Friday, March 14, 2008

Wow! Look out for the Bear!

Short version: Bear Stearns seems to be in a bunch of trouble. Not only has their liquidity disappeared, but other firms are reluctant to do business with them. This has led the Fed and JP Morgan to at least temporarily bail out the firm.

From the NY Times:

"The news from Bear Stearns came after the bank had insisted for days that its finances were in adequate shape. But the situation rapidly changed.

“Our liquidity position in the last 24 hours had significantly deteriorated,” Bear’s chief executive, Alan Schwartz, said in a statement. “We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations....So far, that confidence has been elusive. Bear Stearns’s stock price was down nearly 40 percent, to $34.68 a share, after falling as low as $26.85, its lowest level in nearly a decade. Shares of JPMorgan lost 4 percent."

From CNN Money:
"Bear Stearns Cos.' (BSC) troubles graduated from problematic to crisis size in the past week as fellow banks and customers went from worry about profit declines stemming from its large mortgage exposure to fear about the firm's sheer ability to fund its businesses.

With Bear Stearns now making history as the first investment bank to require a Federal Reserve bailout, indirectly through J.P. Morgan Chase & Co. (JPM), its problems are far from over.

"Once this happens, no one will deal with them," said Joseph Rizzi, a veteran banker who focuses on risk-management. He equated the crisis of confidence to the one that caused Barings Bank to collapse after its massive trading scandal. "The remaining franchise value, customers and employees, will evaporate," he said....

"I am sure the Fed will evoke the too-big-to-fail doctrine to engineer an orderly transition," banker Rizzi said."

From another Money/CNN Fortune article:
"But Molinaro also admitted that Bear Stearns was in dire straits Thursday night, after some firms that trade with it - fearful about rumors of a liquidity squeeze at Bear Stearns - "no longer wanted to provide financing."

That comment shows that Bear Stearns is dealing with a classic run-on-the-bank. The firm's short-term creditors refused to lend the firm any more money via the extension of overnight loans, and simultaneously demanded repayment of outstanding debt. The one-two punch overwhelmed Bear's cash position, forcing it to seek help. Had the Fed not stepped in, it appears doubtful Bear could have operated today."

(Molinaro is btw a SBU grad)

``We are facing a potential black hole for all financial markets,'' said Neil MacKinnon, chief economist at London-based hedge fund ECU Group, which manages $2 billion in assets. ``This is being labeled as perhaps the worst financial and banking crisis since the Great Depression. While that sounds fairly apocalyptic, I think it is a realistic assessment of what is happening at the moment.''"
Not surprisingly, this panic led to a flight to quality. From Reuters:
"U.S. Treasury debt prices surged on Friday after news that J.P. Morgan Chase and the New York Federal Reserve pumped emergency funds into cash-squeezed investment bank Bear Stearns, triggering a sharp drop in U.S. stock prices. More than ever, financial markets were fraught with concern about systemic risks that could have wide-ranging effects on a vulnerable world economy."
Wow this came on quickly. With apologies to Kenny Chesney, Don't blink. I had meetings most of the day today, when I got out I had 3 text messages and two voice mails about this story.

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