Bear Stearns Fails - Bailed out by FED Reserve for 28 days

No way shareholders (retail investors, employees or any others) are buying Bear in the hope that the deal is not done. Stick a fork in this one.

Bondholders and hedge funds (the institutional money) are simply buying insurance (as the article noted above references).

These institutions are buying stock (and the associated voting rights) to insure that this deal gets done. If it doesn't get done - AND QUICK - they stand to lose BIG. They appear willing to lose money on the stock purchase to make sure it gets done.

Bear shareholders have every right to be angered by how this turned out. But, anticipating a visceral reaction and a risk that the deal would fall through, the shrewdest guy on Wall St., Jamie Dimon, tucked in two provisions to the deal (according to the WSJ):

1. Chase has an option to buy 20% of Bear Stearns right now without any shareholder approval - whatever risk there is to the deal falling through, Chase has a risk-free option on 20% of Bear today

2. Chase also has an option to buy Bear's HQ building at a 20% discount to current value - the building itself is worth a reported $1.4B or 5X the purchase price for the entire company (that's the deal of a lifetime!) - this is available with NO SHAREHOLDER APPROVAL

The fat lady was singing yesterday and the bondholders and counterparties to Bear Stearns derivatives (mainly hedge funds) know it.

This wasn't a bail out it was a federally backed absorption of a defunct company by another company. Quite a sad day for capitalism, IMO.

Two reasons:

(1) When they originally "Dropped a Deuce" on Bear, it was an exchange for a set fraction of a share of JPM stock (in the amount of $2) for a share of BSC--now that JPM stock is going up, that fraction of a share is also going up in price.

AND

(2) There's rumblings that Bear employees and deep-pocket Bear shareholders are going to vote "No" to the takeover and are threatening to get legal help to pick apart the "$2 Deal" that took place between "W," Hank, Ben and JPM behind closed doors.

The fat lady hasn't entered the stage yet on this.


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I would even go further and say say she hasn't even got to the show.

"...Might be time to sell everything into a "sucker rally" (if there is one) ...?


"...That was last week- remember the 400 point rise?..."




Now you have to decide if this is another "suckers' rally," a "bottom,"
or something else.

Worth sharing, anyone with an hour to kill might want to watch this You Tube video that does a fair job of explaining the basics of securitization - CDO's, CMO's, MBS, etc.

Structured Finance, Lecture 1 - The Alphabet Soup of the Credit Crisis

Fed's doing an amazing job addressing the liquidity issue facing the global economy.

It's a shame though that their addressing the wrong problem. The only solution is to let the losses flow to the equity holders - either property owners or shareholders.

Jim is not happy with the Fed!



http://www.infowars.com/?p=901:shock:


Cramer is an idiot! :angry:



http://www.infowars.com/?p=855











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This story has been amazingly entertaining - drama, controversy, human error. The latest twist - 5X increase in the original price to $10 per share:

?JPMorgan and Bear were prompted to renegotiate after shareholders began threatening to block the deal and it emerged that several ?mistakes? were included in the original . . . . One sentence was ?inadvertently included,? according to a person briefed on the talks, which requires JPMorgan to guarantee Bear?s trades even if shareholders voted down the deal. . . . When the error was discovered, James Dimon, JPMorgan?s chief executive, who was described by one participant as ?apoplectic,? began calling his lawyers at Wachtell, Lipton, Rosen & Katz to seek a way to have the sentence modified, these people said. Finger pointing over the mistakes in the contracts began as bankers blamed the lawyers and vice versa.?

Total price is still less than the market value of Bear Sterns headquarters building. And someone gets extra points for using the word 'apoplectic'. Gotta love it.

Someone mentioned TIPS and another mentioned gold, so I thought I'd mention a fund I've owned for a couple of years, PIMCO Commodity Real Return (PCRDX). It's a good hedge if you're a bit pessimistic about the direction of the economy, as it has a basket of commodities (actually, I believe it holds "commodity-index-linked derivative instruments") that track the Goldman Sachs Commodities index (GSCI), and also holds a position in TIPS as an inflation hedge. Currently, the GSCI is heavily weighted towards energy but also holds precious metals and agricultural commodities.

