An Important Note About the Bear Stearns Situation
It's Not about saving the company
By blackhedd Posted in bailout | Bear Stearns | Economy | federal reserve — Comments (66) / Email this page » / Leave a comment »
There's an important point that should be emphasized about the rescue of the Bear Stearns Companies that was announced yesterday morning. (We debated it vigorously here.)
Much of the debate centers on whether the Federal Reserve improperly used taxpayer dollars to save some very wealthy men from the consequences of their bad decisions.
But this is a misreading of both the situation and of the rescue. Herewith some clarifications.
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I'm not going to argue that Bear Stears, a firm with an illustrious 85-year history and 14,000 employees, got into trouble for reasons not of their doing. They jumped into the market for mortgage-backed securities with both feet during the bubble years. And they got very strong results from this book of business.
Accordingly, when the losses started coming last year, Bear got hit with them harder than anyone else. They went through some management turmoil last summer as co-CEO Jimmy Cayne refused to resign under the pressure and instead fired his heir-apparent and longtime protege Warren Spector (on five minutes' notice, or so the story goes). Three months ago, Cayne couldn't stand the heat any longer and resigned in favor of Alan Schwartz. Schwartz is the man who has been insisting all week that Bear faced no cash shortage.
But Wall Street isn't a place for softies. Bear Stearns themselves proved that back in 1998. As it happens, they were the preferred clearing agent for Long-Term Capital Management, the rocket-science hedge-fund whose spectacular collapse came close to melting down the global financial system. Bear Stearns was the firm with the biggest margin calls out against Long-Term.
So today the boot is on the other paw, as it were.
Enough of that. We can discuss all day what happened, but the reality is that Bear Stearns's days as an independent firm are numbered. They will need a large amount of additional capital to continue operating, and that will most likely come in the form of an acquisition.
In short, Bear Stearns is done, kaput, finito. Shed no tears for them. This is how the world works.
So then why on earth did the Federal Reserve step in to "rescue" Bear Stearns with taxpayer dollars?
Well, what did the Fed actually do? It appears that sometime on Thursday evening, Alan Schwartz got on the phone with Federal Reserve officials and with JPMorgan Chase, the large commercial bank. And they arranged a transaction in which the Fed would lend a significant amount of money to Bear Stearns for 28 days, guaranteed by collateral that Bear pledged to the Fed.
Morgan acted as a conduit for the transaction, because Bear Stearns is not a bank (it's a broker-dealer), and it's extraordinarily rare for the Fed to deal directly with a non-bank.
So. Is this a bailout, and aren't the taxpayers going to get royally screwed, just to keep a bunch of lying Wall Street fatcats in caviar, diamonds and high-priced call girls?
Well, no.
We have no information about the collateral that Bear pledged. If you press me to guess, I'd say it was probably a combination of US Treasury securities and AAA-rated bonds issued by agencies like Fannie Mae. I'd also guess that the "haircut" (the amount by which the value of the collateral exceeds that of the loan) was very, very high.
This is all standard procedure whenever the Fed lends money to a bank. You can go to federalreserve.gov and look up their collateral standards and their deal terms. It's all public. Apart from the fact that the transaction went through a third party (Morgan), there's nothing superficially unusual about this.
The credit risk of Bear's collateral is indeed being borne by the Fed. Is that worrisome and dangerous? There's not enough information to answer that question. But I would be extremely surprised if the Fed relaxed their collateral standards without a very public unanimous vote by its Board of Governors. There's no reason to fear that 28 days from now, the Fed will be stuck holding a glowing pile of toxic waste.
What about all the taxpayer dollars that went to Bear Stearns? Well, no, that didn't happen either. The Federal Reserve is the nation's monetary authority. Whenever they write a check, money springs into existence at that moment. There's no taxpayer money that got taken out of the mouths of sympathetic Social Security recipients or borrowed from the Chinese or the Saudis.
Isn't that monstrously inflationary? No, because when the loan is repaid in 28 days (probably by whoever has acquired Bear Stearns in the meantime), the money will cease to exist, which is what happens whenever the Fed receives a check.
But why is the Federal Reserve stepping in to save an institution that by rights should fail?
The Fed is not trying to save Bear Stearns. As I said above, Bear is done.
