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<center><img src="http://chart.finance.yahoo.com/c/6m/b/bsc"></center>
<h3>JPMorgan Buys Bear Stearns for $2 a Share After Clients Flee</h3>

Investment bank and brokerage Bear Stearn's stock price dropped in half on friday, closing at $39, just days after Bear CEO Alan Schwarz appeared on CNBC to vouch for Bear's liquidity and financial soundness.

I predicted, more than a year ago, on the "1992 Redux" thread, that poor economic conditions would be the main influence on voters in Nov., 2008.
Now, more than ever, I believe that this is true, and I believe economic conditions in the US are on shakier ground than they were even in July, 1932.

This is a liquidity crisis that will trigger a giant asset liquidation sale across the US and the rest of the world, and the proceeds of the sales will rush into US Treasury's T-Bills, preceived as a safe and stable parking lot for dwindling cash assets. The rush to buy T-Bills drives up the price, and the 12 surviving
"primary dealers", post Bear's collapse, are said to have borrowed and sold $1 trillion worth of T-Bills:
This thread will exhibit the denial of the deep economic decline that is coming.....denial still pervasive at present.

Lebell

Hi Host!

Went to the Lawn and Garden show today after singing at church this morning. Hit the gym this pm and now some friends are over. Went to a great production of 12 Angry Men last night too.

What did you do this weekend?

(Oh, nice thread!)

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"Of all tyrannies, a tyranny exercised for the good of its victims may be the most oppressive. It may be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end, for they do so with the approval of their own conscience." – C. S. Lewis

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host

I'm a trader in securities operating as a sole proprietor, under US Tax code provision <a href="http://www.traderstatus.com/mark2mkt.htm">475(f)</a>and I took time out from planning my stock and options trades for tomorrow to author this thread.

My specialty is short selling and lately it's been my kind of market.

DO you understand that the Fed thinks the retail investor is stupid enough not to perceive that Bear Stearns is bankrupted, as long the Fed was able to impose a $2 per share "buy out" of Bear by JP Morgan Chase?

Bear Stearns experienced a "run" on it's customers accounts, last week. It happened at a level of sophistication where there were no opportunities for TV cameras to video the customers lined up outside Bear Stearns HQ to make withdrawals, as we saw at Countrywide bank last year. Countrywide Bank is also one of the Fed's dwindling number of primary dealers. What kind of financial shape do you suspect that it is in?

The run on Bear was accomplished with outgoing wire transfer requests.

This is now a desperate battle to shore up "investor confidence". The goal was to force Bear to opt for the $2.00 offer before the markets open in Asia tonight. There isn't much difference between $2.00 and bankruptcy, and bankruptcy would have delayed the layoffs of many of Bear's !4,000 employees and probably been more favorable, under a non-intervention scenario, to the top executives at Bear, than this deal is going to work out to be.

The Fed does not want Bear's assets liquidated and it does not want details of Bear's financial state filed in a public bankruptcy court proceeding. The details get buried in the combined JP Morgan Bear merged "entity".

So now we watch to see if the public hold their stocks or cough them up.

The Fed will claim everything is A-OK even when the DOW 30 index drops another 5000 points. It's down just 3000 points since last September.

Either way, the public will bear the costs of the serial string of Fed "bailouts" that will be coming along soon, as well as the lost stock portfolio and home valuation that is also going to come down hard on the upper middle class.

I think you are off topic, Lebell, and that you have been off topic in almost all of your posts on this forum since your return.

Tully Mars

What's your take on the feds dropping the rate another quarter and how do you see that affecting the dollar?

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Lebell

Naw, just yours

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"Of all tyrannies, a tyranny exercised for the good of its victims may be the most oppressive. It may be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end, for they do so with the approval of their own conscience." – C. S. Lewis

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james t kirk

In all seriousness, this is amazing bad news.

It affects everyone who has any sort of investment holdings - Stocks, mutual funds, retirement savings. Tomorrow the panic is going to be be unlike anything seen since 1929.

None of us here were around in 1929 when there was a run on the banks. I only pray that this time it is different. At least the Federal Reserve is trying to do something, anything.

This is getting rather frightening.

Tully Mars

Last I looked the Nikkei was down over 4% for Monday the 16th and the dollar was at a 12 year low against the Yen.

Nothing to see here folks, move along, all is well.

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RenaissanceII

I clearly recall a conversation that I had with my dad one afternoon a few years ago (he grew up during the Great Depression). He made the point that everybody, more or less was in the same boat (I am not sure the same could be said today). I opined to him that perhaps another depression was in order, dad said "God, I hope not."

