Bear Stearns Bust

Bears Stearns bought out in a stock swap with JP Morgan Chase at $2/share; Bear opened at $53 on Friday morning after the announcement of the Fed/JP Morgan rescue before sliding to a close of $30.

As I type S&P Futures are down about 26 to 1265.  The bottom is somewhere, but where and when?

And why is this a bigger crisis than the S&L collapse of the late 80's?  After a few rocky years we moved on quite nicely back then.

MORE: OK, Bear Stearns opens at $3.17 and is now trading just below $4.  Why? Is another bidder really likely to emerge?  My stray guess is that shareholders expect that, after the stock swap with JP Morgan goes through, some entity called "Bear Stearns" will be carved out and spun off.  That guess and a buck get you a cold look at a Starbucks - bring a fiver.

Comments

[RichatUF]

And why is this a bigger crisis than the S&L collapse of the late 80's? ...Bus

We are all yellow?

We are all being driven to hell, with Bush in the driver seat...

[narciso]

No, Bear Stearns was repackaging 'junk' as prime grade securities; they got burned more than most. By itself, it's not unlike what happened to venerable Barings Bank; in part due to Nick Leeson's trade. The last minute Fed injection to Bear Stearns, sends a bad signal; now everyone is going to expect to get bailed out. Mr. Paulson's appearance on This Week was most
dissapointing. The larger point about the S&Ls, Penn Central, Franklin National, (back in the 70s)and other debacles in recent history is on point. Which raises an interesting question, if this downturn is going to be as Mssr. Dunham, or Mrs. Rodham
think; why would they want to win this time
around.

[anduril]

I shot my wad linking all those articles throughout the week, and anyway I'm no economist. Nevertheless, I'll take a stab at a partial explanation--nothing to do with the fundamentals: world financial markets are far more integrated than they were in the 1980's, info is more available and money moves exponentially faster, borrowers and lenders of all sorts are more leveraged/extended. This leads--a theory of a non-economist--to more jitteriness and volatility.

There are no lack of comparisons out there to the S & L crisis--all you have to do is google something like "comparison credit crisis s & l crisis".

Here's one comparison, almost at random:

The Credit Crisis: Just How Bad Is It?
by Alexander Green, Chairman, Investment U
Investment Director, The Oxford Club

We all know what's been ailing the financial markets lately - record oil prices, the threat of recession and a stubborn liquidity crisis that refuses to go away.

What caused this credit crisis? What can be done about it? And how long is it likely to last? These are the questions investors everywhere are grappling with right now.

The answer to the first one, of course, is easy. In an effort to stave on a potentially debilitating Japan-style deflation, Greenspan took short-term rates all the way down to 1%.

Predictably, that stimulated the economy and the stock market. It also had unintended consequences. Borrowers were motivated to buy more home than they could afford. Lenders were motivated to make loans they shouldn't have made. And Wall Street took these bad loans - along with some good ones - and turned them into publicly traded securities.

The real problem was masked as long as real estate prices kept rising. But when the housing market rolled over, the jig was up. As foreclosures rose - eventually hitting record levels - the market value of subprime mortgages plunged. Eventually they went "no-bid." No one wanted them. And no one wanted the securitized mortgages that Wall Street created, either.

As the Housing Market Succumbs, The Credit Crisis Evolves

The end of the rising housing market has caused a severe liquidity crisis at the nation's banks. And we're now caught in a vicious circle. The value of home loans falls, forcing banks to take write-offs. That pushes the market lower, causing still more write-offs.

However, this week the Federal Reserve announced its intention to lend up to $200 billion of Treasury securities to primary dealers for a term of 28 days, rather than just overnight. The idea, of course, is to increase liquidity and ease the credit crunch.

Unfortunately, this is just a Band-Aid. The wound has still not been treated. And the credit crisis is likely to persist.

Bank Write-Offs Could Hit $600 Billion During the Credit Crunch

So far the total amount of bank write-offs comes to just over $150 billion in this continuing credit crunch. That is equal to only 1% of U.S. GDP. It is less than 1% of the market capitalization of U.S. stocks.

