Ben Bernanke admits Bear Stearns was hours from collapse

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

[TigerLikesRooster]

If there were no Fed interventions in a last few months, the bottom must have fallen out in the market.

[TigerLikesRooster]

Ping!

[LS]

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.

[ex-Texan]

I saw him making those comments. He looked like a kid caught reaching into the cookie jar. His eyes were shifting around while he was spinning and parsing his words. People sitting behind him were looking at the ceiling while Helicopter Ben was giving his sales pitch. Ron Paul looked totally disgusted and pissed as Hell.

Bernanke's days at the Fed may be numbered.

[jiggyboy]

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.

[cinives]

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.

[jiggyboy]

Mr Bernanke today reiterated his forecast that the US economy would slow in the first half before staging a recovery in the second half.

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.

[politicket]

The reason that the bottom would have fallen out of the market is because all of the investment house whores are in bed together with hundreds of trillions of dollars worth of derivatives.

If and when the derivatives market tanks then the entire world will be in deep doodoo.

[kenth]

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.

[DuncanWaring]

...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.

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?

[DManA]

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?

[ikka]

MY VIEW: If BS had failed, all of the "unknown value" CDOs/SIVs/etc. would have had to be auctioned off. Because of the fire-sale conditions it would sell for low amounts.

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.

[GovernmentShrinker]

how can any one of many companies be sufficient to collapse the nation’s financial system

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.

[Red in Blue PA]

Re: Ben Bernanke admits Bear Stearns was hours from collapse

This made as much sense as bailing out Pets.com would have in 2000.

[Red in Blue PA]

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!

[GovernmentShrinker]

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?

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.

[the gillman@blacklagoon.com]

You’re not supposed to see the men behind the curtain.
Pay no attention to them.

[politicket]

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.

Too late - it's already "wound around the axle". Investment houses no longer trust each other, since they know what sits "off the books" in their own house.

That's the reason the Fed had to step in and prop up Bears. They didn't really care if Bears and its shareholders went under, but they were deathly afraid of what worldwide derivatives would unravel if they let it happen.

Think of the dollars tied up in derivatives worldwide. We have a national debt above 9 trillion dollars - which is horrendous, but the derivatives amount to around 750 trillion (or 3/4 of a quadrillion) dollars. Can you now see why Bernanke looks so stressed all of the time?

[Proud_texan]

"The proof that the Fed did the right thing"

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.

[L,TOWM]

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

An extremely astute observation.