Bear Sterns Sold!

[Embar Angylwrath]

This is incredible news.

http://www.ft.com/cms/s/e2206ed2-f380-1 ... fd2ac.html

Bear Sterns was sold for $2.00/share. That's less than what triggers penny stock ranking and being shunted to the pinlk sheet/OTC bulletin board trading(below $5.00/share). Considering it was trading at $165 last year, and started at upwards of $55 just this last Friday (ended at about $30), the share and option holders just took a financial anal fisting. And this is AFTER the Fed stepped in and gave Bear Sterns four weeks of liquidity support.

Come Monday, expect all US bank stocks to take damage. Especially those with large exposure in bundled mortgages.

[Partha]

Socialized banking. Hmf.

[Klast Brell]

Scariest thing I heard about the 2 buck a share sale is that that price does not even cover the value of their headquarters building.
Markets all over the world are taking a shit over this. I wonder if this will mark a turning point in our economy?

[Embar Angylwrath]

Socialized banking. Hmf.

I agree. The Fed shouldn't have financed the sale. If JPMorgan couldn't come up with a measly $270 million...makes you wonder if JPMorgan is all that sound. And if you read that article carefully, there were some very rich people who aren't so very rich anymore, because of that. Having a billion dollar investment get reduced to 20 million overnight.... wow.

[Finglefinn]

It is obvious that Bear Stearns has made some bad decisions in the past couple years.

There's nothing wrong with the Fed backing $30B. They aren't funding the $236MM stock purchase. They can't legally do that. They are simply giving JPMorgan a treasury note to secure the $30B mortgage securities JPMorgan acquired with the stock purchase. It's about keeping the market stable in the middle of a significant event.

[Partha]

Oh, THAT'S all it is. And here I thought it was just another example of 'failure is something that only gets to happen to the little people'.

[rodric]

like the little people that are getting bailed out of subprime loans?

Rhodric

[Embar Angylwrath]

like the little people that are getting bailed out of subprime loans?

Rhodric

Oh snap!

When the little people get bailed out, according to Partha, it a fundamental right they have. When banks get bailed out, it's corporate welfare.

It's welfare on both ends, and I think it's wrong. The houses that were bought with unsustainable mortgages need to enter the market again as foreclosures. This will increase supply, decrease demand, resulting in lower prices and correcting for the run-up in prices over the last few years.

The banks and investment houses that funded those sub-primes need to pay the price too. Arguably, Bear Sterns DID pay the price. They sold for less than their balance sheet, which is probably what they would have sold for in a bankruptcy. There wouldn't have been a reorganization bankruptcy, it would have been a liquidation. Investors who bet on the heavy subprime mix lost entire fortunes and were wiped out.

I think there are three or four more investment houses that are at risk like Bear Sterns. THe same thing will happen to at least a couple of them. For trading houses, the assets you hold must actually trade in order generate capital. In every transaction, there's a buyer and a seller. No one is buying bundled sub-prime mortgages, or if they do, it's a pennies of what the investment houses bought them at. For all their complxity with the types of structured deals they do, investment houses, at their core, are really quite simple.

Here's a shitty analogy. Lets say you're a buyer and seller of farm goods. You think oranges are really going to sell well this year, so you use 90% of your assets to buy oranges, ready to make a killing when you sell them. Then a government report comes out linking oranges to a deadly virus, and all of a sudden, no one wants to buy oranges. Try as you might, you can't sell even one damned orange, no matter what offering price you put out there. No one will buy an orange, period. That 90% of your assets just became worthless. You're bankrupt.

That's what happened to Bear Sterns (although I don't know what part of their assets were tied up in sub-prime.. whatever it was, it was enough).

[Finglefinn]

I don't know Bear Stearns balance sheet mix either, but as of 11/07 on the asset side, of the $395B in assets, $269B were tied up in long-term investments. And since they are an investment bank, you can bet a significant portion of those assets are mortgage-backed securities.

On step further, Embar, all mortgage-backed securities are taking a hit right now. Not just subprime. The problem is, investors do not trust the quality of the security they are buying. With default rates increasing across the board, the rating of the security is untrustworthy. It's going to take some time to correct this issue.

[Finglefinn]

dp

[Klast Brell]

like the little people that are getting bailed out of subprime loans?

Rhodric

Let me just call bullshit on you right now. No "little people" are getting bailed out yet. There are just vague proposals floated by the presidential candidates. The only bailing out that has happened so far is for the "big people"

[Harlowe]

Going to echo Klast here - Where are the little people being bailed out? When has that happened? Seriously, all we ever do is bail out companies and banks.