Two weeks ago, however, a report by UBS said losses among financial institutions could top $600 billion as world credit markets continue to freeze up. That's a lot, even measured by the free-spending ways of Washington. Still, it's not as if we haven't been here before.

As Rich Karlgaard writes in the March 10 issue of Forbes, "The nearest historical comparison we have is the savings-and-loan crisis of 1986-95. On a constant dollar basis - so we can compare apples with apples - the S&L crisis saw $700 billion in bad loans… The S&L crisis caused some damage, to be sure. But during the 1986-95 period, the U.S. economy grew and stocks went up."

Investor Tip: Don't Shrug Off The Continuing Credit Crisis

Don't get me wrong. I'm not suggesting that investors shrug off the credit crisis and get fully invested. Far from it. We're likely to see plenty more market volatility in the weeks ahead.

But when some market commentators argue that "we've never seen anything like this before," take it with a grain of salt. We have been here before. We have survived… and prospered.

Let me add one caveat, however. If housing prices continue to slide and Alt-A and prime mortgages start going the way of subprime debt, we're likely to experience more difficult times than most investors are expecting. So keep your investment posture on the conservative side.

The burden right now is on the Federal Reserve and other central banks to do what they can to help guide the economy through this tough period.

[RichatUF]

narciso-

The last minute Fed injection to Bear Stearns, sends a bad signal; now everyone is going to expect to get bailed out.

The horse left that barn a while ago. And if it were a "bail out" why is it that the deal is going to close with JPM acquiring Bear for 0.05473 of JPM common? Seems more like a fire sale to close up the pot smokers books before they caught all of Wall Street on fire as they had to unwind all their positions.

As I said on the other thread, today (oops, tomorrow) has that Black Monday scary feel to it.

[SK]

All that to say Federal Reserve has to bail out? Bush bailed the mortgageholders and Merrill admitted to like 30 billion over a few months. Bear should go under. Merrill should have gone under. The buyers from China or wherever are going to lose and the Fed can't do anythinng about it.

[anduril]

Bears Stearns bought out in a stock swap with JP Morgan Chase at $2/share; Bear opened at $53 on Friday morning after the announcement of the Fed/JP Morgan rescue before sliding to a close of $30.

$53/share to $2/share essentially overnight--OUCH! Jittery hardly begins to describe what the mood will be like when the market opens tomorrow.

[anduril]

I highlighted the scare quotes:

Dollar Doomsayers Draw Signs From Bernanke Rate Cuts (Update1)

By Bo Nielsen
Enlarge Image/Details

March 17 (Bloomberg) -- Ben S. Bernanke's interest-rate cuts have touched off a vicious circle of doom for the dollar.

The Federal Reserve reduced the rate on direct loans to commercial banks by a quarter-point to 3.25 percent before Asian financial markets opened today. It will likely lower its target rate for overnight loans between banks tomorrow to at least 2.25 percent from 3 percent, according to futures traded on the Chicago Board of Trade. Lower borrowing costs work against the dollar by making fixed-income securities issued by the government less appealing to global investors.

``The relative return on U.S. assets is not attractive enough and we have moved back into looking for dollar weakness,'' said Robert Robis, a bond fund manager in New York at OppenheimerFunds Inc., which oversees $260 billion. Robis last month was betting the dollar would rally versus the euro.

If that weren't enough to make bears out of bulls, the weakest dollar since at least 1971 based on a Fed trade-weighted index is helping push oil, grains and metals, which are priced in the U.S. currency, to record highs. That in turn is causing economists to lower growth forecasts for the U.S. and preventing central banks concerned that inflation is accelerating from cutting interest rates, further undermining the dollar.

``The whole world feels there's inflation when a good part of that is the weak dollar itself,'' said Stephen Jen, head of global foreign-exchange research at Morgan Stanley in London. ``Watching the dollar plummet like this is very dangerous.''

...

`Down the Tubes'

``It's hard to stimulate an economy when the currency is going down the tubes,'' said David Malpass, the chief economist at Bear Stearns & Co. The New York-based firm expects the dollar will fall to $1.60 per euro in 12 months.

