Credit Crises
The Consumerist has posted the testimony of one of the credit card customers, Steven Autrey, who had planned to testify before Congress last week until Congressman Bachus insisted that Autrey agree allow his own financial history to be made public before he could testify.
The NFL does not allow one team, in the midst of the fourth quarter, to unilaterally move their end zone 20 yards in their favor just because they don’t like the point spread. The rules are laid out before the kickoff, and the umpires enforce the same rules for both home and visiting teams for the whole contest. It’s time for legislation at the federal level that tells the credit card industry, "Game Over" to unilateral, one-sided, rule changes.
As a registered Republican, it has typically been my philosophy that business and commerce flourish and perform better with minimal government interference. However, when an industry sector proves time and again that it is unable to police itself and behave and engage in fair and ethical trade practices, legislative intervention is required.
With some progress in our consumer credit laws, and reform of the monopolistic credit scoring cartel controlled by the Fair, Isaac, and Company ("FICO"), perhaps once again consumers can have a level playing field in doing business with credit card issuers.
Click through to read the whole thing.
And while Congress was demanding that consumers forgo all financial privacy in order to have the right to speak to Congress, the US was helping to bail out Bear Stearns. Only, that didn’t work out so well–Bear Stearns is as we speak desperately trying to sell itself before the markets open tomorrow (they’re opening already in Asia).
Bear Stearns Cos. was closing in on a deal Sunday afternoon to sell itself to J.P. Morgan Chase & Co., as worries deepened that the financial crisis of confidence could spread if Bear failed to find a buyer by Monday morning.
People familiar with the discussions said all sides were pushing hard to complete an agreement before financial markets in Asia open for Monday trading. "None of these things is done until they’re done," Treasury Department spokeswoman Michele Davis said Sunday afternoon. "But I think everyone’s expectation is sometime in the early evening hopefully" the deal will be done.
Terms of the deal were still being hammered out Sunday afternoon. Reflecting the dire situation at Bear, the company is likely to fetch considerably less on a per-share basis than its stock price of $30 in New York Stock Exchange composite trading Friday at 4 p.m. Last year, the shares hit $170.
One stumbling point appeared to be the amount of risk that J.P. Morgan would absorb in any type of transaction. While J.P. Morgan is eager to snap up some of Bear Stearns assets — such as its prime brokerage business that caters to hedge funds — Chief Executive Officer James Dimon was reluctant to pursue the deal without certain assurances that would protect his firm’s exposure, said people familiar with the matter.
Despite the emergency funding from J.P. Morgan and the Federal Reserve that was announced Friday and gives Bear access to cash for an initial period of 28 days, the clock is ticking against the 85-year-old company. Regulators, bankers and investors are concerned that the firm could plummet even further when markets open Monday. A continued exodus by parties that Bear trades with could even cause the investment bank to collapse.
There is something very wrong with this picture. I understand the efforts to bail Bear Stearns out. I understand this is going to get much much worse. But as it does, we need to foreground the real people who are at the end of the process.
Update: JPM got Bear Stearns for the rock bottom price of $2 a share. Wow.
Update: They used the words "huge discount" in the headline. That doesn’t even begin to describe it.
Bear Stearns, facing collapse because of the mortgage crisis, agreed Sunday evening to be bought by JPMorgan Chase for a bargain-basement price of less than $250 million, the two companies announced.
emptywheel,
What is wrong with this picture is that it presupposes that Bear Stearns is an isolated case. It isn’t. We’re still at the setting up of the dominoes part of this, they haven’t really begun to fall yet.
It really is true, today, that there are tens of millions of “homeowners” out there with less than zero equity, and we are probably no more than months away from doubling that. Once people really deeply understand how the tradeoffs between continuing to make payments on a mortgage on a house that they will not be able to sell at a profit, and walking away and starting over — there is going to be a tidal wave of foreclosures, and tens of trillions of dollars are going to evaporate.
Bear is getting out while it’s still possible to get out.
Thad
Yup.
Somehow they love domino theories until they hit Wall Street.
See the update–the sale went through, $2/share.
Good to see you hit the main points, which are that (a) as to big businesses we privatize profits, and socialize losses and (b) Republicans are frickin’ hypocrites.
But, here’s a couple more.
1. Bailing out Bear is not going to help matters. If anything, it’s going to make things worse, because everyone else in the world is going to see clearly that Bushco is more concerned with making sure his base – “the Haves and the Have Mores” – is taken care of than anyone else. As that realization sinks in (if it hasn’t already) it’s going to be every man for himself.
2. The Dollar will continue to crater. A few minutes before I write tis, German radio reported in their midnight news (they’re still on standard time) that the Euro is in the hunt for a new record as trading opened in New Zealand.
What does it tell you (or anyone) about the seriousness of the situation when the beginning of trading in New Frickin’ Zealand is a lead item in the radio news of midnight Sunday into Monday?
3. From the 1997 meltdown – an NYC friend related to me that, during that crisis, one of the regular customers of the store where he worked (selling fishing gear) was Rubin (if it wasn’t Rubin, it was Summers) who came in enroute from A to B in the City during the midday. In the middle of buying something or other (a five minute transaction) his beeper went off and he had to borrow the phone in the store. Part of saving the world in 1997 entailed his standing at a wall-mounted phone for the better part of the afternoon talking to one person after another trying (ultimately successfully) to unscrew that day’s part of the financial crisis. After a while, they gave him a chair. I see neither Bernanke nor the current SecTreas (whatever that cipher’s name is) doing anything similar – no urgency, no working the phones, no nothing.
This is the Hoover administration, writ large.
And, what are the Democrats doing or saying? They’re fighting over whether Obama’s minister is too harsh, not harsh enough, or just right. When they could be making hay out of the facts that the economy is going to hell in a handbasket before the Republicans’ eyes (and on their watch) and McBush’s touted success in Iraq is so thorough that he has to sneak into the country by the back way, in secret.
Bullsh*t. It’s time for Edwards (or similarly-minded Dems and 527s) to start pushing his economic issues -loud, in public and in the Rethugs’ (and Dems’) faces. Spend some gelt on ads – to shock the Dems to their senses and to cudgel the Rethugs. Among other things.
Did you say $2/share?
It was $30, Friday.
That’s what Sean Paul said, yes. $2/share.
As recently as February, Bear Stearns was trading about $85/share.
stock chart
Yup. It was. But it was down from, what, $170 a year ago?
The sale is now up on the Gray Lady.
Yeah, and I been seeing this particular comment over and over again:
To which I call Bullshit, Bullshit and Bullshit some more!
Repeatedly calling it the “truest measure of the financial health” does not make it so.
Ouch. $2/share. And not in cash.
Interestingly, Buffett was not (to my knowledge) part of anything. Seems like KKR was looking, shopping, but not buying. Smarter guys.
I speculate it’s possible Morgan bought because someone had to and there’s likely some backdoor deal to back them up for taking on Bear.
It’s not every day that $250 million will buy you a huge finance company.
Though it may be every day for the next several weeks.
