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.
You may still be retired next year. But at a much lower-than-planned standard of living.
Hopefully not.
That’s a bit over the top even by FR standards....
sub-prime was always a small part of the total mortgage market and the illegals a small % of that.
Although I am waiting for a few stories to come out that talk about wage inflation if the illegals get kicked out and people cannot get their yards mowed for less than $50.
I don’t blame blindly, I blame the Executives and traders and decision makers who decided that loaning money has zero risk, and that they hold no responsibility morally or legally for making sure they lend appropriately.
If you loan someone money you know they have no chance of paying back, you are a snake and a bastard, and are even less moral than the borrower who eventually will not be able to pay.
Lending and borrowing is a two way street... you can’t “mathematically take risk out of lending” These CDO’s and crap were a scam. You can’t “AUTOMATE” lending... FICO scores have nothing to do with lending or repayment... They are just algorithms that frankly are crap. Yet the entire industry decided hey as long as the computer spits out what I want to see, who cares what the underlying inputs are.
The Federal Reserve Banks and the large national Banks are nothing but snakes, the lot of them. They have completely failed in any measurable way of engaging in fiscal responsibility. They sold out this nation on every level to pad their own pockets, and have left a mess the rest of us will have to clean up. And not 1% if that will ever pay the price for their malfeasance.
The Street is screaming that the government should directly or indirectly begin buying mortgage backed securities
+++++++++++++++++++++++
The GOVERNMENT shouldn’t do a damn thing until some heads have rolled, some crooks are jailed, some decision makers at firms responsible lose everything before one American taxpayer is involved in any bailout. I for one don’t give a damn if reckless and/or crooked & incompetent firms go away forever. If enough of these crooks are ruined it is unlikely that they’ll repeat their behavior.
It’s criminal in my view that government is so willing to involve taxpayers in a bailout while not one of these jerks feels any negative consequences for their actions.
I know a way they can get it done for about $1.
That's the one thing that keeps America strong.
I think he was talking about financial strength, not physical.
This is such absolute BS trype that its embarrassing that so many people repeat this crap. This ideological rhetoric is flat out lies and while I expect such blithering stupidity from talking pinheads like Hannity, its not reality. Everything was not going along fine until the Dems took over congress... Gubment programs did not create the sub prime mess.
Greed created the sub prime mess, it had nothign to do with government policy. Sub Prime going mainstream due to corporate greed led to the sub prime mess not government policy. This and the CDO bundling and rebundling and rebundling. To blame the dems for individual corporate greed is just flat out ignorant, and it does no one any service by repeating such ignorant nonsense.
The big institutions honestly thought they could by CDO bundling and rebundling mitigate the risk of lending, particularly to less than qualified people. It had ZERO to do with any changes made by congress. By the times the dems took over congress in 2006 (and not sworn in until 2007) the seeds had already been set for years for the collapse we are now seeing.
Anyone who says otherwise, is beyond ignorant, and has more interest in their political rhetoric and world view than facts. The Dems took over congress in Jan 07... and the mess we are seeing is far more than 1.25 years of a bad policy.. what you are seeing is the collapse of about 5-6 years of absolutely rediculous lending driven by greed. And that in turn is starting to unravel several decades worth of incredibly bad long term fiscal policy by the fed.
The direct bailout is not the biggest problem. The problem back in 1998 was not the few billion it cost to bail out LTCM, although that did create moral hazards which are biting us now. The bigger problem was Greenspan lowering rates to inject liquidity. The problem is that the liquidity does the wrong things, sends the wrong messages. The Nasdaq took off and that made the 2000 crash much worse. The other thing that started in earnest in 1998 was adjustable rate subprime mortagage securities. Bear's stupidity was driven by the stupidity of injecting liquidity in 1987, 1990's, 2002/3, and as we speak.
May your investments prosper!!
Pretty much. Those guys were essentially giving $400k to any Mexican who would “X” a document, slicing it up to hide the accountability trail, and repackaging the slices as investment grade securities.
There is no way but this administration and the last knew the risks of both overextending credits in the housing market and tremendous government deficits on this economy but these idiots refused to admit and act on what they knew to be the true situation. All of this to essentially buy votes. We have incompetents in office throughout the United States. Both political parties are almost equally to blame. Even some so-called conservatives refused to face facts.
We will see the Schumers and other liberal instigators of this mess take to the airwaves laying total blame on the republicans while the incompetent republicans remain totally inarticulate and fail to respond listing the true reasons for this horrid mess.
It is a pathetic situation. We are headed for a total economic breakdown without any responsible politician being able to explain to the electorate as to the reasons for same.
HamiltonJay is right, everything was not going smoothly. The Fed's 1990's liquidity binges created this problem. The Fed is fixing it today with the exact same incorrect solution.
Well, I appreciate the opportunity you’re giving me, Mr. Cromwell,as the single largest shareholder in Teldar Paper, to speak.
Well, ladies and gentlemen, we’re not here to indulge in fantasy, but in political and economic reality. America, America has become a second-rate power. Its trade deficit and its fiscal deficit are at nightmare proportions. Now, in the days of the free market, when our country was a top industrial power, there was accountability to the stockholder. The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management has no stake in the company!
All together, these men sitting up here [Teldar management] own less than 3 percent of the company. And where does Mr. Cromwell put his million-dollar salary? Not in Teldar stock; he owns less than 1 percent.
You own the company. That’s right — you, the stockholder.
And you are all being royally screwed over by these, these bureaucrats, with their steak lunches, their hunting and fishing trips, their corporate jets and golden parachutes.
Cromwell: This is an outrage! You’re out of line, Gekko!
Gekko: Teldar Paper, Mr. Cromwell, Teldar Paper has 33 different vice presidents, each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can’t figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I’ll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents.
The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated.
In the last seven deals that I’ve been involved with, there were 2.5 million stockholders who have made a pretax profit of 12 billion dollars. Thank you.
I am not a destroyer of companies. I am a liberator of them!
The point is, ladies and gentleman, that greed — for lack of a better word — is good.
Greed is right.
Greed works.
Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.
Greed, in all of its forms — greed for life, for money, for love, knowledge — has marked the upward surge of mankind.
And greed — you mark my words — will not only save Teldar Paper, but that other malfunctioning corporation called the USA.
Thank you very much.
I agree with everything in your post. We currently have the worst govt in my memory. There are virtually no honest or responsible people left. All are simply vote whores who keep promising more and more services with no regard for the ability to pay. At some point the whole system will come crashing down. Maybe then some sanity will be restored.
As you say, it was the absolutely wrong thing to do. It did make it worse. And they are doing the very same thing today (I just heard on the radio the Fed board is meeting tomorrow to lower rates more). This is their version of "bailing out" Wall Street. Stay out of it and let the market correct itself. It will be painful, some people are going to get hurt badly, but it will be better for everyone in the long run. So far, all they have done is drive down the value of the dollar more.
I hear the voice of Howie Mandel saying, “Deal — Or No Deal?”
Not with gas at $3.50 a gallon.
Ironically, I spent yesterday morning reading the Von Mises articles...
The chart mentioned on the site didn’t show so I’m still a bit fuzzy on the details, but the essence of the story was illustrated very well = yesterday afternoon.
How much gas does it take to mow a lawn?
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