Bear Stearns, One Year Later

One year ago, Bear Stearns failed. On March 16, stockholders found that their stock, which had sold above $150, was being bought for only $2. The financial disaster had been brewing since the prior summer, but the failure of Bear Stearns marked the beginning of the credit crisis.

For a frame of reference, the following had values back then:

Dow Jones........11,951
S&P500..............1,288
Alerian MLP Index..279

Over the next 6 months, stocks fell but very few (including government regulators) recognized the approaching credit crisis. Barney Frank reassured Fannie Mae (FNM) investors during the summer that Fannie Mae was financially strong even though the stock had plummeted to 10 (shown over his shoulder) on CNBC. Around early September, the two parties had their political conventions. Not one person at either convention mentioned anything about being on the brink of an enormous financial crisis. Six months after Bear Stearns collapsed, around September 15, the credit crisis struck full force with the failure of Lehman (LEHMQ.PK). In mid September, Dow was about 11,000 and the S&P 500 was above 1200 as the financial world and the entire US economy hit a brick wall from which there has been no recovery.

There has been one bank bailout after another, costing billions and billions of dollars. The money spent is so vast it's difficult to tabulate or even comprehend it all. AIG, which had been an insurance company (for financial companies, among others) with a AAA credit rating, would have gone out of business without enormous sums of government bailout money. Now utter confusion reigns in Washington DC as legislators are trying to explain what they knew about AIG, saving them and the emotionally charged bonus payments issue. Fannie Mae and Freddie Mac (FRE) are lucky to be alive, again bailed out with huge amounts of government aid. Citigroup (C), which had been the largest financial company in the world, is now a dollar stock. Whoops, it's back to $2+ after its recent rally. Who would have predicted such a low price as recently as last year?

The Bloomberg S&P 500 FINANCIALS INDEX shows the damage to financial stocks. It had risen to over 500 in 2007. This month it went down to a low of 82, shot up to 126 followed by a drop to under 110 in the last 2 days. Virtually every major bank has slashed its dividend to a nominal amount or nothing. Of the 7 major banks in the S&P 500 Dividend Aristocrats in 2005, none remain. Damage was not limited to the financials. Just from the S&P 500 Dividend Aristocrats, long time members Pfizer (PFE), Masco (MAS) and General Electric (GE) have announced large reductions in their dividends which will remove them from the group.

Six months after the collapse of Lehman, the government has tried and tried to fix the credit crisis mess with little success. Stocks have lost one third in the last 6 months from already low values. As bad as things have been for financials, they may get worse. In the middle of last week, after the the Federal Reserve announced plans to buy bonds, markets lost their way and sold off. The credit crisis has gotten caught up in DC politics as politicians felt a compelling need to go after a handful of AIG executives receiving a relatively modest amount of incentive bonus money. The same Congress, which generally requires a month or two just to form a committee to think about things before beginning any project, launched a campaign in a few days to go after the bonus money (even though it represents only a tiny fraction of all the money they authorized to bail out AIG) with a vengeance. This controversy is making it even more difficult to run a huge business at AIG and allow it to recover.

To emerge from this recession, business needs credit and that will come largely from banks. Banks are not giving loans, to a degree because Congress has declared war on bailout banks, financial institutions and Wall Street. Strong emotional issues are running very high, making it even harder to obtain guidance and helpful legislation out of DC. As this is being written, hints about the new bank bailout program are leaking out finally. That announcement should give the markets a lift, but maybe only temporarily. Congress still has to approve any plans and that is uncertain given the political mess in DC which is proving to be worse than the the credit crisis. When Bear Stearns went out, Dow was 12,000. Six month later, it slipped to 11,000. From today's value, under 7300, it's going to take a very long time before we see those levels again.

Comments

[Amouna:]

One year ago already! it seems so fresh in memory and yet soo much has happened since...

Mar 24 08:41 AM

[nukldrager:]

Something like the right hand not knowing what the left hand is doing except that neither hand knows what it's doing.

Mar 24 08:51 AM