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.
The bulk of subprime mortgages going into foreclosure were those issued to illegals, landlords (not all illegal) of overcrowded homes renting to illegals, or typically exploited blacks who were displaced from jobs by illegals.
If you do a little research rather than fall for the fog the money movers and politicians are putting out, you will see that there is a correlation, right down to the ZIP code, of the location of subprime foreclosures and concentration of illegal alien residences. (Realtytrac and Pew Hispanic Center websites).
Bear Sterns and their ilk created all this phony paper (CDOs, bonds) that required a huge amount of mortgage paper to support the bottom of their Ponzi pyramid. The low hanging fruit was a vast new mortgage market to house 20 million newly arrived illegals, equal to the population of New York state.
To win enough people like you over to a government bailout, they don't want this little secret out, because a steady stream of cheap labor is just as important to Wall Street as the phony money.
What gives me sour stomach is the fact that there are $750 Trillion in "derivatives" out there, some of which aren't understood by their creators, much less by the traders or admittedly by the Secretary of the Treasury or his crew.
By my math, if just 1% of these unwind abruptly due to margin calls or the like, it would cause a $7.5 Trillion train wreak, the consequences of which no one can estimate...but they would be bad, very bad.
You’ve got gas?
Bad investments happen in good times and bad times. Bandwagons always get going. It is human nature. To turn that into a sustained bubble requires lots of cash and credit. That is where Greenspan came in to help out.
No, but then I can’t afford a lawn either, so it really doesn’t matter.
And if just 0.1% unwound that is $750 B or about 3 Bear Stearnses.
Really? When exactly was that?
Thank!
***You may still be retired next year. But at a much lower-than-planned standard of living.
Hopefully not.***
I figure California might be nice. Live on the beach, no AC needed.
Eat free at the Salvation Army and other missions.
Showers at the beach campgrounds.
I need my friends there to find me a nice bridge to live under when it does rain.
Things are looking up!
Both. The story of credit is the story of triggering greed, losing common sense, etc. It's the difference between investing your own money for the long term and playing with someone else's money for short term gains.
Then please explain why there are so many investor owned new houses that are going into foreclosure that were financed with higher interest rate debt? I agree that illegals are a part of the story but I can also pick up the paper and read about some poor inner city people (black) who are “victims” of predatory lending lending by big bad banks. In both cases I cited they are not illegal related. Furthermore, there is also a difference in immigrant lending and illegals immigrant lending.
The Nasdaq crash was driven by bad investment from the VC side and stock deals where companies were buying companies left and right by printing their own money. One of my partners would wander by my office telling me that NORTEL or Lucent had bought another company for $3-4 billion in stock and no one would bat an eye goven how common the practice.
Also, you cannot ignore the mandate that telcos had to share their netwoks with competitors at sub market prices which gave rise to a whole bunch of pretenders that were never going to be able to be cash flow positive as well as their suppliers, and the lies that said Internet traffic was doubling every 9 months. Oh, and let’s also not forget the inability for companies to truly value E-business models. That was a whole other story....
Unless he was short.....
Uhhh... what freepers were those?
Dane, Bray and End Times Crusader come to mind.
NASDAQ was a sort lived run up. Took a year to ramp up then blow apart.
I just want to thank you for pointing me to the LAZ A MA TAZ portfolio, which has produced a 16.5% return YOY.
Keep up the good work.
That reminds me... I’d better sell my D’Anaconia Copper stock today.
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.