There are quite a few other funds and ETF's that could accomplish the same thing, but I like this one because I do feel we are headed towards a period of higher inflation with particularly high oil prices yet to come, and this one fund balances my portfolio without me having to mess around with it at all.

Obviously this fund took a hit last week with commodities dropping, but might be a good time to get in.

Dr. Roberts explains this better than I can. I hope you take the time to see that this Bear Stearns thing is not over.

YouTube - The Alex Jones Show - 3/19/08 : Dr.Paul Craig Roberts pt 1

YouTube - The Alex Jones Show - 3/19/08 : Dr.Paul Craig Roberts pt 2

I know many are hoping the Real estate market is going to flip around but I would only say to hold on to your hat because I don't think we have seen the bottom quite yet. I pray I am wrong.

Not one rep for the post above. You people are a hard crowd to please :roll:. Well, I am sure this is old news to all of you.

Not one rep for the post above. You people are a hard crowd to please :roll:. Well, I am sure this is old news to all of you.

It is if they've heeded my posts for the past couple of years.


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Well sir/madam, I would say that you are in front of the curve and quite a bit smarter than me.

I am not an economist but I would say that we have quite some ways to go before many on this board really see what we are facing.

We are being cooked by some of the finest bankers this Old World has seen yet. I do pray that I am wrong but I don't think the fun will start for at least another year and then like the Chinese would say, we are in for some interesting times.


My apologies for my assuming you were a male. After looking at your name I see the name Shelly is mostly used as a girls name some 99.84% and is male some 0.16%.

My apologies for my assuming you were a male. After looking at your name I see the name Shelly is mostly used as a girls name some 99.84% and is male some 0.16%.

Do not put your faith in what statistics say until you have carefully considered what they do not say. ~William W. Watt

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Do not put your faith in what statistics say until you have carefully considered what they do not say. ~William W. Watt

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Well, from your writing style I would bet you were a man, but I would love to know when you were born to go further with my prediction.

Can you give a hint of how old you are. Ballparkish?

Well, from your writing style I would bet you were a man, but I would love to know when you were born to go further with my prediction.

Can you give a hint of how old you are. Ballparkish?

Older than Kimmifunn and younger than Goofer44.


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Older than Kimmifunn and younger than Goofer44.


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I am sorry to say I don't know Kimmi or 44 and I am sure they are nice people but can we get just a little closer on the age. Within a ten year range?

I am sorry to say I don't know Kimmi or 44 and I am sure they are nice people but can we get just a little closer on the age. Within a ten year range?

....ahhhhh...:scratch:
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What a pleasant and giggly start to my Sunday after reading the last few posts. BTW-To all interested and uninterested parties: I am not compiling dossiers on anyone. That means you Shelly, though I think/hope you knew/suspected I was joking in another thread. I post just in case what I implied was misinferred and before I misinferred what may or may not have been implied. I promise I am not crazy!

I am not compiling dossiers on anyone. That means you Shelly, though I think/hope you knew/suspected I was joking in another thread. I post just in case what I implied was misinferred and before I misinferred what may or may not have been implied. I promise I am not crazy!

That's too bad; I'd like to see what you come up with after paging back through my 3200 posts over the past 3 years--plus--it would save me a lot of time and effort when I get around to penning my memoirs.


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Mr/Mrs Shelly,

If I could ask a few questions, I would be so grateful.


Do you see the real estate market turning around within the next 5 years?

Do you see anyway that the U.S dollar can or will be saved?

If you were going to invest in a currency, what country would you favor?

What do you see happening to America if China is pushed off of the dollar peg, or decides to give up on the dollar to stay off inflation of their own currency?

If our currency collapses, what will people use in order to purchase products.

What is Stagflation?

These are questions that I would like to hear from you, if you would be so kind as to give me a quick lesson on economics.

