The Incredibly Shrinking Dollar!

[GG]

I read that the JPM deal came with an option to buy BS's Manhattan property @ 1.1 B when its value is $1.4 billion. So even in the worst case if the $236 million came to naught, the real estate will compensate JPM. Sweet deal if I have ever seen one. Wonder what the folks at the Fed get in return for their largess.

 

Some good reads:

http://money.cnn.com/2008/03/17/magazines/...sion=2008031718

 

http://www.becker-posner-blog.com/

Nobel prize winning economist Becker," Still it is difficult to see the merits in the Fed's efforts to help the sale of Bears Stearns to JPMorgan Chase by guaranteeing many billions of mortgage and other assets of the company."

 

Read the Journal's account of the events from Thursday to Sunday. Everything was driven by Paulson's fear of a Bear Ch. 11. JPM appears to have gotten a sweet deal, but what's not counted is the guarantees it's providing to continue Bear's business. There's no sense in talking asset value of a brokerage with whom nobody wants to do business.

 

Someone may come in to try to buy Bear at a more reasonable price to its assets, but JPM needs to be paid for stepping in at the crucial time, when no one else did.

 

To me, this was guiding the Fed's principle, as Becker's contradictorily points out:

 

Despite the moral hazard risks, interventionist policies might be justified not because some borrowers or lenders were taken advantage of, but if these interventions would help the economy recover more quickly, and insure that the recession is neither prolonged nor deep.

[DC Tom]

And I don't agree with most of it. Basic problem I have is with the explanation for the Fed action citing the impending crisis that may have doomed the financial markets. What I see from the little financial knowledge that I have is that this network of credit between banks appears to not be founded on real assets. The risks associated with the lending practices appear to not have factored enough risk. Maybe the combined risk of all credit for a particular bank is too overwhelming even though individual deals are sound. Whatever the reason, I still think there are large fundamental problems in the banking system right now and propping up one major institution continues to encourage such bad behavior. If a major shake-out is to happen, it is better to get it done and over with rather than prolong and compound the problem.

 

I know no one here other than stuckincincy remembers it first-hand...but haven't people at least read about 1929? Wasn't the Federal Reserve created in response to the banking collapse back then, with the mission of mitigating or avoiding a similar crisis?

 

And didn't they just do their job? I have no problem seeing stupid people get punished for it (and believe me, I can't wait until it's Countrywide's turn)...but are we really wishing for the same sort of implosion that precipitated the Great Depression?

 

 

In the BS deal, JPM seems to be the sole winner having taken on the upside with Fed protection on the downside.

 

Don't see how this is true. JPM has to pay back the Fed, and absorb Bear Stearns' asset valuations against their balance sheet. The Fed either gets their loan repaid or - worst case - would get the underlying collateral (presuming they have a senior claim on it). The only issue for the Fed is the value of the collateral relative to the amount of the loan - which I haven't seen numbers on - versus the risk of the entire sector collapsing.

[GG]

I know no one here other than stuckincincy remembers it first-hand...but haven't people at least read about 1929? Wasn't the Federal Reserve created in response to the banking collapse back then, with the mission of mitigating or avoiding a similar crisis?

 

And didn't they just do their job? I have no problem seeing stupid people get punished for it (and believe me, I can't wait until it's Countrywide's turn)...but are we really wishing for the same sort of implosion that precipitated the Great Depression?

Don't see how this is true. JPM has to pay back the Fed, and absorb Bear Stearns' asset valuations against their balance sheet. The Fed either gets their loan repaid or - worst case - would get the underlying collateral (presuming they have a senior claim on it). The only issue for the Fed is the value of the collateral relative to the amount of the loan - which I haven't seen numbers on - versus the risk of the entire sector collapsing.

 

The Fed was created to avert a 1907-like collapse. Which obviously it didn't do so well in 1929. But your main point still stands.

[Fan in Chicago]

I know no one here other than stuckincincy remembers it first-hand...but haven't people at least read about 1929? Wasn't the Federal Reserve created in response to the banking collapse back then, with the mission of mitigating or avoiding a similar crisis?

 

And didn't they just do their job? I have no problem seeing stupid people get punished for it (and believe me, I can't wait until it's Countrywide's turn)...but are we really wishing for the same sort of implosion that precipitated the Great Depression?

Don't see how this is true. JPM has to pay back the Fed, and absorb Bear Stearns' asset valuations against their balance sheet. The Fed either gets their loan repaid or - worst case - would get the underlying collateral (presuming they have a senior claim on it). The only issue for the Fed is the value of the collateral relative to the amount of the loan - which I haven't seen numbers on - versus the risk of the entire sector collapsing.