Your Paul Harvey "Rest of the story" moment?
This conversation occurred on the afternoon of September 10, 2001.

/We also spoke about WWII basically ending the depression

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I Wish You Well.

host

The Fed can do nothing to improve inter-party perception of solvency....the banks will be even more reluctant to make "overnight" loans to each other. The rate for that type of transaction is the only rate that the Fed thinks it is in control of.

The Fed is trying to give the impression that it has things under control. The perception is that the Fed is exhibiting a panicky reaction contradicting the impression that it has things under control.

The Fed cannot improve the credit worthiness of primary dealers, and it cannot spur demand in the economy that isn't there.

Each Fed rate cut, and another full point cut on tuesday would not be a big surprise, lessens incentive to own dollars in anticipation of superior return over holding other currencies or precious metals.

Short term, paper assets besides T-Bills will be sold, T-Bills and precious metals will be bought. Soon, everything will be sold to meet margin calls on poorly performing paper assets, so even precious metals, stocks of companies that mine them, and petroleum and oil service company stocks will all be sold.

Within a year, the dollar will buy more, as the prices of everything else, including oil, gold, stocks, and real estate fall to a lack of demand.

The first phase seems likely to be an inflationary recession, deteriorating into a severe stagflationary recession, eroding further into a deflationary depression.

No matter how the Fed postures, it is trying to encourage inflation in reaction to massive systemic debt and discourage the deflation trend that collapsing demand predictably triggers. When demand is sharply reduced, sellers become more willing to sell at any price.

All exporting nations will attempt to reduce the valuatiions of their currency, a competititon in which the US has an enormous head start.

The Fed is also trying to persuade asset holders not to sell. Now seems to be the best time to sell everything. The "obvious" move on friday was to buy Bear Stearns near the close, at it's new low price of $30, and sell march call options, which expire at the end of the coming week, for at least $600 each.

Those who did that trade ended up paying $24 net for each share of Bear, and they lost $22 per share today.

The likely scenario tomorrow in the US market is a lower opening, morning trading down, and a tradeable bounce up before the close. That seems less obvious than a lower open and down, down into the close, especially with the expectation of a 3/4 pt. or more Fed rate cut announcement coming the next day.

None of the Fed rate cuts so far have done much but pressure the dollar's exchange rate down. This isn't about interest rates, it's about deteriorating credit quality. All of this will trigger rising unemployment. Then the downturn in housing valuation will begin to be driven by fundamentals other than the mislabeled "subprime loan" crisis.

Before tomorrow, stocks like KBH and CTX were still in the 20's, good stocks to buy put options on, or to shortsell to attempt to neutralize the risk of dropping valuation of your own homes.... Before this is all over, I doubt that CTX will avoid BK....too much debt.

james t kirk

Sounds like the proverbial race to the bottom.

I've never seen anything like this.

host

Nothing is going to stop the domino effect.....here is a taste:

Emory Univ. officials are puzzled.....

Baraka_Guru

* * * * *

Looks like we're going to have to ride this one out.

It's global.

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james t kirk

While I would agree that it is affecting the globe, it is a Made in America problem.

The whold sub prime mortgage fiasco was born and raised in the USA.

Things were too quiet in the mortgage industry. There was no large growth, no big action, no excitement.

How do you create growth in a fully mature industry?

Well, you make lots of loans to people who really can't afford to have a mortgage. Suddenly, you are issuing lots of mortgages and growth is up. Way up.

Then you sell the debt and you walk away with shit loads of money and make the debt someone else's problem.

Who's problem you ask.

Well, obviously Bear Stearns for one. They bought up shit loads of debt without doing their due diligence. So much for all those MBA's now.

You don't hear of such bullshit here in Canada, or in Europe. Our banking system is much more regulated and they don't run around throwing money at people who have no way of repaying it.

Canada does not have a sub prime mortgage problem, but we're going to feel the impacts of the one that's happening down south.

n0nsensical

Apparently, he actually contributed to the Politics forum

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host

Considering the opening of the Bloomberg article in the OP..... The Fed actually bought all of the potential Bear Stearns downside risk, while JP Morgan Chase reaps the reward from any actual upside...

So how many of these Fed enigineered "deals" can "we the people" potentially absorb, while we suffer the accelerating affects of the broader economic "downturn"?

n0nsensical

Happens every time, doesn't it? When the profits are rolling in, it's all rah rah rah, free markets, goooo capitalism. Then the bust comes and everybody's caught with their pants down. Don't ask about those millions dollar bonuses paid out to the bankers and executives, somehow Wall Street has no money and that leaves the taxpayers to bail out the system or watch the whole economy implode. I'd say they don't really have much choice. Private profits, socialized losses. Corporate welfare. The whole story. Judging from their actions over the past 8 years, I'd say the people don't mind blowing money, but maybe there's a breaking point out there somewhere with the economy in the dumps. All I will say then is, don't say we didn't have it coming.