What the Fed wants to do is to keep Bear afloat for 28 days so that the business can be acquired by someone else in an orderly fashion. If they hadn't done so, then Bear could have defaulted Thursday night on payments to any number of trading counterparties.
And that would have caused all of those counterparties to default in turn, causing yet more defaults. A whole raft of perfectly healthy companies would have gone out of business on the same night. And on Friday morning, it would have been awfully difficult for your employer to fund your paycheck.
That's the scenario that I and others mean when we use the word "meltdown."
Did the Fed set a bad precedent here? That's a somewhat harder question.
When the Long-Term crisis came to a head in late September 1998, there were similar fears of a meltdown, as Long-Term was close to default on their obligations. Then as now, there were deep concerns about transparency, risk management, and incorrect portfolio valuations. Let's leave that part of it for another day.
The New York Federal Reserve Bank took the lead in dealing with the crisis. According to legend, they summoned the CEOs of all the major firms that were counterparties of Long-Term, and shut them up in a room on neutral turf over a weekend. The CEOs were told not to come out until they had a deal.
And so they formed a syndicate to acquire Long-Term's assets at a deep discount in return for a temporary infusion of liquidity. The only money the Fed put in was the price of coffee and sandwiches for the conferees.
Could such an approach have worked here? Maybe. But in 1998, they had significantly more time to figure it all out. If the published news accounts are true, the Bear Stearns situation blew up in the course of an afternoon. And in another key difference, today there are concerns about the health of a whole lot of major firms, not just one as in 1998.
So in dealing with this as it did, has the Fed created an expectation that it will do so again? Perhaps yes, and this is dangerous.
For now, let's hold our breath and hope the Bear Stearns situation resolves peacefully. Then let's hope for a few weeks of relative calm with no more shoes dropping. Then we can step back and discuss the larger policy issues.
-Francis Cianfrocca ("blackhedd")
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... (or equivalently, makes a cash loan), money appears in the banking system (and by extension, the economy).
Whenever they sell anything (or equivalently, receive repayment of a loan), money is extinguished (disappears).
Fractional-reserve lending is something else entirely.
Ironically the Federal Reserve doesn't actually do reserve banking, heh. It just stores everyone else's reserves, which is why it's called the Federal Reserve Bank I guess.
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...the peculiar structure of the Federal Reserve derives from fear that Congress, back in 1910, would never approve a national bank. Standard practice in regard to bank reserves in the 19th century involved holding some percentage of assets in the form of US Treasury securities. Before 1913, the US was the only major trading nation without a central bank.
The Fed was created mostly in response to the Panic of 1907, which made clear to everyone that a formal lender of last resort was needed. In October 1907, that role was filled on a night-to-night basis by individuals and institutions closely allied with the semi-retired and 79-year-old J. P. Morgan.
Yes, the same J. P. Morgan whose name is on the bank that facilitated the Bear Stearns rescue. They're going to come out of this episode with an awful lot of new credibility and respect.
I was referring to the fact that once the fed adds money to the money supply for a time they need to take significantly more out to put it back where it was.
As long as the money isn't being put under a mattress, it winds up in banks. It makes its way into M3. It grows. It gets lent. deposited and relent etc.
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-Thomas Paine: The American Crisis, No. 4, 1777
...multiplier effect in the real economy because of fractional-reserve lending. But the opposite effect is also true. When the Fed takes money back out of the system, the multiplier effect works in reverse.
The Fed seeks to manage the liquidity of the banking system through frequent short-term transactions (like the Bear Stearns loan) that don't permanently change the money supply.
They do also engage in operations to permanently increase the money supply and inflate the economy. (Congress requires them to do this.) But these operations are quite infrequent. The last time I checked, there hasn't been a permanent change in the money supply since last April.
I pay some attention because I believe all inflation is fundamentally a monetary phenomenon(yes I am austrian/chicago in outlook)
anyway as expected M3 is ever growing.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
I know it's *called* a measure of the money supply, but that doesn't mean it's a reasonable measure.
Didn't the Fed stop publishing their own measures of it?
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M2 tracks well also.
P* is an even better measure of the inflationary effects of the money supply but the fed doesn't report on that either. You have to use the numbers you can get.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
costly compliance procedures saved the day for the US public?
You didn't?
