Ben Bernanke admits Bear Stearns was hours from collapse

Times of London ^ | 04/03/08 | Dearbail Jordan

[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.

[nicmarlo]

Meredith Whitney says there is no bottom yet.

[bpjam]

Thanks.

Valuation on the market or any individual stock is really just a giant game of ‘agreement’. If I can convince you and everybody else of importance that the world is too hot and we need to reduce the global temperature by 2F, then we can create a model by which everybody else basically sees the daily thermostat as under or over the ‘average’. It only works if an overwhelming majority go for it.

But looking at a company like Goldman Sachs, which is the best of breed in the brokerage sector, is trading at an 8 PE and that is historically so low that it should be a STRONG BUY for anybody. But there are so many calculations at any given time necessary to figure out what the temperature of investors and (more importantly) investment fund managers are that overvalued or undervalued is something which only has meaning in the very near term.

Curiously, I could make a very good case that on a purely technical standpoint that the 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. And while that even might be fundamentally true, it doesn’t take into account anything which will be happening in the real world which will have bearing on it. So, it might turn out that what we are looking at today is actually UNDERvalued by quite a bit considering that we’re seeing number like these at a time when we are also in a recession.

Smart investing is a constant and diligent process. The whole ‘buy and hold’ mantra is great as a bumper sticker but it’s not something actual investors believe. I’m just glad that we had Big Ben in there and not Greenspaz because we might have had a much worse outcome.

And one very good way to judge whether the Fed actions are successful or not is to see if the Dems immediately try to get major traction in attacking him. If they don’t attack, its a case of unquestioned success for the Fed or for Ben. The dems (like Chuckie Schumer today) try to make political gain out of anything possible and the fact that they haven’t figured out how to do it on the Bear Stearns fiasco means Ben knocked it out of the park.

[nicmarlo]

UBS to Write Down Another $19 Billion
April 2, 2008

The mortgage crisis set off fresh shock waves Tuesday, with the biggest banks in Switzerland and Germany announcing huge write-downs totaling $23 billion, adding to the hundreds of billions in losses that financial firms already face from the subprime mortgage fallout.

Despite the continuing global tide of red ink, investors seized on hopes that the crisis may have hit bottom. Dow Jones industrial average surged more than 3 percent, or nearly 392 points.

...."The market has been consistently wrong each time they tried to find a bottom,” said Meredith Whitney, an analyst at Oppenheimer & Company, noting that earlier stock rallies in January and last fall were overwhelmed by more bad news......“There’s a ‘hooray’ from the stands, but investors don’t realize the bench has been weakened,” she said. “There’s no end in sight in terms of bad news.”.....

[nicmarlo]

Also, from my audio link posted in #73....

15:50

“We don’t know if Bear Stearns is the mine disaster, or the
canary in the mine announcing that there is more to come”

[Mr. Jeeves]

The whole ‘buy and hold’ mantra is great as a bumper sticker but it’s not something actual investors believe.

Unfortunately, it's something the compliance department at my firm believes - and our rules virtually prohibit trading. So all I'm allowed to do is 'buy and hold' in this very dangerous market. ;)

[nicmarlo]

Kind of depends on what you mean by “well.”

By well meaning escaping a MAJOR recession if not outright depression.

[GOPJ]

So he basically admitted that JPM was the next domino to fall if Bear had declared bankruptcy.

And if that had happened, the whole system would collapse.

And then? What?

[GOPJ]

If failure is not an option, then no consequences occur and no lessons are learned.

You're right

- why should Chase or Bear or anyone reduce risk - and the extra profit that comes with extra risk...

if in fact there is no risk.

Next time, it'll be worse.

Much worse.

[irish guard]

Wading carefully into this conversation is a bit dangerous, but there were days over the past two months where I felt we were on the verge of global financial collapse. I knew of Bear’s troubles and of others. Had the Fed not arranged the merger and simply let Bear fall, that might have been really ugly, uglier than any of you can imagine. Money market funds would have possibly broken the dollar, derivative defaults everywhere and serious panic that the markets could absorb the hit. But equally as bad would have been to not open the discount window to others. While it philosophically cuts me to the bone to admit we needed government intervention, we were right on the edge of a cliff and Bernanke made the right call. Flame away.

[null and void]

That’s not what toddsterpatriot says. (Assuming, of course, that I understood what he was trying to say).

[Abigail Adams]

Very interesting, thanks!

[nicmarlo]

No intention of flaming away. I don’t think Bernanke made the right decision. And I don’t think Greenspan did years earlier (by allowing this to happen...too much evidence out there to suggest that he either encouraged these risks, looked the other away, or didn’t understand the devastation these “innovations” would bring).

But...I still don’t believe we are passed the worst. Too much bad debt (and other issues) out there.

And new information I’m seeing and reading about Lehman isn’t too good, either.

[spectre]

I love reading your excellent posts!

So after I panicked when Citi was at its lowest, we decided to keep it. It's coming back up now.

As far as using WAL*Mart as your "example", I don't think they'd dump THAT stock..cuz I fully expect that if we colonize the Moon, the first store on it will be a Wal Mart! :)

sw

[GovernmentShrinker]

If there were other institutions that were willing to step up and commit to a deal on such short notice, why haven’t any of them piped up and said so? At least a couple of other institutions had brief discussions with the Fed about stepping in, but backed off (reportedly they only wanted certain plum pieces of Bear).

