"Rescue Me: Fed Bailout Crosses A Line" NYT Business article

[Bill]

You know, something I learned today that amazed me was that it was just on monday of last week that Bear Sterns issued a press release from the CEO saying that the rumors that they were in trouble were "ridiculous".

Turns out, they weren't. What's ridiculous, is the thought of a CEO who wouldn't lie to cover his ass and mismanagement.

This is a pretty good article. Basically, it's saying the bailout of Bear virtually guarantees that the WHOLE cost of this credit crisis / solvency crisis will now be passed on to the taxpayer. If we bail out the worst bank, then we will have no choice but to bail out them all as all the overpriced securities face their margin calls.

http://www.nytimes.com/2008/03/16/business/16gret.html

WHAT are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms for the past year?

Stick around, because we’ll soon find out. And it’s not going to be pretty.

Agreeing to guarantee a 28-day credit line to Bear Stearns, by way of JPMorgan Chase, the Federal Reserve Bank of New York conceded last Friday that no sizable firm with a book of mortgage securities or loans out to mortgage issuers could be allowed to fail right now. It was the most explicit sign yet of the Fed’s “Rescues ‘R’ Us” doctrine that already helped to force the marriage of Bank of America and Countrywide.

But why save Bear Stearns? The beneficiary of this bailout, remember, has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach. Until regulators came along in 1996, Bear Stearns was happy to provide its balance sheet and imprimatur to bucket-shop brokerages like Stratton Oakmont and A. R. Baron, clearing dubious stock trades.

And as one of the biggest players in the mortgage securities business on Wall Street, Bear provided munificent lines of credit to public-spirited subprime lenders like New Century (now bankrupt). It is also the owner of EMC Mortgage Servicing, one of the most aggressive subprime mortgage servicers out there.

Bear’s default rates on so-called Alt-A mortgages that it underwrote also indicates that its lending practices were especially lax during the real estate boom. As of February, according to Bloomberg data, 15 percent of these loans in its underwritten securities were delinquent by more than 60 days or in foreclosure. That compares with an industry average of 8.4 percent.

Let’s not forget that Bear Stearns lost billions for its clients last summer, when two hedge funds investing heavily in mortgage securities collapsed. And the firm tried to dump toxic mortgage securities it held in its own vaults onto the public last summer in an initial public offering of a financial company called Everquest Financial. Thankfully, that deal never got done.

Recall, too, that back in 1998, when the Long Term Capital Management hedge fund required a Fed-arranged bailout, Bear Stearns refused to join the rescue effort. Jimmy Cayne, then chief executive at the firm, told the Fed to take a hike.

And so, Bear Stearns, a firm that some say is this decade’s version of Drexel Burnham Lambert, the anything-goes, 1980s junk-bond shop dominated by Michael Milken, is rescued. Almost two decades ago, Drexel was left to die.

Bear Stearns and Drexel have a lot in common. And yet their differing outcomes offer proof that we are in a very different and scarier place than in the late 1980s.

“Why not set an example of Bear Stearns, the guys who have this record of dog-eat-dog, we’re brass knuckles, we’re tough?” asked William A. Fleckenstein, president of Fleckenstein Capital in Issaquah, Wash., and co-author with Fred Sheehan of “Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.” “This is the perfect time to set an example, but they are not interested in setting an example. We are Bailout Nation.”

[Bill]

JP Morgan just closed an emergency deal to buy Bear Sterns for 10 cents on the dollar - and that's at it's already much reduced valuation.

The Fed is helping with the deal in various unspecified ways - probably with loan quarantees to JP Morgan. Meaning, this buyout/bailout is being made on the taxpayers dime.

And guess what - the fed was supposedly going to cut the interest rate by half or three quarters of a point on tuesday, see?

In a surprise move, on a sunday night, they just cut the rate by a quarter point, to stop a panic tomorrow.

It's going to be a heck of a week. Probably wise to strap in.

[Bill]

The article on that just came up on NYT.

Turns out the taxpayers paid $30bil to bailout the rich.

No wonder they needed Spitzer out of the way.

Looks like the Federal Reserve is actually going to manage Bear too, in some odd and unprecedented new way. That seems wierd - they are selling it to JPMorgan, but to protect the rest of the ndustry, they are going to manage the bank themselves?

http://www.nytimes.com/2008/03/17/business/17fed.html?hp

Hoping to avoid a systemic meltdown in financial markets, the Federal Reserve on Sunday approved a $30 billion loan guarantee to engineer the takeover of Bear Stearns and announced an open-ended lending program for the biggest investment firms on Wall Street.

