The Incredibly Shrinking Dollar!

[Dwight Drane]

A brown paper bag usually helps hyperventilation. The problem with CDS is exactly why Fed did what it did. If you let Bear fall, the unraveling of its obligations will spread far and wide, given their disproportionate role in fixed income. Fed won't help WaMu, maybe Lehman and Citi - but their liquidity is ok for now. Fed stepped in to help with the winddown of LTCM, knowing the potential for disaster. Bear would be worse. An orderly liquidation by JPM is much better than a Ch. 11 liquidation. The end effect on the Bear bankers will be the same - 90% will be jobless in a few months.

 

I'd like to know what makes you think those names are liquid? Sure, they are liquid for the next 6 hours.

 

Look at Lehman options and they will tell you the story. April $10 puts were selling at $3 this morning when the stock was at $23.

 

I believe you also told me two weeks ago that the economy was fine, the stock market rallied because stocks were cheap, and that there was only a total writedown of $200 billion for all of the banks. I was over-reacting when I said 1 or 2 major banks were on the verge of going under and there were going to be multiple firms with $100 billion+ writedowns.

[Dwight Drane]

GG, what I am trying to come to grips with is the who part of it. Who are the ones in such imminent danger ? Who deserve to be saved and why ? What specifically are these ripple effects that are so frequently mentioned ? Sounds like a bogeyman concept thrown around here. If the 'who' are these esteemed financial companies and their respective employees, scre* them and their bloated lifestyles. I do not want my money spent to rescue these high and mighty. I rather save the entrepreneur who opened a cute coffee shop down the street and faces closure cos Starbucks invaded her territory.

 

They are all fair game to go under if the Fed doesn't step in. The Fed says they are going to everything neccessary to protect the system. This means give loans on TRILLIONS of dollars of bad loans. Are you an investment bank holding a bad mortgage worth 30 cents on the dollar? Send it to us and we'll lend you a dollar for 28 days...I mean 90 days....I mean Forever.

 

Now Bear is not getting bailed out, they are being commandeered by the Fed. JP Morgan stands to make profits, and will probably get to pick apart Lehman as well. That is the thing....many employees from Bear have no job and no savings now. If life was fair, the whole thing would blow up. Instead, the US can't let that happen, so they nationalize the sick institutions that can't make it through with their generous "loans".

 

Trust me, every institution out there should really be out of business if the credit swaps market was held to truth. I still don't know how that will be solved in the longrun.

 

As long as nobody panics, this will just be a painful drawn out process. If people start naming names, and stop doing business with places....it is a disaster that nobody wants to comprehend.

 

I have puts on the 3 names I mentioned...Lehman, Citi and WAMU. Long term I have calls on Barrick Gold, ABX. They are the biggest gold mining corp and have no hedges going forward other than a financing deal. I am short the NASDAQ as a whole, but you have to be careful as the stock indexes inflate. The Dow can stay at 12,000 like it was over a year ago, but Gold is up 50% and the Dollar is down 30%. That is how your wealth gets whittled.

[GG]

GG, what I am trying to come to grips with is the who part of it. Who are the ones in such imminent danger ? Who deserve to be saved and why ? What specifically are these ripple effects that are so frequently mentioned ? Sounds like a bogeyman concept thrown around here. If the 'who' are these esteemed financial companies and their respective employees, scre* them and their bloated lifestyles. I do not want my money spent to rescue these high and mighty. I rather save the entrepreneur who opened a cute coffee shop down the street and faces closure cos Starbucks invaded her territory.

 

The settlements deserve to be saved. The root of the trouble is leverage and structured finance. This is not a case where letting Bear fail will only affect that company's employees and investors. The CDS market is about $40 trillion, and if you remove one major party from the equation, you may start a ripple effect that will cause margin calls for other players. Just imagine that less than $30 billion of total sub-prime loans caused $200 billion in bank write-downs and two major failed financial houses. Now multiply that many times over if Bear collapses.