__________________
"Prohibition will work great injury to the cause of temperance. It is a species of intemperance within itself, for it goes beyond the bounds of reason in that it attempts to control a man's appetite by legislation, and makes a crime out of things that are not crimes. A Prohibition law strikes a blow at the very principles upon which our government was founded." --Abraham Lincoln

james t kirk

Very well put....

Lebell

Indeed, ad nauseum

__________________
"Of all tyrannies, a tyranny exercised for the good of its victims may be the most oppressive. It may be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end, for they do so with the approval of their own conscience." – C. S. Lewis

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Yakk

I've been expecting at least a few firms to die from over purchase of bad mortgage-backed securities.

Bear Sterns in particular wasn't an apparently healthy company.

Note that it is in the financial interest of someone in a bear market position to encourage the perception of a bear market.

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tisonlyi

"Private profits, socialized losses."

It's called externalization and is standard capitalist practise.

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abaya

The Icelandic kronur was 65 to the dollar when we got here last year, and went down as low as 58 to the dollar in the last 6 months. On Friday, it was up to 70 to the dollar, and I cashed some American checks, pretty happy with myself... figured it would drop back down soon enough, given the relative instability of this country's currency.

Today, it's up to 75 and doesn't appear to be stopping anytime soon.

I don't know all of what's going on Stateside, but the fact that the little Icelandic kronur has dropped over 5% in value overnight does make me more than a little concerned. I know it's been the same in several markets, but the changes have been more around 3-4%. It's definitely global.

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Tully Mars

That's interesting. In Iceland it's up to 75? I'm showing it at 61 and some change.

http://www.x-rates.com/d/ISK/USD/graph120.html

I'm in no way questioning what you're seeing, I just think it's odd the difference would be so great.

I think the TSX took a much larger hit today then the Dow. Hell, the last I looked the Dow was up a little.

The world has been dollar based for a long time. Now many places that used to prefer payment in US dollars are quickly shifting to the Euro. I know down here south of the border store fronts that used to advertise they accept US dollars are quickly taking down those signs. I'm on the gulf coast but I know over on the Mayan coast, Cancun et el, the signs of "Euros accepted" are replacing "Dollars accepted."

As the dollar drops it's likely to help some in the short term but be harmful to most in the long run, IMO.

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abaya

Weird. I'm getting my quotes from my personal bank in Iceland (live rates), the largest daily newspaper in Iceland (this afternoon), and this general currency-exchange website confirms it: http://www.xe.com/ucc/ ... so yeah, I'm not exactly sure what that x-rates website is, but it confuses me.

I was clicking through some other currency charts on that website (e.g. the Slovenian one), and it came up with the same huge dip as the kronur... seems like there's some missing data here, for some countries:
http://www.x-rates.com/d/SIT/USD/graph120.html

__________________
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for Love, if it finds you worthy, directs your course.
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host

If you're talking about me, Yakk.... three things for you to take however you like.

I held no positions in ANY stocks or other securities between 4:00 pm lastfriday and 8:00 am this morning, when the am pre-market trading session opened.

I started the "1992 Redux?" thread on US economic conditions on MArch 3, 2007. I've made some pretty accurate observations and predictions, in the OP on that thread, and since.

Does this look "normal" to you? It is the Wall Street firm, Lehman Bros. price chart covering today's regular trading session, since 9:30 am. This isn't an "internet stock", it is a "white shoes" blue blood investment bank and brokerage, and there seems to be disagreement on it's stock's valuation:

<img src="http://ichart.finance.yahoo.com/b?s=LEH">

ktspktsp

For whatever reason, those numbers end in 2005, as you can see from this page:
http://www.x-rates.com/d/ISK/USD/data120.html

Tully Mars

I'm confused too. As you may know I live in Mexico. I use x-rates to track dollar- pesos rates. I checked out your site and get the same amount for pesos that I get on x-rates. Why the Kronur is listed so different on the two sites is puzzling.

Maybe I better start using your site, might be more accurate. I'd hate to base my decisions on poor data, esp. decisions on money.


I didn't even notice that, just looked at the latest rate they're showing.

That settles that, no more x-rates for me.

Thanks for the info.