I don't have any knowledge about the 1929 crash but I would guess the Fed's role would be to set policy that allows institutions to function, for the country to grow and to set monetary policy that is forward looking. If true, I do not agree that their role is to support a failing enterprise. That is the essence of a free market economy. For lack of a better cliche - the fittest survive. If the risk is of the sector collapsing, then there are so many underlying problems with that sector that it may be worth it in the long run for it to collapse and rebuild itself with the lessons learned.

And GG, I don't think Becker is entirely contradicting himself. This action will not help the economy recover quickly - it simply prevents a panic-driven collapse of the financial sector. I partially agree with you that the result of such a collapse means that the credit crunch will trickle down to smaller companies essentially bringing investment to a grinding halt thus causing or accelerating a recession. But I question this morbid fear of recession. For the long term good of the economy it may be worth having a recession if it means better lending practices, stronger focus towards fee-based financial services and less focus on lopsided leverage by investment banks.

[DC Tom]

I don't have any knowledge about the 1929 crash but I would guess the Fed's role would be to set policy that allows institutions to function, for the country to grow and to set monetary policy that is forward looking. If true, I do not agree that their role is to support a failing enterprise. That is the essence of a free market economy. For lack of a better cliche - the fittest survive. If the risk is of the sector collapsing, then there are so many underlying problems with that sector that it may be worth it in the long run for it to collapse and rebuild itself with the lessons learned.

 

I would half-agree...the key point being "set policy that allows institutions to function". The thing here is that, were Bear-Stearns allowed to go under in the current environment, it becomes a very real possibility that financial institutions do not function. If the credit markets were liquid and healthy, I'd be screaming bloody murder about bailing Bear Stearns out of their own stupidity, because God knows I'm all for punishing idiots for their own idiocy. But there are systemic issues at play here that, if you believe the Fed's proper role is to set policy that allows institutions to function, then you would have to admit the Fed's actions are at least creditable, as a meltdown on the order of the one Bear Stearns was experiencing (really, how do you go from "We're solvent" on Thursday to "We're taking desperate measures to remain solvent" on Friday to "We're being sold at a fraction of Thursday's market value" on Sunday?) would have inescabably reverberated through the entire financial sector and severely inhibited everyone's ability to function.

[Fan in Chicago]

I would half-agree...the key point being "set policy that allows institutions to function". The thing here is that, were Bear-Stearns allowed to go under in the current environment, it becomes a very real possibility that financial institutions do not function. If the credit markets were liquid and healthy, I'd be screaming bloody murder about bailing Bear Stearns out of their own stupidity, because God knows I'm all for punishing idiots for their own idiocy. But there are systemic issues at play here that, if you believe the Fed's proper role is to set policy that allows institutions to function, then you would have to admit the Fed's actions are at least creditable, as a meltdown on the order of the one Bear Stearns was experiencing (really, how do you go from "We're solvent" on Thursday to "We're taking desperate measures to remain solvent" on Friday to "We're being sold at a fraction of Thursday's market value" on Sunday?) would have inescabably reverberated through the entire financial sector and severely inhibited everyone's ability to function.

First of all let me say I am very happy we all are having this discussion. I get to learn more.

The highlighted portion is so key in this discussion as it points to severely flawed fundamentals in such companies. I have to wonder how many others out there are on such a precipice. A company that has operated for ~ 80 years goes under in a matter of days. I am happy to have my average-paying, steady, no-bonus job.

[meazza]

I would half-agree...the key point being "set policy that allows institutions to function". The thing here is that, were Bear-Stearns allowed to go under in the current environment, it becomes a very real possibility that financial institutions do not function. If the credit markets were liquid and healthy, I'd be screaming bloody murder about bailing Bear Stearns out of their own stupidity, because God knows I'm all for punishing idiots for their own idiocy. But there are systemic issues at play here that, if you believe the Fed's proper role is to set policy that allows institutions to function, then you would have to admit the Fed's actions are at least creditable, as a meltdown on the order of the one Bear Stearns was experiencing (really, how do you go from "We're solvent" on Thursday to "We're taking desperate measures to remain solvent" on Friday to "We're being sold at a fraction of Thursday's market value" on Sunday?) would have inescabably reverberated through the entire financial sector and severely inhibited everyone's ability to function.

 

to we're looking for a better offer and the price jumped 67% on Tuesday due to speculation

[meazza]

First of all let me say I am very happy we all are having this discussion. I get to learn more.

