Long Live Corporate Welfare!

[Hugh Conway]

http://www.cnbc.com/id/23630235

 

Bear Stearns Gets Bailout From the Federal Reserve

Topics:Banking

Sectors:Financial Services | BanksBy CNBC.com | 14 Mar 2008 | 09:34 AM ET Font size: The Federal Reserve agreed to provide emergency financing to Bear Stearns, after the

investment bank said its cash position had deteriorated sharply in the past 24 hours.

 

The short-term financing from the Fed Bank of New York is being arranged through JPMorgan Chase. Bear said the financing is intended to help shore up confidence in its operations.

 

[Bug]

I am now lacking confidence.

Can you spot me a measly million or two?

[Hugh Conway]

I am now lacking confidence.

Can you spot me a measly million or two?

 

If the Federal Government is willing to guarantee the loan - sure!!!!

[Hugh Conway]

comeon - where's our free marketers?

[Hugh Conway]

Oh, and not to be forgotten:

 

James E. Cayne, Chairman and former Chief Executive Officer of Bear Stearns, is a Bush Pioneer having raised at least $100,000 for Bush in the 2004 presidential election.

 

comeon - where are our subprime bailout denouncers? bailouts are only bad if they are for poor people who make bad decisions and not rich people?

[Hugh Conway]

JayB?

KKK?

Fairweather?

 

your fellations are requested here!

 

r4-9mB_kGgg

[Dechristo]

comeon - where are our subprime bailout denouncers? bailouts are only bad if they are for poor people who make bad decisions and not rich people?

 

A bail to lessen a bale.

[JayB]

They can all implode or head to the petrostates with hat-in-hand in an effort to recapitalize for all I care.

 

More an underlying solvency issue than a liquidity issue at this point IMO.

 

 

[JayB]

Today's WSJ Editorial:

 

"Bear Essentials

March 15, 2008; Page A10

 

Yesterday's combined J.P. Morgan-Federal Reserve rescue of Bear Stearns is one of those judgment calls that are easier to second guess than they are to make in the heat of a financial panic. Regulators have to balance the risks to the larger financial system of letting a big investment bank fail against the discipline of seeing bad risk management punished by the marketplace.

 

These columns prefer the discipline of the market, but then we don't know all of the facts that regulators confronted as they looked at Bear's troubles. Specifically, we don't know if letting Bear collapse might have had a domino effect on others in the debt and derivative markets.

 

The Fed and J.P. Morgan are acting in concert to give Bear short-term access to the Fed's discount lending window that Bear couldn't access on its own. A big plunger in the debt markets but not a standard commercial bank, Bear's private sources of funds had dried up. The overriding public interest at the current moment is to maintain a functioning financial system, and regulators clearly felt this was at risk from a Bear failure. Just once we'd like to see what would happen if a big bank did fail, but the current general market panic arguably isn't the best time to have that experiment. Presumably Bear will now be shopped to private buyers.

 

On the other hand, the financial system also can't function properly if every institution believes it is "too big to fail." That's an invitation for everyone to behave the way Bear Stearns did in the mortgage securities market. This means that if taxpayer funds are going to be used to rescue Bear, then Bear's private actors need to accept their own form of discipline.

 

This includes Bear's equity owners, who deserve to endure major losses, if not lose their entire stake, in any sale. The discipline should also apply to Bear managers who got the bank into this mess. They should be fired, without bonuses and golden parachutes to the extent that is contractually possible. If bankers believe they can make bad investments and still emerge with enough cash to buy another beach house, the financial system will never have enough discipline.

 

Looking ahead, regulators need to anticipate these liquidity bank runs, not merely react to them. The larger danger is that even this temporary Bear rescue could set a precedent that the Fed will find hard to resist. Wall Street is already demanding that the Fed do more in this crisis than its traditional duty as a lender of last resort, and start buying up mortgage-backed securities and other troubled paper as a way to entice more buyers into frozen credit markets. This means the banks would be able to dump their worst paper on the Fed, which ultimately means the taxpayer.

 

We'll have more to say about that idea at a later date, but we trust the Fed understands the risks to its credibility that such a decision would pose. Does the Federal Reserve want to become a buyer of first resort?"

 

 

[JayB]

Some interesting material in the comments section below each Bear Stearns Blurb here:

 

http://blogs.wsj.com/marketbeat/

[Hugh Conway]

Today's WSJ Editorial

 

It's amazing how much more polite they are when we are speaking of the subprime lenders as opposed to subprime borrowers.

 

Typical - throw the little guys to the wolves; fellate the big guys.

[JayB]

Felating? Strange take on that editorial.

 

There's a front page spread on the situation in today's WSJ. Worth reading if you can find a copy.

 

The loan is for a month, which I suspect is how long they figured it would take for institutions doing business with Bear Stearns to unwind their positions in a manner that won't release whatever Genie that the Fed regulators saw in the bottle when they looked over their books on Thursday. Apparently this is the first time that the Fed has lent money to a non-commercial bank like this since the Great Depression, and doing so requires the approval of five of seven Fed Governors.

