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.
Ping!
Agree. If we learned one thing from the 1929-1932 period, it is that if the Fed has ANY job at all, it is to keep banks from failing and preventing contagion.
Bernanke's days at the Fed may be numbered.
CNBC is showing him at Congress now. It’s turned pretty much into kabuki theater: somebody asks him how something like this could have happened so quickly, how can any one of many companies be sufficient to collapse the nation’s financial system, and he just stumbles out a meandering response (not an answer) that invariably includes all the phrases “long time in the making”, “international repercussions”, “interconnected” (the new way of saying “too big to fail”), the senator thanks him for his answer, and then the next senator takes his turn on the dance floor.
So he basically admitted that JPM was the next domino to fall if Bear had declared bankruptcy. And JPM has, nominally, 24T dollars worth of derivatives at stake, of which Bear was the counterparty.
http://www.gold-eagle.com/editorials_02/chapmand061302.html
This is a story that bears repeating. J. P. Morgan Chase & Co. (JPM-NYSE) is one of the biggest banks in the world with assets of approaching US$ 700 billion, capital of about US$ 41 billion and a market cap of US$ 71 billion. By comparison Canada’s largest bank the Royal Bank of Canada (RY-TSE, NYSE has assets of about US$ 235 billion, equity of about US$ 12 billion and a market cap of about US$ 26 billion. J.P. Morgan Chase is roughly three times the size of Canada’s largest bank.
But there is an area where J.P. Morgan Chase dwarfs the Royal Bank. Indeed J.P. Morgan Chase dwarfs everyone in this business. The business is derivatives. In the USA J. P. Morgan Chase is over 50% of the derivatives market. According to figures from the Office of the Comptroller of the Currency (OCC) as at December 31, 2001 JPM had notional amounts of derivative contracts outstanding of US$ 23,520 billion or US$ 23.5 trillion. That was out of total derivatives of reporting banks of US$ 45.4 trillion. The aforementioned Royal Bank of Canada had at the end of their second quarter a notional amount outstanding of approximately US$ 1.2 trillion.
Ah the old "second half recovery" routine. Gawd how many times did we hear that from the tech companies in the first two quarterly reports of 2000 and 2001.
It’s pretty simple how one bank could lead to many other failures, at least in this country. The nanny-state education has set in and some people don’t know how to use the john without government intervention. Had the government allowed such a company to collapse under the weight of its own mismanagement, people would have panicked and done even more damage.
Apparently the lack of confidence started at the top. I've seen reports that Bear-Stearns execs sold 27 million shares of B-S stock for $2 billion in mid-February.
If Bear-Stearns did not have a lack of capital or liquidity, why hasn't any other outfit offered more than $10 per share for it?
The market after digesting all the public information available on BSC valued it at $30. All the available public information was a lie. It was worth less than nothing. How can anyone have any confidence in this stock market?
However, the prices would be public and therefore, *every other holder of this exotic paper* would have to assign a value to what they were holding. And then bump up their reserves to cover it.
Because massive and largely pointless regulatory burdens have forced the consolidation of certain types of financial business into a few huge institutions, so that they can manage the regulatory burden through economies of scale.
Re: Ben Bernanke admits Bear Stearns was hours from collapse
This made as much sense as bailing out Pets.com would have in 2000.
If a few people can take down the entire economic world, then perhaps derivitives trading should be more closely regulated, or done away with entirely.
We didn’t have it in the 1950’s and somehow we managed to thrive and prosper!
Indeed. The proof that the Fed did the right thing here is that of all the parties whining about how it was the wrong thing, not one is offering a higher bid to accompany the whine. Even while it was still at $2/share, there were no other bidders.
You’re not supposed to see the men behind the curtain.
Pay no attention to them.
Indeed. If more proof is needed one only needs to listen to the Sr. Senator from NY (who's name I will not repeat).
I will also add that I think he posts here.
An extremely astute observation.
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