Bear Stearns Collapses

[DanS]

God, that was fast! Took less than a week.

[Lancer]

Where will it end DanS? What is the future for the US? What will remain when the dust settles?

[Theben]

It means that this thread should be closed cuz LS started one about it 2 days ago (under a stupid thread title).

[Lancer]

Soooo, can I post a pic in this thread and kill it for sure?

[Theben]

[Lancer]

A Sunday at the beach with less booze than yesterday. Most of us are still recovering from Saturday at the beach with Zkribbler...who ought to be getting home about now. I wonder what he thinks of Beer Steins? (Trying to make the post relate to the thread)

Rigo got a hair cut.

[One_more_turn]

How to Make Money in a Recession... (If You Are a Big Banker).

So you've just taken over as CEO of SuperMegaMonster Bank. Your predecessor skated off into retirement with a $200 million golden parachute, leaving you to manage $200 billion in bad loans and assorted toxic waste just as the economy is plunging into recession. What are you going to do?

Step 1: Write-Offs
Take huge one-time hits to your earnings and balance sheet and blame it all on the last guy. You'll be able to show a profit sooner if you don't have all these losses trickling in over time. When you do start claiming positive earnings again you'll get all the credit and big bonuses too.

Step 2: Offload Risk
Shift ownership of as much of your toxic waste as possible to the government and retail investors. Scare the crap out of government leaders and the Fed by telling them our entire economic system will come unraveled if they don't save the big banks. They'll enact a wide range of idiotic policies designed to bail you out of the mess your firm created and profited from in the first place. Public pension plans can be suckered into any investment so load them up with the worst of the worst.

Step 3: Credit Crunch
Call in loans to hedge funds, mortgage REITs and other investment schemes. They've served their boom cycle purpose and now they are expendable. Use the money that comes flowing back in to your coffers to purchase the securities that they are forced to unload at a steep discount. The Fed will loan you extra money at ultra cheap rates with your existing securities as collateral so that you can leverage up on even more cheap investments. Don't buy the hopeless stuff, just buy the higher quality stuff that will survive the recession or senior debt that will survive the bankruptcy process.

Step 4: Ride the Carry Trade
With short term rates low and yields high you can play the carry trade for maximum profit. Panicked investors will put their money in low yielding savings accounts and money market accounts and you can invest this in the long-term, high yielding stuff you soaked up in the credit crunch. As short term rates continue to fall, the spread widens and your profit margin increases.

Step 5: Kill Off Struggling Entities
Identify any exposure you have to companies or municipalities that are likely to become insolvent in a recession. Make sure you sell off any equities or long term debt you hold first. Then pull their short term funding to force them into bankruptcy. Layoffs and general panic will help you pick up more securities on the cheap.

Step 6: Eliminate the Competition
Take advantage of the struggling economy to wipe out any competition that grew too quickly in the last boom cycle. Sub-prime lenders? Savings and Loans? Small, local banks? REITs? Fannie Mae? Kill all you can while you can, as you don't want them to compete with you for banking business in the next boom cycle or investing opportunities late in the bust cycle.

Step 7: Debase the Currency
Lobby the Fed for low rates and the Federal Government for deficit spending. Remember that you are now a carry trader, rather than an creditor. It doesn't hurt you if debtors pay you back in a debased currency because you get to pay back depositors in a debased currency as well. To the extent that you have equities, real estate and other hard assets on your books offset by short term debt, inflation actually works in your favor. Paper gains on these assets will help your case with the compensation committee around bonus time.


Reality
No doubt, the big banks are in a very precarious situation right now, but they have their tentacles wrapped around Washington and the Federal Reserve System. There is a clear path to banking profitability and it will come almost entirely at our expense as citizens, investors and taxpayers. All of these steps overlap in the timing of their effectiveness, and I expect we'll see most of the same themes continuing to pop up over the next couple of years as the recession deepens. So far we've seen:

