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.
Diamond should be Dimon in the above quotation.....
....alas, however, it wasn’t MY quote. : )
September 13, 1991
Hearing: Subcommittee on Telecommunications and Finance
Committee on Energy and Commerce
102nd Congress
A bill to Amend the Federal Securities Laws to Equalize the Regulatory Treatment of Participants in the Securities Industry
STATEMENT OF STEPHEN P. PIZZO
Mr. PIZZO. Thank you, Mr. Chairman, for an opportunity to address this committee. To get right to the point, this so-called bank reform legislation is nonsense. It is dangerous nonsense.The premises on which it is being peddled to Congress are contrived, cynical, and transparent. They are the same arguments, the very same arguments, recycled from a decade ago, only then it was the U.S. League of Savings Institutions that was peddling them, rather than the ABA and the Association of Banking Holding Companies.
...
Instead, the administration and many in Congress have chosen to listen to the failed portion of the banking industry, America's big and super-big banks. It is these colossal failures that many in Congress and the administration now want to accommodate with even broader banking powers. If only you would let them stay out later and associate with new friends, they promise they will straighten up and fly right.
Well, to veterans of the S&L crisis, all of this has a Mad Hatter's tea party quality to it, and I am here to layout in the starkest terms I can what I believe will happen if Congress accommodates the desires of these tumor-like money center banks.
As for allowing corporate ownership, corporations want to be affiliated with banks for the very same reason that Bonnie and Clyde and Willie Sutton wanted to be affiliated with banks, because that is where the money is. And if you facilitate this union between banks and commercial interests, you will effect the most fundamental change ever in how and where capital flows to American business.
Big banks owned by Fortune-500-size corporations will favor the corporate culture. Credit will inevitably begin flowing away from small, family-owned and closely held businesses and into subsidiaries owned by large corporations. Since small business, not corporations, create the majority of jobs in America, the demise of the small business community will translate into higher unemployment and the accompanying cost to government. In the end, Washington will have to rescue job-creating small businesses through a massive and expensive government-backed loan program.
Corporate ownership of banks will also give big business a critical tool with which it can engineer society and the competitive business environment in ways heretofore out of their reach. Suppliers who accommodate a corporate bank's department store chain, for example, will find credit plentiful and easy, while those who do not play ball will find the same credit tight, expensive, and at critical times, unavailable.
The Mafia built its empire on just such subtle, difficult-to-prove, extortive, and anticompetitive relationships....
. . .
As we autopsied dead savings and loans, we were absolutely amazed by the number of ways thrift rogues were able to circumvent, neuter, and defeat firewalls designed to safeguard the system against self-dealing and abuse. One of the favorite methods was to link up like-minded thrifts in the daisy chains through which they could circulate inflated assets and hide their rotten loans to each other and to each other's customers from regulators.
Banks that need to get money to a trouble securities affiliate will do exactly the same thing. By linking up three or more banks, each with its own securities subsidiary, a daisy chain will facilitate a round robin of reciprocal loans in times of need. Then, the next time we have a Black Monday on Wall Street, this daisy chain will swing into action as a handful of mega-banks try to prop one another's securities subsidiaries and their customers as the market plummets.
In such a scenario, billions of federally insured dollars will disappear in the twinkle of a few program trades.
That will happen, not might happen but will happen, and when it does these too-big-to-fail banks will have to be propped up with Federal money. In the smoking aftermath, Congress can stand around and wring its hands and give speeches about how awful it is that these bankers violated the spirit of the law, but once again, the money will be gone, the bill will have come due, and taxpayers will again be required to cough it up....
If you still think that letting Bear Stearns fall into bankruptcy, allowing billions of derivative transactions to default, allowing investors in money market funds to lose money that Bear floated its debt with, allowing other investment banks (larege ones) to possibly default is a good thing then we will certainly disagree is right. This thing had a real multiplier effect that I'm not sure you are aware of and I'm never going to convince you of it. I think the Fed and about 5,000 people in the United States actually understood the full ramifications of a Bear default and it could have led to global depression.
We're far from out of the woods, but about 50 billion out of 350 billion of municipal auction rate debt has already been refunded and another 150 billion will be soon. That will eliminate some of the pressure these investment banks have on their books (in addition to mortgage paper) that you haven't even mentioned. We need to have another two months pass before we've vastly reduced that risk.