The highlighted portion is so key in this discussion as it points to severely flawed fundamentals in such companies. I have to wonder how many others out there are on such a precipice. A company that has operated for ~ 80 years goes under in a matter of days. I am happy to have my average-paying, steady, no-bonus job.

 

Why? Do a good job for a while and then take 100 Million severance package when you get fired as per the ex-ceo of Merril Lynch (can't remember his name).

[GG]

First of all let me say I am very happy we all are having this discussion. I get to learn more.

The highlighted portion is so key in this discussion as it points to severely flawed fundamentals in such companies. I have to wonder how many others out there are on such a precipice. A company that has operated for ~ 80 years goes under in a matter of days. I am happy to have my average-paying, steady, no-bonus job.

 

I think we're making progress.

 

Put another way, if Bear had gone down when it's hedge funds first showed signs of trouble in February '07, there would likely have been no Fed action. But coming on top of 9 months' turmoil, Bear's role in the bond markets, Bernanke's and Paulson's fears of a total meltdown, they had to act. It could have paralleled the days after 9/11, when banks couldn't clear trades. The three-day shutdown could have

 

--`

[DC Tom]

First of all let me say I am very happy we all are having this discussion. I get to learn more.

 

So am I, and so do I.

 

The highlighted portion is so key in this discussion as it points to severely flawed fundamentals in such companies. I have to wonder how many others out there are on such a precipice. A company that has operated for ~ 80 years goes under in a matter of days. I am happy to have my average-paying, steady, no-bonus job.

 

My brother-in-law's an analyst at Citigroup, I'm still trying to talk to him about this. Financial institution have controls in place that are supposed to prevent this sort of thing; I have no idea what Bear-Stearns' were like, but it's pretty clear that they were insufficient. It's pretty easy to see what happened here - it's very generally similar to Enron's meltdown, where the valuation of underlying assets was rather suddenly found to be not what it was thought to be. In BS's case, it was apparently very sudden - inexpicably so, since you'd have to be living in freakin' molsonland to not know that mortgage bonds basically had no market value anymore. But I would think that even rudimentary internal controls would have caught this earlier than Friday.

 

In fact...we might have Bear Stearns' internal controls documented in the database at work here. I wonder if I have access to that data...

[DC Tom]

I think we're making progress.

 

Put another way, if Bear had gone down when it's hedge funds first showed signs of trouble in February '07, there would likely have been no Fed action. But coming on top of 9 months' turmoil, Bear's role in the bond markets, Bernanke's and Paulson's fears of a total meltdown, they had to act. It could have paralleled the days after 9/11, when banks couldn't clear trades. The three-day shutdown could have

 

--`

 

What is (was?) their role in the bond market? Market maker?

[GG]

First of all let me say I am very happy we all are having this discussion. I get to learn more.

The highlighted portion is so key in this discussion as it points to severely flawed fundamentals in such companies. I have to wonder how many others out there are on such a precipice. A company that has operated for ~ 80 years goes under in a matter of days. I am happy to have my average-paying, steady, no-bonus job.

 

I think we're making progress.

 

Put another way, if Bear had gone down when it's hedge funds first showed signs of trouble in February '07, there would likely have been no Fed action. But coming on top of 9 months' turmoil, Bear's role in the bond markets, Bernanke's and Paulson's fears of a total meltdown, they had to act. It could have paralleled the days after 9/11, when banks couldn't clear trades. The three-day shutdown could have been a disaster, but obviously no one took advantage of the situation and calm was restored.

 

Bear's collapse is not so much an indication of the flawed fundamentals, but an illustration of the true risk of financial firms. These companies make money through leverage and the confidence that people will do business with it. If investors/customers/depositors start pulling money in droves, there's very little a firm can do to save itself. Usually, the end comes within a day (even though the assets may be ok). At the end of the day, they only have a reputation.

[GG]

What is (was?) their role in the bond market? Market maker?

 

Their history is that of a bond house, so they have a large role as a primary gov't dealer. They also clear a lot of trades. But the biggest fear (as per WSJ) was the CDS and repo markets. Paulson was worried that if Bear wasn't rescued by the time Asia opened for business on Monday (Sunday night in US) the repo market would seize, and effectively freeze the financial markets everywhere.

[DC Tom]

Their history is that of a bond house, so they have a large role as a primary gov't dealer. They also clear a lot of trades. But the biggest fear (as per WSJ) was the CDS and repo markets. Paulson was worried that if Bear wasn't rescued by the time Asia opened for business on Monday (Sunday night in US) the repo market would seize, and effectively freeze the financial markets everywhere.

 

Explains the timing of JP Morgan's announcement quite nicely, too. I was wondering why they announced their purchase intent on a Sunday afternoon.