Bear Stearns’ building in Manhattan is worth at least $1billion – the price paid by JP Morgan can only be truly evaluated when it discloses what liabilities it assumed from BS, if any. There seems to be a Potemkin Purchase going on here – if BS had been an insolvent bank, the FDIC would have gone in and liquidated and that would have been it. The real issue for BS was how its default would have cascaded with derivative exposure.
They might have gotten a nice 54 story office tower on Mad Ave (per today’s NYDN estimated to be worth about $1.2 Billion) in the deal.
If so, that means the value of Bear was, um, seriously negative.
In order to have a wee chance at financial security, Wall Street should enter the Lottery business and let us Main Street folks wager on the actual date/time of the “tipping point” into the next Great Depression.
Twould be just my luck that said “tipping point” already occurred when Junya and Deadeye first
stoletook the oath of office, but I still want that as my Lottery number.And msnbc has a banner up that the Fed just did a quarter-point rate cute. On a Sunday?
Oh my.
Heck, why not. They were at the office anyway having their Sunday Garage Sale.
It’s Christmas for Bears Sterns execs: they’ll get those bonuses they so richly deserve: they got Bears Sterns a first sip at the Federal Reserve trough while there still are reserves, they convinced the Feds to take subprime mortages as security for the loans (!!!), and they’ll make privatized profit on the short of the $200 billion taxpayer bailout. They’ll deserve those bonuses for such a scam, don’cha know?
The Bear Stearns building alone is worth about$1.4BB. So the rest of the company was valued negative.
Our posts crossed – Manhattan real estate may be one of the few places left that will have value when this shakes out!
Or not.
If Wall Street were a Latin American country, and it had to go to the IMF for a bailout instead of the Fed and friendly Hank Paulson at the Treasury Dept., any bailout money would be made contingent on “market reforms”. I know I don’t need to ask why the same concessions were not requested from Wall Street for this bailout and the ones that will happen soon. The Citigroup exposure is the scariest.
Yes.
The discipline of the markets is for the little people.
If a Sunday-evening rate cut (not even waiting two days for the previously planned Tuesday Fed meeting) doesn’t say panic, I don’t know what does.
The actual sale is still subject to shareholder approval, so if you were worried about BSC as a counterparty, it’s still not a done deal. BSC is one of the largest derivatives clearinghouses, meaning they are counterparty to both sides of the trades. So their servers will doubtless still have a crushing traffic load of people closing positions tomorrow.
Time to buy stock in Tums, Pepto and the distiller of your choice.
Not only a rate cut. From the JPM announcement by way of calculatedrisk:
Oops, crossed with you.
Yeah – I figured they couldn’t make the deal go without fed money in it.
Yahoo finance tells me the New Zealand 50, now open about 2 hours, is down 1.68% from open.
So any bets where the DOW will open tomorrow?
Above or below 10,000?
I haven’t checked but the Dow futures market will give you an accurate guesstimate.
Dow futures down 300 since the announcement,
Down.
How far – anyone’s guess. Depends on how the markets interpret the Bear deal.
The chart tells me the All Ordinaries showed a rapid drop and what looked like a recovery almost to opening, probably contemporaneous with the Bear deal being announced, followed by a more gradual decline.
I’d watch Shanghai and Hong Kong to see how the Chinese take this – if they go into panic mode it’s “Katie, bar the door.”
On Ian’s excellent post yesterday at the Lake, I’d jokingly said it’ll be Black Monday, now, I’m worried it will be…!
Will it go down in history as the St. Patrick’s Day Massacre? Inquiring minds want to know!
Dang, how true, good thing I’ve decided to boil my flat of corned beef already, and the fixings are all prepped…!
Seoul and the Aussie All Ordinaries, down similarly – 1.68-1.70 percent.
See what happens when you turn your economy into one where there is only consumption and intangibles being produced?
We manufacture nothing (worth talking about, in dollar terms).
And, Ishmael, if Wall Street were a Latin American country, there’d be people hanging from lampposts already.
Am I nuts for posting this?
Maybe this will force Congress to force Bush to pull the troops out of Iraq?
I think the campaigns have been staying away from this, for fear of being accused of putting a price on national security (”millions for defence, but not one penny for tribute!”), but the direct costs of Iraq, ten billion plus a month, plus the oil premium, and the effect that the war is having on inflation may make this a very potent argument very soon.
Yes, you’re nuts.
But I’m hoping this week generates some support for Darcy Burner’s out of Iraq option.
Besides, this gives anti-war people a new metric. Each month in Iraq costs 40 Bears Stearns.
So 1 Friedman = 240 Bear Stearns = much moral hazard.
My favorite comment on the deal at calculatedrisk: transcript of the final thirty seconds of the buyout negotiations.
Wiping fluids off monitor.
This is interesting from calculated risk…
that’s going out a limb … what’s going to happen if they fail other than the debt just falls away and gets monetized?
When BS and Citigroup and the rest go to a sovereign wealth fund in Dubai, the fund gets a piece of the company in exchange for the equity infusion. And the Fed, in exchange for $200 Billion, gets the crap collateral that caused the problem in the first place. Heckuva job Hank!
It may turn out that Chris Wallace was actually being “Faux Noise” kind to Paulson when he *shock* actually grilled him today
Splendid.
JPM pays $250 million.
And we pay $30 billion:
Boy EW this is real Bullshit!!! it should be against the law but I guess it’s not
It would not matter if it were against the law or not… The idiots who are in Washington don’t care and they are just thumbing their noses at everyone daring them to do something about it.
Sad to say, we will all suffer because of Bush and his “policies.” The so-called free market knows no restraint — but bush is there to use the power of the federal government to bail out the idiots who created this mess, and their shareholders who were so greedy.
Good point
This is much bigger than Bush; it goes back to Bush41, Reagan, ‘the financialization of the US economy’, and all of us being told we can have something for nothing. Plus, gutting wages so that people went into debt, which was then ’serviced’ by the Bush41Club at a profit. Booyah…
A lot of what’s happening here seems like the Sorcerer’s Apprentice scenario. You want a money? We got lotsa cheap money for ya. You want more money? Here, have some more….
The financial apparatus seems to have some rogue code; all based on the assumption that the mint can operate on overdrive.
Foolish.
In the trade, we call that ‘voodoo economics’
Ah.
I think a few #$%**& might be useful to add to that phrase in view of Bobby G’s news.
PJEvans, your story just makes me ill.
Bad week coming. Bad.
As one who was caught by the Keating 5 scandal in Phoenix and subsequest bailout under Reagan, I think this meltdown is much more severe.
St. McCain should have been busted then, but like GW he has teflon hypocracy.
Did I edit correctly?
This is what they paid $30BB for (same source, sorry next time I’ll try to line up my ducks in one post):
That’s what it’s all about. Not saving Bear per se–avoiding a one-day unwinf of $14 trillion.
So, further to my Potemkin analogy from before, JPM is the cutout that allows the Fed to say that this is not a nationalization of BS? Except that on Wall Street bizarro world, a nationalization is not one of assets, but of liabilities by the government.
