Posted on 04/03/2008 9:22:59 AM PDT by TigerLikesRooster
April 3, 2008
Ben Bernanke admits Bear Stearns was hours from collapse
Dearbail Jordan
US Federal Reserve chairman, Ben Bernanke, today revealed that Bear Stearns was just one day away from going bust when the central bank stepped in to save the Wall Street bank to prevent chaos and a "severe" impact on confidence.
Speaking for a second day in front of US Congress, Mr Bernanke attempted to justify JP Morgan Chase's rescue of Bear Stearns, in a deal that included the US Fed agreeing to back $29 billion of the troubled investment bank's assets.
Mr Bernanke said: "... on March 13, Bear Stearns advised the Federal Reserve and other government agencies that its liquidity position had significantly deteriorated and that it would have to file for bankruptcy the next day unless alternative sources of funds became available."
The Fed chairman said that the central bank was forced to step in because the US financial system is "extremely complex and interconnected", and the collapse of Bear Stearns would have led to a "chaotic unwinding of positions in those markets are could have severely shaken confidence".
Mr Bernanke added: "Given the exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain."
JP Morgan Chase agreed to acquire Bear Stearns for an initial $2 a share, valuing the lender at just $240 million. However, an investor outcry forced JP Morgan to increase the offer to $10 a share, as well as taking on $1 billion of Bear Stearns' assets with the remaining $29 billion backed by the US Fed.
Jamie Dimon, chief executive at JP Morgan, who was also appearing before Congress today, said the bank would not have offered to buy Bear Stearns if the Fed had not agreed to back the assets. His co-speaker, Alan Schwartz, chief executive at Bear Stearns, said today that the bank was not involved in negotiations between JP Morgan and the government regarding the $30 billion asset deal.
Mr Schwartz also maintained, as he said days before Bear Stearns nearly went bust last month, that the run that brought the lender to its knees was due to a lack of confidence and not because of a lack of capital or liquidity.
Mr Bernanke today reiterated his forecast that the US economy would slow in the first half before staging a recovery in the second half. However, like yesterday, Mr Bernanke refused to label the current economic situation as a recession.
It emerged today that US unemployment claims unexpectedly spiked last week by 38,000 to the highest rate since September 2005, alarming investors ahead of monthly jobless figures due out tomorrow.
New data revealed that the number of unemployment claims rose to 407,000 for the week ended March 29, above an expected 370,000 and the previous week's total of 369,000.
The sudden rise in benefit claims sent the Dow Jones industrial average down 48.6 points at 12,556.7 as investor grew nervous that today's figures are an indication of employment numbers that are due out tomorrow that are expected to show non-farm pay rolls for March have fallen by 60,000.
“And JPM has, nominally, 24T dollars worth of derivatives at stake, of which Bear was the counterparty.”
Ehhhhh...you’re off..a bit...say by 2/3...hang on to your shorts...
“At the end of 2007, J.P. Morgan’s exposure totaled $77.2 trillion in notional value, exceeding that of any other commercial bank, while Bear Stearns had $13.4 trillion in notional value.”
http://financialweek.com/apps/pbcs.dll/article?AID=/20080324/REG/110730692/1003/rss02
You left out the major culprit...William Jefferson Clinton
Bill Clinton repealed Glass-Steagall,........
“Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s – lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s. Much of it isn’t paper at all, and the whole process is supercharged by computers and automated formulas.”
http://www.progressivehistorians.com/2007/11/bill-clintons-role-in-mortgage-crisis.html
That way the gov can skim its cut and the polticoho's can smile telling the public that 'the economy is just fine'?
Seems to be the case in the the US needs an economic scheme on paper to manage its debt since w e manufacture little more than charts and food for domestic consumption.
PING Reply....left you off by mistake...sorry
Give me a break please.....
I cannot believe that there aren't more people on the tube criticizing the economic Ponzi scheme that has developed from the notional economy. It's nothing but a shell game for the wealthy and the government to skim all the potential profits of investments of the average Joe.
To me, it smacks of borrowing future other peoples' monies for investment insurance that may or may not occur from business transactions . How is that possible in the real world?
Investment is always a risk and it should be the responsibilty of the investor for the losses and gains, not the government (taxpayer).
One of the biggest problems this go-round, is that after several trades and package reorganizations to sell, the buyers refused to analyze in detail what they were buying for the most part.
Seems as though there is still a lot of question as I type as to who really owns the properties and who owns the debt associated with the real estate bust, not to mention all the other types of credit related packages.
Seems as though a huge amount of equity was sucked out of the economy building houses that people could not afford, not to mention payment of commissions, bonuses, dividends, etc.
The thing about your "ponzi schemes" is that historically, every market has a bottom; usually land and real estate are closely tied to banks, and usually when land/real estate values fall (1830s, 1850s, 1870s, 1890s, 1930s, and 1980s) they come back. How long it takes them to recover usually depends on the amount of government interference.
1837 was a particularly bad depression---probably the worst ever, except for the 1930s. It took about five years for real estate to recover, without government interference.
That's why the role of the media is in our day so incredibly important. The media can literally "talk down" a recovery, can destroy the faith that would reinvigorate land prices and bank confidence.
I'm NOT condoning the ridiculous prices in places like CA---but the fact is, 99% of people want to live close to large bodies of water in temperate climates. Only a handful can really afford to. But the combination of government subsidies in the form of insurance bailouts, zoning, rent control and other things makes it possible for large numbers of people TEMPORARILY to "afford" such a lifestyle, as in CA. It cannot last, and eventually (5 yrs, 10 yrs, whatever) it will be driven by market forces to come to terms with reality.