[meazza]

And the fed makes another move.

 

http://online.wsj.com/article/SB1205862243...us_inside_today

[SD Jarhead]

And the fed makes another move.

 

http://online.wsj.com/article/SB1205862243...us_inside_today

 

I guess stagflation is the lesser of the evils?

[Dwight Drane]

So am I, and so do I.

My brother-in-law's an analyst at Citigroup, I'm still trying to talk to him about this. Financial institution have controls in place that are supposed to prevent this sort of thing; I have no idea what Bear-Stearns' were like, but it's pretty clear that they were insufficient. It's pretty easy to see what happened here - it's very generally similar to Enron's meltdown, where the valuation of underlying assets was rather suddenly found to be not what it was thought to be. In BS's case, it was apparently very sudden - inexpicably so, since you'd have to be living in freakin' molsonland to not know that mortgage bonds basically had no market value anymore. But I would think that even rudimentary internal controls would have caught this earlier than Friday.

 

In fact...we might have Bear Stearns' internal controls documented in the database at work here. I wonder if I have access to that data...

 

Citi is in tough. They have some of the exact same problems, but are more diversified and haven't had a run on them. Their credit swaps keep getting marked down as well. The government still hasn't decided what to do about these. They are going to have to make them disappear somehow, or else there WILL be another Bear, and fast.

 

On the issue of the Government and the Fed stepping in, I understand it. It takes almost a religious man to stand back and allow self-destruction because of free will. By stepping in however, I now view the Iraq war as a sham. I now view "capitalism" as a sham. We have reached a testing point in the economy never seen before, and true colors were shown. I used to view Democrats as the bigger hypocrites....they would say they are for the good of the people, but would line their pockets in the back rooms. I thought Republicans were at least honest enough to say up front they were going to line their pockets through policy. I respected the honesty. But by stepping in and changing the rules of the game, and deciding who is ruined and who isn't......Capitalism just proved that it doesn't work. We've seen Marxism fall apart, we've seen Tyrants go down, but we are no better. The idea was great, but in the end, human nature is selfish no matter what.

 

I have no reason to pout. We dodged a nuclear bomb as a people and immediate suffering has been contained. The poor people at Bear probably want to see some heads on a platter. If the Government opened their window 24 hours before, none of this would have happened. Hell, they could probably put Bear back out there right now. The spin is, Bear had bad management and deserved to go under. The truth is, if we really enforced debt values by the books of the SEC, every major firm would have to take a haircut so big, that the game is over. Think of these swaps as Baseball Cards. Your Beckett may say that your 1985 Roger Clemens rookie card is worth $50....but the guy at the corner shop says he's not interested in it. He's not interested at $50....he's not interested at 50 cents. That is how bad it is.

 

One of my best friends is Lebaneese, and comes from a powerful family in Lebanon. He told me a story of how his father invested in a big factory in Iraq. He partnered with a few others that had an in with the old Iraqi government, and built up a business from scratch over the course of a few years. He invested a quarter of his net worth. Once all the capital improvements were in and product was ready to roll....Sadam called in the guards to seize the factory. When the US first went in to Iraq 5 years ago, my friend felt horrible that we were fooling with the region as he is Muslim. He also understood first hand about the tactics used by Saddam, and there were no tears shed for his departure.

 

I can only think of that story, as I'm sure Jamie Dymon was smoking a big fat stogie, and firing a rifle off his balcony after the Fed helped him fleece Bear Stearns. Either let all fail, or let none fail. Trust me, I usually cringe when I read a bunch of the liberal schmaltz here.......but for once they may actually be right. For the past 36 hours, they are the lesser hypocrites.

 

I need a Beer, or 10!!!

[meazza]

Citi is in tough. They have some of the exact same problems, but are more diversified and haven't had a run on them. Their credit swaps keep getting marked down as well. The government still hasn't decided what to do about these. They are going to have to make them disappear somehow, or else there WILL be another Bear, and fast.

 

On the issue of the Government and the Fed stepping in, I understand it. It takes almost a religious man to stand back and allow self-destruction because of free will. By stepping in however, I now view the Iraq war as a sham. I now view "capitalism" as a sham. We have reached a testing point in the economy never seen before, and true colors were shown. I used to view Democrats as the bigger hypocrites....they would say they are for the good of the people, but would line their pockets in the back rooms. I thought Republicans were at least honest enough to say up front they were going to line their pockets through policy. I respected the honesty. But by stepping in and changing the rules of the game, and deciding who is ruined and who isn't......Capitalism just proved that it doesn't work. We've seen Marxism fall apart, we've seen Tyrants go down, but we are no better. The idea was great, but in the end, human nature is selfish no matter what.