My take is that JPM is the cutout that has half-a-trillion in cash. To keep that $14T in place for an “orderly runoff”, you need a player with a boatload of cash that people will trust.
I really think Ben Bernanke is just doing whatever it takes to avoid declaring a bank holiday this week. He’s willing to act now and survey the damage later.
Dow-wise, I think they’re lucky it’s opening at all.
That’s pretty harsh. I don’t know that it’s that bad.
Singapore is up, BTW.
Actually, a bank holiday would be likely the single worst thing he could do. What confidence is left in the US economy and the idiots in charge of it would be totally blown away if he declared one – and likely the world economic system would not be able to recover from it for years to come.
Precisely why he’d do anything to avoid one!
I the Fed stared down the barrel of a $14T mother-of-all-unwinds (which also would have takens years to recover from) and blinked.
nb I’ve no inside info at all, I’m just a physicist, but one who knows how to read a 10-K…so to your comment martha, I think JPM is one of the financial institutions in the best shape right now (looking at current assets / current liabilities ratio) and that’s precisely why they were chosen. Given the $30B Fed backstop, if I were a JPM shareholder I’d probably be outright pleased about the deal.
Sorry? I don’t get the full meaning here…?
I’m not sure I’d accept anything reported on the balance sheet in the way of assets or liabilities right now … especially financial institutions. It’s a bit hocus pocus what with estimated reserves for loan losses and assets not marked to market. When was the last time they were up for CAMEL?
Neither would JPM–that’s why they required $30BB from the fed!
They’ve got Putnam though … that has to have some value. The investment banking business would have been shot, but there still must be valid assets in the Putnam investments
Japanese markets down 1 perecent on open.
Euro up to $1.5773 on early Japanes trading.
So Bear Stearns was leveraging $1:$31 and things have gone belly up? Sad, really. For a while there, Wall Street made gambling seem ‘respectable’, even ‘patriotic’.
Color me seriously confused, but am I the only one here who smells a citizen rebellion coming on?
As for Bernacke and the rest of the Mighty Giants, they’re like itty, bitty cartoon characters waving their arms and helpless in the face of a tidal wave. Moral hazard, indeed.
Well, the one thing that got forgotten as all those brokers and bankers who’d had first-hand or second-hand experience with the Great Depression either quit, retired or died, was the seriously bad things that can happen with too much leverage.
Remember, over-leverage was for many years considered the single worst thing a banker or broker could do in terms of exposure.
But, what once were vices became, in Republican economics, habits of the virtuous. And we are where we are now, because of that.
Actually, this isn’t my field and so I had no idea, but it makes sense. I have the book by Yusuf (about Grameen Bank), and this looks like an excellent time for ideas like his to gain relevance.
scribe @24:
Yup.
hey .. what’s 30 billion . just leave the printing presses running overnight and ..natch .. ya got it ..
nothing backs our currency right now but the now empty phrase “full faith and credit of the united states” …
buckle up .. zip up your flak jackets and hang on .. it’s going to be a long slide to the bottom …
Hey, we don’t need no stinking printing presses, we’ve got dollar shaped electrons now! Step right up for your wire transfer. (offer good only if you are a private entity, no ’socialist’ progressives need apply).
hey .. i’m an old fashioned kind of guy .. i like the smell of fresh green ink .. how dare you deprive me of such a simple pleasure .. lol
this is what happens when we make speculation cost free to the speculator .. the fat cats fueling this mess need to get a cold shower .. not a warm blanket and government (taxpayer) purchased pacifier to tide them over ’til their next dividend check ..
Thank you!!
Will you be running for Congress?
Or only making sure they ‘get this message’?
At ratios of 1:31, I resent being asked to bail out profligate stupidity.
Tea Leaf .. as a possesser of a small dose of horse-sense .. i am constitutionally barred from holding public office ..
i’m sure the gub’mint will tell us this is a necessary evil to prevent a collapse of the “system” .. but imo ..wall street is a corrupt system .. the big wigs with the capital can call the shots and suffer a loss .. it’s the little guys who get wiped out..
pulled everything .. lock stock and barrel out of the market the day george bush got the ock on the republican nomination .. went liquid to gold and silver .. my C.P.A. thought he need to get my wife to sign commitment papers .. but boy ..was i lucky .. first time i ever got it right ….
Smart decision with gold at $1K an ounce…!
To add to this: a UK bank is apparently interested in buying into WaMu, which is holding a whole Saganload of mortgage crap.
And Congress and this maladministration were so afraid of what they’d find if they made the hedge funds actually report properly … they should have done it then, so the shock would have been over with sooner, and before things got worse.
Not to worry; I’m sure they’ll blame it all on George Soros.
(rolling eyeballs here…)
Oops. Even the golden boys at
Goldman Sachs can’t outfox this market.
So is the big crash gonna happen tomorrow? Oh boy. Seems like the Feds are panicking along with everyone else.
I know zero about the stock market, but I am getting a feeling the future isn’t looking too bright at the moment.
RobZuber just posted this comment on FDL a few minutes ago:
http://firedoglake.com/2008/03…..nt-1339223
Professor and CTuttle–some commenters at calculatedrisk believe that this was a “backhanded” (my word) bailout of JP Morgan–NOT Bear Stearns. Thoughts?
So what’s going to happen to Putnam … isn’t that subsidiary a bigger issue than the hedge funds and investment banking part of BS?
Probably talking through my hat – economics not my field. But, I work for a divison of JPMChase -my impression has been (and I don’t just read the company’s spun communications to employees) that JPMC held far fewer of the mortgage-backed securities than the other banks – such as WaMu – and therefore had far less exposure. The stock price has, I believe, gone up some while other banks’ stocks have been going down.
So probably not a back door bailout of JPMC. (I sure hope not. The best thing about my job is knowing that my paycheck will be deposited on time and it will be cashable.)
Actually, I’m guessing that “argument” could probably be made for almost any of the big investment banks today. They all have at least some nasty stuff sitting on their balance sheet and would like a way to get rid of it. Even Goldman Sachs.
*gah* Greenspan speaketh…
Be afraid, be very afraid…
http://www.ft.com/cms/s/0/edbd…..fd2ac.html
Gosh, he’s brilliant. Someone should hire him for his foresight and managerial skills…
great! now he gets it after he helped fuel it!
Sh*t, he steered us on to the reef, not just fueled it…!
This could be a very bad week. Bear Stearns has essentially been liquidated — with taxpayer money. But, the panic may still spread.
Your shares will arrive in the mail in 6-8 weeks.
LOL. My stocks have been fucking hammered. Same for my IRA accounts.
i’ve decided i’ll die in the classroom before my retirement fund will see the light of day again
Bobby, I’ve been reading waaay too much about this the past few weeks. I think it will be very very bad. As usual, the normal people will suffer the most. I really feel for the “worker bees” at Bear Stearns.
Jkat, smart move.
FWIW, I think we’re way outside what anyone expected.
The map is probably changing by the minute, and it is almost certainly NOT the territory. The territory is probably a blur these days; lots of phony analogies will be offered to try and prevent panic.