Of course we didn't, because it didn't happen.
As a footnote to this debacle, I would love to hear how much time and money Bear spent on SOX compliance.
We need more. I am not certain what kind but its obvious that what we have isn't working so we need more. Lots more, bigger stronger more able to protect us from evil people.
< /snark >
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
we lowly sinners are treated to a cascade of jeremiads- or would that be Jeremiahs?
In what way are "the laws ...not good enough?" Bear Stearns chose over the past several years to significantly leverage its balance sheet. Some of the assets it added (abs/mbs) fell in value. Money started to run off; the Fed made sure there was liquidity for BSC to settle its trades while a deeper pocket negotiates its purchase.
What's the problem?
didn't you see the < / snark > tag at the end ?
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
I'm not necessarily a fan s Sarbanes-Oxley, but I don't think S-O was their problem. If anything, it prevented them from hiding their losses and creating a much worse situation two months from now.
The fact is, government regulation failed. That's because government isn't the solution to all problems. It's a dumb idea to begin with.
Buyer beware is the principle to remember. Shareholders need to get into gear and work, instead of just relying on government to do it for them.
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For Bear-Stearns investors. Yes. In no way do I envy their position, but for their investors, not to mention the economy as a whole, a Bear-Stearns acquisition - even if it is at bargain basement - is better than insolvency.
Not great. Not good, Not even middling. But better.
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Although it we should probably talking pennies, not dimes.
The Federal Reserve now has a big non-recourse claim against the company. We don't know how impaired Bear's long-term assets are, but under distress circumstances like this, they're going to be undervalued pretty sharply.
Bottom line, I think the long-term liabilities of the company wipe out the equity. (Which as of Friday's close is only worth about $4 billion and change.)
on the end result. I'm trying to be optimistic here.
Sometimes they thow a bone to the equity. Here they could get warrants to buy shares in the acquiring company at, say, 20 percent premium to the most recent price.
On another subject, James Cayne, who at one time had a billion dollars market value of BSC common was playing bridge as this evolved. No one at the firm has more to lose, and if he wants to play bridge as the firm burns, he's entitled to.
The way I heard it, Cayne and Spector were both at that world-class bridge tournament in Tennessee or wherever it was, back in July while their hedge funds were blowing up.
Cayne cut his trip short and hauled tail back to New York. But Spector was winning (he and his partners eventually won the world championship), so he didn't come back right away.
That was one of the excuses Jimmy gave for firing him. In retrospect, I think Spector comes out of this looking better, because he was long gone when the ship started sinking.
By the way, Spector is a major Obama supporter. Maybe a candidate for Secretary of the Treasury in case Barry wins.
http://www.acbl.org/nabc/view-results.php?day=13
Fourth place
How exactly did government regulation fail?
is time diverted from other, more worthwhile things, like minding the store.
Thanks again for the insider summary, Blackie.
But here may be the rub:
Then as now, there were deep concerns about transparency, risk management, and incorrect portfolio valuations. Let's leave that part of it for another day.
If tactically a deus ex machina intervention is a noisome necessity to prevent a much larger catastrophe.... well, then I guess we have to do it.
But will we (that's the big "we") ever circle back to that "another day"?? I don't remember too closely, but it seems that we heard that back during LTCM's meltdown, and after some other meltdowns (like the dot-com meltdown). But once the crisis had passed, did everyone just move on and forget about it?
What I fear is that once is a fluke, but that twice makes a trend. And strangely, this could "digitalize" the evaluation of financial risk. By "digitalize" I mean that instead of some continuum and risk-vs.-sanity trade-off, risk gets exclusively pushed to either extreme. You go either to "0" (absolutely NO risk, which would mean the end of venture investments in promising new ideas - my meat-and-potatoes) or to "1".... which would basically be the orders given by the big boss at some future Testanegra Capital Management to his minions.... "Boys, if we fail modestly we're finished. But it we fail so spectacularly that we'd take half of the world down with us, we'll get bailed out. So be sure to make everything we do be as risky and dangerous as possible, since it's the safest way." In other words.... "moral hazard" on more steroids than Jose Canseco.
We've now had at least two of these. Let's actually FIX THIS this time so it doesn't happen again?
