March 14 (Bloomberg) — Bear Stearns Cos. obtained emergency funding from JPMorgan Chase & Co. and the New York Federal Reserve as the securities firm said its cash position had “significantly deteriorated.”The New York Fed will “provide non-recourse, back-to-back” financing for up to 28 days, JPMorgan said in a statement today. Bear Stearns said it was in talks with the New York-based bank “regarding permanent funding or other alternatives.”Bear Stearns plummeted $21, or a record 37 percent, to $36 at 10:08 a.m. in New York Stock Exchange composite trading, the lowest level in more than eight years. The shares fell to as low as $26.85 earlier today.Chief Executive Officer Alan Schwartz said in a separate statement that the firm acted in response to “market rumors” of a liquidity crisis. He had denied this week that Bear Stearns faced a cash shortage, saying the company’s “liquidity cushion” was sufficient to weather the credit-market contraction. Traders have been reluctant to engage in long-term transactions such as credit-default swaps with Bear Stearns as the counterparty, the Wall Street Journal reported yesterday.
Bear Stearns is finished. If your prime broker freezes up, your trading freezes up, too. Every hedge fund, etc. that has BSC as a prime broker is doing whatever it can to get out of that relationship; everyone knows that everyone else is also trying to do that; so Bear Stearns is facing a high-finance version of a run on a bank. Its stock is down 48 percent just today, to about $29, from $160 nine months ago.
Lehman is down 12 percent and still falling. Watch them.
It seems that the keystone-kop Fed has tried the same “bandaid on the jugular” with BSC that it did with Countrywide. JPM threw a 28-day lifeline to Bear, guaranteed by the Fed, much as the Fed (allegedly) got Bank of America to stake Countrywide when it was blowing up.
And of course, for good measure, Bernanke pulled another “getting back at the bears” stunt. The first “tape bomb” was simply that Bear had gotten “financing” from JPM. That sounded like a huge piece of good news and forced BSC short sellers to dump their positions. BSC soared 10% in pre-market trading. Then the second piece of information hit the wires and BSC collapsed 50 percent. JPM probably made more money stealing all those short positions than it “risked” in supporting Bear.
And, as usual, the Fed screwed over the smaller traders who did real research, and made the right calls, in favor of the politically-connected institutions. What a bunch of parasites.
In gold we trust.
Eric:
I think we still have LEH, MS, MER, GS which at some point in time may face a similar (or somewhat milder variation) of BSC situation. What happens then?
What happens when banks start failing?
Instead of reducing rates all this time, the Fed should have kept them high, let the equity markets correct and have foreign buyers provide equity to these players at sharply reduced equity values.
Based on the deterioration in BSC, do you seriously think that any foreigners (or other investors for that matter)
would step up to provide equity to any of the other companies (mentioned above)?
We are in a situation which none of us have experienced and it is going to be extremely ugly.
Why not let these fail? I must be missing something here.
At the end of the day, the debt will have to be paid back – either through deflation or hyperinflation. No?
Does Helicopter Ben seriously believe that he is doing any good by doing all this?
Notwithstanding the fact that the way to make money just got clearer (and easier), I am puzzled by Fed’s decisions.
One thing that I always wondered about was what happens when the Central Bank purchases everything? Theoretically, can’t it just purchase all these bad assets because it can create money out of thin air (putting Harry Potter and He-Who-Must-Not-Be-Named to shame).
Hyperinflation?
Shankar,
In terms of the “let the dumb capitalists fail” argument, you are preaching to the choir here.
Keep your cool. We have been here before: the S&L crisis, for example. The S&L response was actually somewhat restrained. The Japanese response to their systemic banking crisis, on the other hand, was in my opinion an utter disaster. Unfortunately, Bernanke’s life mission has been to prepare a “Japanese response on steroids” “solution” to the next financial crisis facing the United States.
You are correct in surmising that we will either have to shoulder credit deflation now (i.e., higher real value of present debt and no change in long term interest rates) or much higher long term interest rates after attempting to inflate away our present stock of debt. The difference is that the inflationary approach rewards those who allocated capital inefficiently, at the expense of the next generation; whereas letting deflation happen punishes inefficient capital allocation and clears the way for future workers to re-assume normal purchasing power once the bad debt has been dumped from the system.
Remember that there are lots of cash rich vultures out there, who will come in at some point. At worst they can always structure the bailouts in such a way as to insulate themselves from dollar movements (although that is a highly annoying and expensive process). At some point the vultures will swoop in, certainly by Dow-9000 or so.
Also there was the 1980 Latin American loans crisis, which the American banks muddled through by simply not marking losses to market for about 7 years. However, my guess is that Paul Volcker’s credibility was the only reason that Fed wink-and-nod worked.
So no, the end is not nigh. But high structural inflation almost certainly is.
Well, I am glad at least there are a few (such as you) who have the same thoughts and issues with what is going on. Its really sad to see the disaster brought on by a Central Bank run amok. First Greenspan and now Bernanke.
I do watch CNBC and I must say that I get disappointed listening to their commentators and experts (except Rick Santelli).
I still think that Bernanke will try to inflate out of the current mess only creating commodities inflation. In the next few months, 2 things will happen – 1. high commodity prices will run the economy in the ground, and 2. there will be a huge uproar about it. At that point the first phase (inflationary recession) will end and then the second phase (deflationary recession) will begin. I also think that Ben can’t let US$ fall down too much because US still runs a huge deficit and needs foreigners to purchase its treasuries.
I couldn’t agree more with you when you wrote (in one of your earlier articles) about deflation being good for US.
The time to avoid the deflation was during 2002-2003. The Fed is trying to shut the barn door in Montana when the horse has already reached Idaho.