No doubt the End Times believers will feel vindicated. That’s also scary, if it gives them any credence (!). Yikes 8
naww .. believe it was just dumb luck .. i had a small stock portfoilo which came my way by way of a vested retirement account from a former employer.. and i din’t like the way our republican brothers in the US house were casually talking about letting Social security go belly up .. what it got me to thinking was .. if these folks will casually talk about defaulting on that system .. how far can i trust them on general obligations .. the upshot of it all was to go straight liquid ..
to the other poster .. yeah .. gold is worth $1k an oz. .. the trouble with that is the $ .. we’ve been printing two billion “excess dollars” a day every day the bushies have been in office .. to finance the conservative dream of smaller government and to fight wars while still cutting taxes .. at some point the piper has to be paid .. paid with what seems to still be the question ..
i’ve no doubt there will be a meltdown .. there is no top without a bottom ..
That was about what I said when the ‘tax rebate’ was announced – ‘where are they going to get the money for it? Because we’re already broke.’
By this upcoming weekend, we may not care one whit about the Bu’ush “tax rebate” or what Geraldine Ferraro said or what Obama’s preacher said or what Hillary’s negative spinners said, we may all be wondering just where all of our 401k money and IRA money went, and whether we have any recourse about getting any of it back.
it’s called letting the mint presses wide open …
Thanks Professor, that’s what I thought. mr. martha is the king of reading 10-K’s…I’ve been learning the finer points from him lately.
This is what Nouriel Roubini is saying:
The problem is no longer merely sub-prime mortgages, but rather a “sub-prime” financial system. The housing recession – the worst in US history and worsening every day – will eventually see house prices fall by more than 20 percent, with millions of Americans losing their homes. Delinquencies, defaults, and foreclosures are now spreading from sub-prime to near-prime and prime mortgages. Thus, total losses on mortgage-related instruments – include exotic credit derivatives such as collateralized debt obligations (CDOs) – will add up to more than $400 billion
He thinks housing prices are going to stop before they’ve dropped 30 to 40 percent, at least in some areas? (They’re already hitting the 20 percent markdown around LA, but they’ve been insane here for years.)
So a question arises: who in the Bush administration is beholden to JPMorgan Chase, and stands to gain by delivering this windfall to a private company?
Or is it just business as usual — i.e. pillaging the economy to enrich private corporations in general?
The long answer is “yes.”
Basically, the FED felt it had no choice in the matter. This is a bit like ensuring the gears of capitalism haven’t run out of grease. Failure of a huge institution like this left alone would have an impact on the credit markets unlike anything we’ve seen since the great depression!
on the credit card hearing:
A burning question is why did the Dems let this happen, above all the feisty feaaless (Boston for fearless) Barney Frank.
I did some digging and reported the results on his and his committee’s position.
Nada. nothing. zero
My googling + videos results, some of them funny are posted on
http://www.dailykos.com/story/…..553/477447
I have alo posted Academic witness Elizabeth Warren’s bibliography and a link to her bibliography there.
Excuses for comment pimping, but this save my time and space on this server.
I absolutely cannot believe it. Bernanke got nothing for this bail-out. Bear Stearns had a book value of $80 per share. I know they had a huge pile of toxic mortgage backed securities, but they had already written them down, and they can’t be totally worthless in the long run. They had a very valuable building in Manhattan. They had a bunch of valuable businesses besides the main business, including a good prime brokerage business, and a strong back office business.
The problem isn’t that the asset-backed securities are worthless, its just that right now, we don’t know what they’re worth. Even so, JP Morgan wouldn’t do the deal unless the Fed guaranteed 30bn of those assets. And the taxpayer gets nothing for this? WTF.
he’s slowing down a meltdown of the capital markets … if Bear Sterns hadn’t been bailed out, panic would ensue in nearly all markets
quite so — but it is now with OUR money!
s h e i t. . .
well, we loose either way, hopefully, this stops the decrease in value to some of our assets, even though we should eventually be paying all this off in taxes
yah .. i’m thinking there has to be some criminality in here somewhere .. cooking the books .. valuing up what one knows to be worthless .. etc etc .. it’s the enron scam all over again ..imo ..and the perps will walk away with golden parachutes and pockets lined with cash ..
i hate to be cynical .. but that’s my prediction of the outcome ..
when will the “hearings” start ya reckon ??
But the lawyers and accountants told me it was ok…..
Boo .. until very recently .. ignorance of the law was never an excuse .. but ..in current times .. all bets are off …
Par for the course, as was mentioned earlier, Privatize the Profit, Socialize the Losses…:(
i have so many thoughts on bear stearns.
none of them pleasant. be back tomorrow
with those — but i suspect the fed rate
cut will not prevent a 200 point down day
in the market overall — this has the smell
of panic all over it. . . dripping with it.
sorry to break slightly O/T, but. . .
will a u.s. district court judge
sitting in colorado, make sure that
the same rules of law apply to dick
cheney, as applied to bill clinton,
when was the sitting 42nd president?
that is — will he allow a subpoena
for cheney’s deposition to be served by
the u.s. marshals, in a civil case?
we will soon see. . .
this is the colorado section 1983 law-
suit for false arrest of a man who touched
cheeny’s arm, as he shook his hand, in
beaver creek, at a public appearance by
the vice president, and then voiced
his disgust for the iraq war.
see the subpoena, and the motion to
support the service of it, at the above link!
p e a c e
At least we could have gotten the building, kind of like a tip.
Think of the expenditure as an insurance policy that may pay off if we don’t have a Black Monday worse than ‘87. We may have gotten an intangible for our money.
Spent all weekend on our taxes here – and in doing so, went through our investments. We lost more than I netted last year, and there’s really no place else “safe” to put the rest. [sigh] Frustrating to explain to my spouse why he must relinquish the notion that investing in the American financial industry at any level is the worst possible thing to do at this very moment.
That’s next year for me. Unfortunately, I have stuff that, for the next three or four years, actually is a ‘gain’. (Taking the interest income off an inherited annuity. It’s doing wonders – for the tax collectors. Me, not so much.) I figured out years ago that I won’t be able to retire ….
Remember, when you are dumping financial stocks, there are a lot of financial businesses inside large companies. GE, for example, was getting 35% of its profits from its financial arm, General Electric Capital Corporation. There are a bunch of others like that.
And FWIW, I think the moral hazard of saving those turkeys is a greater risk than letting them fall apart. These are the idiots that whine about the “moral hazard” of health insurance, saying that people game the medical industry for treatment they don’t need; but run crying to taxpayers for our money when they gamble rich people’s money away.
Yeah, I know; I spent quite a bit of time this evening educating my spouse on mutual funds while we manipulated his 401K. He’s a smart guy but an engineer by profession; he’s not particularly savvy about the ins-and-outs of investing. Unfortunately had to conduct a crash course about a potential market crash this evening. Been nagging for a year now that we had to do something about asset allocations and he’s only now realized I was right, at no small expense. So there we were for several hours, reading through quite a number of prospectuses and lists of holdings; it’s so very scary to see how many of the same companies are bought by so many funds, to the point where it’s very difficult to get real diversity in certain fund classes. Like Large Cap Value or Small-Mid Cap Growth — we saw the same dozen companies in each class over and over again.