Maybe it's just because we're closer to them, but I think we've had way more financial disruptions in the last twenty years than has been the historical norm. We had bizarre stock market crashes in 1987, 1989, 1991, 1994 and 2000. There was the Japan bubble, the Mexico default in 1994, the Norway bubble, the Asian flu, etc. etc.
What's been different in this time? Three different things that I can name: mathematical portfolio management, the rise of the non-gold-backed dollar as the world currency, and global capital markets that are fully meshed through information technology.
Have any or all of these factors combined to destabilize the financial world? The guy who answers that deserves a Nobel prize.
After the Long-Term crisis, massive changes were made in counterparty relationships to prevent a recurrence. Bear Stearns was one of key firms driving changes like twice-daily marks-to-market, etc.
Didn't help.
I'm starting to think that moral hazard (overexposure to risk by people with limited downside) really is an important key to the problem.
The guy who answers that deserves a Nobel prize.
Oh, please, Blackie, may God in Heaven preserve us from that!!!!!!!! :-)
If I remember correctly, wasn't that one of the biggest pieces of structural hubris that got LTCM into trouble? That their "magic" was Nobel-prizing winning stuff with the Nobel laureates as principals?
I want to circle back to this later - it's an over-chored day around the house. I can let Uncle Kowalski's comments below hold for now - that the overreaching self-enamorment of these "rocket scientists" actually running the Corvette at full speed.... right off a cliff.... was a big part of the problem.
A big missing piece of "moral hazard" seems to be "accountability." If these things keep happening, why do the same people get to cause them over and over again? If certain things have become clubs, so that once you get in you can screw up over and over and over yet always get another chance.... then the trouble is much too deep for a few "structural reforms" to remedy....
Hold that thought until later....
I certainly don't enjoy it, although if the truth must be known I am also a descendant of a Dutch DAR family here in America (on my mother's side) and I've been treated to the full Dutch Uncle treatment myself on a couple of occasions...
I freely admit my ignorance of the nuances of these complex instruments, and that is because I've never had time to study them carefully. Probably I should, but for this particular crisis it's a little too late. From my perspective, it therefore looks a great deal like there were many complicated transactions happening according to esoteric protocols and guidelines before they were properly regression-tested against reality, which is ultimately pretty simple.
I find it shocking (even as a jaded person) to see that there weren't enough people calling these things "nonsense upon stilts" before it became a global crisis that affects Wall Street but also measurably, tangibly hurts people on Main Street. And, as usual, at the worst possible time.
"The More They Overtake The Plumbing, The Easier It Is To Stop Up The Drain." -- Chief Engineer Montgomery "Scotty" Scott.
Well, as the Arab proverb supposedly says, "A dog barks, and the caravan moves on."
I guess the only thing I'd bother to add (at this point) to my earlier blather is to just re-iterate my caustic comments from a couple days back about a decade of contact-experience with financial people.... not Wall Street types for the most part, but venture investment types.
In terms of attitude - arrogant, stuck-up, full of themselves, self-anointed of godhood. In terms of more tangible things - shallow, superficial, impatient, ineducable.... that there was nothing too complicated for an explanation to them that didn't exceed 20 words or 20 seconds.
"I don't know anything, but I have a nice office!" Julia Roberts possesses superior intellect.
I won't even start on the messes this lot has made, or the money they've flushed down toilets, or the wonderful things we could have had now but don't, or their mindless herd-mentality. Even worse, they've empowered a layer of crooks who have them pegged - and just come feed them what they want to hear.
I don't know how this latest will play out, but once the catastrophe has been staunched, I want some changes that will put an end to this kind of cr*p. Too much of this has indeed been "nonsense on stilts," but as long as you could run a bunch of quasi-Ponzi schemes and get out just before it caved in and then move on to the next "mania".... this was allowed to continue.
I mean, to me it is:
I won't even start on the messes this lot has made, or the money they've flushed down toilets, or the wonderful things we could have had now but don't, or their mindless herd-mentality. Even worse, they've empowered a layer of crooks who have them pegged - and just come feed them what they want to hear.
The problem with all of these things is that the aftermath is always, always, another click in the endless ratcheting mechanism toward greater regulation. One would think that more people in the financial industry would recognize by this point that if their grand schemes and callow attitudes result in pain for millions of people, eventually it is their own industry that will suffer simply because it will be regulated more and more tightly.
