Bear Stearns feels the bear, when in doubt 'bailout'

bear stearns bought by JP Morgan ChaseBear Stearns is toast. They have gotten money from the Fed (via) also JP Morgan Chase (who took them over), sorry, I meant ‘bailed them out‘ Bear Stearns became the financial equivalent of a drunken brother who was a hit and run driver, they fled the scene of their mortgage write downs and now JP is going to have to save their neck. Lehman Brothers is potentially facing the same issue.

If Lehman brothers are not in trouble then why do they need the 2bn dollar credit line? There is a credit crisis, but I think some of the firms out there are now facing a credibility crisis. The Lehman stock fell 40% in the last year.
The underlying issue is property and leverage, there is a worldwide fall off in property prices, the problem is the leverage used to purchase those properties. Debt works both ways, when you leverage you can make a lot of money fast on the strength of that leverage, but if the assets backing the leverage fall in value then you can lose big time as well, in essence you ‘leverage’ your loss, or accelerate it versus the actual money you put into the deal. CDO’s, SIV’s etc. have been the vehicles that allowed this to happen but they were not the root cause, the root cause was and is property and leverage .

talk our way into a recession, but don't worryIt has spread like a virus, mortgage lenders were the hit first, then it spread over to commercial banks, then it went to the insurance companies (look at AIG last week) then it finally hit the investments banks who hit their clients in turn. So if you are the manager of a big fund imagine how nervous you must feel today! We were told this was contained, but it simply wasn’t and hasn’t been contained, the asset bubble is behind everything and that asset bubble was property. It doesn’t mean that people in the property business were out there plotting or trying to do wrong it’s just that this current market recession is property based. Every time there is a recession some sector gets the blame, in the 80’s it was housing/banking/pharma, then there was the S & L’s, the dotcom and now the ‘sup-prime’.

People look at the 1980’s and the recession at the start of it which was to a large degree brought about because of Fed moves to control inflation and they think that this needs to be avoided at any cost, but inflation has it’s causes and you can’t simply ‘buy them’ out of existence, in fact the current fiscal policy is ensuring even greater inflation, instead of berating Volker the Fed should be mirroring him and the Government, if they want to put their nose into things should move towards creating manufacturing commodity producing jobs.

Bailouts are what will come next, but its a mistake. Home owners in the USA are getting government help as are the banks, I hope this doesn’t happen in Europe because if we go the ‘bailout’ route then we are just rewarding them (the institutions) for reckless behavior, there is no lesson in that, and in America the money for bailouts has to come from somewhere, it will come from US taxpayer dollars. Or if the ECB follow suit it will be burdened upon EU citizens.

At the moment for America there is not even the money there to do the bailouts, it would be better to take the hit and face what ever comes, you can’t falsely move the market in a perpetual upward direction. In a way they are just giving the market shots of morphine each time they (the Fed or US Government) intervene, I like to call it ‘intravenous intervention’ because its giving morphine shots but not fixing the cause of the pain, just the symptoms.

burning the economic candle at both endsGovernments should just but out, but they don’t seem to be listening, in the UK it culminated in the state purchase of Northern Rock, in the USA its bailouts. The problem if you keep printing money – especially when its not in the coffers – then you can get a situation like Germany during the 1920’s where they experienced ‘hyperinflation’. This was where inflation was so intense that people burned money instead of wood. This is the day to day reality for the most sewage status economies such as Zimbabwe’s where inflation was about 100,000% last year, in fact its so bad they can’t even measure it there any more.

The financial markets are now in ‘uncharted waters’ according to Robert Rubin (former US Treasury Secretary). The fed is using laws that were designed during the great depression to lend money to the private sector and now Bear Stearns is assigned to history. Interestingly they were (Bear Stearns) able to survive the Great Depression but they couldn’t survive the Sub-Prime Crash.

The fed is attempting to stop the tide from coming in, the cash injections are not working, the bubble is there and bailouts won’t fix anything, what is the problem with letting the tide come in and then cleaning up when its gone? That way you can let the dead-wood companies go to rack and ruin as they rightly should, the USA is a capitalist society right? So why the Socialist answers?

Recessions are much like tides, they come and go with a degree of regularity, every time the recession tide comes in people think the sky is falling but it hasn’t happened so far in history, but by giving a boon to mistakes made by companies the Fed is throwing good money after bad, and in fact they are offering insurance to companies ineptness, giving a lifeline to bad decisions. What a debacle.

Losses have reach almost 200 billion so far in the sub-prime crash. Bear Stearns first came out in Q4 of 07′ and announced $854million of losses, not a nice opener and that opening gambit is what has brought about the current end game. The whole business model of many financial institutions is broken. Bank of America took over Countrywide, the vultures are picking off the dead, but at least that’s a sign that the most intensive fighting is possibly over.

Bear Stearns is (was) Wall Streets 5th largest securities firm and is over 85 years old. It is the end of an era, and JP Morgan Chase will be picking them up for pennies on the dollar for what they used to be worth.
I mentioned at the start of January that we were at the cusp of a recession and that we would only realise this at the end of Q1, this seems to have come true, it has taken a while, and also many events for the R word to come into regular use (as it always does), but by and large its now accepted common knowledge. There is a ‘Lag Effect’ where it takes a certain amount of time for the information to seep through hence the delayed use of ‘recession’ as being a fact.

3 dollar billSome analysts think that we could be going into the worst recession since the second world war (at least for America) if it does turn out to be true then why not let it happen and then get on with rebuilding the economy? This whole approach rings of an effort to selo-tape a damn back together to prevent a flood rather than letting it break and building a new dam.
The sentiment in the market is likely worse than some of the reality, and that can cause runs on other banks and companies that are good firms, the expression ‘you can talk yourself into a recession‘ is true in a way, but those runs only tend to happen after the actual damage is done or near done because that’s when the greater public start to get the news and lose faith.

We are now in the first quarter reporting season so answers may start to come out in that wash but in the mean time Sovereign Wealth Funds are cleaning up, they are highly liquid – generally due to oil/mineral/commodity wealth and they are snapping up firms as the companies hit rock bottom. Its a classic polar play on US firms because in the past it was America that perpetuated vulture buying.

This is only possible because of the commodity boom that we are seeing at the same time, much of it is linked directly to the demise of the US dollar, however it is also because of the fact that the commodity rich countries of the world are not in the first world. This could be the single largest re-distribution of wealth in the history of the world, I’m not uncomfortable in saying that this represents the fall of Rome if you take it that the USA is the modern empire.

Bush is coming to the end of a term and it seems he waited for the 11th hour to speak some (sorry, I meant ‘any’) sense because he is (for the most part) against government intervention. The only issue is that if the bailouts don’t come as expected then you have a situation where rates will go haywire to the retail market as banks feel threatened by lending money to Joe public because there are no guarantees either the banking market (just look at inter bank lending rates) or government will be there to help them out if everybody decides not to pay their loans, and as mentioned in a previous post, it was individuals who, when all added together, caused this crisis that we are keen to blame on CDO’s, SIV’s and Banks.

The simple truth is that you can’t put out a fire by adding fuel to it.

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