And yes, among them firms like GE — fortunately in the better examples offset by larger percentages of consumer goods firms, perhaps with a solid mix of technology companies. And yes, we did look offshore, too. I’d moved $$ in my personal accounts to a number of global funds, including BRIC firms, but with a corporate 401K it’s really tough to get the same amount of diversity depending on the financial services firm they use.
Also had to explain that we couldn’t expect much more from our shuffling tonight than stemming the hemorrhage, that virtually every thing will tank for 6 months or longer, and that we’re going to have to ride it out, watch for buy opportunities when we really hit the bottom. Assuming we have anything left with which to bid…now have my fingers crossed that Bernanke doesn’t need to halt the market tomorrow, before our shuffling is executed.
i frankly am thinking bank run … the dollar is getting hammered in the asian sector right now, it’s down to pre-asian crisis levels
Well, the building seems to be all that kept BS out of the dreaded (and boy do I ever mean that in this case) bankruptcy court:
Deal — $270M (gross of $30B non-recourse debt financing against BS liabilities from Fed);
Building — $1.6B according to widely-quoted appraisal.
I really think someone is keeping him busy and who knows what else because they don’t want him (or Globetrotter) to get wind of much of what B-e-n is doing, which actions will lead to the taking of a lot more hoist from petards than their throwers had in mind.
The day they sent him up to NYC to make one of those silly speeches (can it have been only Friday?!), Fed chair was down in DC announcing a plan to reinstate basically all the regulations that Greenspan refused to enforce on consumer mortgage lending. He can do that much because the laws giving the Fed those authorities are already on the books. (I think there’s a 30- or 60-day comment period that the change of practice is going through right now.)
You mean when I made that big hardship withdrawl from my 401K, that was a good thing? *g*
One of the last things we needed was allowing short sells on a downtick. That trick is only a year or two old. If you want to drive stock prices down, make it as easy as possible, right? Makes no sense (unless you want to help out hedge funds and retail day traders in a bear market), but that’s what they did.
Heck, they’ve spent the last few years making daytrading look profitable if not super-easy. What’s another set of lies on top of that?
New headline:
________________
Asian stocks tumble as credit crisis deepens,
Hong Kong down 5 pct
Nobody’s buying this fed ruse.
So i got a good question, if Bear Sterns is worth $2 a pop, what are the OTHER wall street banks worth?
8 months ago, Countrywide Mortgage was touted by Bank Of America. BOA was buying tons of it at $20 a share. It was $4.68 on Friday’s close. Will the market continue to believe that Countrywide is worth more than Bear Stearns’$2 share price?
my guess is no, but you know its one of the gang that’s allowed to get the bail out money from the FED’s new program and it can sneak to the window compared to Bear Stearns that had to get JP Morgan to go for them.
Used toilet paper comes to mind.
well, now we have a commodities bubble since all the speculators went there … every day trader making a mint off of your milk n cookies and commute to work
Oh, I myself am not a day trader, but I know a number of people who’ve been (probably fairly) honest with me about the sums of money they lost day trading in the late 1990s.
More than one million or two evaporated.
But I think that’s going to look tame compared with what must be coming.
I’m sometimes haunted by recollections of Eastern Europe in the late 1970s; very little food on the shelves of stores, just a ruined economy. Let’s hope the US with it’s different culture and history will be more resilient.
However, maybe we’ll hear about Hilary and Obama on economics, rather than trivial surrogate claptrap.
well, all they have to do is play up i don’t know nutting about economics McCain
I didn’t really believe it until about 5 pm today.
Now, I do.
This made me laugh…
http://www.juancole.com/
Where was it that Chimpy wanted us to put our Social Security accounts now?
Jeb talked a whole lot of Florida counties into pooling their operating cash into an investment account, which dropped something like $1.5b out of 2.5b in value on rumors of sub-prime exposure a few months ago.
Shrink gov small enough to drown in the moneyed class’s debt?
Wow… I’d forgotten about Chimpy wanting all the SocSecurity $$.
I hope the Dems hammer this point repeatedly.
If I were buying stock right now, I’d sure pick up whoever makes Prozac.
Do you think Bush will even lose the ‘haves’ and ‘have more’s’ or will they be untouched by this?
Obviously, I’m not an economist, so forgive me if the answer is obvious.
There is, indeed, something grossly wrong with this picture. Something very basic, which doesn’t require an MBA or JD; it requires only the common sense of Ma and Tom Joad.
When the UK government recently bailed-out a failed bank, the bank’s shareholders lost their equity and top management lost their jobs. When the US taxpayers propped up Bearish Stearns, top management kept their jobs – and bonuses – and its shareholders kept the promise of improvement. Even $2/share, which the bail-out permitted, is better than zero or a protracted bankruptcy.
The Bush administration seems bent on treating taxpayer funds like Indian lands and royalties – no payments and no accounting for oil and other royalties. It will ignore the demand for them and lose the paperwork on its way out the door. Just like it does with every other problem its created (White House e-mails, anyone?). Bearish Stearns alone cost $200 billion – and that’s a drop in the bucket compared to the problem and the amounts the Fed might shell out, directly or indirectly, over the next nine or ten months. And that money is borrowed, too, like the money used to pay for the war Bush promised would pay for itself.
Until next January, the most effective thing we can do is keep up pressure on Congress and on the Dem’s presidential nominee. McCain would be an ueber-Hoover – he knows less about economics and telling the truth than George Bush. We need someone willing and able compellingly to make the case that progressive policies are all that stand in the way of the worst depression America’s middle class has seen in seventy-five years.
This was a FED decision. Nothing to do with BUSH et al.
oops, just read they actually did sign off on the deal, my bad
Correction. The $200 billion the Fed recently injected into the financial system was to prop up “the market”. It was not directly related to the Bearish Stearns bail-out; it was connected with, in effect, the exchange of USG IOU’s for bad debts held by various big lenders.
I was thinking what the Fed should have done was to tell the management at Bear Stearns – everyone who was making decisions and getting bonuses based on those heavily-leveraged investments – that they could keep a million a year of everything they’d been paid the last, say, five years, but everything over that was going into the bail-out kitty. And they were going to be permanently out of the banking/securities/financial industry after the bailout, permanently, because of what they’d done.
(That last could also apply to a lot of people at the Fed, and elsewehre in government.)
CEOs and senior management of firms generally don’t get the jobs based on their credentials, but the perception of competenence, their chums, and their alpha maleness… i can’t tell you how many idiot CEOS I’ve consulted with … they’re just good suits, good hair, and smile and the ability to know who to stab in the back
I prefer a more rational solution, like the one the Brits just used when taking over a failed bank: Top management – out; you got us into this mess. Shareholders – Nothin’; taxpayers aren’t going to insure you against standard equity risks. Taxpayer money goes, instead, to helping reorganize the critter under new management, or get someone else to buy it while providing the target temporary liquidity outside of the normal, but lengthier and more expensive, bankruptcy process.