[Partha]

When the little people get bailed out, according to Partha, it a fundamental right they have. When banks get bailed out, it's corporate welfare.

It's welfare on both ends, and I think it's wrong. The houses that were bought with unsustainable mortgages need to enter the market again as foreclosures. This will increase supply, decrease demand, resulting in lower prices and correcting for the run-up in prices over the last few years.

Congratulations, you've managed to reject one part of the Free Trader's Mantra.

No, I don't agree with a bailout of anyone, either. But if you're (not you, but the ones who really believe there IS an 'invisible hand' that will correct everything to the good) going to argue that bailing out Bear Sterns is a necessity...then you're arguing that ALL bailouts are a necessity. There is NO SUCH THING in the free market as 'too big to fail'. Or, there shouldn't be, at any rate.

But over and over, we see government come to the rescue of the screaming plutocrats who were riding high on the hog just a few short years ago on the backs of workers who didn't get wage increases, lost benefits, and worked more for less security.

Chrysler under Iacocca. The airlines. And now a 'bank' whose only rationale for existence was to push paper around for fictional profits. No talk about tightening their credit standards back when they were short selling option shares at $145, and no attempt to give up their golden parachutes even while Rome burns around their fucking ears and they end up selling their company for a total of one FOURTH the assessed value of their corporate headquarters. No big talk about 'personal responsibility'. It's just 'Oh, Mr. Bernanke, come save us with your MAGICAL HELICOPTER!'.

Disgusting.

[Kulaf]

What is this "bailout" you keep harping about Partha? No one is bailing out anyone. The Fed is guaranteeing the loans.......much like the FDIC guarantees deposits. Do you have a problem with FDIC insured accounts too for "the little people"? Or if their bank fails should they just lose all of their life savings because they made the unfortunate choice to bank at that location?

The CEO there saw his personal investment in the company go from 900 million to 13 million. Now if someone bails him out I will have a problem with it, but guaranteeing loans so their is not a firesale on mortgage backed securities is hardly a "bail out" of Bear Sterns.

[Finglefinn]

Kulaf is right and as I posted before, the Fed is simply supporting, by way of a $30B note, the mortgage backed securities Bear Stearns has that JPMorgan is acquiring. The Fed is making sure that JPMorgan does not go in and liquidate the securities. If they had to do that, the mortgage market would surely be in much worse shape than it is now. Mortgage backed securities are already struggling. With a $30B liquidation, the entire market would most likely be downgraded to junk bond status.

If you know anything about 401Ks or the mortgage banking industry, the actions the Fed is taking are very very good. Anyone who's 401K invests in mortgage backed securities is very happy right now.

[Partha]

Let me put it in these terms: If JPMorgan can't afford to service the potential debt on a company they're buying for seven cents on the dollar...they shouldn't be buying. If I can't afford to buy a 50k car for $3500, I have no right to expect the Fed to offer to underwrite my monthly car payments.

Quite frankly, there SHOULD be a fire sale and liquidation on exactly those kind of mortgage securities. Gaming the system to prevent unwelcome outcomes for the plutocrats is the reason we're in the mess we're in now - without any risk, they felt free to gamble on bad loans. If you take away the negative outcomes from the system, why bother with the system?

[Kulaf]

Man you have a twisted way of looking at things Partha. On one hand you rail for the "little guy" and then with the other slap em in the face by saying the economy should be tossed on the scrap heap.....hell let's just trigger a depression then the "little guy" will be much better off.

Janus thy name is Partha.

[Partha]

The 'little guy' has already been piled under in the current system, Kulaf. My view is that the system shouldn't deliberately sacrifice them to allow a few to prosper beyond all reasonable expectations. If it takes a depression to foster a reasonably regulated economy and clear out the trickledown libertarian economic mumbojumbo out of the system, I'll be hurting just like most of my fellow Americans. My parents were born into the depression - I can't say I'll be looking forward to it, either.

[Ddrak]

The Fed is artificially reducing the risk for JP Morgan in the purchase of Bear Sterns (and hence giving them money in the interest they save by borrowing to finance at a reduced rate). They're not actually paying anything *unless* JP Morgan goes under and their creditors hit the Fed up for the guarantee - then shit's hit the fan so bad anyway that the 1930s will look like a minor correction.

It was the right move for the Fed to make, but the overall effect is going to be to drive up inflation and drop the dollar, which is the direction it's been heading for a long time now. Real Estate is a good option, or moving your investments to European or Chinese stocks (in my rather stupid opinion). The US still isn't out of crisis.

Dd

[Kulaf]

Partha is just channeling Lenin.