Mr/Mrs Shelly,

If I could ask a few questions, I would be so grateful.


Do you see the real estate market turning around within the next 5 years? If by "turning around" you mean a return to the "frenzy" of circa 2005ish....no. Real Estate sales are running about normal now.

Do you see anyway that the U.S dollar can or will be saved? In the near-term, no. Beyond that a return to the gold standard or some other major event that would crush other world currencies in relation to the dollar.

If you were going to invest in a currency, what country would you favor? Pass

What do you see happening to America if China is pushed off of the dollar peg, or decides to give up on the dollar to stay off inflation of their own currency? A big burst of inflation, a sell-off of US treasuries, increase in interest rates, followed by a decrease in availability of cheap goods from China. (The Five Dollar Tree Store?)

If our currency collapses, what will people use in order to purchase products. Dollars, lots and lots more dollars.

What is Stagflation? Inflation + high unemployment - economic growth.

These are questions that I would like to hear from you, if you would be so kind as to give me a quick lesson on economics.

See answers in red above.

IMO the only way America can pull itself out of this nosedive is for us to change from a debt-and-spend nation into nation that saves, produces and sells again. We've essentially "sold our souls to the company store" by borrowing money from the rest of the world to buy their "stuff." If this cycle doesn't stop, the USA and her assets will be sold off to the highest bidder--which will be the nations of oil producers or "stuff" producers.

"The Art of War" by Sun Tzu was a Chinese military treatise written during the 6th century BC. Sun Tzu wrote: In the practical art of war, the best thing of all is to take the enemy's country whole and intact; to shatter and destroy it is not so good. Hence to fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy's resistance without fighting.

Don't underestimate the power that China holds over America....they manufacture the lion share of America's goods and they hold over $477 Billion in US treasuries (second highest after Japan). If they decide to dump these treasuries onto the market they will crush the US dollar--and our economy--overnight.

Going forward I'm hoping to see a change in the US psyche whereas we start to save and live within our means and shun the materialistic, wasteful, debt-inducing lives we've been living that got us into the mess we're in today.
The people of the US have gotten to a point where they are using debt (credit cards advances, equity loans) to pay off debt (mortgages, car loans)...and America is doing the same thing by selling treasuries to pay off the interest of previously sold treasuries (and now exchanging them for subprime mortgages!). It's economic insanity out there and if we are to survive as a nation, it's gotta stop...if not for our own sake, for the sake of our children and grandchildren.

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Bernanke?s Next Big Bail Out Plan