In a third move aimed at helping banks and thrifts, the Fed also lowered the rate for borrowing from its so-called discount window by a quarter of a percentage point, to 3.25 percent.

The moves amounted to a sweeping and apparently unprecedented attempt by the Federal Reserve to rescue the nation’s financial markets from what officials feared could be a chain reaction of defaults.

After a weekend of intense negotiations, the Federal Reserve approved a $30 billion loan to help JPMorgan Chase acquire Bear Stearns, one of the biggest firms on Wall Street, which had been teetering near collapse because of its deepening losses in the mortgage market.

In a highly unusual maneuver, Fed officials said they would minimize the central bank’s own risk by taking direct control over the huge Bear Stearns portfolio.

The Fed, working closely with bank regulators and the Treasury Department, raced to complete the deal Sunday night in order to prevent investors from panicking on Monday about the ability of Bear Stearns to make good on billions of dollars in trading commitments.

In a potentially even bigger move, the Federal Reserve also announced its biggest commitment yet to lend money to struggling investment banks. The central bank said its new lending program would make money available to the 20 large investment banks that serve as “primary dealers” and trade Treasury securities directly with the Fed.

Much like a $200 billion loan program the Fed announced last Tuesday, this program will essentially allow the government to hold as collateral a wide variety of investments that include hard-to-sell securities backed by mortgages. But Fed officials told reporters on Sunday night that the new program would have no limit on the amount of money that can be borrowed.

It was unclear just how much risk the Federal Reserve was taking on, especially in the bailout of Bear Stearns. Without providing details, Fed officials insisted that the $30 billion in loans was “over-collateralized” and thus secure. They said the central bank would take control of Bear Stearns’s investment holdings in order to maximize their value and minimize disruptions as a result of a cash squeeze.

[Bill]

Ooops, got one thing wrong.

Bear was bought for 1/15th of it's value - was worth $30 a share on close friday, bought sunday night for $2 a share.

Dang, those must have been some ugly looking books JPMorgan was looking at, if the Feds had to step in and quarantee $30 billion dollars just to get them to buy Bear's collapsing equity.

I've read that the Bear building may be the most valuable thing Bear owns. Well, used to own.

[Bill]

Holy shit! $236 Million?

Bear's BUILDING alone is supposed to be worth 1.2 billion!

I wonder what the hell the $30 Billion in loan guarantees was for, then?

http://www.msnbc.msn.com/id/23661000/

Wall Street begins the new week trying to come to terms with just how bad the fallout from the credit crisis is — so bad that an investment bank worth $20 billion weeks ago has been bought for just $236 million.

The news late Sunday that JPMorgan Chase & Co. will buy Bear Stearns for a sum that’s considered paltry by Wall Street standards is likely to leave investors shaken. What might give stocks some support is the Federal Reserve’s latest steps to inject cash into the banking system — steps aimed at lifting the economy but also to restore some confidence to investors. But how much that will help stocks, and for how long, is a big question on the Street.

Some answers will come this week, when quarterly earnings reports are due from Lehman Brothers Holdings Inc., Goldman Sachs Group Inc., and Morgan Stanley. Bear Stearns was scheduled to report its results Monday; it wasn’t clear if it would go ahead with that plan.

Meanwhile, the Fed has been using the various tools at its disposal — even creating some that investors have never seen before — to try to mend the ailing financial markets.

On Sunday, the central bank cut its discount rate, the interest it charges financial institutions, to 3.25 percent from 3.50 percent, effective immediately, and created another lending facility for big investment banks to secure short-term loans.

The steps are “designed to bolster market liquidity and promote orderly market functioning,” the Fed said in a statement. “Liquid well-functioning markets are essential for the promotion of economic growth.”

And last week, the Fed said it would pump up to $200 billion into the system by taking mortgage-backed securities as collateral.

The Fed is expected to take another step this week to help the economy — on Tuesday, it holds a regularly scheduled meeting on interest rates. The Fed is going to have to make a big rate move and a powerful statement to reassure the markets, and most analysts expect at least a half-point reduction in the key fed funds rate, which now stands at 3 percent. Some believe the Fed will slash rates by a full point.

[Bill]

And, of course, oil hits a new high.

I'd bet ten bucks that oil will bust $115 this week.

Sombody better stop those commodities guys.

No wait, this is a free market economy, it would be totally against republican doctrine to stop them.

Besides, it's a global market, they'll just make their trades from another time zone, and another front corporation.

http://www.iht.com/articles/ap/2008/03/17/business/AS-FIN-MKT-Oil-Prices.php

Investors fled the dollar after a surprise move by the U.S. Federal Reserve on Sunday to provide cash to financially squeezed Wall Street investment houses pushed the battered greenback deeper into multiyear lows against the yen.