1. A huge "stimulus" package that will help some distressed borrowers make some more mortgage payments. (Step 2)
2. A big increase in FHA, FHLB, Fannie Mae and Freddie Mac backed loans and securities to take up some of the load off of Wall Street with regards to the mortgage mess. (Step 2)
3. The invention of "Term Auction Credit" as a way of helping big banks sustain or increase their investment portfolios. (Step 3)
4. Falling short term rates to lower the borrowing costs for big banks. (Step 4)
5. Widening spreads to increase the profitability of banks that purchase new assets. (Step 4)
6. A large credit crunch that is forcing hedge funds and other investment vehicles to sell into a difficult market, with investors taking the losses. Carlyle Capital was the first to go, Annaly Mortgage might be next. (Step 3)
7. Continuing rapid growth of the money supply. (Step 7)
8. Struggling municipalities. (Step 5)
9. Rising inflation. (Step 7)
10. A declining dollar. (Step 7)
11. A variety of measures designed to help forestall foreclosures and let banks fudge their accounting for bad loans. (Step 2)
12. The VISA IPO. (Step 2)
13. Big banks helping Thornburg Mortgage raise $230 million in stock offerings in January, only to give them big margin calls in March. (Step 5)
14. The collapse of hundreds of smaller banks and lenders. (Step 6)
15. The abandonment of the Auction Rate Securities market. (Step 3)
16. Seizing control of hedge funds to liquidate their assets. (Step 3)
17. Run on Bear Stearn, the weakest of WS banks and the only renegade from 1998 LTCM episode. Throughout this crisis, Goldman Sachs and Merrill Lynch refused to act as counter-parties to Bear. JP Morgan Chase will get Bear Stearn's assets on the cheap. (Step 5, 6)

Eventually the economy will hit bottom and the banks can go back to their even more profitable boom cycle business plan, where they make money by extending credit to anyone who wants to take risks and can make the payments in an expanding economy. It might take awhile for the dust to settle this time though, because the big banks sure managed to mess the economy up badly this time.

[DanS]

Originally posted by Lancer
Where will it end DanS? What is the future for the US? What will remain when the dust settles?

Oh, God. As if a couple of Wall Street firms crashing causes some existential issues.

[Lancer]

So you guys are hopeful!

I have no clue, so this is good.

[Aeson]

Playing Bridge while Bear Burned:

http://www.bloomberg.com/apps/news?p...lvg&refer=news

Bear Stearns's Cayne Was Playing Bridge, WSJ Says (Update1)

By Nicholas Larkin

March 15 (Bloomberg) -- Bear Stearns Cos. Chairman James ``Jimmy'' Cayne was playing in the North American Bridge Championship in Detroit over the past two days, the Wall Street Journal reported.

Cayne and a partner were placed fourth in a pair's event on March 13, the newspaper reported yesterday, citing the American Contract Bridge League's Web site.

The event took place while Bear Stearns Chief Executive Officer Alan Schwartz held a series of conference calls with company directors to discuss a cash pledge from the Federal Reserve and JPMorgan Chase & Co., the Journal said, citing unnamed ``insiders'' and people familiar with the matter. Cayne participated in at least some of the discussions, the newspaper said.

Cayne was playing the game yesterday as the investment bank's shares plunged, according to an unnamed attendee, the Journal reported, adding that Cayne declined a request to comment.

Cayne and partner Alfredo Versace finished fourth in a pair's event on March 13 with a score of 21.94, according to the league's Web site. The pair dropped to 26th place yesterday, scoring 42.87, the Web site showed.

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

(Probably nothing he could have done anyways, but it's still funny.)

[DanS]

[MarkG]

Cayne and partner Alfredo Versace finished fourth in a pair's event on March 13 with a score of 21.94, according to the league's Web site. The pair dropped to 26th place yesterday, scoring 42.87, the Web site showed.

from fourth to 26th? see? he was thinking about the bank all the time and the poor chap didnt do well in his tournament....

[Aeson]

It could also be he had been offering stock options as bribes to competitors to throw matches...

[Dinner]

Just yesterday BBC had an article saying BS was in trouble but they might get a government bail out.

[Aeson]

The bailout seems more for JPM's good, BSC is done. The FED is taking all the risk and JPM gets anything of value. Ur tax $ at wrk

[Dinner]

It's sad to see a big name go especially since the company (or at least parts of it) has been around for so long. A lot of these companies take a century to build and one bad CEO to destroy.

[One_more_turn]

OMG! JPM bought Bear Stearn for $2 a share, and with Fed support! How fvcked up is Bear's balance sheet then?

For shareholders, it's the same as bankruptcy!

http://biz.yahoo.com/ap/080316/jpmor...r_stearns.html

[Aeson]

So... $40 to $2 in the 3 days after the CEO had gone on TV and said everything was fine. If I was a shareholder...