Mike Whitney
Counterpunch
March 30, 2008
The Federal Reserve is presently considering an emergency operation that is so risky it could send the dollar slip-sliding over the cliff. The story appeared in the Financial Times earlier this week and claimed that the Fed was examining the feasibility of buying back hundreds of billions of dollars of mortgage-backed securities (MBS) with public money to restore investor confidence and clear the struggling banks? balance sheets. The Fed, of course, denied the allegations, but the rumors abound. Currently the banking system is so clogged with exotic investments, for which there is no market, it can?t perform its main task of providing credit to businesses and consumers. Bernanke?s job is to clear the credit logjam so the broader economy can begin to grow again. So far, he has failed to achieve his objectives.
Since September, Bernanke has slashed interest rates by 3 per cent and opened various auction facilities (Term Securities Lending Facility, the Term Auction Facility, the Primary Dealer Credit Facility, and the new Term Securities Lending Facility) which have made $400 billion available in low-interest loans to banks and non banks. He has also accepted a "wide range" of collateral for Fed repos including mortgage-backed securities and collateralized debt obligations (CDOs) which are worth considerably less than what the Fed is offering in exchange. But the Fed?s injections of liquidity have not solved the basic problem which is the fall in housing prices and the persistent downgrading of mortgage-backed assets that investors refuse to buy at any price. In fact, the troubles are gradually getting worse and spreading to areas of the financial markets that were previously thought to be risk-free. The credit slowdown has also put additional pressure on hedge funds and other financial institutions forcing them to quickly deleverage to meet margin calls by dumping illiquid assets into a saturated market at fire-sale prices. This process has been dubbed the "great unwind".
In the last six years, the mortgage-backed securities market has ballooned to a $4.5 trillion dollar industry. The investment banks are presently holding about $600 billion of these complex debt instruments. So far, the banks have written down $125 billion in losses, but there?s a lot more carnage to come. Goldman Sachs estimates that banks, brokerages and hedge funds will eventually sustain $460 billion in losses, three times greater than today. Even so, those figures are bound to increase as the housing market continues to deteriorate and capital is drained from the system.
The Fed has neither the resources nor the inclination to scoop up all the junk bonds the banks have on their books. Bernanke has already exposed about half ($400 billion) of the Central Bank?s balance sheet to credit risk. But what is the alternative? If the Fed doesn?t intervene, then many of country?s largest investment banks will wind up like Bear Stearns; DOA. After all, Bear is not an isolated case; most of the banks are similarly leveraged at 25 or 35 to 1. They are also losing more and more capital each month from downgrades, and their main streams of revenue have been cut off. In fact, many of Wall Street?s financial titans are technically insolvent already. The Fed is the only force keeping them from bankruptcy.
Case in point: "Citigroup may write down $13.1 billion of assets including leveraged loans and collateralized debt obligations in the first quarter?.. U.S. bank earnings overall will tumble 84 percent in the quarter?.?We anticipate further downside to both estimates and stock prices? because banks will be under pressure to mark down assets to reflect falling market indexes." (Bloomberg News)
It?s generally accepted that the market for mortage-backed securities (MBS) will not improve until housing prices stabilize, but that?s a long way off. Mortgages are the cornerstone upon which the multi-trillion dollar structured investment market rests. And that cornerstone is crumbling. If housing prices continue to fall, the MBS market will remain frozen and banks will fail; it is as simple as that. No one is going to purchase derivatives when the underlying asset is losing value. The Bush administration is pushing for a "rate freeze" and other clever ways to keep homeowners from defaulting on their mortgages. But it?s a hopeless cause. The clerical work needed to change these complex mortgages is already proving to be a daunting task. Plus, since 60 percent of these mortgages were securitized, it is nearly impossible to change the terms of the contracts without first getting investor approval.
Also, the tentative plans to expand Fannie Mae and Freddie Mac, so they can absorb larger mortgages (up to $729,000 jumbo loans) is putting an enormous strain on the already-overextended Government Sponsored Enterprises (GSEs; financial services corporations created by the United States Congress. By attempting to reflate the housing bubble, the administration will only increase the rate of foreclosures and put the two mortgage behemoths at risk of default without any clear sign that it will revive the market.
Yesterday?s release of the Case/Schiller Index of the 20 largest cities in the country, shows that housing prices have slipped 10.7 per cent in the last year while sales were down 23 per cent year over year. That means that retail equity of US homes just took a $2 trillion haircut. Still, prices have a long way to go before they catch up to the 50 percent decline in sales from the peak in 2005. From this point on, prices should fall and fall fast; following a trajectory as steep as sales. Many economists expect housing prices to drop at least 30 per cent, which means that $6 trillion will be shaved from aggregate home equity. In a slumping market, many homeowners will be better off just "walking away" from their mortgage instead of making payments on an asset of steadily decreasing value. Who wants to make monthly payments on a $500,000 mortgage when the current value of the house is $350,000? It?s easier to pack the kids and vamoose then waste a lifetime as a mortgage slave. Besides, the Bush administration has no interest in helping the little guy stay out of foreclosure. It?s a joke. All of the rescue plans are designed with just one purpose in mind; to save Wall Street and the banking establishment.