"The Fed's move overall will help the liquidity of the U.S. dollar, and that will really further soften the dollar," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "Meanwhile, investors seem to be just following the mantra of buying oil and commodities to hedge against the falling dollar and inflation."

Light, sweet crude for April delivery spiked to a record US$111.42 a barrel — up US$1.21 from Friday's close — in electronic trading on the New York Mercantile Exchange midmorning in Singapore. It later slipped back to US$111.10 a barrel.

The contract's previous high was set Thursday at US$111 a barrel. It fell 12 cents to settle at US$110.21 a barrel on Friday.

[asroc]

forget it bill, everytime i bother to talk about economic specifics and exactly how fucking dire it's going to become (the mortgage situation hasn't even crested yet), i just get blanket partisan bumpsersticker rhetoric replies from both sides

[disrupter]

Which is more frightening?

A CEO who lies so convincingly or one who is so out of touch with his operation that a week after saying 'in trouble' was ridiculous it is bought out, near-bankruptcy for 2 dollars a share?

Neither lends much confidence to the US financial industry.

Isn't it interesting,
socialism, ie. government intervention, is necessary & good for reckless big financial firms, but don't even breathe anything like that for actual people in front of GOP nutbags.

I guess the GOP deregulates precisely so they WILL behave recklessly & then the government will be forced to steal even more taxpayer dollars to clean up their mess.

After all, it isn't THEIR money they are spending, it is the taxpaying public & their children's.

It is like a one-way gear mechanism,
always going to the rich & corporate,
with a crooked government to engineer it all with twisted legislation.

[bigfootzx]

The street talk suggests $2/share bailout is out of the question. Talk about a Take Under deal!! We'll see other companies researching buyout offers before Bear committs. Bear employees own 30% of the stock

Lehman Brothers may be the next to fall!

http://online.wsj.com/article/SB120571021671940207.html?mod=hps_us_editors_picks
British Billionaire Joe Lewis owns about 10% of Bear stock, he's already lost about $800 is equity since January. Talk about getting a haircut!!!

"Mr. Lewis began rapidly building his stake in Bear Stearns last summer, shortly after the bank announced that two internal hedge funds had imploded. In December, his stake rose to just under 10% from about 7% when Bear's stock price fell below $110, forcing him to make good on an
options trade he had made with another party."

"The elusive septuagenarian is one the biggest losers from the New York investment bank's problems. In just a few months, he has paper losses of about $800 million on his roughly 9.6% stake in Bear, whose share price has cratered in recent days."

http://www.reuters.com/article/marketsNews/idUKN1758723020080317?rpc=44&pageNumber=2&virtualBrandChannel=0
"The market is pricing in a distinct possibility of a higher bidder emerging at some point," said David Trone, an analyst with Fox-Pitt Kelton Cochran Caronia Waller.

"Another bidder could rationalize that Bear's current arrangement will bring calm to creditors and counterparties, thus bringing an end to the run-on-the-bank," Trone said in a research report.

[bigfootzx]

Here's two screen shots below from CNBC's Jim Cramer's Mad Money web site at http://TheStreet.com

The first screen shot shows what his site looked like last week after he recommended Bear Stearns as a buy on his show.

http://i121.photobucket.com/albums/o221/wildbillzx/cramer.jpg (http://www.vbulletin.com)


http://i121.photobucket.com/albums/o221/wildbillzx/cramer2.jpg (http://www.vbulletin.com)

They removed the buy recommendation from a week ago and replaced it with a sell recommendation. Too late for investors, Cramer was hawking this stock all the way down. Monday he says Bear was a dog and the rumors that Bear would fail were flying for months. Yet he still recommended it on the air!!! It takes a couple of hours of research to weed out bad investment ideas, it only takes a few seconds to pick up the remote and change the channel.

Jim Cramer CNBC and TheStreet.com should be ashamed of themselves!

[bigfootzx]

JP Morgan offers $10 per share to buyout Bear Sterns, stock price closed at
$11.26. Looks like to Fed deal with JP or $2 was to cheap, and $10 is not going to close the deal anytime soon.

http://biz.yahoo.com/ap/080324/jpmorgan_bear_stearns.html?.v=26
The $2.4 billion lifeline to rescue the investment house stands a strong chance of success -- assuaging investors unhappy with a $2 per share offer by upping it to $10 apiece. JPMorgan has faced an outcry among Bear Stearns shareholders about the lowball offer, and faced the possibility that rival deals would begin to surface. Most analysts said a higher bid was unlikely, but some bondholders have reportedly been buying the stock in order to ensure their right to vote for a deal and prevent a bankruptcy that would wipe them out.