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abaya

Yeah, I've never heard of x-rates before, but given the way they present their data (without a year!), I wouldn't trust them. I've used xe.com for all my cross-currency calculations for a long time, haven't had a problem yet.

In any case, the kronur is indeed falling! (Which is a big deal, here.)

__________________
And think not you can direct the course of Love;
for Love, if it finds you worthy, directs your course.
--Khalil Gibran

Tully Mars

Thanks for the heads up.

I take it you're paid in Kronurs and not dollars?

I'm paid in dollars so when the local currency drops in comparison I benefit, IE my dollar buys more pesos. Lately it's been pretty steady at 10.75 to 10.80. I find if I use my ATM card to withdraw funds I get a better rate, sometimes as high as 11.00. Why? I have no idea.

Lately I've moved most of my investments into Euros, GBP and gold and silver etc... As the dollar drops I've got a little shield.

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abaya

Well, for the last year I've been paid in dollars, so this is a good thing for me. However, I'm a grad student and my income doesn't amount to much anyway, I'm about to switch to kronur on the next paycheck, and my husband (ktspktsp) has been on kronur for the last year as well (he has the more significant income), so for us collectively... yeah, it's not a good thing.

If this pattern continues, we'll need to leave any money that we earned here, in the Icelandic banks for future use when we visit... and not change it to other currency, because it just won't be worth it. Which is kind of unfortunate, since we've saved a decent amount here. Damn Iceland, not being part of the EU! (Though they have their reasons, namely fishing rights.)

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And think not you can direct the course of Love;
for Love, if it finds you worthy, directs your course.
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Jinn

I got click-happy and selected the first option, so ignore the "No, It's an isolated incident, the economy is sound, just slowing" selection - I really don't have a fucking clue what this thread is about, so I was otherwise ignoring it and accidentally selected an option.

What's with all the charts?

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abaya

You really haven't heard about this Bear Stearns thing at all today?... it's all over the BBC news here in Iceland, which is pretty rare for American news (the last time I remember them covering so much American stuff was on 9/11, if that gives you some idea of the impact).

__________________
And think not you can direct the course of Love;
for Love, if it finds you worthy, directs your course.
--Khalil Gibran

Jinn

I have, but I don't know who tf Bear Stearns is or why I should care. Could be because my 401k consists of my 2.5% interest savings account, since I'm too lazy to set it up..?

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"I'm typing on a computer of science, which is being sent by science wires to a little science server where you can access it. I'm not typing on a computer of philosophy or religion or whatever other thing you think can be used to understand the universe because they're a poor substitute in the role of understanding the universe which exists independent from ourselves." - Willravel

abaya

Well, it's not really about Bear Stearns, but it's about the US economy and subsequently the world economy. It's too early to say if this is going to be more than a major recession (e.g. if it will become a Depression, as in the Great Depression in the 1930s), but let's just say that I'm expecting anything at this point. I don't think we've hit the lowest lows yet... but it does feel like one hell of a Black Monday, worldwide.

__________________
And think not you can direct the course of Love;
for Love, if it finds you worthy, directs your course.
--Khalil Gibran

Cynthetiq

Those Cod Wars with the UK probably are a good reason why Iceland is in as good a shape as it is.

Anyways, we too have monies in Icelandic banks for when friends make purchases that we bring for them. Before we used to collect monies and have them wire it to our account at Islandbanki (now Glitner, Skogafoss loathes the new name), now we ask for them to pay us back in dollars.

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loquitur

I guess the choices are incomplete because they assume static state - i.e. that people won't do things in response that will minimize or blunt the impact.

I don't even have enough of a sense of whether counterparty trading risk was enough at issue to be a threat to liquidity of the market as a result of the Bear situation, which means I don't know whether we might not have been better off just letting the outfit fail rather than have the govt bail it out. Sometimes we're better off just letting a company fail and letting the market find its own floor, rather than propping things up artificially. I have no clue whether this is or isn't one of those instances.

Also, is this causing or the result of contractionary pressures in the economy? Dunno....... I'm not wired enough to know. But I bet the dollar takes a further hit.

Seaver

Not to derail, but I thought you were a waiter?

Anyways all of this boils down to one thing. Investments are a gamble. When you invest in PEOPLE, it's a bigger one. When people buy things they can't afford, gambling on the future, they can not complain about losing on the gamble.

Unfortunately, this worked for over 20 years and it became a certainty. People continued to buy McMansions, or houses that were more than their total gross income for 8+ years on 15 year mortgages.

So now those pushy mortgage brokers who made their bonuses by pushing these risky investments, the shortsighted managers who pushed the brokers to continue it, and the bug-eyed purchasers are paying the price.

