More thoughts on the Fed & JPM's BSC Liquidation
Anyone get a great night sleep?
Not me. I kept waking up, mind racing, thinking about what all this means going forward.
I have Kudlow & Co. tonite, and Morning Call on Fed day, and I always like to bring some ideas that are not the usual clichéd blahblahblah. Hence, the adrenal overload.
This entire series of events has me thinking about some fascinating wrinkles:
• I think the Fed is acting appropriately to avert an entire financial system meltdown. Whether they will be successful is as of yet, unknown. As we are so fond of saying, there will be costs: Financial, economic, psychological, and prestige wise to this debacle.
• TANSTAAFL: Speaking of which, we see the Dollar getting whacked further, Gold at $1030, and Oil over $110.
• A bailout for Wall Street may not be very palatable during a recession in a election year. Thus, we should expect a major Housing/Mortgage bailout along any day now. Cost: Very expensive.
• Could J.P. Morgan (JPM) really complete a thorough due diligence on all of Bear Stearn's (BSC) crappy paper, leveraged risk, and counter-party obligations in 2 days? I doubt it. Hence, the $30B backstop from the Fed. Not quite free market capitalism, but definitely creative, and certainly destruction.
• JPM now gets a terrific scapegoat for the next 4 (or 8 or 12) quarters to blame for all of their crappy paper, leveraged risk, and counter-party obligations: Bear Stearns.
• The Efficient Market Hypothesis (EMH) takes yet another hit. I am beginning to think markets are lagging indicators . . .
• The impact of the credit crunch is -- disturbingly -- showing up in places you would never expect. Example: 20% Of Silicon Valley Startups Can’t Get To Their Cash.
• Does this mean Bear's Quarterly earnings call -- scheduled for today -- will be canceled?
• EVERYTHING seems to trace its way back to Housing.
Markets are closed for Good Friday, option expiry is Thursday. Get ready for a fun filled, jam packed 4 day week!
~~~
UPDATE: March 17th, 2008
A friend IMs me, and says:
The NY Yankees paid more for A-Rod than JPM paid for Bear Stearns
Monday, March 17, 2008 | 06:40 AM | Permalink
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Barry...The analogy I like to use here is the Fed is 4th and 10 from their own 30 with 2 seconds on the clock. You throw a Hail Mary pass and pray for a miracle...you don't do nothing. What is unfortunate is they can't really let on how bad this is, so people (Joe Lewis OMG) keep trying to catch a falling knife. And this time it is the so-called smart money that is the dumbest as they are so removed from the reality that many Americans have lived way beyond their means.
(Feel free to use my analogy on your media tour)
Posted by: Dee Leverage | Mar 17, 2008 7:26:39 AM
yes, the earnings report will not occur. This information via their website: http://www.bearstearns.com/
Great blog.. Thanks for all your work.
Posted by: Wells | Mar 17, 2008 7:29:54 AM
Barry,
More interesting tidbits:
I have a friend who was the CEO of a now-defunct California mortgage lender that went bust last summer. He told me that is was common knowledge within the industry that Lehman was holding more crappy mortgage-related paper than anyone, followed closely by Bear. Lehman's reported troubles are not surprising.
As for your observation that this credit crisis is spreading to non-financials, the proposed new professional football league, the AAFL, canceled its first season because it could not obtain financing at anything approaching reasonable rates.
Also, my hometown Patriots recently were stuck paying about 15% on their debt because one of their bond auctions failed. They eventually figured out a way to restructure this debt, but the Patriots are a solvent, extremely profitable organization. If they're having trouble with financing, that does not bode well.
Posted by: Peter Davis | Mar 17, 2008 7:31:55 AM
In a similar vein, I ran into a former top analyst at Bear Saturday night...he said he still had some options (stock closed at $30 remember) and was a little bummed. Told me a former "Bear alumni" called him during last week and told him he was buying Bear at 50.
This should be a reminder of how much WS wealth is tied to stock and particularly options, which the way they are leveraged to strike price go from worth millions to nothing rather suddenly. That is the unspoken fallout here.
Posted by: Dee Leverage | Mar 17, 2008 7:33:41 AM
Next stop on Dow is 10,600...could happen today.
Head and shoulders knees and toes
Posted by: Dee Leverage | Mar 17, 2008 7:41:03 AM
Understatement of All-time by CNBC's Leisman:
"If the Fed hadn't acted last night, we would have really had a serious problem."
Stevo: This IS pretty serious.
Posted by: Dee Leverage | Mar 17, 2008 7:43:05 AM
11:37AM (GMT)
LEH is down 30% in pre-trade.
YEN is up 2.7% vs. the USD.
There appears to be massive closing of YEN/USD carry-trade positions.