The senior execs of every financial institution on the planet that’s even a tenth of the size needed to handle an acquisition like this knew full well by Friday morning that the Fed was seeking a buyer to do an emergency deal to rescue Bear. It’s not like any of them don’t know how to contact the Fed to express interest. Some of them certainly did put in inquiries, but nobody offered to do a deal involving the whole Bear Stearns entity, to be publicly announced by 8PM Sunday evening, which was the absolute time limit. There simply wasn’t time to entertain complicated bids that involved parceling off different pieces of Bear, taking multiple bids for each part, parceling out liability for corporate level actions to part-buyers, etc.

Nobody should be complaining about the Fed’s deal with JPM. It was the only deal available, and it had to be done, because 99.9% of Americans don’t want to have their financial security devastated in hopes that it will bring about some ideologically pure financial system.

There ought to be a LOT more focus on how Bear got itself into this condition in the first place. The plan to give the Fed some regulatory authority over broker-dealers is a step towards preventing a repeat of this. But all the senior executives and board members of Bear Stearns should be under intense criminal investigation right now. At the very least, there was a lot of gross negligence on their part. These schmoozing, golfing, bridge-playing big-wigs only understand one punishment, and that’s getting locked up. The message needs to be sent loud and clear that if you negligently cause the failure of a large financial institution to a degree that puts other institutions and whole countries’ economies at risk, that you can’t assume the worst that will happen is you get fired and lose the value of your stock and stock options. The prospect of playing golf/bridge full time instead of just half the time isn’t scary enough to curb their misdeeds.

[irish guard]

I'll agree that Greenspan was partially at fault by his policies, but the list of who caused this is long:

Congress for encouraging lenders to lend to people who had no business taking on a mortgage. They neither had enough money down, nor the ability to pay their debts

Lenders for being greedy

Borrowers who had no business doing this

Investment banks who did poor due dilligence

Bond insurers who never understood the risks properly

The commissioners of insurance in New York and Wisconsin (Ambac is domiciled in Wisconsin)

The rating agencies for not understanding the risks.....

All this led to the sub prime collapse. I hope to God we are past the worst, won't comment on Lehman, but stand firmly behind Bernanke. The sub prime mess spilled beyond commercial banks, investment banks and bond insurers. It ran all the way to the municipal markets where there were nearly a trillion dollars of bonds at risk of downgrades. The market needed the stability the Fed provided.

We're not out of the woods, but had they not acted to find a buyer for Bear, to open the discount window to certain investment banks and cut rates, I really wonder where we'd be right now.

[nicmarlo]

....All this led to the sub prime collapse. I hope to God we are past the worst, won't comment on Lehman, but stand firmly behind Bernanke. The sub prime mess spilled beyond commercial banks, investment banks and bond insurers. It ran all the way to the municipal markets where there were nearly a trillion dollars of bonds at risk of downgrades.

Exactly. And ALL those problems still exist. You haven't seen nothing yet in California, for starters. There's untold numbers of people who have still not yet defaulted on their mortgage payments. It'll take several months before that all begins to have additional severe effects on the economy/market. Is it 3 months or so before lenders can go after people for default?

As far as the AMBAC & MBIA ratings...I don't believe their joke ratings (which were bought and paid for) have been re-evaluated to honest ratings (and will not be AAA any longer). So...beyond the ratings currently in place...who will truly put their trust into whatever ratings AMBAC or MBIA places in the future? Had they given accurate and honest ratings....how many of these junk ratings would have been given AAA?

The banks will continue to have announce write-downs. And as, no doubt, many will seek to raise capital by transferring at least some assets into actual values (and we are looking at way less than what they could otherwise get...because credit has now become more restricted, and corporations/people are likely less able and/or willing to spend their monies on properties, etc.), they will continue to be worth less and less and more and more banks/corporations continue to try to dump their assets. (Meredith Whitney also spoke to this problem....they will be competing against each other to get rid of these assets...this will only further reduce what they can sell it for; and to less and less interested and/or qualified buyers.)

All these problems haven't gone away because of the Bear Stearns "deal." And the economy isn't going to "get better" because of Bear Stearns, either. It's way beyond just "BS".

[nicmarlo]

Here's one "for instance" regarding defaults/foreclosures:

http://bigpicture.typepad.com/comments/2008/04/the-advantages.html

Lender-Abandoned, Non-REO Foreclosures
Thursday, April 03, 2008

Consider this troubling question: Do mortgage lenders have any obligation to take over a property that has defaulted on its mortgage?

The short answer, it appears, is no:

I hadn't previously considered this, until a recent article in the Chicago Tribune started me down this path.

Foreclosures and REOs properties are impacting more than the neighborhoods they are in -- they are actually adversely impacting the real estate business -- especially when it comes to foreclosed homes in possession of lenders (REOs).

First, have a look at some recent data regarding REOs:

* * *

"In some cities that have low property values, where there are dense concentrations of foreclosures, you see lenders who file foreclosure proceedings but don't actually take control of the properties, because the lenders have to maintain them and pay taxes on them."

"There are areas in some parts of the country where property values are quite low, and there are no large-scale expectations of them going up. They don't know that they will ever recoup those costs," and so the lenders never re-take title to the properties, allowing them to become derelict."

Municipalities/local governments will be stuck with this mess...either paying the taxes, foregoing the taxes, trying to sell or, perhaps, just bulldozing homes....and IT WILL BE THE LENDERS who, once again, get bailed out, courtesy of U.S. taxpayers.

[rolling_stone]

Here you go nic
http://www.youtube.com/watch?v=tebO2v3qBVY

[nicmarlo]

Good post! Good video about Lehman. Thanks for the posting the link.

Wow....when I first saw it, it was at 40 (it had just been posted) now it’s at over 3,600.

[nicmarlo]

hehehe

Mr. Mortgage’s video is on

http://ml-implode.com/