The U.S. economy may expand 1.4 percent this year, according to the median estimate of 82 economists surveyed by Bloomberg News this month. The median in March was for growth of 1.7 percent. As recently as September the Fed's target rate was 5.25 percent.

Global investors see little reason to own U.S. financial assets with the two-year Treasury yielding 1.48 percent, or 1.73 percentage points less than similar-maturity German bunds. The gap reached 1.80 percent on March 6, the widest since 1992. Foreign purchases of U.S. financial assets slowed in each of the final three months of 2007, to a net $56.5 billion from $113.9 billion, according to the latest Treasury Department data.

As the currency fell, the UBS Bloomberg Constant Maturity Commodity Index of 26 commodities ranging from energy, metals, agriculture and live stock rose 43 percent in the past 12 months, the biggest increase since the index's inception in 1998. The price of a barrel of crude oil surged 89 percent in a year to an all-time high of $111 on March 13.

Commodities Hedge

``A lot of people out there are using oil and other commodities as hedge against a falling dollar,'' said Simon Wardell, manager of energy research at Global Insight Inc. in London. ``We could get to $120 in oil if we continue to see weakness in the U.S. dollar.''

...

Relief may be in sight. The International Monetary Fund in Washington said last month that oil prices may be peaking as growth slows. The median forecast of 34 analysts surveyed by Bloomberg is for the dollar to gain about 11 percent against the euro this year and 4 percent versus the yen as the Fed's rate cuts spark the economy in the second half of 2008.

``If the U.S. dollar turns higher or if the crude oil market reverses then we have a spiral working the other way,'' said Tim Evans, an energy analyst at Citigroup Global Markets Inc. in New York. The price of crude oil will at $70 by September, Evans said.

`Major Concern'

...

Inflation in the euro zone rose at a 3.3 percent annualized pace last month, the fastest in 14 years, the European Union's statistics office in Luxembourg said March 14. Consumer prices in the U.S. were unchanged in February, the Labor Department said.

Kenneth Rogoff, the former chief economist at the IMF and now a professor at Harvard University, said the greenback may drop another 12 percent on a trade-weighted basis.

``This recession will be long and deep and when we get out of it, we'll have inflation,'' Rogoff said in an interview. ``Confidence in the dollar is down.''

[RichatUF]

anduril-

There are no lack of comparisons out there to the S & L crisis--all you have to do is google something like "comparison credit crisis s & l crisis".

If the S&L crisis was at 700 billion nearly all in the US and the sub-prime crisis is somewhere in the neighborhood of 600 billion spread globally (with over a decade of global economic growth on top of that), isn't the reaction a bit odd. It is as if people believe that somehow the US is putting out the "Going Out of Business" sign tomorrow-ridiculous. First the "stagflation and the worst economy since the 1970's", now its "depression and worst economy since the 1930's"-if all that were true, commodities (even gold) wouldn't be anywhere near their current prices because demand globally would plumment (and probably will with the passing of the Beijing Games), deflation would be the rule of the day, and unemployment would skyrocket to double digits. And it wouldn't be contained to the US, it would spread ever where, quickly.

I suppose that some on Wall Street might be trying to get the Fed to blink so they will buy up all the rot and then they go into their books and sell all the worthless junk with the legal hassles for 10 cents on the dollar. We'll see...

[Rick Ballard]

They're throwing up in waste baskets in Asia this morning.

Anduril,

That's solid advice. The only thing I would add is that learning how to do cap rates for the rental value of houses will give you an idea about when the housing backed issues have gone to a real buy. Most of the junk issues average $200K per mortgage. JPM/Chase picked up a ton of value for literally pennies on the dollar.

That Great White is going to be giving off satisfied burps for years.

[anduril]

I have a particular interest in this (but sadly no particular knowledge) because I just moved my upper 80's parents into assisted living and now I'm trying to sell their condo. Even in a desirable market that will remain desirable come what may, people are leery of buying right now.

[Rick Ballard]

Rent or lease it. If cash is needed then finance against the lease. Two years from now you'll look like a genius when you sell. If you don't want to deal with tenants then hand it over to a property management outfit.

