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Posted at 6:27pm on Apr. 2, 2008 "That Was an Extraordinary Thing To Do"

"I thought about it long and hard"

By blackhedd

Fed Chairman Ben Bernanke testified in Congress today about his team's handling of the Bear Stearns collapse, story here.

I'm among the many people who have written at length about how the Fed formed an external entity funded with $29 billion, in order to purchase mortgage-backed securities from Bear.

Here's what the Chairman had to say about that part of the episode:

``That was an extraordinary thing to do, I thought about it long and hard,'' Bernanke said, referring to the funding. ``I hope this is a rare event, I hope this is something we never have to do again.''

I'm going to take Bernanke at his word on this. The Federal Reserve (unlike the Treasury, at various points in history) has never exhibited a taste for exceeding its charter to anchor the nation's money supply and its payments system.

Extraordinary times require extraordinary actions, from extraordinary men.

-Francis Cianfrocca ("blackhedd")

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Posted at 7:16am on Mar. 29, 2008 More on The Federal Reserve's St. Patrick's Day Massacre

The New York Fed Puts on a $29 billion Trade

By blackhedd

Two days ago, I wrote here on the widely-reported $30 billion loan that the Federal Reserve made as part of brokering the acquisition of the Bear Stearns Companies by JP Morgan Chase (the "St. Patrick's Day Massacre").

I now have much more information on what this deal is all about. I guessed quite wrong about the deal structure. The $30 billion loan is not a term repo as I originally thought. Nor is it likely to generate monetary losses for taxpayers. (In fact, the opposite is true.)

But it is something bold and different that's worth understanding. In fact, it's a major milestone event in the monetary and financial history of the United States.

Before I launch into this, let me set the context by reminding you why all this financial mumbo-jumbo is important: it's because of politics. Even before the full effects of the credit crisis make themselves felt, we're already deeply into a paroxysm of "the sky is falling! What is the government going to do about it?" I'll be posting as much as I can on this subject in the coming days and weeks, because there is at least as much danger to the real economy from a mad dash toward new regulations and Federal involvement, as there is from the financial-system disorders themselves.

Keep reading...

Posted in bailout | Bear Stearns | Economy | federal reserve | JP Morgan Chase | SIV — Comments (49)/ Email this page » / Read More »

Posted at 9:16am on Mar. 18, 2008 Steady As She Goes

Markets looking ok this morning

By blackhedd

Markets are looking healthy and happy so far this morning.

Goldman Sachs and Lehman Brothers both announced earnings last night that were putrid, but not as bad as expected and both will rise sharply when the stock market opens. (Goldman should rise about 6%.)

The worry about Lehman is that they’ll be the next to get what Bear Stearns got. But I heard no rumors yesterday that anyone is pulling short-term funds out of Lehman or that anyone major is refusing to trade with them.

JP Morgan is going to open up another 4%. The market is confirming my interpretation that they stole Bear Stearns.

Asian and European stock markets all up. Oil, gold, and grains are all back up somewhat after yesterday’s plunge. The dollar is up against the yen (the Japanese are breathing easier since it didn’t break down below 95 yen) and flat against the euro.

We have a regular scheduled meeting of the Federal Reserve’s Open Market Committee today. I expect they will drop the Fed funds rate a full percentage point. That news will be out around 2:15pm EDT.

It’s too early to express the hope that the death of Bear Stearns was the climax of a really bad quarter and things will stabilize from here. But as long as you remain wary, I won’t blame you for hoping.

Let the debate begin as to whether the Federal Reserve did the right thing by extending to Wall Street firms the emergency liquidity facilities normally used by banks. To me, it's very clear that they did the right thing.

Steady as she goes.

-Francis Cianfrocca ("blackhedd")

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Posted at 7:12pm on Mar. 16, 2008 Yer DONE on 136 Million Shares BSC at 2 Flat!

JP Morgan Chase Buys Themselves a Broker-Dealer

By blackhedd

News hits the wires at 7pm EDT, just before Monday morning trading opens in Asia.

JP Morgan Chase has acquired the Bear Stearns Companies at $2 a share.

This stock was worth $57 a share on Thursday night, and $170 a share one year ago.

I'll update this as events warrant, in particular how the Asian markets react.

Update: 7:25pm EDT: The Federal Reserve announces a one-quarter point cut in its discount rate, effective tomorrow morning. Remember, their regular FOMC meeting is Tuesday, and we'll probably get a full percentage point cut in the Fed funds rate.

Update: 8:05pm EDT: The US dollar is trading sharply higher at this hour against the euro and the yen. The stock market just opened in Tokyo, down only about 1%. So far, so good.

Update: 8:40pm EDT: The dollar has reversed and is now below 98 yen, a 13-year low. Tokyo stocks down more than 3%. It's gonna be a long night.

Update: 3:30am EDT: With an hour left to trade in Tokyo, stocks are down about 4%, with the most actives concentrated in heavy industry. Hong Kong also down about 4%. Singapore is up 1%.

Europe has opened not so bad. London is down about 1%, Paris and Frankfurt down less than 1% percent.

The dollar is off its worst levels, now trading above 97 yen. Oil and gold are at record highs. US Treasuries are sharply higher across the yield curve.

I stand by my interpretation that the toll in Asian stock markets is because of the falling dollar, which is going to wreak havoc in Japan. They're probably excreting bricks over there right now.

As of this moment, it looks like the world wobbled, but is still on its feet.

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Posted at 5:46pm on Mar. 16, 2008 Jamie Dimon Dances With Bears, and a Correction

Time for a Deal?

By blackhedd

I'm writing this at 5:30pm EDT on Sunday. It's early Monday morning in Asia, and financial markets there will be open for trading in a few hours.

It's quite likely that by the time you read this, the Bear Stearns Companies will either have been acquired by JP Morgan Chase, or will have announced a bankruptcy filing.

The total value of Bear Stearns's outstanding stock was a bit more than $4 billion at the end of Friday. The company owns a building on Madison Avenue that is worth a bit more than a billion dollars, and (more importantly to Morgan CEO Jamie Dimon) is a lot nicer looking than JP Morgan's building around the corner.

Bear also has a prime brokerage business and other assets that are worth maybe another billion. Considering that Bear has a stated book value of around $80 a share (more than ten billion dollars), this acquisition is going to be one of the all-time historic fire sales.

What might get in the way? A lot of things. One of them is that Dimon doesn't particularly like Bear Stearns. Lots of people on Wall Street don't, as a matter of fact. When Bear Stearns was a powerhouse, they acted like one, and didn't worry about the ill-will they often generated. (Such as in the Long-Term crisis.) Chickens are coming home to roost.

Correction: in a comment to an earlier post, I mentioned that China's government owned a one-billion stake in Bear Stearns, through its Citic Investments entity. Since then I've learned that this deal has not closed, despite a mad dash this week to do so by a Bear vice-chairman with a close personal tie to the boss of Citic. The Chinese are already feeling sheepish after buying into Blackstone Group. Closing the deal with Bear would have made them look like idiots.

Stay tuned.

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Posted at 11:48am on Mar. 15, 2008 An Important Note About the Bear Stearns Situation

It's Not about saving the company

By blackhedd

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.

More...

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