[Dinner]

The CEOs and Politicians always go on the air and tell the peasants everything is fine while Rome burns nothing new about that. Not that it is good or acceptable but in the end nothing will really happen to the people who do that so nothing will change.

[Darius871]

Originally posted by Aeson
So... $40 to $2 in the 3 days after the CEO had gone on TV and said everything was fine. If I was a shareholder...

http://www.youtube.com/watch?v=zIllRdSzSug

[One_more_turn]

A bank boss can never publicly state that his company is in liquidity crisis, because the slightest hint will cause immediate bank runs. Every bank, regardless how well managed, will collapse if faced with enough runs. Bank is all about confidence, and its executives must exhibit confidence at all time in the public until after the fact.

[Aeson]

Originally posted by One_more_turn
A bank boss can never publicly state that his company is in liquidity crisis, because the slightest hint will cause immediate bank runs. Every bank, regardless how well managed, will collapse if faced with enough runs. Bank is all about confidence, and its executives must exhibit confidence at all time in the public until after the fact.

We know this.

We also know that anyone with nearly instantaneous 95% depreciation on their stock will still be angry as hell.

[Darius871]

Originally posted by Aeson


We know this.

We also know that anyone with nearly instantaneous 95% depreciation on their stock will still be angry as hell.

I'm sure at least two dozen starving attorneys have already printed and mailed out feeler letters to hook some people into a class action for that very reason.

[Colon™]

That may be probable but it's also deranged. To demand that banker does not exhume confidence at all times is guaranteed to hurt stock prices far worse.

[Lancer]

Like a real estate agent. They might not have sold a property in 5 years but everything is always "great, very busy".

[Darius871]

Originally posted by Colon™
That may be probable but it's also deranged. To demand that banker does not exhume confidence at all times is guaranteed to hurt stock prices far worse.

Oh of course, but it won't stop a half-dozen or so ignorant retirees from signing on so there's enough named plaintiffs to certify the class. Then you get a nice motion to dismiss and they're stuck with the bill. Good times.

[Colon™]

JPMorgan Chase Buys Bear Stearns for $270 Million (Update1)

By Yalman Onaran

March 16 (Bloomberg) -- JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for about $270 million after a run on the company ended 85 years of independence for Wall Street's fifth- largest securities firm and prompted a bailout by the Federal Reserve.

The deal values New York-based Bear Stearns, with 14,000 employees, at $2 a share, compared with $30 at the close on March 14. The central bank will provide financing for the transaction, including support for as much as $30 billion of Bear Stearns's ``less-liquid assets,'' the two companies said in a statement today.

JPMorgan Chief Executive Officer Jamie Dimon had the upper hand in negotiations after coming to the smaller firm's rescue last week with a cash infusion engineered by the Federal Reserve Bank of New York. Bear Stearns's CEO, Alan Schwartz, faced the prospect of bankruptcy as clients pulled $17 billion in two days last week and creditors stopped renewing loans.

``JPMorgan Chase stands behind Bear Stearns,'' Dimon said in the statement. ``Bear Stearns's clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns's counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner.''

Bear Stearns's sale to JPMorgan caps an eight-month slide in the company's fortunes that began last July with the collapse of two of its hedge funds. Those failures sparked a wider market concern that called into doubt the value of any asset linked to the mortgage market, Bear Stearns's biggest business.

...

http://bloomberg.com/apps/news?pid=2...Anw&refer=home

[DanS]

JHC... The WSJ was talking $20 per share just this afternoon...

Wow, they didn't mess around.

[LotC]

Now I'm no expert in Wall Street takeovers, but I imagine the conversation went something like this:

JPM: Who's your daddy? Who's your daddy you dirty little b***h?

BS: You're my daddy JP...

JPM: Who's the dirty little whore? Who's the worthless little b***h?

BS: I am, daddy.

JPM: $2 a share?

BS: Deal.

[Colon™]

Yeh...

Bear Stearns's profit exceeded $2 billion in 2006, yet the price JPMorgan is paying is about one quarter the value of the securities firm's headquarters building in midtown Manhattan. The 1.2 million-square-foot, 45-story structure built in 2001 is worth about $1.2 billion, based on the average $1,000 per- square-foot that comparable office space in the city is currently fetching.

The bright side is that we can be somewhat assured JPM's financial credibility won't get hurt.