Will this be '29? I SERIOUSLY doubt it. Will this, along with the oil prices, cause '70s stagflation and short-term recession? I am gambling on it. Honestly, 10% of my income is buying up stocks to get them cheap and reap the benefits later.

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roachboy

it's quite odd, what is going on. i've been getting curious about how this mess is being seen outside the states, what it's being linked to, how it's being interpreted. for the moment, i'll put up stuff as i find it in english...working my way along....feel free to comment (not entirely sure if this is a threadjack or not--i just don't think there's a wide enough angle on this so far..)

http://www.ft.com/cms/s/0/8ad0ca52-f...0779fd2ac.html

alan greenspan is quoted as estimating this will "probably turn out to be the most serious crisis since world war 2..." see this article from le monde (in french):
http://www.lemonde.fr/economie/artic...#ens_id=951246

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Tully Mars

No I'm the waiter. I'm waiting on her, when I meet her... I'll know her.

Roger that. People (and in this case an entire national budget) can not survive on borrowing money endlessly. Least not for long, the Visa bill come due at some point then we're screwed.


Close, but the way I see it the pushy brokers sold those risky notes to large finance houses. It's those institutions that are now failing. The Fed is stepping in and bailing them out. So in affect the US taxers are the ones now paying. That makes you and I the losers


I think you might be right. I hope you're right. But doing anything other then shorting stocks right now takes the balls of giant.

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host

Interesting....roachboy. I don't know if these two foreign sourced articles I came across earlier today are simply based on newer information than the article featured in your post, or not, but they tend to contradict or to mitigate some of the points in your ft.com article.

The point I highlighted in the second piece below, fits with my prediction in an earlier post on this thread that the real danger we face is the one the Fed has long feigned a lack of concern about; the coming damage to debtors that deflation will bring. <h3>The Fed could have left short term interest rates near their 6 percent level in January, 2001.</h3> But nooooooo..... the perception then was that the Fed could turn the stock market decline "around", avoiding or lessening the effects of the perceived economic slowdown in the US.

Gold was $250ish an oz, silver was under $4.00, oil was $30 bbl and the average national home price was about $140,000. The Fed proceeded to lower short term interest rates down to one percent, federal annual borrowing just $18 billion in fiscal year ended 9/30/00, roared up to <a href="http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm">$421 billion</a> on the yeare ended exactly two years later.

The Bush presidency, within it's first four months distributed a $70 billion "stimulus" package of tax rebates, just as it is about to do in the next six weeks. Added to all of that new stimulus to the economy was relaxation of lending qualification regulations and new lax mortgage loan terms.

The Bush administration tax cuts, touted as THE REASON for economic growth that followed, was actually just icing on the new liquidity wave "cake".

Home prices, oil, gold, were all driven up massively in price. Serial refinancing by homeowners mining rising home valuation, made it easy to run up credit card balances, buy a new RV every two years or a scond home, and roll it all over with a "cashout refi", resulting in a new higher mortgage balance, after each refi.

By 2005, the rise in home prices influenced the "fortunate" homeowners who found new wealth in their home refi application appraisal process, resulted in $800 billion in MEW (mortgage equity extraction) in just one year.

Of course, this economic miracle was all attributed by the presdient and his party to the effects of his "tax cuts"....arguing that they were so successful that they should be made "permanent".

The increased federal borrowing initially triggered by the president's spring 2001 tax rebate program, resulted in $3.8 trillion in additional federal debt since 2001. The national debt was totalled $5.65 trillion in fall, 2000, and the total debt today is $9.4 trillion.
http://www.treasurydirect.gov/NP/BPD...application=np

During the Clinton admin., yielding to the lobbying of the finance and banking interests, congress repealed the post depression formulated consumer protection of the <a href="http://en.wikipedia.org/wiki/Glass-Steagall_Act">Glass Steagall Act</a>, and Clinton signed the repeal legislation. The Act had prohibited banks and brokerages from direct ownership affiliation.

I described this Fed "relaxation" of the rules, in a post 3 moinths ago:
Now the people who rented during the "roaring Bush era" and those who did not do "cash out refis", or "trade ups" to bigger and better homes, will be saddled with the new rise in national debt coming from this mess. They are the actual victims of the mass "leave taking" from a sane sense of
economics.

The rising tide was only a pyramid scheme, and when the "new blood", non english speaking cleaning ladies qualified for $500k subprime loans for the purchase of one bathroom 1920's bungalows in "Cali", ran out because loan approval became less likely, America stated slipping towards the economic depression that will be at least the size and scope of the excess that it will be the consequence of.