 

Bear Stearns itself is Toast IMO, this loan isn't going to save it, and I suspect that everyone involved knows that at this point. After reading the article, it sounds to me like one reason that JP Morgan was willing to step in and play the role that they have is that want to be the first vulture to pick over BS's carcass. Sounds like JPM is especially keen to get their hands on BS's prime brokerage business.

 

Looks like the financial equivalent of keeping a patient alive just long enough to harvest the organs to me.

[Hugh Conway]

Bear Stearns itself is Toast IMO, this loan isn't going to save it, and I suspect that everyone involved knows that at this point. After reading the article, it sounds to me like one reason that JP Morgan was willing to step in and play the role that they have is that want to be the first vulture to pick over BS's carcass. Sounds like JPM is especially keen to get their hands on BS's prime brokerage business

 

If someone else in guaranteeing the loans why not take any and every risk? Sure the execs lost cash this time around - the top 4 also made $120 million last year. Hell - average compensation was ~$300k for the 12k employees. LET THEM FUCKING RUST!

 

I'm not sure why JPM did this aside from a long history of bailing out banks on behalf of the government. From what I've heard nobody really wants Bear Stearns business because it's currently shit (Bank America has already bought it's turd for the year)

[JayB]

Happy Scrolling...

 

http://dealbreaker.com/community/2008/03/bear-stearns-news-rumors-facts.php

 

Footage from a hidden camera near the water cooler at Bear Stearn's HQ...

xh0qD0aA2bY

[prole]

Analysts on Wall Street say the bid to rescue Bear Stearns was more than just saving the nation's fifth-largest investment bank. Instead, keeping Bear Stearns afloat — even if it is sold off — was really propping up both the U.S. economy and global financial system.

 

"This is going to go down in very historic terms," said Peter Dunay, chief investment strategist for New York-based Meridian Equity Partners. "This is about credit being overextended, and how bad it is for major financial institutions and for individuals. This is why we're probably heading into a recession."

 

The government, led by the Treasury Department and the Federal Reserve, was reported to be closely monitoring the talks. Any deal to rescue Bear Stearns was seen as a lifeline for the entire financial services industry, helping to stave off further weakness on Wall Street.---from AP 3/16/08

 

Guess that wholesale deregulation of finance thing hasn't worked out so well. Funny how the phrase "since the Great Depression" keeps popping up.

 

Here's a funny bit from the same article about Bear's most significant contributor in terms of "value-added":

The funds' collapse and subsequent problems in the credit markets called into question Bear Stearns ability to manage its own risk and the leadership ability of then-Chief Executive James Cayne. Critics of the company said Cayne spent too much time away from the office last year playing golf and bridge as the problems unfolded.

 

 

[Mal_Con]

Who would have known, that loaning money to people at high interest rates that could only be paid if the price rises above historical levels would not work out. Can anyone say Tulipomania.

[JayB]

"JPMorgan Chase will host a conference call today, Sunday, March 16, 2008, at 8:00 p.m. (Eastern Time) to review the acquisition of Bear Stearns. Investors can call (800) 214-0745 (domestic) / (719) 457-0700 (international), with the access code 614424, or listen via live audio webcast. The live audio webcast and presentation slides will be available on http://investor.shareholder.com/jpmorganchase/presentations.cfm under Investor Relations, Investor Presentations. A replay of the conference call will be available beginning at 11:00 p.m. (Eastern Time) on March 16, 2008, through midnight, Monday, March 31, 2008 (Eastern Time), at (888) 348-4629 (domestic) or (719) 884-8882 (international) with the access code 614424. The replay also will be available on www.jpmorganchase.com."

 

And...

 

" JPMorgan Chase To Acquire Bear Stearns

 

NEW YORK--(BUSINESS WIRE)--JPMorgan Chase & Co. (NYSE: JPM) announced it is acquiring The Bear Stearns Companies Inc. (NYSE: BSC). The Boards of Directors of both companies have unanimously approved the transaction.

 

The transaction will be a stock-for-stock exchange. JPMorgan Chase will exchange 0.05473 shares of JPMorgan Chase common stock per one share of Bear Stearns stock. Based on the closing price of March 15, 2008, the transaction would have a value of approximately $2 per share.

 

Effective immediately, JPMorgan Chase is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations. Other than shareholder approval, the closing is not subject to any material conditions. The transaction is expected to have an expedited close by the end of the calendar second quarter 2008. The Federal Reserve, the Office of the Comptroller of the Currency (OCC) and other federal agencies have given all necessary approvals.

 

In addition to the financing the Federal Reserve ordinarily provides through its Discount Window, the Fed will provide special financing in connection with this transaction. The Fed has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets.

 

“JPMorgan Chase stands behind Bear Stearns,” said Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan Chase. “Bear Stearns’ clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns’ counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner.”

 

Dimon added, “This transaction will provide good long-term value for JPMorgan Chase shareholders. This acquisition meets our key criteria: we are taking reasonable risk, we have built in an appropriate margin for error, it strengthens our business, and we have a clear ability to execute.”

