DougM

Making Sense of the Brokerage Bust

The hedge funds are doing exactly the same things these failing firms have been doing; gambling in the markets against each other with huge sums of borrowed money. The only difference is, the big WS firms forced the rest of us to invest in their schemes by virtue of being publicly traded. And, in an odd way, the hedge funds are a cheaper way to lose your money, since their take of the profits is "only" 20%.

More Questions Than Answers on Bear

1. Why was J.P. Morgan able to name its price?
A: The only firm available to buy BSC that has the balance sheet strength and liquidity from the fed. Other possible buyers either can't borrow from the fed or are banks with balance sheet troubles of their own.

2. Why were Bear's shares worth $30 Friday at 4 p.m. and close to $0 by Saturday evening?
A: Because bankruptcy appears to have been the only other alternative, as their liquidity was exhausted. The new liquidity facility from the fed arrived too late for BSC. It might have collapsed Friday if not for the liquidity infusion channelled through JPM. As to the price, who knows? Wishful thinking on the part of shareholders as to the actual value of the company? But without any other buyers, JPM could effectively name its price.

3. Is it possible (and I am asking here, I really don't know!) that an "in-the-money" derivatives portfolio could be viewed as an asset, and pledged to the Fed?
A: Many people think it's already a stretch that the fed is accepting MBS as collateral. Clearly the fed got involved here to avoid a cascade failure of the shadow banking system's derivatives pyramid, so I could forgive them from steering clear of that mess on their own balance sheet.

4. Why should Bear shareholders accept this deal (they must vote to approve it)?
A: You're right, BSC could have threatened to "go nuclear" and trigger the derivatives panic, as a means for trying to get a better price for the buyout. Then again, executives might have been worried about the lawsuits and possible criminal prosecution that might await them along that path. It will be interesting to see if large stockholders want to play at that kind of brinksmanship.