The aim should be to help limit market excesses, including knock-on failures of other banks, and to allocate the losses most fairly, not to subsidize wealthy managers against the risks of their own screw ups. Only the community of true believers in corporatefare do that.
In four months, banks and investors will look longingly at the Bearish Stearns deal. Bail-out costs will rise, there will be fewer of them relative to those demanding them. But that won’t happen in isolation. In four years, General Motors’ will complete the disassembly of most of its US manufacturing jobs. They’ll be gone, pfft, like Delphi’s, relocated to China and Eastern Europe, with a few to Latin America. The communities that gave it tax breaks for decades will have to pick up the pieces with a few jobs at Wal-Mart.
Medical and Hi-tech jobs, you say, will replace manufacturing or financial industry jobs? Many of these will be offshore, too. Even within China, fewer and fewer are going to major centers like Beijing, Shanghai and Guangzhou. They’re going inland, to provinces where costs are still lower, but where technical universities still graduate thousands of new job applicants every year.
Mr. Bush remains upbeat – perhaps its drugs or alcohol or psychosis, perhaps he’s just high on life or because the job he hasn’t a clue how to do will “soon” be over. In any case, he insists that the US economy is vibrant. It may be, but it’s in more trouble than it’s seen for decades. Among the cause-and-effect connections Mr. Bush seems unable to see, is that when you stick your head in the sand, it leaves the back-end up in the air, the highest landmark in the middle of a thunderstorm.
I shudder at how much of our IT work is done “off-shore.”
Texas based EDS has convinced a lot of state Medicaid departments to slash their IT staffs, and let EDS do it. I would bet dollars to donuts, that work is done at EDS’ off-shore sites in India. It’s also done badly, as EDS can’t meet it’s deadlines.
Absofrigginglutely. IMHO, EDS is among the worst. It over promises, over charges and under-performs. It stovepipes its staff so that Joe and Jill haven’t a clue how to do the other’s jobs – an anti-poaching measure that cuts management depth paper thin and escalates risk. Costs to fix EDS’s staffing choices are, of course, a surcharge to the customer. Like a cost-plus government contract.
Undoing an outsourcing to EDS (and to most outsourced service providers) is like bringing up the Titanic: technically possible, wholly impractical at any reasonable cost. EDS and ACS and their competitors subcontract much of what they do. Much of what they and their subs do is offshore. A customer has few practical ways of knowing where it’s work is done or by whom, or where it’s data really is.
Private equity investors play a part in this. If a company in EDS’ business wasn’t doing significant work offshore, it wouldn’t get private equity funding. Less of a problem for an established firm like EDS, but a roadblock to an entrepreneur. It also assures that much of the innovation we count on for jobs and business is done offshore, too.
The public discussion of the impact of these changes has been spiked by this administration, its captive press, and by companies straining to stay alive and avoid the hard issues internal and external outsourcing creates. There are a lot of heads in the sand, and a lot of back ends hanging in the breeze, just waitin’ for that thunderstorm.
as EDS can’t meet its deadlines.
I really hated that about EDS, too. They always over-promised in order to win the contract, and then once in the door, nagged away for increases to the contract and missed deadlines. Grr…and then they’d move customer-facing roles overseas, making end users quite unhappy. At first I thought it was upper management’s fault; over time, it looks more like a key part of the business model.
Like a foretaste of this administration, in hindsight. Makes me miss Perot.
It is absolutely a part of their business model.
Am I correct in assuming that part of the Mittster’s role at Bain was to presume that simply because he could BUY all those companies, he/Bain knew how to run them?
Starting with layoffs?
I tell ya, Nordstrom may charge a bit more, but even the family members have to start on the shoe floor. I’m really weary of ownerships that don’t understand their own businesses.
I don’t really know. But many of the financial games played by consultants and a growing number of once traditional business (eg, Chicago Tribune) are about moving, repackaging and liquidating assets, not running a company. Many of these whiz kids consider that as old hat as a vinyl record.
Bankers, for example, used to lend money, hold the debt, and keep as profit the interest the debtor paid when paying back the loan. That’s long been superseded. Banks quickly sell off mortgages or other debt instruments, and other companies sell their receivables (what their customers owe them). These are repackaged and sold as “asset backed” securities of purportedly high quality and low risk. That’s the essence of “sub prime” crisis.
Comparing profits to a Jules Verne notion of speed, that business model is like tearing up the ship’s decks for fuel. Speed, or higher profits, comes at the cost of cannibalizing the business.
Combine that with the disposable diapers attitude of modern employment models, and the studied lack of connection between business leaders and their communities, and you have a tidal wave coming at middle class America. But hey, did you see who won Idol last night? Bread and circuses! Who cares about the Vandals and Visigoths?
there’s some great stuff @321gold. in particular,hyperinflation,stagnation or just the endof your way of life !!!
EW
I just recieved a questionare from Neilson, doing a survey of fdl. asking questions generally relating to
what I buy in retail stores vs what I buy online, plus the basic gender, age,marital stat,etc. Wierd
IMHO, I would never respond to such a survey, unless, of course, I just made stuff up. The response may appear anonymous, but anonymity can be overcome, an ominous problem given the industry that collects much disparate information, collates it and reorganizes it without restriction. There is no way for you to tell and no practical consequence for them if they don’t do what they promise.
Actually, by design.
FDL as a whole is doing them–to try to get paid more than DFHers for our ads.
Should be – the Nordstrom family does understand their business.
I’m really tired of ‘owners’ for whom businsses are mostly ‘investments’. Hard enough to keep a business going, without ownership that has its head up its arse from sheer ignorance of what you’re actually supposed to accomplish.
Mittster always struck me as one of the ‘I bought the business; now I’ll manage it’ airheads. But am I correct…?
Some companies are notable exceptions to the business model I describe and resent. I think recovering from the troubles ahead will require incentivizing them because they still want to run a business, not sell it to the first investor with cash who doesn’t look too closely at the books.
Bailing out hedge fund managers and ueber-bankers and GM/Delphi-like top managers – who have little interest beyond their own assets and bonuses – is throwing good and scarce taxpayer dollars after bad.
Ha, ‘thought I’d check the mainstream about this before going to bed. The NYT has some thing up. Interesting that the BS execs are not looking good in this:
I calculate the values now as $620,914.00 and $586,928.00. Some of the gold in them ‘chutes is looking like yellow paint!
I read somewhere today that Bearish Stearns’ CEO is looking to keep about seventy million in walk away money, and has been paid about ten million a year in bonuses each of the past several years. I guess it’s like Hollywood accounting; depending on who you work for, it’s either the most profitable film in America or it never made a dime.
http://www.reuters.com/article…..1520080317
check that out, it says they’re not walking away with much
Sorry, still trying to go to bed, I have to start a new job tomorrow.