As for the banks only having written off some, not all of your hypothetical mortgage defaults, don't assume they haven't reserved for them. That was not in your comments and all banks have, in addition to loan loss write-offs, loan loss reserves. In addition to the massive write-offs that have already been recognized, they all added dramatically to their reserves and probably have more loans listed on a non accrual basis. But the brunt of the sub-prime loans aren't held by banks, but by investors. Remember the banks originated the deals, but investment banks bundled them and sold them off to investors. Investors will indeed get hammered, unless people in the congress bail those people out.
In the meantime, helping Chase acquire Bear and opening the discount window averted a financial crisis for the investment banking industry and I will forever stand behind that.....it avoided more than you think.
I realize that, but taking in the news that banks are recovering about 50% on most properties, there’s a huge backlog in the system where people who have not paid for 6 months are still living in the houses because they HAVEN’T EVEN BEEN CONTACTED by their lender, and a lot of people are trashing the houses on the way out, the actual % rate is hard to estimate.
I kinda fudged it because the actual current foreclosure rate is well over 2% and it will go a lot higher when the latest rate resetting of ARMS that occurred in March start getting delinquent.
http://activerain.com/blogsview/58601/FHA-vs-Subprime-default
Your post is so useless. You like to act superior but you don’t post jack to support any statement.
All hat no cattle.
Why is it that every time you show up on these threads they degenerate into you claiming "I never said that!". Why don't you think before you post and we can avoid all of this discussion over syntax.
So if joe taxpayer goes bankrupt and other joe taxpayers are asked to bail him out, you’re good with that ‘cause it’ll only cost you $5 and he gets to walk away with all his toys ?
Hello, socialism.
Good post, I hadn’t seen that yet.
Kinda puts paid to those who said raiding the taxpayers was justified because it “saved” us all.
You need to read post #222.
Jamie Dimon said JPM and everyone would have been just fine if BSC declared bankruptcy. Bernanke said it was to avert systemic meltdown.
So - do you believe Bernanke or Dimon testifying at the SAME HEARING ?
If Dimon was not lying, then the Fed did not need to step in, now did they ?
Do you really think Dimon wanted to buy Bear? It was a forced merger because of all the other problems at Bear. No one had any idea how to unwind all those billions of derivative defaults pending, nor did they know how many muni issuers would suffer as a result of failed remarketings and auctions. In addition, its easier for Dimon to see now that the discount window bailed out Goldman, Lehman and other investment banks......hindsight sure is pretty isn’t it? I’ve always commented here that the discount window being open to investment banks was a critical element to the mix. Dimon only knew of Bear’s issues, don’t you think Bernanke held discussions with other banks and brokerages that Dimon hasn’t a clue about?
Dimon’s a really smart guy, but I am sure Bernanke knew in confidence of other problems that could occur behind the Bear matter and sharing that with the world would not have been a good idea.....so yes, I believe both Bernanke, and Dimon, but only Dimon to a degree since I am sure Bernanke didn’t share everything with him.
I just wanted to work in a little dig at Dubya. I've redirected a contribution from The Sisters of Charity to help support the families & victims of Dubya's Work Comp Program & OHSA for Drug Dealers.
Bit of Irony here: House of Morgan rode in to rescue the Panic of 1907 and 100 years later, does it again. Deja vu all over again ;^)
And I see very little if any, concern over the $50 billion aid for Africa, most of which will end up in Swiss vaults. And as everyone knows it in advance, we don't even get the good karma return.
I gotta say that keeping BS from taking down the economy was an appropriate action, and that as a taxpayer (well, not lately) it was in all of our best interests for the Fed and Treasury to intervene, even if it costs us more on April 15th.
The part that bothers me is a) they are lying through their teeth about nearly every facet of the deal, and b) the people who causes the problem are not simply getting away scot-free, but are groaning under the weight of all the money they are lugging off.
It should be $100 billion, after all, the taxpayers a good for it...
I won’t disagree about those at fault...Congress, banks, stupid borrowers, investment banks, bond insurers, rating agencies and insurance commissioners. All of them lost their senses and we are paying the price. Its beyond me however that others can’t seem to understand how dangerous the BS default would have been. It went way beyond the sub-prime mortgage market. Money funds, munis, derivatives at least.
You provided so much support for your statement.
Yet they put the Enron execs in jail over less.
LOL!
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