Thinking About the Bear Stearns Bailout 16 comments
-
Font Size:
-
Print
- TweetThis
When I go to prayer meeting on Thursday evenings, I have recently begun requesting prayer for the economy and policymakers. Ordinarily, I resist doing that, because it usually doesn’t sound right. I remember one time two years ago explaining why we should pray about a given economic issue, and my dear wife said, “Let me get this straight. We’re praying for the World Economy, that we don’t have a disaster?” But when I was asked to explain my concern recently, I said, “Things are breaking in the financial system that no one a year ago would expect to break, and the costs could be high. A second Great Depression is not impossible, and a repeat of something similar to the 70’s is more likely, minus the ugly clothes.” That said, I am satisfied with praying for my daily bread, and the daily bread of others.
I didn’t expect to start the post this way, but that’s what’s on my heart. Things are breaking that should not break, but what is happening is consistent with what I have been writing about here and at RealMoney for the past four years. I am not a bear by nature, nor a bull. I just try to analyze economic situations from a holistic perspective, and what I have seen over the past four years, was a massive increase in leverage that was not sustainable. This affected the investment banks as well, and in this case, Bear Stearns in particular.
Confidence is tricky. The investment banks are more highly levered than mortgage REITs, and we have seen the fallout there, even though real estate is more stable than the assets financed by most investment banks.
This is why in investing, I write about having a provision for adverse deviation, or in Ben Graham’s terms, “A margin of safety.” With leverage, one should always calculate the maximum amount of leverage consistent with prudence, and then take several steps back from there. What is permissible in the boom phase has little relevance to the bust phase.
Now, I tell my children, “Don’t blame the Ump.” In sports, if it is call of an umpire or referee that is the difference between victory and defeat, then you did not deserve to win. You did not gain a commanding lead in the contest. In this situation, Bear Stearns played close enough to the edge that rumors could begin to push at their short-term financing base, creating a crisis. Investment banks must be like Caesar’s wife — there can’t be a hint of impropriety (with respect to financing).
Now, with a downgrade in credit ratings, Bear Stearns will have to find a buyer. Why? Major financial companies that lend have to have A-1/P-1 commercial paper ratings in order to make money. The ability to borrow at cheap rates in the short run is important to profitability.
Naked Capitalism has some good points on this topic. I would echo on the mortgage exposure. More important is not being liked. According to friends of mine, Lehman got rescued privately during the LTCM crisis because they convinced creditors to support them. Bear walked out on the LTCM bailout, and it still leaves a bad taste in the mouth of Wall Street. Wall Street does have honor, in a twisted way. They remember who were their friends during tough times. Bear was not one of them.
When there is a lot of worry around, it doesn’t take much to kick a marginal firm over the edge. Bear had ample opportunity to move to lower level of leverage, and did not do it. Now let’s talk about the rescuer.
The Omnipotent Federal Reserve
The Fed can’t run out of bullets, because it can always print money. That comes with an inflation price tag attached, though. In this case, they are providing funds freely to J. P. Morgan to the extent that they lend to Bear Stearns. Now, I know why the Fed did this. Bear Stearns my be small in a market capitalization sense, but is large when one considers all of the debts that they have, both in the cash and synthetic markets. (As an aside, I was analyzing some muni bonds of a major issuer today, and it amazed me that Bear Stearns was their #2 counterparty.)
Now the Fed has Fed funds, the discount window, TAF, TSLF, and more. I am not here to fault them for lack of creativity. I am here to fault them for (like Bear Stearns) overtaxing their balance sheet. There is only so much that the Fed can rescue before it chokes, because they (at that point) have no more safe assets to pledge.
I sold my capital markets exposure earlier this week, and I am glad that I did, late as that was. The Fed is not big enough to rescue all of the investment banks, nor could they rescue the GSEs, without creating significant price inflation. What a mess. Avoid the depositary financials, and those that lend and intermediate aggressively. This is not a time to be a hero in financials.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 16 comments:
Chance of a Great Depression II is not likely; God is on our side.
My personal take is we have reached the pinnacle of this current financial crisis, a crisis which never should have come to be. I am not writing this crisis should have been prevented by powers to be greater than God Herself. No, I am writing those of our American public and other peoples, have been slapped down and removed from our markets for their irresponsible borrowing of money. Yes, a lot of families are caused harm but this is self-inflicted harm. Yes, there is some responsibility amongst lenders for lending to families who those lenders knew had no chance of making payments, especially when interest rates reset.
So, all of us are being b-word slapped. Our bottoms are being spanked, and lessons are learned. Will not be long those television commercials for new cars will have changed fine print, "Only for exceptionally well qualified buyers." This is not you. Today's well qualified buyers are those who pay with cold hard cash, if not cold hard gold bullion.
Inherently, there is a lot of panic surrounding this Bear Sterns comedy, and this panic is what the Feds are addressing. I am not in a panic, nor should others be in a panic. This blood in the street is our cue to start buying stocks, a variety of stocks and lots of stock.
