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| Home Front: Politix |
| Bear Essentials; Too big to fail, alas. |
| 2008-03-16 |
| 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? |
| Posted by:Nimble Spemble |
| #16 Told you. Lehman Next. Big problem is that the taxpayer will be eating the sh1t-sandwiches so the big banks are OK. IMHO Socialism for banks is just as bad as socialism for people. |
| Posted by: Bright Pebbles 2008-03-16 22:29 |
| #15 All the BSC stock at .05473 per share of JPM stock. Here. |
| Posted by: Nimble Spemble 2008-03-16 21:03 |
| #14 $2.00 per share, $236 million total price. That's for a stock that closed at $30 per share on Friday. I'd call that an equity wipe out. |
| Posted by: Nimble Spemble 2008-03-16 20:58 |
| #13 Does this mean that JPM is exchanging all common stock of BSC at .05473 per share of JPM stock, or just enough to buy the company? |
| Posted by: Anonymoose 2008-03-16 20:54 |
| #12 This is why they get to keep their parachutes. This is a Fed forced cram down. There is no way JPM has had time to do sufficient due dil to justify this one way or the other. Likewise, the fairness opinion probably comes with a drum set for do it yourself rim shots. So everybody lives for another day, at least in their dreams tonight, and the Fed hopes the dominoes stop here. Good luck Benny. You're on your way to the G. William Miller Award. |
| Posted by: Nimble Spemble 2008-03-16 20:51 |
| #11 Just coming across the newswires tonight...JPM buying BSC for $2 a share...that is not a mis-print! Wow...I think investors in the financials are going to get creamed tomorrow. Wish I had bought some BSC puts... |
| Posted by: mjh 2008-03-16 20:38 |
| #10 I got Skilling and Fastow mixed up. Here's a link |
| Posted by: Nimble Spemble 2008-03-16 17:42 |
| #9 Also, I would not be surprised to see BofA get in a bid also. |
| Posted by: Nimble Spemble 2008-03-16 17:34 |
| #8 That's right, Mike. Fastow's conviction will be overturned and maybe Lay's, too. Another Nifong/Spitzer style cf. I used to assume that if someone was being prosecuted chances wer 99.99% guilty. Never again. |
| Posted by: Nimble Spemble 2008-03-16 17:33 |
| #7 ...Well, let's see - FoxNews is reporting that JPM will make an offer tomorrow for Bear - AND it's being reported that the Feds may have withheld and/or doctored evidence in the Enron trials. The Chinese curse, once again... Mike |
| Posted by: Mike Kozlowski 2008-03-16 16:43 |
| #6 Actually, I am not so pessimistic. BSC has a huge amount of paper that the government will want to have carried for quite a while. And if there is a market recovery, that paper could propel BSC right back up the ladder. So as I said, tomorrow will be the big day. By the end of the day, if it loses another 50%, it will be one thing; but if it regains much of its Friday losses, it may be back on its feet again for quite a while. There can be plenty change of command at the board and executive level that will be pretty invisible to investors, but will do much to restore insider confidence. |
| Posted by: Anonymoose 2008-03-16 16:09 |
| #5 Bear Stearns has already failed. It's dead, Jim, its name may live on, but no one in their right mind would want that company handling their money. Its living remains will be transferred to others, and the taxpayers will be on the hook for the rest. It should have gone without saying that Bear's equity owners deserve to lose their entire stake, they had their chance to change months & years ago & did nothing but make matters worse. Any contracts Bear has with its "employees" better known as "overlords" to provide gold parachutes & millions in looted equity should be voided by whatever means necessary. The worst perps, in addition to losing their ill-gotten riches, should be doing hard time, but I anticipate that will work about as well as the retribution meted out to Ken Lay for his Enron caper (i.e., none at all besides his time spent in a courtroom). The Fed's only success in covering Bare Sterns is that a total credit collapse has been avoided, one more time. We may not know if Bear's collapse would have had a domino effect, but Ben Bernanke didn't want to run an uncontrolled experiment on the world. I for one like to have running water & electric power, to see my neighbors employed, and food for sale at the grocery store. Confidence in the Fed and ultimately in the full faith & credit of the USA is the next factor at risk. |
| Posted by: Anguper Hupomosing9418 2008-03-16 15:41 |
| #4 Bear Stearns has gone already. It's just a matter of signing the paperwork. However with JP Morgan's name over the door, it's worth a lot of money. Banking is all about confidence. |
| Posted by: phil_b 2008-03-16 15:04 |
| #3 You won't be seeing this stock much longer. Fed will support the buyout so that the assuming entity is not saddled with enormous losses. The taxpayers will absorb these losses, just as in savings and loan mess. Those responsible walk away untouched. They have to get new management in charge of the mess, that's the bottom line. |
| Posted by: Woozle Elmeter 2700 2008-03-16 10:37 |
| #2 Trading will be halted long before then. I also wouldn't be surprised to see JPM come out with an offer of next to nothing. |
| Posted by: Nimble Spemble 2008-03-16 10:24 |
| #1 This will be an interesting stock to follow (BSC), come Monday. Its success or failure will be seen by many as a true indicator of the economy. Within the last year it has been as high as 159 a share, now it is 30. In the long term, it averaged 75. On Thursday it was at 57. On close of business tomorrow... |
| Posted by: Anonymoose 2008-03-16 10:22 |