They profess not to want more invasive regulation but inevitably people act in a way that invites it, and even requires it, because of their own reluctance to govern themselves. Eventually the Cosmic Cops catch everyone, including the people who invent sophisticated financial instruments.
Bittersweet nostalgia, as the Nifty Fifty debacle helped to wreck the economy as I graduated from college in the mid 70's.
Not clear to me what you want fixed.
* Bond ratings based on computer models projecting mortgage default rates?
* Limits put on allowed leverage of brokerage/investment companies?
* Limits on size and consolidation of financial organizations?
Perhaps, when mbs/abs markets were flying high, a call from the Fed to BSC management about shrinking its balance sheet might have prevented this outcome.
But, just as everyone should have bought Microsoft at the outset, 'everyone' should have acted differently at peak of realty bubble.
On main street we are losing arms and legs for energy prices. Thirty year mortgage rates haven't gone down in like manner like the Fed target rates.
The Fed has its own auction facility to take care of the banks through its discount rates.
So a more pragmatic answer to these inflationary pressures which are out of hand is to raise rates, and deal with these Wall Street institutions in some other fashion.
Seems that the Fed cure for the sub prime fallout is insufficient and has become counter productive. Any stimulus package will get swallowed up by the price of gas, and upper $3 range/ gallon will be average nationwide if Bernanke raises rates as expected this week due to anticipation for a much weeker USD.
Increasing liquidity and lowering interest rates is driving down the value of the dollar and increasing the price of energy. So Fed policy is acting like an energy tax, without the increased government spending. It will encourage exploration and conservation.
And let's face it- Americans are still guzzling like there's no tomorrow. Which would be fine in a truly free market, but not the cartelized one we actually have with its unsavory Middle East/Hugo Chavez connection.
$125 per barrel is the trigger price. But even the Alaskan Republicans are acting as Hillary lite in wanting a % of royalties to go to alternative fuels. http://www.ibdeditorials.com/IBDArticles.aspx?id=290386753960217
Then there are the Dems proposals for increasing the taxes.
No thanks to this compounding problem, weakening USD = higher commodities, weakening financial institutions = lower interest rates = weakening USD,
I would say that the USD has just been shot, or the American Eagle has been shot and is falling out of its low orbit flight and where it lands no one knows.
I'm being hard headed I know, but the USD looks like it will worth about as much as that Alaskan bill in IMHO.
It's the old, and now threadbare, line that we need the seniority of Stevens and Young to "get ANWR." Well, they've never gotten it, and now many don't want it. We like ANS at $110 and climbing, so why would we want to throw a bunch of oil on the market and drop the price? It's nothing personal towards the good people of the Lower 48, we are just "nowhere" after all.
In Vino Veritas
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Nobody makes subtle distinctions between the Ketchikan bridge to which you refer and the Knik Arm Bridge in Anchorage, and I'm not going to waste time again explaining them. It was all "bridges," as in plural, to nowhere. So, we'll accept that Alaska is nowhere, an even lesser status than "flyover country." And we'll remember all that when the Lower 48 is desperately looking for some oil to keep the Escalades from becoming lawn ornaments.
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Achance
I did a quick google and came up with Knick Bridge Facts. I don't know who the people behind this web site are, but they make some interesting points and sound like local Alaskans.
http://www.knikbridgefacts.org/
They don't seem as ready to secure those Federal Earmarks for this project as the current Alaskan congressional delegation.
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Proud member of the Barry Goldwater wing of the party !
We have our Citizens Against Virtually Everything (CAVE) people just like everywhere else. The site has no attribution or sponsorship, and the general theme is "what can we do to stop it?"
It really isn't about commuters, though that's the way they spin it. It is a way to get container traffic to and from the Port of Anchorage and Anchorage International Airport (the largest air cargo port in North America and by some measures in the World) onto the highway system to the interior US without going through downtown Anchorage. Since that highway system, the Alaska Highway is the Great Circle route to the interior US, it is the shortest route. That's why the delegations from WA and CA got so interested in "pork." Wouldn't want to take any traffic away from SEA, SFO, Oakland, or LA would we?