Our fed boys are not saving Bear Sterns. Those fed boys, guided by a chimpanzee romping around upon an Oval Office desk, those feds are saving us from panic. Our feds are sending us a message, "Don't worry, be happy." The Bush monkey and circus sidekicks are addressing our American public by bailing us out of panic which could lead to a certain collapse of almost all financial institutions. Our Oval Office chimpanzee is being taught about a past history of Americans forming long lines at bank doors to withdraw their cash.
Our federal three ring circus will prevent this by dropping tons of freshly printed dollar bills from black U.N helicopters upon the American public.
I am not worried about Bear Sterns, am not worried about our American economy. I am worried about our American public flying off into an mindless panic rather than their calmly acknowledging our American public is the root cause of our current financial calamity,
then getting to work repairing the damage done by poor thinking.
I would pray for our America but I am a pagan American Indian who relies upon good thinking and upon good actions rather than upon wishful prayers.
Okpulot Taha
Choctaw Nation
Sky is falling, sky is falling.....all banks are going belly up....sell, sell, sell
Prayers will save no one....time, patience and logic will.
Ask yourself, are the assets Bear's problem, or is it the irrational reaction of certain investment partners that caused a domino effect? I would argue it is the latter. This is no Enron, no S & L. These are hard assets with serious value that are getting killed because the same idiots that would sell a loan to a fire hydrant now won't deal in assets insured by God himself.
Sharks are out looking for blood and several firms will make serious money. Greed overcomes fear. Next.
"I hope you have a crate of gas-X because that BSC stock is going to cause you some indigestion."
I will fall to my knees and pray for profitable salvation.
There is little concern on my part. Should my trading strategy prove successful, I will be out of Bear Stearns stock before close of markets on Monday, and enjoying a five to ten percent profit margin.
If not, I will be out of BSC by Monday afternoon and suffering a five to ten percent loss on my money.
Trading stocks is simply an art of risk management. You have to be willing to take risks if to effectively play the markets.
Prescient shares his thoughts,
"Sharks are out looking for blood and several firms will make serious money."
Yep. Bear Stearns is a K-Mart blue light special at a fifty percent discount sale price, a blood in the streets sale. I am noting there is even a Chinese shark or two joining in on this feeding frenzy. Rumor has it JP Morgan will be the shark who takes the biggest bites.
Peter Lynch up there, smells this one just right. Only problem with Bear Sterns, setting aside a cash flow problem, is fear and panic. Any of you readers notice how fast trades were flying by on Friday? Heck, I had to down ten cups of Folger's jitter juice just to catch every fifth trade flying by at warp nine.
Label me a sinner. I jumped in to wring a few Chicken Little necks for a fine feast. Rather gratifying to feed upon fear and panic of others; easy pickings. Easy to do when you do not have Heavenly commandments and proper societal mores in your way.
Pays well to be a pagan savage.
Okpulot Taha
Choctaw Nation
If we are on the downslope past the inflection point of a multi-decade credit cycle then there will be people who didn't forsee these troubles, who did what they thought was right, perhaps bought a home to shelter and protect their families and not to get rich, lived within their means and worked hard, who are going to get hit with a ton of bricks.
I read Pierre Berton's book about the Great Depression, as seen through Canadian eyes, but equally and perhaps more nasty as conditions in the USA at that time.
The utter desperation of ordinary people who weren't greedy speculators, struggling to stay alive. The destruction of credit that precipitated that time has eerie parallels to today's situation. Only we are talking about a vastly greater loss of confidence due to the globalization of finance.
www.amazon.com/Great-D...
www.jpmorgan.com/cm/Sa...
(This chicken little was smart enough to buy put options on Friday. BSC - like any investment company - was bankrupt the moment that bailout was announced. Take my advice and do the same with the next "troubled" announcements - and there will be more. If a bank or investment company loses "client trust," they're effectively worth the value of their real estate and office furniture).
Purl Gurl gets a kick out of antagonizing people with her arrogant boasting, preaching and put-downs but her posts do have some entertainment value...
Where I am is about to hot rod my way to our bank, laughing the whole delightful way. On Sunday, I had a parish priest bless my plan B for making a graceful exit from Bear Sterns.
I did so. Plan B cleared me a net profit of $4688.51 in exchange for a weekend of significant high anxiety. A few more gray hairs on my head, a few more worry wrinkles on my face, but worth the money. Just a matter of dumping a total quarter million into Bear Sterns to exit with a little bit of pocket change.
Whew! Thank God and Her preference for favoring women; now I can afford a tank of gas for my classic hot rod Corvette.
So, how many of you savvy trader boys saw this $2.00 per share sellout coming on Sunday? Not one of you! I sure did not nor did anyone else around our world.
Difference between boy traders and girl traders is God, in Her infinitive wisdom, blessed us women with metaphorical balls and blessed us women with sense enough to have a plan B backup.
Now I am looking at plan C to possibly earn more profits off Bear Sterns but must first confess to a priest inside one of those cramped little boxes where people spill their guts and say a lot of "Hail Mary" type repentance. I must confess I made use of a lot of vulgar words on Sunday afternoon. Certainly I am on the Highway to Hell.
Not really. I am not about to confess to a priest I am a typical healthy person prone to both success and failure, along with be tempted by the lure of the Almighty Buck.
Besides, I am pagan savage American Indian.
Purl Gurl
Choctaw Nation