 

This isn't about preserving jobs on Wall Street, as layoffs are in full swing, with more to come. The real worry is that you are going to see this manifest in more places like Jefferson Co Alabama, and other everyday places that have been reliant on cheap Wall Street money.

 

I don't think that anyone is deluded that boom times will return any time soon. What people are trying to avoid is an all out panic, where Main Street fares much worse than Wall Street.

[GG]

I'd like to know what makes you think those names are liquid? Sure, they are liquid for the next 6 hours.

 

Look at Lehman options and they will tell you the story. April $10 puts were selling at $3 this morning when the stock was at $23.

 

I believe you also told me two weeks ago that the economy was fine, the stock market rallied because stocks were cheap, and that there was only a total writedown of $200 billion for all of the banks. I was over-reacting when I said 1 or 2 major banks were on the verge of going under and there were going to be multiple firms with $100 billion+ writedowns.

 

Sorry, got the wrong guy. I never claimed that the economy was fine two weeks ago, and I certainly didn't comment that the stock market was cheap. I do recall asking if your $200 bn writeoff number was on top of the $150 bn already booked.

[Dwight Drane]

Sorry, got the wrong guy. I never claimed that the economy was fine two weeks ago, and I certainly didn't comment that the stock market was cheap. I do recall asking if your $200 bn writeoff number was on top of the $150 bn already booked.

 

Sorry, it stinks having the server crashed here.

 

Just trust me, it's a disaster out there. If proper protocals were being followed, there would be the mother of all margin calls. I know a few guys here are in the financial industry. Anything in the trenches is walking on eggshells.

[meazza]

GG, what I am trying to come to grips with is the who part of it. Who are the ones in such imminent danger ? Who deserve to be saved and why ? What specifically are these ripple effects that are so frequently mentioned ? Sounds like a bogeyman concept thrown around here. If the 'who' are these esteemed financial companies and their respective employees, scre* them and their bloated lifestyles. I do not want my money spent to rescue these high and mighty. I rather save the entrepreneur who opened a cute coffee shop down the street and faces closure cos Starbucks invaded her territory.

 

When the subprime fallout was announced back in August, every part of the world was hit. For example, 5 out of 6 of Canada's major chartered banks were hit due to holding asset backed commercial paper tied to loans linked to the US. This on its own caused the ABCP market to be frozen at a value of about 30 B.

 

Now this did affect other people outside of the main management of each bank including the bank i work for (brokerage arm) as i know a lot of people who lost their that don't even know what commercial paper or subprime loans are. Now considering the bank I work for employs close to 20 000 people, and it has affected us in a big way without even being a company that deals directly with subprime loans, imagine another major crash as GG mentioned before.

 

In the end though, these loans will not be recoverable, Bear Sterns will still be sold for scraps but at least it is done gradually to keep investors from totally going into a panic. There is almost so much the central bank can do.

[Lakesider]

If we can all just hold on until January 21, 2009 all will be made right by President Clinton. She will export from NYS to the nation the spectacularly successful economic polcies she devised, incubated, then implemented to solve all of our fiscal problems here in The Empire State, and in particularly the incisive strategies she developed to encourage job growth in Western New York.

 

Uh huh....

[molson_golden2002]

Plus, as I heard, the Fed's terms were "This is a 28-day loan. You have THAT long to get your sh-- together, no longer."

 

Not much of a bailout, if what I heard was accurate.

 

Oh no, they just accepted the sh-- mortgage obligations thus becoming a creditor in the business. They basically took over the worthless debt that had dragged the company down thus enabling JPM to buy them out.

 

The Fed is bailing the whole rotten system out with monetary policy anyway.

[molson_golden2002]

http://www.washingtonpost.com/wp-dyn/conte...8031702150.html

 

Really good summary of what's going on

[DC Tom]

 

Oh no, they just accepted the sh-- mortgage obligations thus becoming a creditor in the business. They basically took over the worthless debt that had dragged the company down thus enabling JPM to buy them out.

 

The Fed is bailing the whole rotten system out with monetary policy anyway.