That was the article I was quoting from. I have too many tabs open.
np, and good luck tomorrow
I was referring to the CEO’s bonuses, not senior executive golden parachutes or overall compensation. I think the Reuters article is consistent with that:
US business priorities never cease to amaze. A billion to pay for the smooth, ie, STFU, exit of senior executives, and to retain the services of the “top men…Top men” [h/t Raiders of the Lost Ark], who mismanaged the company into a fire sale half a step ahead of a forced bankruptcy. Shareholders and employees? Nada.
The other BIG benefit of a forced merger over a forced bankruptcy is that it’s relatively confidential. Other than mandatory, but largely sanitized and anonymized disclosure statements, much of the deal will remain private. There will be confidentiality obligations in all the merger documents and executive payment/severance packages, ad nauseum. An exception would involve shareholders’ litigation, which may be inevitable, but the Roberts Supreme Court has made such suits harder to win.
A bankruptcy, apart from being higher on the financial Richter scale than a forced merger, is very public. The court also has authority to approve or undo lots of contracts and payments, which might keep junior out of Princeton or require Muffy to give up the Hamptons and Upper East side and move to the Vineyard. It’s soo hard making doing with less, isn’t it?
Lead paint?
What we are currently seeing is the FED subsidizing the practice of throwing good money after bad. Noe of this addresses the fundamentals of the subprime mess or the piratical activities of hedge funds. Financial markets should not look like casinos but that is what they have become. Rational decision making and assessment of risk have been replaced by pure speculation with little or no understanding of what is being speculated on.
it’s either that or a bank run …
it still might be a bank run…
Under no regulation by Chris Cox SEC Chair for Bushco since 2005. the markets are self regulated…what ever sells sells. Creating magic paper by bundling mortgages of differing risk financed the housing industry bubble that the Bush economy has run on.
Hot potato, a kids game the last holding the potato looses. SAme principle in derivitives of bundled mortgages. Thr investment bank or Hedge fund buys it all on CREDIT. Converts it to mortgagrd backed CDO’s and makes a market throiugh the Investment banks who get interest on the loan and commissions on the trades in and out.
Problem property is over valued and goes into it’s down cycle (predictable.
The Bell curve starts all equity as prices drops so do home/property equity.
Results: if prices contunue to drop a larger percentage of the loans become unsecured, the banks and hedges have to restate their dwindling equity position and the loans are either called or a larger reserve or margin must be ponied up.
There is not enough capital to cover those calls So the FED is bailing them out. The Other markets Asia and Europe know that they have seen the runs on the banks and the doors close in France recently.
American assests are being sold off to Soveriegn Funds. Now they are close to max. American assests are liabilities and retirement funds are at grave risk.
In cities and counties all over the USA property owners are reappraising their homes to reflect the 20% reduction in value to save 20% on their property tax bills. The local governments are faced with reducing services including vital social services. Our Governor Arnold Swarzneggere has demanded a 10% cut in the government. Instead of a progressive tax on the wealthy that would easily cover the shortfall. Just sayin government contractor will be going on vacations the projects are drying up.
I agree it might be a bank run but my point is that there are ways of dealing with the current crisis. As I have said in other places, this would mean investors taking a loss but retaining some value on their superheated investments and debtors getting relief but paying a penalty for their poor choices, i.e. subprime and marginal mortgages. And above all placing severe limits on the ability of hedge funds to game the system which is what they will do if they are allowed any leeway at all.
point well taken but it’s a crisis now … if they’d have acted a few years ago and regulated the financial system like they’re supposed to, then you could hammer the bad decision makers … problem is now it’s every one’s problem
Which is why a general settlement is necessary and not a bunch of stop gap, ad hoc, piecemeal fixes which end up fixing nothing.
Well, that sounds like a rational starting point for a way to address where we are today. Not possible of course, but rational. Shared sacrifice is the only way out of the mess, but our leaders don’t do that. They have a habit of shunting the sacrifice onto the taxpayers and little people while lying to them about what they are doing and who they are protecting (i.e. themselves). I would like to filet open the entire financial sector, explain it to everyone, make everybody take the hit now, suffer the pain and reset the whole playing field intelligently. We are already in a world of hurt, lets just get it over with so that it doesn’t drag on forever, waste any more money and prolong and exacerbate the pain. Alas, this will never happen either. Problem is, the crooks that got us here in the dumper are the ones we have to rely on to get us out. Ain’t going to happen, they will put a bandaid on and continue to churn and pillage; grinning and boasting like Bush about how great we are.
Hi all. Seems The Sweetie and I picked quite a week to go on vacation — thoroughly overwhelmed and only slowly catching up.
Curious timing on the BS deal. On Friday the FISA bill finally passes the House sans the discovery prevention measures, and by Sunday the long-held-off consequences of the financial services’ over-leveraging suddenly manifest concretely, threatening (perhaps) to crash the US economy. At a minimum, extreme distraction from FISA ensues. If one wishes to follow that train of thought further, over at FDL CTuttle notes that one of the triggers for the EO on Continuity of Government is domestic economic crisis. Congress out of session, and McCain and Cheney both in the ME. Hmmm.
I am trying not to think about Naomi Klein and Naomi Wolf right now, and am watching MSNBC which has (unusually, I am informed) gone to live relay of MSNBC Asia and MSNBC Europe.
Also, try not to think about Emmanuel Todd, author of After the Empire: The Breakdown of the American Order. As a snot-nosed dual American/French (gasp!) graduate student in Demographics in Paris in the 1970s, Todd wrote a book that predicted the forthcoming demise and breakup of the Soviet Union. His professors, as well as his peers and the pundits, all sadly shook their heads about how such a promising young man had crapped in his career when it barely started. Two years ago he wrote about the US of A using the same analytical methods he’d used thirty years before and published under the title After the Empire.
Further observation: Spitzer = NY, Wall Street also = NY.
Gulf central banks urged to sever links with tumbling US dollar
Most analysts think the move not imminent, but this crash ain’t gonna help.
Gulf countries including Saudi Arabia have a lot of dollar denominated investments in aggregate well above a trillion dollars so they have an interest in not seeing the dollar collapse completely.
True. On the flip side, a severe dip in the USD would make it an exceptionally good time to make large additional dollar-denominated investments (’sovereign funds’), and at a more basic level they can’t abide unnecessary deterioration & instability in current & future oil revenues.
On the other hand, US assets may go for fire sale prices, in US Dollars.
Companies own lots of things foreigners may find interesting, from redwood groves to mountain, coastal or forested properties, to reams of intellectual property. In Europe, when you buy a business, you automatically must take all the employees or make legally mandated severance payments. Here, apart from union shops, you just tell them to go away. That’s called “freedom of contract”. (Whose “freedom” is another matter.)
…not to mention huge amount of March $25 puts [options] were taken on BearStearns before market closed Friday! ..@ from $.30 to $3.50/100 shares!
Insiders trump all; Free-market for the rest of us.
HEY! Anybody remember Boosh giving that catatonic economic speech where he told us how strong the US economy was and how his pissant stimulus was going to make what is already great even better? Hows that working out for Booshie? Doesn’t look so good. Since McCain self admits he doesn’t know anything about economics, which means he must be far worse off than Boosh, our “first MBA president”, I guess he can’t tell us more about all this. But McCain and Huckleberry Graham are rug shopping in that Baghdad market again. I wonder how many troops, Apache heliocopters and AC-130 gunship aircraft are protecting them this time?