The Fed chairman has simply responded to events as they unfold. The collapse of Bears Stearns came just weeks after the SEC had checked the bank?s reserves and decided that they had sufficient capital to weather the storm ahead. But they were wrong. The bank?s capital ($17 billion) vanished in a matter of days after word got out that Bear was in trouble. The sudden run on the bank created a risk to other banks and brokerages that held derivatives contracts with Bear. Something had to be done; Rome was burning and Bernanke was the only man with a hose.
According to the UK Telegraph:
Bernanke felt he had no choice but to step in and try to minimize the damage, but the outcome was disappointing. Bernanke and Secretary of the Treasury Henry Paulson worked out a deal with JP Morgan that committed $30 billion of taxpayer money, without congressional authority, to buy toxic mortgage-backed securities from a privately-owned business that was failing because of its own speculative bets on dodgy investments. The only people who made out were the investors who were holding derivatives contracts that would have been worthless if Bear went toes up.
Still,the prospect of a system-wide derivatives meltdown left Bernanke with few good options, notwithstanding the moral hazard of bailing out a maxed-out, capital impaired investment bank that should have been fed to the wolves.
It is worth noting that derivatives contracts are a fairly recent addition to US financial markets. In 2000, derivatives trading accounted for less than $1 trillion. By 2006 that figure had mushroomed to over $500 trillion. And it all can be traced back to legislation that was passed during the Clinton administration.
The Fed chief is now facing a number of brushfires that will have to be put out immediately. The first of these is short term lending rates, which have stubbornly ignored Bernanke?s massive liquidity injections and continued to rise. The banks are increasingly afraid to lend to each other because they don?t really know how much exposure the other banks have to risky MBS. This distrust has sent interbank lending rates soaring above the Fed funds rate to more than double in the past month alone. So far, the Fed?s Term Auction Facility (TAF; under the Term Auction Facility (TAF), the Federal Reserve will auction term funds to depository institutions) hasn?t helped to lower rates, which means that Bernanke will have to take more extreme measures to rev up bank lending again. That?s why many Fed-watchers believe that Bernanke will ultimately coordinate a $500 billion to $1 trillion taxpayer-funded bailout to buy up all the MBSs from the banks so they can resume normal operations. Of course, any Fed-generated scheme will have to be dolled up with populous rhetoric so that welfare for banking tycoons looks like a selfless act of compassion for struggling homeowners. That shouldn?t be a problem for the Bush public relations team.
The probable solution to the MBS mess is the restoration of the Resolution Trust Corp., which was created in 1989 to dispose of assets of insolvent savings and loan banks. The RTC would create a government-owned management company that would buy distressed MBS from banks and liquidate them via auction. The state would pay less than full-value for the bonds (The Fed currently pays 85 per cent face-value on MBS) and then take a loss on their liquidation. "According to Joseph Stiglitz in his book, Towards a New Paradigm in Monetary Economics, the real reason behind the need of this company was to allow the US government to subsidize the banking sector in a way that wasn?t very transparent and therefore avoid the possible resistance."
The same strategy will be used again. Now that Bernanke?s liquidity operations have flopped, we can expect that some RTC-type agency will be promoted as a prudent way to fix the mortgage securities market. The banks will get their bailout and the taxpayer will foot the bill.
The problem, however, is that the dollar is already falling against every other currency. (On Wednesday, the dollar fell to $1.58 per euro, a new record) If Bernanke throws his support behind an RTC-type plan; it will be seen by foreign investors as a hyper-inflationary government bailout, which could precipitate a global sell-off of US debt and trigger a dollar crisis.
Reuter?s James Saft puts it like this:
Saft is right; foreign creditors will see it as an indication that the Fed has abandoned standard operating procedures so it can inflate its way out of a jam. According to Saft, the estimated price could be as high as $1 trillion dollars. Foreign investors would have no choice except to withdraw their funds from US markets and move them overseas. In fact, that appears to be happening already. According to the Wall Street Journal:
$121 billion does not even put a dent the $700 billion the US needs to pay its current account deficit. When foreign investment drops off, the currency weakens. It?s no wonder the dollar is falling like a stone.

Bear Stearns was set up by the Fed Reserve to go down.