Posted on 03/17/2008 5:57:12 AM PDT by Lazamataz
Monday, 17 March 2008 Major financial news and emergency Fed meetings on a Sunday? If you had any doubts about how serious the Panic of 2008 is going to be, this should start hinting at how deep we've gotten. Watch Lehman Brothers this week - the brokers are selling it before the market even opens.
Early on Sunday (3-16-08) the details of the JP Morgan acquisition of Bear Stearns were released: $220 million, $2 per share. This is pennies on the dollar - or at least the dollars that Bear was claiming to have just a few days ago. Many were absolutely shocked at this final price, and the Fed rushed in immediately to cut discounts rates by 25 points - many expect an additional emergency meeting early today (Monday 3/17/08) with a target cut of about 100 basis points.
International markets wasted no time in profitting off American weakness, and the dollar crashed to yet another record low. Gold spiked $20-$30, and is now entrenched well over the psychological $1000 / ounce threshold.
Panic of 2008: AAA and Mortgage Miscalculations
What exactly took down Bear Stearns? Well, the subprime credit crisis is part of the story, but we're at the point now where panic itself is driving collapses left and right in the financial sector. In the history books, they'll simply call it a "bank panic."
Obviously, it all began following 9-11 as the Fed cut interest rates to very low levels, fueling an increased boom in home buying and mortgage activity. New demand for real estate drove up prices, and the banks holding mortgage-backed securities were using them as collateral for their own investments or as the reserve for their loans to hedge funds.
This is where Carlyle comes in (you may recognize this name for its association to the Bush family). One week ago, they managed $80 billion in assets - today there is nothing left. They had leveraged some assets 23 times into triple AAA bonds, and the bonds went bust. Within a day, the chain reaction brought them to default on their debts and triggered a "run on the bank" that effectively eliminated the company.
You know the economy is bad when the sitting president can't keep his dad's company from going bankrupt.
Enter Bear Stearns: They were the unfortunate holders of 15% of Carlyle's stock. Again, within the day, margin loans were being called in and Bear Stearns was in a position to liquidate its assets and shut down shop.
As if this wasn't bad enough, the Fed managed to engineer a "rescue" for the economy as a whole that consists of JP Morgan acquiring the Bear Stearns assets for 1 / 100th of their previously reported values.
Stop for a second and think about that. To save the economy, we have to revalue financial assets at 1 / 100th of their previous value.
There is a big problem with that, beyond even the inflationary pressure of all this Federal Reserve activity and asset guarantees. What happens in today's stock market when all the investors and depositors at the banks that had invested in the now worthless Bear Stearns stock?
That's right - margin calls, mass withdrawls - another bank run, another daily panic in the Great Panic of 2008. Dow Futures are indicating an open at the 2008 low - about 11,750 and still a way to go before seeing the important 11,500 level I predicted we would be testing. If another major bank suspends investor access to liquid assets or announces another "bailout" (or fire-sale), then I don't even know how low things would go.
The talk, the rumor, and the panic is pointing at Lehman Brothers as the next victim of the post-bubble crisis. In the Monday morning trading hours, Lehman Brothers Stock is down almost 15% - and that is before any actual bad news. This is the phase we are in: Almost no bank or financial institution could actually cover all of its liabilities in the face of a panic-driven run. At the same moment, almost anything can create the fear and panic necessary to create such a reaction. If the Fed doesn't act, banks will collapse left and right. When the Fed acts,
No, just the people who live off debt. ;)
This certainly is a very big concern for me - this industry affects my job, directly.
I know there’s a lot of fearmongering out there. But comprehensive, thoughtful, objective analysis is hard to come by. Any sources, from anyone, would be particularly helpful, to me and others I’m sure.
Thanks for posting.
Speculative chickens are coming home to roost. What’s amazing is that these supposedly prestigious investment firms allowing themselves to be so far out on that limb.
Steve Forbes on Fox just said that there should be a suspension of the “mark to market” rules. This is the second time in a week I’ve heard this suggestion.
Anyone with a better understanding of this have comments?
They don't know more than me after all...They're just bigger gamblers.
Adjustment of the book value or collateral value of a security to reflect current market value.
1) What it is: With the heightened trading activity of the stock market in recent years, many individuals, particularly the so-called "day traders," may find it advantageous to elect the mark-to-market method of accounting for their trades. This means that traders will have to recognize their gain as ordinary income, which is not as detrimental as it sounds (most of the gain would be short-term capital gain). The real advantage of using mark-to-market accounting is that traders can claim losses as ordinary losses, and can be freed from concerns about the wash sale rule, constructive sale rule and straddles.
I have two grandmothers who lived thru the first depression so I’m set. But grub/worm recipes are gladly accepted, and should I tape up the toes of my shoes today or wait until the holes appear?
It is the people living off lending that are doing the dying.
That's not on my to-do list.
All of the brokerages were my customers at one time or other. I never like Bear Stearns so nyah! nyah! nyah!
You are rich.
I heard alpo tastes best, followed by kennel ration
BLOAT.
You are rich.
Some of them are going bankrupt overnight, others are getting government-backed sweet-heart deals. Everytime the Fed throws these billions around, it comes out of the value of the dollar. Private profits + public losses = the worst of socialism.
This is not why Bear was taken under. If the whole thing could have been fixed with a loan from the FED or a change in accounting rules it would have been [they were a primary dealer]. The problem is clearly that the income coming from the securities Bear held (whatever their "market value") was grossly insufficient to pay their obligations and the problem was not likely to get better.
You are rich.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.