998, which was sparked off by the Russian debt crisis and the implosion of hedge fund Long-Term Capital Management, Lehman was the subject of rampant market speculation that it might face financial difficulties, because it held emerging market bonds and other assets that were falling in value. As Lehman's shares and bonds dived on the rumors, the Wall Street firm, which at the time depended heavily on short-term funding, ran into problems obtaining such financing. It fought its way out of the trap without having to turn to the Fed, however. "The nature of financial companies is that they are pretty much a black box," says Jeff Houston, a bond fund manager at American Century Investments in San Francisco. "If people start to worry about what's in the box, there's not much the firms can do to demonstrate that they are not as weak as they appear to be." Lehman's shares dropped 11% Friday -- outpacing declines of roughly 3% for its investment banking cohorts. Lehman said late in the day it closed a $2 billion unsecured credit line. Global Treasurer Paolo Tonucci called it "a strong signal from the market and our key bank relationships." |
| www.bloomberg.com/apps/news?pid=20601087&sid=aa874wpC8wcg denied that the firm lacked sufficient access to capital, after speculation about a liquidity crisis pushed the stock down 11 percent in New York trading, the most since the 1987 stock market crash. Wall Street shares lower in the past six months as the world's largest banks and securities firms wrote down $188 billion of assets linked to the subprime mortgage market. The company's fourth-quarter loss of $854 million was its first, and analysts in the past month have lowered expectations for earnings in the first quarter. debt maturities over the next 12 months without issuing additional unsecured debt or liquidating assets,'' Molinaro said at the time. Readily available secured and unsecured committed bank lines'' were $8 billion. Credit-Default Swaps Credit-default swaps protecting against a default by Bear Stearns for the next two years soared to 900 basis points, according to broker Phoenix Partners Group in New York. That's up from 514 basis points last week, CMA Datavision prices show. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A decline indicates improvement in the perception of credit quality; revenue came from mortgages and related securities before those markets froze, according to estimates from Bernstein's Hintz. Moody's Investors Service downgraded 163 portions of 15 mortgage bonds underwritten by Bear Stearns today, and said 78 of those may be cut further. Wall Street firms sell most such bonds to their clients, though they have written down the value of some tranches remaining on their books. Moody's downgraded 46 classes from Bear Stearns so-called Alt-A deals on Jan. Fitch Ratings last week put $160 billion of Alt-A mortgage securities under review for downgrades. Analysts cut their first-quarter profit estimates for Bear Stearns and other brokers last week partly on expectations of increasing Alt-A writedowns. David Trone expects four Wall Street firms to cut their Alt-A portfolio values by $6 billion in the quarter. While Bear Stearns had less than $40 million of its own money in the funds, it was forced to bail one of them out. Options traders increased their bets today that Bear Stearns shares will continue to fall. Put-option volume rose to 158,599 contracts, seven times the 20-day average. most-active contracts, which give the right to sell the stock at $30 before this month's options expire at the end of next week, rose 13-fold to 65 cents. For those wagers to pay off, the shares must drop 52 percent in the next eight trading sessions. March $60 puts, the second-most active, quadrupled to $5. An increase indicates traders anticipate bigger stock-price swings. Calls give the right to buy a security for a certain amount, the strike price, by a given date. |
| tinyurl.com/rcrv8 -> en.wikipedia.org/wiki/When_Genius_Failed:_The_Rise_and_Fall_of_Long-Term_Capital_Management Between 1994 and 1998 the fund showed a return on investment of more than 40% per annum. On the precipice of not only an American financial disaster, the fund's imminent collapse had significant international monetary implications, jeopardizing the financial system itself. |