 

I have no reason to pout. We dodged a nuclear bomb as a people and immediate suffering has been contained. The poor people at Bear probably want to see some heads on a platter. If the Government opened their window 24 hours before, none of this would have happened. Hell, they could probably put Bear back out there right now. The spin is, Bear had bad management and deserved to go under. The truth is, if we really enforced debt values by the books of the SEC, every major firm would have to take a haircut so big, that the game is over. Think of these swaps as Baseball Cards. Your Beckett may say that your 1985 Roger Clemens rookie card is worth $50....but the guy at the corner shop says he's not interested in it. He's not interested at $50....he's not interested at 50 cents. That is how bad it is.

 

One of my best friends is Lebaneese, and comes from a powerful family in Lebanon. He told me a story of how his father invested in a big factory in Iraq. He partnered with a few others that had an in with the old Iraqi government, and built up a business from scratch over the course of a few years. He invested a quarter of his net worth. Once all the capital improvements were in and product was ready to roll....Sadam called in the guards to seize the factory. When the US first went in to Iraq 5 years ago, my friend felt horrible that we were fooling with the region as he is Muslim. He also understood first hand about the tactics used by Saddam, and there were no tears shed for his departure.

 

I can only think of that story, as I'm sure Jamie Dymon was smoking a big fat stogie, and firing a rifle off his balcony after the Fed helped him fleece Bear Stearns. Either let all fail, or let none fail. Trust me, I usually cringe when I read a bunch of the liberal schmaltz here.......but for once they may actually be right. For the past 36 hours, they are the lesser hypocrites.

 

I need a Beer, or 10!!!

 

A tad dramatic aren't we? But maybe a beer or 10 will help calm you down

[DC Tom]

Citi is in tough. They have some of the exact same problems, but are more diversified and haven't had a run on them. Their credit swaps keep getting marked down as well. The government still hasn't decided what to do about these. They are going to have to make them disappear somehow, or else there WILL be another Bear, and fast.

 

On the issue of the Government and the Fed stepping in, I understand it. It takes almost a religious man to stand back and allow self-destruction because of free will. By stepping in however, I now view the Iraq war as a sham. I now view "capitalism" as a sham. We have reached a testing point in the economy never seen before, and true colors were shown. I used to view Democrats as the bigger hypocrites....they would say they are for the good of the people, but would line their pockets in the back rooms. I thought Republicans were at least honest enough to say up front they were going to line their pockets through policy. I respected the honesty. But by stepping in and changing the rules of the game, and deciding who is ruined and who isn't......Capitalism just proved that it doesn't work. We've seen Marxism fall apart, we've seen Tyrants go down, but we are no better. The idea was great, but in the end, human nature is selfish no matter what.

 

I have no reason to pout. We dodged a nuclear bomb as a people and immediate suffering has been contained. The poor people at Bear probably want to see some heads on a platter. If the Government opened their window 24 hours before, none of this would have happened. Hell, they could probably put Bear back out there right now. The spin is, Bear had bad management and deserved to go under. The truth is, if we really enforced debt values by the books of the SEC, every major firm would have to take a haircut so big, that the game is over. Think of these swaps as Baseball Cards. Your Beckett may say that your 1985 Roger Clemens rookie card is worth $50....but the guy at the corner shop says he's not interested in it. He's not interested at $50....he's not interested at 50 cents. That is how bad it is.

 

One of my best friends is Lebaneese, and comes from a powerful family in Lebanon. He told me a story of how his father invested in a big factory in Iraq. He partnered with a few others that had an in with the old Iraqi government, and built up a business from scratch over the course of a few years. He invested a quarter of his net worth. Once all the capital improvements were in and product was ready to roll....Sadam called in the guards to seize the factory. When the US first went in to Iraq 5 years ago, my friend felt horrible that we were fooling with the region as he is Muslim. He also understood first hand about the tactics used by Saddam, and there were no tears shed for his departure.

 

I can only think of that story, as I'm sure Jamie Dymon was smoking a big fat stogie, and firing a rifle off his balcony after the Fed helped him fleece Bear Stearns. Either let all fail, or let none fail. Trust me, I usually cringe when I read a bunch of the liberal schmaltz here.......but for once they may actually be right. For the past 36 hours, they are the lesser hypocrites.

 

I need a Beer, or 10!!!

 

Honestly, sounds like you downed half a case before you wrote this.

[Booster4324]

A tad dramatic aren't we? But maybe a beer or 10 will help calm you down

 

He might have a point about the validity of the system though. Pity, you didn't address that.