[RichatUF]

anduril-

``A lot of people out there are using oil and other commodities as hedge against a falling dollar,'' said Simon Wardell, manager of energy research at Global Insight Inc. in London.

Think about how many are piled into that trade, if everyone else is in that trade and no there are no more buyers, how quickly will it fall. No one is going to stand under that knife especially since this type of market behavior puts a lie to the "we are running out of oil" argument-if we were, people would not be able to buy it as a currency hedge. And if we are going into recession global oil demand is going to wane as well.

Asian market update: S&P down 32, Dow down 200, gold surging up 32, and Asian markets broadly lower in the 3.5% to 5.0% range. Its going to suck in Europe too.

[Pofarmer]

as the Fed's rate cuts spark the economy in the second half of 2008.

I don't see it happenin. The Bush tax cuts, specifically the accelerated depreciation provisions, have already sparked an awful lot of upgrading and investing in businesses. I jut can't beleive that lowering the interest rate any further is going to have much effect, other than torpedoing the $.

[anduril]

Rick, that's what we're having to think about.

Rich, somewhere in that article it says re the oil hedge thing, "If the U.S. dollar turns higher or if the crude oil market reverses then we have a spiral working the other way."

I've heard oil analyst after analyst say that the fundamentals just don't support these prices.

[ece]

JP brought mortgages or penny stock? Bear has penny value, I doubt there were many mortgages. If the other buyers at Merrill etc. could have bought mortgages for that, they would have; I don't think it's the same deal. If it is, the buyers are going out of business.

The futures business sure picked up on the margin news for those mortgages. 1%? Oil is going up either way, it's neat to have it hover around like 110/115 before shooting up to 150. We're all smart.

[ben]

"A lot of people out there are using oil and other commodities as hedge against a falling dollar,''

I don't know about other commodities, but those using oil as a hedge are going to have an unpleasant surprise...watch oil prices dive real soon.

[glasater]

Lehman is most likely the next shoe to drop.

[glasater]

I've heard oil analyst after analyst say that the fundamentals just don't support these prices

Well just take a squint at what's been going on in the wheat markets. Ten dollar plus a bushel?

[Pofarmer]

Glasater

Looking at the Fundamentals.

Wheat is probably the MOST solid of the Ag commodities trading right now. What about corn that went over $6??? Beans at $16.00??? Granted, they've backed off from those positions some. There is a long ways to go down, if it decides to drop for whatever reason. If these funds have to start to remove funds from the commodities markets to make margin calls in their other investments, the whole house of cards could collapse.

[anduril]

May I recommend a read of Paul Krugman's article today? The B Word. That's as in TPB or TB: Taxpayer Bailout--and Krugman says it's coming. Personally, I expect it. Krugman says the main thing is to bail out the system, not the people who screwed up. And he has harsh words for Bear Stearns.

I'm interested in reactions to Krugman's article. Here are a few grafs:

O.K., here it comes: The unthinkable is about to become the inevitable.

Last week, Robert Rubin, the former Treasury secretary, and John Lipsky, a top official at the International Monetary Fund, both suggested that public funds might be needed to rescue the U.S. financial system. Mr. Lipsky insisted that he wasn’t talking about a bailout. But he was.

It’s true that Henry Paulson, the current Treasury secretary, still says that any proposal to use taxpayers’ money to help resolve the crisis is a “non-starter.” But that’s about as credible as all of his previous pronouncements on the financial situation.

So here’s the question we really should be asking: When the feds do bail out the financial system, what will they do to ensure that they aren’t also bailing out the people who got us into this mess?

Let’s talk about why a bailout is inevitable.

Between 2002 and 2007, false beliefs in the private sector — the belief that home prices only go up, that financial innovation had made risk go away, that a triple-A rating really meant that an investment was safe — led to an epidemic of bad lending. Meanwhile, false beliefs in the political arena — the belief of Alan Greenspan and his friends in the Bush administration that the market is always right and regulation always a bad thing — led Washington to ignore the warning signs.