In Vino Veritas
Everything I've read says that even at peak production, the quantity of oil out of ANWR is such that it would just barely tap the supply curve and affect price only very minimally. If I recall correctly the DOE estimates were something on the order of 50 cents a barrel when oil was $60 a barrel. Can you point me towards something which projects a more pronounced affect?
-exits
In Vino Veritas
I do a mediocre job of managing my own finances and investments. Information from those in the know, who are NOT tied to the MSM, is extremely helpful to me in figuring out what is actually happening in the markets. I never miss one of your posts.
Thanks again.
from emails at www.stockcharts.com from the free subscription service. They are good at spotting financial market trends that emerge and email their subscribers every two weeks. For more in depth coverage, there's a small fee for daily emails.
Or the extraordinary actions they've had to take to prevent the kind of financial calamity that fills people's nightmares, but I have to say this:
I'm tired of "rocket science" when it comes to basic, simple matters like mortgages and credit. I realize that the esoteric concepts were invented to solve specific problems but just existentially, doesn't anyone involved in these industries have a sense that their heads are getting out too far in front of their skis? Do any of them ever sit and look at their glittering abstractions and wonder whether or not they really exist?
Nothing in the mortgage and credit crisis that I've read so far strikes me as the least bit prudent or conservative, particularly when it comes to self-policing and reality testing.
I'm starting to think that moral hazard (overexposure to risk by people with limited downside) really is an important key to the problem.
Even with my limited background in these kinds of financial instruments, I couldn't agree more. Psychologically it makes sense, particularly if people don't realize it because they're convinced of the value of their abstractions.
The Fed's move may have prevented a complete vanishing of risk-takers' life savings yesterday, but the invisible hand still slapped a lot of idiots around. Bear Sterns stock lost half it's value yesterday alone according to WSJ. The Journal said this is a nine-year low, which suggests this erased all the gains it's made by taking risks on subprime mortgages during the housing bubble.
This is way bigger and way scarier than most people realize. As Blackhedd notes, this had very, very little to do with saving Bear Sterns. It had to do with preventing, as much as possible, a disorderly collapse of the whole highly-leveraged financial system.
Francis notes that Bear Stern's equity is around four billion. Off that equity they ran something like a 32-1 leverage. That kind of leverage lets you get rich quick, but it also lets you go broke fast.
With that leverage comes margin calls. As the value of the assets you have leveraged drops, you get a call from Mr. Margin - you need to put up more assets against your obligations or the assets you have put up get seized (as happened to Carlyle Capital).
If something happens so that lots of paper gets dropped on the market, it drives down prices of assets, which causes more margin calls, to more people. If it happens fast enough, it is a self- reinforcing vicious cycle, as assets get seized and dumped, causing more margin calls.
If Bear Sterns had failed, it could well have prompted just that kind of rapid fire collapse. That the fed stopped that from happening already is a very, very good thing.
But we aren't out of the woods yet. It's not clear that anyone will want to take over Bear Sterns at any price. Beyond that, Bear Sterns is not the only bank suffering from both huge leverage and balance sheets loaded up with dubious assets. Morgan Stanley, for example, looks just about as bad, and in a few weeks or months we may be reading about a bailout of Morgan Stanley or another big bank.
The dubious value of the assets is one reason we have a problem. Banks are reluctant to lend money to each other right now because they cannot tell how credit worthy their counterparts really are. The fed is trying to fix this both by allowing banks to, in effect, swap out dubious securities for T bills, and by buying time for the value discovery process to happen.
Then there is the decline of the dollar. Up to a point, the falling dollar is ok - it allows exports to compete better, and so on. After a point, however, if foreigners lose faith in the dollar and US dollar denominated securities, it can lead to a dollar collapse.
These are perilous times. The fed's rate cuts have had very little positive impact on anything that matters, and they are feverishly trying things outside the box to avoid a really ugly collapse.
Reluctance to acquire Bessco at any price: there are a lot of profitable businesses there, including the prime brokerage unit, that will find a home in some other company.
I didn't say that BSC's shareholder equity (in the sense of a balance-sheet liability) is $4 billion. (Or if I did, I misspoke.) That number is their marcap as of Friday's close. Last summer, it was over $20 billion.
Someone like JP Morgan can buy them and sell off what they don't want. (And, if JP Morgan, knowing what they know about Bessco's assets, doesn't want them, you have to wonder who is bold enough to step up instead).