It does not look like the fed can do much at this point.
Posted by: Steelduck | Mar 17, 2008 7:43:18 AM
Reverse Head and Shoulders breakout on the long term Euro/USD chart measures to a $1.88/Euro target... If that happens, what will everything else look like?
Posted by: SINGER | Mar 17, 2008 7:54:14 AM
So, what financial will not take a big hit today? It seem quite likely that an efficient market will knock some to low single digits-after all--how different are they than BSC?
After all--it was only one week from "no problem" to collapse for BSC.
Posted by: Neal | Mar 17, 2008 7:55:32 AM
If the fed is backing up 30B in bad paper doesn't that mean that the Fed is paying Chase over 29B to take over Bear?
Posted by: John T | Mar 17, 2008 7:58:15 AM
Don't forget moral hazard. BSC shareholders certainly did not get bailed out. Everyone says they were the poster child for risky lending and securitization. Well, now they're also the poster child for shareholder losses.
A lot of idiots thinking they were bottom fishing over the last eight weeks are about to get a little surprise.
Posted by: Bob_in_MA | Mar 17, 2008 7:59:33 AM
My shorts: (like Whitney's call)
LEH
MER
GS
IBN
intitiate sell ratings:
bombay sensex
euro
gold
oil
BUY:
piece of mind
Posted by: sam | Mar 17, 2008 7:59:44 AM
BR:
If larry gets on your case at all (he might be going insane, who knows) remind him he said in Sept. after the first rate cut that the dollar would strenghten because of it.
Posted by: Dee Leverage | Mar 17, 2008 8:03:34 AM
A bailout of housing is an economically untenable position for this country. We don't have the money to pay for our current budget, and with the economy slowing and tax receipts diminishing, a huge housing entitlement program could only be accomplished by inflation and taxation. It would be a ruinous path for us to take. But of course, political expedience makes for strange bedfellows.
Which brings me back to back to a quote by Lenin, "we will destroy the bourgousie by grinding them between the millstone of inflation and taxation".
Posted by: njdoc | Mar 17, 2008 8:08:23 AM
Fire sale! Unfrigging real. I was busy all weekend, and I didn't find out about the latest debacle till momments ago. This is how you screw shareholders. The Masters of The Universe are clueless, and in fact, they are the Apple Dumpling Gang.
Posted by: SPECTRE of Deflation | Mar 17, 2008 8:13:52 AM
Why sell Euro/Gold/Oil with another rate cut coming? Why not wait for the next hit of Helicopter Ben heroin?
Posted by: RNL | Mar 17, 2008 8:14:20 AM
They tried the bailout for homeowners first. It turned out it was mostly symbolic. But it was designed to pave the way for the bailout of Wall Street. Since the Fed or some other gov entity will have have to end up owning the toxic paper, yes I agree that they will try another homeowner bailout with some teeth to it. It's election year after all.
Posted by: Kuds | Mar 17, 2008 8:15:11 AM
Could this be The Saint Patrick's Day Massacre??? Shame I can't trademark a short catch prase.
Posted by: Dee Leverage | Mar 17, 2008 8:18:30 AM
Why does CNBC feel that they have to always make the "Bull Case?" Who signs their pay-checks? Hmmmmm?
Posted by: JustinTheSkeptic | Mar 17, 2008 8:18:47 AM
Am I reading this right? $2 per share? Someone should really go to jail on this BS (pun intended).
Posted by: SPECTRE of Deflation | Mar 17, 2008 8:23:00 AM
No, it is not a bailout. Remember, the extent of Morgan's exposure is unknown... they are, in reality, paying a LOT more than $2 for their fun.
The quarter-point is mostly symbolic and, personally, I hope it stops there. The rate cuts are doing no good and a lot of harm. The problem isn't rates and lower rates are not doing their traditional job of propping up banks because lower rates have no effect if there is no lending.
Posted by: wally | Mar 17, 2008 8:24:28 AM
So that's what they all meant by "contained"!! Just cannot imagine what else the Fed knows, and is yet to hit the fan.
Posted by: Strasser | Mar 17, 2008 8:25:33 AM
Oh Kudlow and Co. should be interesting. Larry only recently got onboard for defending the dollar.
Now BSC, two trading days ago in the $60s, sells for $2!!!!
That's a frontal labotomy for Goldilocks!!!!!
Posted by: Chief Tomahawk | Mar 17, 2008 8:26:01 AM
Remember--it's only money and stocks can't go lower then zero---lol
Posted by: gunthestops | Mar 17, 2008 8:26:18 AM
Does anyone know what the CEO of Bear Sterns will receive? Had they gone belly up would he would probably loose his Golden Parachute.
Posted by: jpl | Mar 17, 2008 8:28:03 AM