It’s worth it, though. The price of rugs has gone down. This is nothing if not absolute idiocy. Hope there are lots of pics for Obama or Clinton to use. I can hardly wait for the general election debates.
Nice contrast:
– Wall Street and all their paid politicians including Bill Clinton whacking “welfare moms” for mooching off the taxpayer an extra $200.
vs
– Bernanke and Paulson working all weekend to bailout Bear Stearns for a cool $30 billion while Bear Stearns Chairman Cayne played bridge and just bought 2 apartments with Central Park views for over $25 million. Oh! He and other executives were paid $billions in bonuses and options over the past few years while indulging in ever more financial leverage.
Who got the real taxpayer welfare check?
Where’s Charles Ponzi when you need him?
Alighieri!
Signore Dante Alighieri! Please step to the courtesy phone at the information counter.
(Actually, the fraudulent of various kinds make up the lowest levels of Inferno.)
I’m (once again) a little confused. That $30BB — is it an actual payment that’s currectly due from the US Treasury to BearStearns or Morgan/Citi? Or is it more of a guarantee that the USG agreed to pay in the event that certain conditions (”unwinding” claims/demands?) arise? And if the BS 10k said that the total possible liabilities on these instruments actually runs to $13T, what good does the $30BB USG figure do against that?
There are two different things in play here.
1. The $14T number: When Wall Streeters enter a derivatives contract, there is always a middleman who “guarantees” it. Basically, the contracts are split in half and the middleman executes each half. This only matters if one of the parties fails to live up to their half; then the middleman is on the hook. BSC was one of the largest clearinghouses, and therefore nominally involved in $14T of trades as middleman. However, it is only the guarantor of the trades (for which it is paid a small amount.) There was no actual danger of BSC losing $14T in trades. However, if everyone started to think BSC might not be able to execute its role as middleman, they would have closed out as much of those $14T in derivatives contracts as quickly as possible. That would have crushed the financial system (not least because some positions cannot be gracefully closed out in the case of a middleman failure). It’s my take that that was the terror that led to today’s actions, and that what the Fed was really after for its $30BB was this statement released this evening from JPM: “Effective immediately, JPMorgan Chase is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations.”
2. The Fed is guaranteeing the performance of various BSC assets. I don’t know any more details than that. It is not a direct infusion–if the assets hold their value in the market, the $30BB will not get used. FWIW BSC holds $46BB of mortgage-backed securities.
3. According to their 11/07 10-K, BSC had about $395 BB of assets (about 50/50 long term and short term securities) and about $383 BB of liabilities. Assuming not too much has changed, the $30BB Fed guarantee protects JPM against losses of up to about 10% in asset value. I don’t know enough to say if 10% is a plausible loss. Obviously JPM thinks so.
Yves Smith quotes Richard Bookstaber, who’s among those who think that “tight coupling,” as he calls it, accounts for the high risk levels in the financial marketplace:
The part I emphasized describes the situation of many U.S. financial firms. They are required to maintain a certain leverage ratio, assets ÷ equity. So if asset values fall, say, the financials also take a hit to their equity by accounting rule. That could lead them to have a capital crisis, if they have to raise more capital to restore the proper leverage ratio, and also to sell assets into an already falling market. The market could go into a credit and capital crunch, as it in fact has done.
The paper “Leveraged Losses” tells a story that links a better version of the balance sheet tale I just tried to spin, to the tight coupling story to explain why losses that don’t seem that big compared to other troubles we have had are treacherouly close to out of control. The main technicalities required to read it are some understanding of balance sheets and, to ease the data analysis in the early parts of the paper, some understanding of the dynamics that are revealed in the YouTube Suzanne embedded a while ago at the top of this post at FDL. (Really. That’s not facetious. Well, maybe just a bit around the edges. But the real deal is too scary not to keep things a little loose. Really.)
Btw, the scenario Yves works out in his post could describe some of the hazards of the course we’re on, but I have a little more faith than he seems to that the folks at the Fed have already thought through more than they’ve been getting credit for. That’s not the same thing as my thinking “everything” will be A-OK, however.
I’m with you on this. This crisis was baked in over the last seven years of housing bubble and leverage–and it seems to me that Ben Bernanke knows it. I don’t think believes that what he is doing will work–he just thinks it’s the course of action with the highest probability of maybe working.
Actually to me he’s been pretty impressive, like watching someone stubbornly trying to stop a slam in bridge holding nothing but an off-suit jack. But I think he just got finessed. It happens when you’re just not holding cards equal to the task.
Derivatives the new ‘ticking bomb’
Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen
worth reading at following link
okay ..but we just witnessed a company with a supposed 335bb asset pool get purchased for a total of 30.275 bb .. not even 10 cents on the dollar
what do you think those 100t worth of “stocks” will get ya if everybody tried to sell them in the same week ??
Yeah, I’ve been trying to unravel the credit derivatives market for about a year now. It’s suddenly become a hot topic in research ciricles now, so i’m trying to hurry and get it published before the big guys chomp into it with their army of GAs.
Sorry links don’t seem to work for me
its at marketwatch.com
‘derivatives new ticking time bomb’
story dated march 10
http://www.marketwatch.com/new…..time-bomb/
last try with link
http://www.marketwatch.com/new…..B59D436%7D
Lehman is down 30% in premarket trading. Today is going to suck rocks.
To celebrate the
recessionDepression, mr. emptywheel is beginning to talk about moving home (for him) to Ireland.Happy St. Patrick’s Day, where even Ireland has a better economy than the US (though I don’t think mr. emptywheel has thought about how closely chained Ireland’s tiger is to the American trainer).
Happy St. Paddy’s Day to you and mr. emptywheel, too.
Yes, he’s not aware about Ireland’s connection to the financial industry in particular. During the fat and happy ’90’s, many companies opened financial subsidiaries in Ireland which had changed their laws to encourage foreign investment so as to become the new Bermuda. I worked extensively on setting up a captive insurance subsidiary there, in which a Fortune 100 company was going to bundle some of its financial exposures. Perhaps laws have changed since then, but they were awfully willing to take American money then, I don’t think that changed.
And then there’s the bit about Ireland being key to rendition flights…
ireland has a great economy … the rank higher than the US on just about every good measure but Size … so as along as size doesn’t matter …
Everybody’s the same size when they’re flat on their back on the floor of a pub. Imagine, Guinness and Harp less than twenty-four hours old. Almost enough to make it worth the cost of rent in Dublin. EW could give literarily guided tours to all the places Joyce never went, or write the Celtic version of Down and Out in Paris and “Dublin”.
Happy St. Patty’s Day, too. Pity the Welsh won the Six Nations tournament and that the English came in second. A move to Ireland would be expensive, especially to Dublin, but it has some of the best telecoms infrastructure on the planet. You shouldn’t have to miss a day’s blogging with the faithful. Enjoy the green beer; I hear that not all the Irish are in South Bend.