Bove: Fed Rescue for Bear Stearns
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"The Federal Reserve's actions today may have been strongly influenced by Bear Stearns' problem."
-Dick Bove, Punk Ziegel & Co.
Go figure: This morning's announcement by the Fed seemed to be designed to help the
brokers and their fixed-income hedge fund clients who were struggling
-- so said Brad Hintz, Bernstein Research covering the Financials. (we noted similar sentiment here)
He's not the only one. Influential Bank/Broker analyst Dick Bove of Punk Ziegel (quoted above) specifically mentioned Beat Stearns (BSC) as the beneficiary of the Fed's largesse.
According to Marketwatch: "Bear's stock dropped 11% on Monday on concern that its borrowing costs are rising. For a brokerage firm, which relies on steady access to financing, such disruptions can restrain its businesses and leave it at a disadvantage to financially stronger rivals."
Pretty wild stuff -- $200 Billion in Fed lending against junk paper, to bail out one mid-size investment bank.
And the market's reaction: Dow up 3.55% (417 points), Nasdaq +4% or more than 86 points, S&P500 up 3.7% or 47 points
Ain't Socialism grand?
>
Source:
Fed action may have targeted Bear Stearns
Alistair Barr, MarketWatch
MarketWatch 3:57 p.m. EDT March 11, 2008
http://tinyurl.com/2m4nv5
Tuesday, March 11, 2008 | 05:36 PM | Permalink
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Tracked on Mar 12, 2008 8:43:25 AM
Comments
And the best thing is, we don't have to pay for it!
Posted by: Marcus Aurelius | Mar 11, 2008 5:49:07 PM
I think thats bit far fetched to think the Fed did this for Bear (or primarily for Bear). And if that was the case, you would expect Bear would be up the most today, yet it was barely up for the day...
Posted by: Mikael | Mar 11, 2008 5:49:13 PM
While I understand the bitterness of the bears [BR: ?!?] I really don't think the Fed had much choice but to do something. The utter collapse of the agency mortgage bond market was simply too threatening to the entire system. I don't think it was just Bear Stearns at all---I think it was a combination of Thornburg, Carlyle Capital, Bear Stearns, Citigroup et al, and all those mortgage REITS... Much longer and you could have been looking at over $100 billion of agency securities being tossed on the bonfire from margin calls.
Does it prevent the inevitable? Probably not. But it buys some time for those entities that didn't have much left...
The equity rally is the same one we have seen about 50 times in the last 9 months. Since they can't use saving AMBAC as an excuse any more, had to come up with something new...
Posted by: Jay Weinstein | Mar 11, 2008 5:56:13 PM
Man on the street gets burnt again while corporate America is shown the fire exit.....and people wonder why the richer get richer and the poor get poorer.
Governments once warned about giving thrid world countries a helping hand whether it be part of our food mountains or financial support.....explain to me how this is any different?
Posted by: Diarmuid | Mar 11, 2008 5:56:21 PM
There are a lot of entities (hedge funds, primarily) that would be affected by a Bear Stern collapse. I believe this was done to keep them from seizing up.
Posted by: Max | Mar 11, 2008 5:56:29 PM
Anyone have volume figures for the US indexes and futures for the time period since the late rally this afternoon around 1? And breath/depth as well?
I'm not interested in the day--just from the point where it looked like the markets were going to fade for the day.
Posted by: Patrick | Mar 11, 2008 5:59:05 PM
Today's rally sure cleared out a lot of shorts. Who knows where we go from here but part of the floor under the market has been removed. Interesting times.
Posted by: Lloyd | Mar 11, 2008 6:00:00 PM
I think jay has an excellent point. If the system seizes the implications for main street would be as dire as for wall st.
It does tell you how very leveraged and fragile the system has become. The FED has by my calculation expended over a fourth of its capital so far. Maybe the question should be.....when does the FED run out of bullets.
Posted by: Ross | Mar 11, 2008 6:11:51 PM
Guys
I think we're missing the "big picture" here.
AAA RMBS isn't, and never was, the issue. It's the "good" 80% of the mortgage market. In order for it to be impaired, we're saying the remaining bad and the ugly parts are toast. That's 20% of a $7+ trillion market. To that ~1.5 trillion, you'd have to add in the carnage in credit cards, car loans, CMBS, etc. Do you seriously think the fed and/or congress would allow that to happen at this juncture?
The real issue is the $1.5 trillion of real problem RMBS (plus collateral damage). Some fraction of that really is bad. At this point though, we don't know the fraction, nor do we know who holds it or their ability to absorb the losses. If the fraction is significant (likely) and/or the holders are weak (also likely), it's still gonna leave a mark.
Posted by: Estragon | Mar 11, 2008 6:20:23 PM
Ross,
The fed doesn't run out of bullets. Ever. They make the bullets magically out of thin air. They can't run out. They could ruin the environment for generations making the bullets, but they can't run out unless they choose to stop making them.
Posted by: Estragon | Mar 11, 2008 6:23:43 PM
Barry - crybaby in chief.. Waaahh the market didn't do what I wanted it too. Waaaaahhh
That's why they call it fighting the Fed buddy. This shit's going to happen all year long.
~~~
BR: Fighting the Fed? Another clueless git with a distorted sense of reality: Since the first rate cut on Sept. 18 of last year, through Monday's close, the S&P 500 is down 16.2%. That makes this the worst performance for the market following a series of rate cuts since the 1950s, according to Standard & Poor's research.
Even after today's 3% pop, fighting the Fed this cycle has been money. If you bought when the rate cutting cycle began, you got buried . . .
~~~
PS: Come back when you learn some manners, boy.