Or, they can go into bankruptcy, and the bankruptcy trustee can try to move the assets to salvage as much value as possible.
If it's the second scenario, the shareholders almost certainly get nothing.
It's also wise to remember the old quip about the assets of an investment bank taking the elevator out of the building every night. To the extent Bear Sterns has value, it's largely in its people, and you can bet that even as we type the most marketable of those people are considering their options away from the firm. Bear Sterns is a wasting asset.
28 days ought to do nicely, in fact, for Morgan and perhaps some others to take their own close look at Bear's portfolio and assess the risk.
An acquisition by the government of China is probably not going to get past Congress. They do own quite a large slice of the company already (through Citic Securities, if memory serves).
I don't think bankruptcy is an option. By definition, you're not going to trade with someone whose ability to make payments is under the control of some judge.
You certainly are right that this kind of firm cannot operate effectively in bankruptcy (although bankruptcy law has tools that deal with that in more ordinary circumstances). You may well be right that someone will buy the carcass and do the stripping themselves. If not, the role of the bankruptcy court will be to liquidate the real estate and other assets for the benefit of creditors.
depending on the seniority of the attorney, and the fact that bankruptcies require boatloads of attorneys and support services, the creditors would be better off not to force the issue.
Besides, I doubt Bear will be allowed to remain independent long enough to be a bankruptcy risk.
The downgrade on the credit rating puts all this into hyperdrive. As of now, Bear is junk rated. No one is going to trade with them as they are. The fed liquidity won't keep them alive if no one will do business with them because of the credit rating. What's more, the run on assets is going to continue.
If someone (and the field seems to be JP Morgan and JC Flowers) doesn't step up by Monday morning, they could be in bankruptcy Monday afternoon.
If and when they do go into bankruptcy, the pile on effects could be horrific. Anyone who is an unsecured creditor is out of luck. Even secured creditors can have their accounts tied up in bankruptcy court for a long while, during a remarkably volatile market. Beyond that, Bear has trillions (yes, trillions) of exposure on derivative contracts, and if they leave the playing field the whole carefully hedged derivatives market goes haywire.
Someone really needs to acquire Bear, and fast, or bad things start to happen.
The problem is, in a deleveraging world, who wants to take a $5 or $10 billion loss onto their balance sheet right now, especially given that the final cost is unknown and could be much higher? It would be a brave CEO that would acquire Bear right now.
Point remains the same, though - they are dead in the water, now, and the question becomes will there be a white knight and what the follow on impacts will be if there isn't one.
The shareholder equity, including preferred stock was
2007 $11.8
2006 $12.1
2005 $10.8
Total liabilities
2007 $383
2006 $338
2005 $281
There was some treasury repurchase of shares, ill advised in retrospect.
If I have read the financials correctly, about $46 billion of assets at Nov. 30 were in mortgaged backed or asset backed securities.
Say (for the sake of argument) that there is a 30% haircut in the abs/mbs portfolio and the rest is ok. Then, the damages are ~ $15 billion, and a buyer (JPM Chase) pays nothing for the equity, assumes the liabilities and takes a $5 billion hit. It could conceivably make that back in a couple of years if it puts all back together. It is not that simple, but not impossible.
although probably not to the extent of the Bear.
"Clearly the business has deteriorated pretty significantly in just the last couple of months," said James Ellman, head of San Francisco-based Seacliff Capital, a hedge fund specializing in financial services. "It's probably not going to be pretty."
As the contagion spread, analysts started furiously lowering earnings expectations. Goldman (GS, Fortune 500), which had largely escaped the subprime mortgage bloodbath of 2007, started the year with analysts predicting first-quarter earnings would come in at $5.64, on average, according to Thomson Financial. Now, the average earnings estimate is $2.59.
Bear's (BSC, Fortune 500) earnings estimate has plummeted to 90 cents, from $2.06. Lehman's (LEH, Fortune 500) estimate shriveled to 72 cents, from $1.62, and Morgan's (MS, Fortune 500) to $1.03 cents, from $1.61.
http://money.cnn.com/2008/03/14/news/companies/firstquarter/index.htm?po...
cease to exist. There will be a small bump to the money supply,
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