CA has a problem where 20% of the people are supported in their lifestyles (not incomes) by 40% of the people who increasingly cannot live anywhere near their jobs. The desperation to get close to "where it's happenin'" and the water has driven up real estate prices to unsustainable levels. Simply paying people more doesn't work---they can't pay them nearly enough to live in the same neighborhoods. So Houston we have a problem.
I don't know the ultimate solution. I do know that we need to begin by removing government insurance subsidies, subsidies for public education, student aid, and everything else that makes it appear "possible" for middle class people to live in Hollywood, at which point the prices would take over and force everyone to make rational decisions.
My only solution is to get the government out as much as possible so that all burdens are borne by the investors. There is always a question of who owns what: in the West, our great strength has been to constantly innovate new legislation that identifies ownership, beginning with the "squatters" laws. This is, IMHO, the next direction.
The difference between us is that you think the economy should be managed. I’m saying that it’s the management that’s causing the problems.
You said: because there would be nobody managing the US currency.
I’m saying we’re far better off with NO management than with the Fed. The dollar is worth .02 today from 1.00 in 1913 - managed by the Fed. Deliberate devaluation over almost 100 years. Before the Fed ? The dollar was worth an almost stable 1.00 with normal fluctuations returning to the mean. Why ? A gold/silver standard.
You said: without those financial markets creating the new types of loans, mortgages, derivatives, collateralized debt obligations and junk bonds we do not have capitalism or entrepreneurs in America
I say: Bull. A fractional banking system can typically manage to stay out of trouble most years if leverage stays around 4-6:1. When leverage gets to 37:1 ? 100:1 ? Impossible. Why is leverage important ? It allows a bank to create money from debt, but it’s also an unsustainable cycle as leverage increases. Have you seen the Fed reports on reserves ? The banks have NO reserves - they’ve borrowed their reserves from the Fed. There is no capital underlying most of the debt. Why was BSC such a problem ? Because they had 37B of capital to 24T of obligations. What happens when just 2% of that debt goes bad ? How about 10% ?
Capitalism is not served by massive amounts of leverage. We grew this country thru the 1800s without the insane leverage we have today. Let’s argue - which time was healthier for capitalism ?
You said: Nobody won here except you and me
I say: Joe 6-pack was screwed. Who were the shareholders of BSC ? Whose taxes went to and whose currency was debased to create the sorry edifice that was BSC ? The Fed is taking securities that cannot be sold in the open market onto its books, whereas before the Fed balance sheet was made up of T-bills and other as-good-as-gold-type assets. That’s a bonus ? I don’t think so. Was it a 1:1 swap, or is the crap paper discounted ? We will not be told - why ? Because we wouldn’t like the answer.
And finally, I don’t personally think taxpayer money should be used to “do good”. Government is not and should not be a charity. Read Davy Crockett on the subject. http://www.theadvocates.org/library/christian-crockett.html
Nope, by these actions we are now firmly entrenched in fascism. And some of you think that is good. I call it a disaster.
Exactly !
A mark-to-market is a needed event - but it will collapse the world financial systems. And, I think that would be very painful but a very necessary event.
Then we have some painful reality. We are all poorer than we think, because debt cannot be money. There has to be value there.
Once reality sets in, we can get back to a reality valuation of assets - in essence that what a bankruptcy is.
It’s not pretty, but without it you just have complexity piled on complexity until the entire edifice collapses anyway.
The end is certain - it’s how we get there that is still somewhat in our control. Congress, the Treasury, the Executive and the Fed colluding with banks to put it all back on the taxpayer is just postponing the inevitable.
Now that the government has trumpeted that any bank is too big to fail, then there is nothing to stop the banks from continuing down the path of more and more leverage and risk.
What they all forget is that there is only so much debt the taxpayer can afford until we are all bankrupt.
And what happens when Citi fails ? Or JPM ? Or UBS ?
How much propping up can be accomplished when trillions are being lost in real estate - the very thing that set off this debacle in the first place. RE is not finished dropping - when a few more trillion are removed from backing all this paper, who can afford that bailout ?
It will happen, and the next failure will just be bigger.
We are trading “security” for freedom. And I ask - how much security is there in a devaluing, paper dollar ?
RE is continuing to fall in valuation, we haven’t even started to see the writedowns from underwater HELOCs and other consumer debt, 1Q 08 earnings reports are only starting to come in - no, we have a long way to go yet to get back to normalcy.
Whatever normalcy is anymore.
There are two major risks right now, cascading defaults with highly leveraged derivatives and a run on the investment bank. GS is barely "best of breed" with leverage of 25 instead of 30. Their potential for a run is as good as anybody's, their cash would probably last a couple days like BSC.
DOW has double bounced off a bottom of 12400 and we are due for another 1000 to 2000 points in gain from here by the end of the year.
The second bottom was lower than the first, that tells me it wasn't the bottom. A bounce is possible, but not likely.
IMO Lehman is the worse off-imagine a 10-30% drop in home prices/mortgage values, $30,000 to 50,000 cost to foreclose that takes 1-18 months (california) and 30 to 1 leverage. Its all over but the crying, I think the books are cooked. The IB’s as a group borrowed what 39 billion last week at the fed window?
We are in for tough times.
You bet. As long as you don't mind the occasional panic and crushing deflation, the gold standard was great!
It allows a bank to create money from debt,
It's true, banks can borrow money and lend it out again. It's like magic!
Why was BSC such a problem ? Because they had 37B of capital to 24T of obligations.
Where did you get these figures?
What did you imagine I said?
Maybe I misunderstood you?
Please do enlighten us.
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.