 

No, they loaned against sh------- mortgage obligations. They didn't take them over. The sh------- mortgage obligations being collateral, the Fed wouldn't take them over until Bear defaulted on the loan. While the arrangement may have ultimately led to the Fed owning sh------- mortgage obligations, the typical convention in the real world is that effect follows cause, and not the other way around.

 

Furthermore, the Fed typically takes mortgage bonds as collateral for discount window loans, so it's not even unusual. If you had even a vague pretense of a hint of a clue of what you're talking about, you'd be complaining about the Fed conspiring with JP Morgan to make the discount window available to a non-commercial bank. But then, they typically don't cover the mechanics of Fed lending on Romper Room...

[molson_golden2002]

1) No, they loaned against sh------- mortgage obligations. They didn't take them over. The sh------- mortgage obligations being collateral, the Fed wouldn't take them over until Bear defaulted on the loan. While the arrangement may have ultimately led to the Fed owning sh------- mortgage obligations, the typical convention in the real world is that effect follows cause, and not the other way around.

 

2) Furthermore, the Fed typically takes mortgage bonds as collateral for discount window loans, so it's not even unusual. If you had even a vague pretense of a hint of a clue of what you're talking about, you'd be complaining about the Fed conspiring with JP Morgan to make the discount window available to a non-commercial bank. But then, they typically don't cover the mechanics of Fed lending on Romper Room...

1) The Fed took on their risk, that's the whole point. Woo hoo! Let's celebrate the free market!

 

2) That's another topic altogether and very interesting, but much is still unknown about the deal, don't tell me what to complain about, unlike you I don't look at a headline in the driveby medai and run off to make posts about it.

[Alaska Darin]

No, they loaned against sh------- mortgage obligations. They didn't take them over. The sh------- mortgage obligations being collateral, the Fed wouldn't take them over until Bear defaulted on the loan. While the arrangement may have ultimately led to the Fed owning sh------- mortgage obligations, the typical convention in the real world is that effect follows cause, and not the other way around.

 

Furthermore, the Fed typically takes mortgage bonds as collateral for discount window loans, so it's not even unusual. If you had even a vague pretense of a hint of a clue of what you're talking about, you'd be complaining about the Fed conspiring with JP Morgan to make the discount window available to a non-commercial bank. But then, they typically don't cover the mechanics of Fed lending on Romper Room...

[GG]

2) That's another topic altogether and very interesting, but much is still unknown about the deal, don't tell me what to complain about, unlike you I don't look at a headline in the driveby medai and run off to make posts about it.

 

Why, so you can pipe in with another topic which you know nothing about?

 

ps- there's a lot known about the deal, and it's far from a bailout.

[molson_golden2002]

Why, so you can pipe in with another topic which you know nothing about?

 

ps- there's a lot known about the deal, and it's far from a bailout.

Really? So was Stearn brought down by panic or genuine trouble withn its books?

[GG]

Really? So was Stearn brought down by panic or genuine trouble withn its books?

 

Yes.

[molson_golden2002]

Yes.

[Fan in Chicago]

http://www.washingtonpost.com/wp-dyn/conte...8031702150.html

 

Really good summary of what's going on

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

[molson_golden2002]

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

You mean like how these corporations can have a 32 to 1 ratio of borrowed money to underlying capital? That sounds like buying on margin, and as you say, "risk, what risk?"

[GG]

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

 

You are correct sir. The issue is much deeper than a simple bailout of Bear. The fixes will encompass separate regulatory guidelines between banks and brokerages, Basel II risk adjusted capital requirements, accounting treatments of financial assets and greater transparency in credit derivatives. Considering Basel II is about 20 years in the making, don't expect a quick fix. But a fix will comeIn the meantime, the risk of letting Bear fail was too great.

 

BTW, it's not only downside for the Fed. If this move settles the markets, the collateral it got from Bear will be a moneymaker.

[Fan in Chicago]

BTW, it's not only downside for the Fed. If this move settles the markets, the collateral it got from Bear will be a moneymaker.

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."