By the way, Mr. Greenspan is still at it: accepting no blame, he continues to insist that “market flexibility and open competition” are the “most reliable safeguards against cumulative economic failure.”

The result of all that bad lending was an unholy financial mess that will cause trillions of dollars in losses. A large chunk of these losses will fall on financial institutions: commercial banks, investment banks, hedge funds and so on.

Many people say that the government should let the chips fall where they may — that those who made bad loans should simply be left to suffer the consequences. But it’s not going to happen. When push comes to shove, financial officials — rightly — aren’t willing to run the risk that losses on bad loans will cripple the financial system and take the real economy down with it.

...

As Bear goes, so will go the rest of the financial system. And if history is any guide, the coming taxpayer-financed bailout will end up costing a lot of money.

The U.S. savings and loan crisis of the 1980s ended up costing taxpayers 3.2 percent of G.D.P., the equivalent of $450 billion today. Some estimates put the fiscal cost of Japan’s post-bubble cleanup at more than 20 percent of G.D.P. — the equivalent of $3 trillion for the United States.

If these numbers shock you, they should. But the big bailout is coming. The only question is how well it will be managed.

As I said, the important thing is to bail out the system, not the people who got us into this mess. That means cleaning out the shareholders in failed institutions, making bondholders take a haircut, and canceling the stock options of executives who got rich playing heads I win, tails you lose.

(h/t bro)

Trillions? So maybe the Street has reason to worry.

BTW, here's the WSJ's lead editorial:

The Buck Stops Where?

They insist that attention should be payed to the dollar unless we want a true crash:

In the credit market panic that began in August, we have now reached the point of maximum danger: A global run on the dollar that could become a rout. As the Federal Reserve's Open Market Committee prepares to meet tomorrow, this should be its major concern.

Yet the conventional wisdom -- on Wall Street and in Washington -- continues to be precisely the opposite. In this view, the Fed is "behind the curve" and needs to cut interest rates even faster and further than it has. Never mind that this is precisely the path the Fed has followed since August, yet the crisis has grown worse and now bids to tank the larger economy. Does it make sense to do more of what isn't working?

The Fed's main achievement so far has been to stir a global lack of confidence in the greenback. By every available indicator, investors are fleeing the dollar for other currencies and such traditional safe havens as gold and commodities. Oil has surged to $110 a barrel, up from under $70 as recently as September. Gold is above $1,000 an ounce, up from $700 in September, and food prices are soaring across the board. The euro has hit record heights against the buck, and for the first time the dollar has fallen below the level of the Swiss franc.

Speculators are adding to this commodity boom, betting that the Fed has thrown price stability to the wind in order to ease U.S. housing and credit woes. The problem is that dollar weakness is making both of these problems worse. The flight from the dollar has made U.S.-based investments less attractive, at a time when the U.S. financial system urgently needs to raise capital. And the commodity boom is translating into higher food and energy prices that are robbing American consumers of discretionary income. In the name of avoiding a recession, reckless monetary policy has made one more likely.

Meanwhile, and disconcertingly, we keep hearing new explanations for the virtues of dollar weakness.

Obviously, I don't know the truth of all this, but I do know this: the outcome of this mess will have a profound effect not merely on the economy but also on the political future of the US. It's disturbing to me that the WSJ clearly has no confidence in the leadership. If they're wrong, I'd like to know why. I'd love to read an explanation of all this in terms I can understand.

[Charlie (Colorado)]

Hmmm.

They're throwing up in waste baskets in Asia this morning.

...the whole house of cards could collapse.

Lehman is most likely the next shoe to drop.

Its going to suck in Europe too.

I jut can't beleive that lowering the interest rate any further is going to have much effect, other than torpedoing the $.

Buy signal.

[anduril]

Interesting combination, hey? Krugman and the WSJ?

Anyway, I forgot to include this from the WSJ (but go read the whole thing):

Another excuse is that a weak dollar is useful because it helps to boost exports, and thus reduces the U.S. trade deficit. Exports have certainly been strong, but exports in goods are being more than offset by the rising cost of oil imports. In January, the U.S. trade gap actually widened thanks to oil imports. In any case, rising exports won't comfort Americans whose standard of living falls due to rising import prices.

