Posted on 03/17/2008 6:41:36 AM PDT by Lazamataz
To everyone who called me or emailed me over the weekend saying, "How could this happen? How could Bear Stearns go from $57 to $2 in two days?" I would offer the comment of one astute trader, who said, "When you are levered 30 times and have no access to finance it doesn't take a huge move on $400 billion in assets and $260 billion of debt to wipe out the equity."
Two questions dominate the Street this morning:
1) What will Bear Stearns' shareholders--specifically Bear employees--do? The $2 per share deal is subject to shareholder approval, and Bear employees--many of whom have significant parts of their life savings in Bear stock--are certainly stunned enough to create at least a minor protest over the price. Sandler O'Neill noted that "we do not believe it is incomprehensible that this deal may have bought Bear Stearns additional time to assess its situation which may lead shareholders to reject the offer."
2) What will happen to the other major brokers and banks, and what will the reaction of the credit markets be? With a book value at nearly $80 per share for Bear, the $2 price makes it tough on other brokers. A flight to firms with the strongest balance sheets seems obvious. Analysts were out this morning with various comments on who does have the strongest balance Goldman Sachs , for example, opined that Morgan Stanley and JP Morgan had the strongest balance sheet. Street seems to be treating it that way: Lehman down 28 percent pre-open, Merrill down 16 percent, Goldman and Morgan Stanley down down 8 percent, JP Morgan up.
Meredith Whitney, who has become an ax in this space through her coverage at Oppenheimer, put out a note this morning titled, "BSC Fire Sale to Cause Valuation Adjustment for All Financials: Banks at Risk," in which she argues that financial stocks have further downside of as much as 50% based upon 1990/1991 multiples of tangible book values. She says most banks are trading well above their price to book lows of the 1990-1991 cycle.
So, what will finally end all this turmoil? The Street is screaming that the government should directly or indirectly begin buying mortgage backed securities, and, to a lesser extent that a wider bailout program needs to be devised to stem home price depreciation.
Get real, you are absolutely ignorant if you believe that the Fed created this mess.. the fed had NOTHING to do with it.
Sub Prime lending existed long before D’s took congress back, and it was always a fringe business... however as automation of credit and CDO’s came to the fore sub prime companies were looked at by large corporations ad good cashflows. They all jumped in, bought out existing ones, or formed their own.. they gave out loans to anyone with a pulse, because they believed they could loan money to just about anyone with no risk.
It had nothing to do with government policy, it had everything to do with corporate greed. Government policy did not create the sub prime mess, and while it may fit your political rhetorical world view, its absolutely false.
Countrywide didn’t wind up belly up do to government policy, Nor did any of these other players wind up in messes because of government mandate.. they got there buy pure and simple greed. They thought they could lend money and then have no risk associated with it... it wasn’t the government that made them do it, it was greed looking at what they believed to be 8 to 14% returns on their money at a time when they were only able to see 4 or 6% in traditional lending.
This “government policy” created the sub prime mess is the most ignorant nonsense ever blathered, its tantamount to the 9/11 truthers nonsense. The absolute sheer and willing ignorance that one has to engage in to repeat that line of crap is astounding.
Just goes to show, the left is the only group with ignorant people who put politics before facts.
The gold bubble has busted before, just like the market.
That is why it is all Texas Hold-em...and so many of these leveraged short term traders will end up holding the bag as always.
I learned my lesson back in 99 on stocks, and on gold I screwed up in 76 or there abouts.
The lesson is to never get caught with the bag.
No, I’m saying the that before the Federal Reserve Charter, we had a lifetime inflation from 1776 to 1913 of about 8% total (not annually... TOTAL)... and a boom or bust that averaged once a decade.
The Federal Reserve system was created with the promise that it would stop inflation and mitigate downturns. Well since its found we’ve had the worst depression in our history, averaged downturns still about once per decade and have had an inflation rate of 2116% since 1913.
So 8% inflation over 137 years, and over 2000% in the following 95 years... Yea the Fed’s really done its job alright.
The left is NOT the only group...
In the late 70’s I learned that gold could be a useful part of my college fund even though I was just into collecting coins. I missed the boat in the 90’s almost completely, so no lessons learned either way. Now I recognize the symptoms of a credit bubble, the only way to keep it going is lower rates and ultimate destruction of the dollar. I don’t say that lightly or the least bit gleefully. I also believe the American economy will retain significant strength throughout the ordeal.
Thanks Palmer. Your economics posts are always enlightening. I am aware of all that Central Bank gold dumping. By default they hate gold
There are plenty of rumors of the Russians shooting for a gold backed to rubel.... They will promote it as a reserve currency
As do I....
The nut in the woodpile could be Obamma, but it looks like his chances are being lowered somewhat and that will be factored in by the market as soon as it is evident.
I never discount politics as a prime mover in a election year. The market is seriously spooked but unknowns, but few will admit that it could be fear of having a die-hard anti business Marxist at the helm of the ship.
I think the turning point will coincide with a Hillary resurgence, if it occurs. Or, a big swing upward in McCain's numbers against the Dem nominee.
That's what I'll be looking for after the market shakes out.
Good Freaking grief! Can’t you READ???? I said CONGRESS DEMANDED banks lend to people who couldn’t afford it!! What are you??
Yes, but it was the CONGRESS that DEMANDED an end to RED-LINING which meant the banks had to lend to people who couldn’t afford IT!! pLUS THE INTEREST RATES WERE extremely low.
Perhaps the rats will pass a law making greed illegal.
What do you think the final total will be of the "sub prime mess"? That is the part, if any, that we will have to pick up?
Here's a definition of redlining
Illegal practice of discriminating based on geographic location when providing loans or insurance coverage.
http://www.investorwords.com/4111/redlining.html
Redlining refers to geographical location, not on the individual's ability to pay.
Don’t be NAIVE.
So are you predicting a recession based on today's rally?
Really? I said that?
foflol! Don't be sitting up too high....might make for a hard landing. : )
That's also another part of this whole mess....nothing much is done "in public." There's no transparency, not by the Feds, .gov, and the corporations involved with all the shenanigans.
Part of that is they can honestly say they don’t know the value of the securities. But that doesn’t really matter since the Fed’s credit is limited only by the destruction of the dollar.
That could fit in "nicely" with particular plans.
Laz—
We don’t own the country.
70% of taxes are paid by 10% of the country. Our government has been sold to that 10%. Until we reclaim the funding of government....90% of us paying 90% of the taxes at a level of reasonable, affordable gov’mt, we will continue with an out of control federal establishment.
http://www.taxfoundation.org/news/show/22652.html
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