Posted by: Freakalex | Mar 11, 2008 6:24:43 PM
Barry,
He has also said the following:
"Punk Ziegel’s banking analyst Dick Bove shocked Wall Street Friday after he called Citigroup (C) the best buying opportunity he’s ever seen. Bove joined the crew to discuss his reasons. Bove said that Citigroup has the best franchise of any bank in the world, it has unit growth and margins are expanding, the market capitalization of Citigroup is almost equal to the bank’s revenues and it’s selling at an 8% discount to book value. He thinks the stock will trade to $55 in three years."
Posted by: Lauren | Mar 11, 2008 6:35:47 PM
" And the market's reaction: Dow up 3.55% (417 points),"
Big deal. The Dow was up 255 pre-market because (Bloomberg) "The Fed said in a statement in Washington it plans to make up to $200 billion available through weekly auctions. Officials told reporters on condition of anonymity that the program may be increased as needed." Why weekly or increase the amount when "Dealers held $139.7 billion in agency debt and $60.2 billion in mortgage bonds, according to the Fed." Which is $200B. "Policy makers said they anticipated the so-called primary dealers will lend the Treasuries to other firms in return for cash." Hasn't this already been tried? And as to these auctions being sterile and not creating inflation; when these primary dealers loan money they charge a percentage. If they get 5% on a $500M loan they just generated $25K out of thin air (much like the FED does don't you think)? According to Jim Sinclair, "What is occurring is THE MONETIZATION OF BANKRUPTCY. The predictable result of monetizing bankruptcy is a significant increase in inflation and a sharply lower dollar. The dress up is to prevent a stinging rebuff for the Federal Reserve paying a FARCE price for bankrupt derivative packages purely to keep the banks that are almost all on the edge solvent." Why didn't the FED just make outright purchases of mortgage securities as many have suggested? According to Bloomberg, "Fed officials said they want to increase liquidity and the regular functioning of markets, rather than determine appropriate prices for securities. Buying the home-loan debt directly would affect prices." Really? Then why did, "FED Officials said they will discount the value of the assets submitted in exchange for Treasuries." Well of course the FED will discount the assets AFTER they become the taxpayer's property. God forbid the banks or mortgage lenders take the hit. Oh the other 167 points on the Dow today was an oversold bounce. Commodities hardly flinched so money didn't come out of them and go into stocks. And another thing regarding the inflation-deflation debate; I'm a believer in the historical data not the conventional wisdom of the day.
Got alot off my chest and feel much better!! Thanks, writing is good for the soul.
Posted by: Pat G. | Mar 11, 2008 6:48:22 PM
4.1 trillion...what's 200 billion going to fix? It might buy some time, but let's face it we aint seen nothing yet!
Posted by: JustinTheSkeptic | Mar 11, 2008 6:54:26 PM
One word - delusional.
Posted by: DC | Mar 11, 2008 6:58:57 PM
I do not understand the analogy with socialism Barry.
What should the greedy capitalistic pig get from the government in return for the hundreds of millions paid in taxes to the government?
Posted by: Greedy Capitalistic Piggy | Mar 11, 2008 7:04:35 PM
It's not socialism Barry in that socialism's positive intent is to spread wealth around to everyone in the society, taking from productive winners and sharing with the losers (or less economically fortunate). This is helping the rich, perhaps taking from the less fortunate and giving it to the most fortunate. Not socialism at all!!!! Not sure what one would call it - Corruption, A Thiefdom, Anti-Social-ism? But history books will someday espouse the universally accepted principle: That the period from 2000 - 2008 was the most corrupt, dangerous, un-democratic and anti-capitalist period of American history.
Posted by: Matt | Mar 11, 2008 7:15:06 PM
Can I be a billionaire aristocrat too?
Or do you have to be chosen?
Posted by: Paul Jones | Mar 11, 2008 7:20:03 PM
Jay,
I know they make the bullets. That's the problem.
The little country bank I use is literally coining money. The lady who runs it (owns it) turned down 2.5x book recently. It's a funny bank. They know their customers and have been known to talk a customer out of borrowing for cars, home improvements etc. Last year they wrote off $18,400 in losses. Talk about community service.
Posted by: Ross | Mar 11, 2008 7:20:33 PM
Might as well move to Europe. At least *their* socialism is right out in the open and everyone gets a small piece of it.
Posted by: IdahoSpud | Mar 11, 2008 7:23:13 PM
If only ProShares offered Ultra-Short Central Banks.
Posted by: thebigkill | Mar 11, 2008 7:27:02 PM
Paul Jones,
Most of the billionaires on Forbes list are self-made billionaires and they did it without the government’s help. If they can do it, you can do it.
"The less government we have, the better" - R.W. Emerson, 1844
Posted by: St. Pauli Girl | Mar 11, 2008 7:29:52 PM
"Anti-Socialism."
That about sums it up.
Posted by: Rodger Coleman | Mar 11, 2008 7:33:25 PM
Crony capitalism at its finest.
Fallon Fails in Mission to "Put the Crazies Back in the Box"
http://www.dailykos.com/story/2008/3/11/18358/0519/419/474514
If the Idiot-in-Chief attacks Iran this will likely trigger the Derivatives 'ticking bomb' and the US economy will go into depression (not just a recession)
Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen
http://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D%2D4796%2D4D0D%2DAC9E%2DD9124B59D436%7D
In short, despite Buffett's clear warnings, a massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession.
Posted by: km4 | Mar 11, 2008 7:35:56 PM
@ Mikael - It could have been worse for BSC.
@ Jay - Very good points, but nothing is inevitable. Certainly, an excuse that applies to so many of our august financial institutions is better than how/whether ABK will get bailed out.
@ Ross - If you're right, inflation won't be just a specter. Where did you get the numbers for your 1/4 capital deployed item?
Posted by: Allan | Mar 11, 2008 7:36:01 PM
