More Thoughts on the Fed & JPM's BSC Liquidation

Anyone get a great night's sleep?

Not me. I kept waking up, mind racing, thinking about what all this means going forward.

I have Kudlow & Co. Monday night, and Morning Call on Fed day, and I always like to bring some ideas that are not the usual clichéd blahblahblah. Hence, the adrenal overload.

This entire series of events has me thinking about some fascinating wrinkles:

• I think the Fed is acting appropriately to avert an entire financial system meltdown. Whether they will be successful is as of yet, unknown. As we are so fond of saying, there will be costs: Financial, economic, psychological, and prestige-wise to this debacle.

• TANSTAAFL: Speaking of which, we see the Dollar getting whacked further, Gold at $1030, and Oil over $110.

• A bailout for Wall Street may not be very palatable during a recession in a election year. Thus, we should expect a major Housing/Mortgage bailout along any day now. Cost: Very expensive.

• Could J.P. Morgan (JPM) really complete a thorough due diligence on all of Bear Stearn's (BSC) crappy paper, leveraged risk, and counter-party obligations in 2 days? I doubt it. Hence, the $30B backstop from the Fed. Not quite free market capitalism, but definitely creative, and certainly destruction.

• JPM now gets a terrific scapegoat for the next 4 (or 8 or 12) quarters to blame for all of their crappy paper, leveraged risk, and counter-party obligations: Bear Stearns.

• The Efficient Market Hypothesis [EMH] takes yet another hit. I am beginning to think markets are lagging indicators...

• The impact of the credit crunch is -- disturbingly -- showing up in places you would never expect. Example: 20% Of Silicon Valley Startups Can’t Get To Their Cash.

• Does this mean Bear's Quarterly earnings call -- scheduled for Monday -- will be canceled?

• EVERYTHING seems to trace its way back to Housing.

Markets are closed for Good Friday, option expiry is Thursday. Get ready for a fun filled, jam packed 4 day week!

Comments

[Tony Soprano:]

"“• I think the Fed is acting appropriately to avert an entire financial system meltdown. Whether they will be successful is as of yet, unknown. As we are so fond of saying, there will be costs: Financial, economic, psychological, and prestige-wise to this debacle.”
______________________...

Bravo! The island must stay afloat or we all drown.

However, every time the government intervened it worked. Also, cost: Financial, economic, psychological, and prestige-wise to this debacle has been, to some degree, factored into the markets.

Don't forget what Jan Hatzius said last Friday: a depreciating dollar is normal for the currency of a country that is about to go into a recession. We fight inflation later.

2008 Mar 17 11:04 AM

[GKM:]

I wonder what the Fed will do tomorrow. Will they shoot the last of their load in one fell swoop? If they do and the Dow isn't up by 800 points what then? Will they honestly cut interest rates to zero at some point once we actually hit bottom? Will the American dollar supplant the Mexican peso as North Amercia's most derisive currency?

Don't bother to answer that last one as that one was just rhetorical.

People keep saying that foreign interests will eventually come in and prop up American asset values. I would venture that the only things they'll be buying will be those which they can repatriate to their home turf. Why carry currency exposure when there is no bottom.

SWF: 'Here's a bunch of worthless t-bills. Give me something I can leave with.' 'Oh, you want to be protectionist? Then I'll just dump my t-bills on the open market and watch you sweat US$200/bbl oil (which will be about 50 EUR).'

The road to ruin is fraught with the best intentions.

2008 Mar 17 10:51 PM