 

“The past week has been an incredibly difficult time for Bear Stearns. This transaction represents the best outcome for all of our constituencies based upon the current circumstances,” said Alan Schwartz, President and Chief Executive officer of Bear Stearns. “I am incredibly proud of our employees and believe they will continue to add tremendous value to the new enterprise.”

 

The transaction is expected to be ultimately accretive to JPMorgan Chase’s annual earnings.

 

“This transaction helps us fill out some of the gaps in our franchise with manageable overlap,” said Steve Black, co-CEO of JPMorgan Investment Bank. “We know the Bear Stearns leadership team well and look forward to working with them to bring our two companies together.”

 

“Acquiring Bear Stearns enables us to obtain an attractive set of businesses,” said Bill Winters, co-CEO of JPMorgan Investment Bank. “After conducting due diligence, we’re comfortable with the quality of Bear Stearns’ business, and are pleased to have them as part of our firm.”

 

“JPMorgan Chase’s management team has a strong track record of effective merger integration,” said Heidi Miller, CEO of JPMorgan Treasury & Securities Services business. “We will work closely in the coming weeks with Bear Stearns’ clients and management to execute the transaction quickly.”

 

 

[Hugh Conway]

Can't have those Hedge Funds feeling any pain.....

[prole]

Some heavy-duty boilerplate there Jay. Sounds like everything's fine, just another day on Wall Street. "Nothing to see here, move along...you're getting sleeepy... your eyelids growing heaavy..."

[Mal_Con]

May you live in "interesting" times.

[JayB]

Can't have those Hedge Funds feeling any pain.....

 

 

What's the African Proverb, "When elephants fight, it's the mice that suffer..." Somehow I think what the Fed saw had them concerned about something beyond whether or not the hedgies would be able to afford the spring renovations they'd planned for their spreads in the Hamptons.

 

FWIW the text in bold constitutes the real bailout IMO, especially if they value the collateral assets at part(which I think they are):

 

"March 16 (Bloomberg) -- The Federal Reserve, in emergency decisions aimed at containing a crisis of confidence in the U.S. financial system, cut the rate on direct loans to commercial banks and opened up borrowing at the rate to securities firms."

 

Seems like Fed's thinking that this'd be something roughly akin to letting a privately run dam at the head of a populous valley fail in order to teach the dam-owners a lesson.

 

 

------

 

I'd look for some of this to materialize in Japan shortly, since there are quite a few folks who borrowed in yen to finance their leveraged MBS purchases in dollars. I suspect that people rushing to settle their yen-denominated debt before the dollar declines still further had something to to with the yen rally last week...

 

 

[Hugh Conway]

Seems like Fed's thinking that this'd be something roughly akin to letting a privately run dam at the head of a populous valley fail in order to teach the dam-owners a lesson.

 

Isn't that the core of capitalism? Reward comes with Risk? BSC made tons of cash in the past decade because of risk. This bailout is privatized rewards and socialized risk.

 

The Bear Sterns building alone is worth $1 billion. Morgan can make a killing on this.

[JayB]

Some heavy-duty boilerplate there Jay. Sounds like everything's fine, just another day on Wall Street. "Nothing to see here, move along...you're getting sleeepy... your eyelids growing heaavy..."

 

I've been worried about something like this coming to pass for quite a while - ever since the price-to-income and price-to-rent metrics detached from anything that could fit into what I thought were the standard lending models.

 

Unfortunately for you, I think that what we're witnessing here is the early stages of a classic credit bubble bursting, rather than the internal contradictions of the capitalist society leading to the ascendance of the proletariat and whatnot.

 

Thankfully the madness was contained to the US....

 

[JayB]

Seems like Fed's thinking that this'd be something roughly akin to letting a privately run dam at the head of a populous valley fail in order to teach the dam-owners a lesson.

 

Isn't that the core of capitalism? Reward comes with Risk? BSC made tons of cash in the past decade because of risk. This bailout is privatized rewards and socialized risk.

 

The Bear Sterns building alone is worth $1 billion. Morgan can make a killing on this.

 

BSC is dead and the shareholders took a 15-fold reaming, so I'm not worried about BSC's example inspiring others to follow their path. The money they've [CEO, CFO, all the managing directors, etc] got in the bank already is the shareholder's concern, IMO.

 

When it comes to opening the Fed Funds window to NCB's, and accepting MBS securities at par for collateral though, I agree that what we're seeing is a classic risk socialization. Short of a time machine that could go back to 1998 and rewrite the rules governing retail lending, transparency and ratings standards for securitizing mortgages, etc - I am not sure what other options the Fed thought that they had available to them.

 

Seems like they're smart enough to devise mechanisms that would transfer at least some of any upside that arose from their action to the public, while still looking like a life-ring to the institutions circling the drain - but who knows. Maybe things are too far gone at this point.

[foraker]

Thankfully the madness was contained to the US....

 

I'm sensing.......sarcasm.