Then there is the "just deserts" school, which claims that dollar weakness is the inevitable result of America living beyond its means for so long. This road-to-perdition view is especially popular in Europe and the U.S. media. To believe it, however, you have to conclude that the world was willing to ignore the U.S. trade deficit for decades only to awaken in horror now.

The truth is that, as ever, the fate of the dollar is in our own hands. Inflation is always a monetary phenomenon, determined by the supply and demand for a currency. The supply of dollars is controlled by a monopoly known as the Federal Reserve, and at any moment the Fed can produce more or fewer dollars. The Fed can also influence the demand for dollars by maintaining a commitment to price stability, or it can reduce that global demand by squandering its anti-inflation credibility the way it is now. Once squandered, it is difficult to regain -- as we learned the hard way in the 1970s and 1980s.

The Bush Administration is also not helping confidence in the dollar. While President Bush is doing well to fight protectionism and higher taxes, his Administration continues to give the impression that it quietly favors a weak dollar. Yes, the official Treasury mantra is that it prefers a "strong dollar." But that mantra was the same when the dollar was strong and oil was $20 a barrel in the 1990s as it is now when oil is $110 and the dollar is weaker than at any time since the 1970s.

Last week Mr. Bush dared to wander from this script and told the Nightly Business Report that a strong dollar "helps deal with inflation" and rued its weakness against the euro. He was quickly reeled in by his advisers, and in his Friday speech at the New York Economic Club Mr. Bush reverted to the boilerplate language that investors now interpret as favoring a weak currency.

[anduril]

So, are we still going to have our 401ks by April Fools Day?
from Steve Sailer's iSteve Blog by Steve Sailer

Just asking ...

[glasater]

Right next to Krugman's article at Real Clear Markets is this one from Bloomberg regarding housing and regulations that seems pretty reasonable.

[anduril]

glasater, I have a hard time accepting planning regulations in 10 states as a global explanation for what ails our financial system. I'm certainly always open to the idea that government regulation has screwed things up, but there's got to be more to it than what the author has to tell us.

[kim]

So what happened in the rating agencies that this garbage got rated AAA?
==============

[Chris]

Anduril,
Interesting stuff. Love it that the WSJ article quotes a Bear economist to tell us what's going on. Malpass is great but the irony is glaring.

Krugman is wrong as the BSC honchos (the ones who caused the mess, in his own words) aren't getting bailed out. Safe to assume that the average BSC employee had a very substantial portion of their net worth tied up in company stock. $2? Hardly sounds like a bail out. You could certainly make the case that Morgan will reap windfall profits, however.

[Pofarmer]

Good to see a contrarian in the group Charlie!!!

BTW, does anybody have a handle on the inflation to wholesale producers???? I gotta tell ya, it's gotten pretty radical out here in the country. Your average joe blow consumer is just getting a little sip of the tiger we've been playing with the last 3 years.

[kim]

Oh, yes, PoF and Charlie, it looks like a buy signal to me. The prices of all the things needed to build a house aren't going to go down. Land won't, and I'll bet that wages won't fall much now.

There was a bank in Texas which tanked in the oil bust, the Feds took it over, but the underlying assets improved while the Feds were paying off depositers so that there was value left at the end. The directors sued to get their company back and the shareholders who at one time thought they'd lost it all ended up rich beyond their most avaricious dreams. Well, those contrarians who bought the stock as it tanked, doubling down everytime the stock price fell in half. Some paid one and 3/8ths for what later hit 50. Oh to be young and in love again.
=============================

[anduril]

Chris, I'm not a Wall Street guy and claim no inside knowledge. I have no idea what an economist does at an investment bank--like, what effect does he have on investment policy? Does he make recommendations, or just supply an overall economic forecast? Of course I noticed Malpass' background and the irony of it. Noting that, however, is not a refutation of his argument--it's not even much of a counter argument. I'm looking for some convincing analysis that I can understand.

As for the BSC honchos, I haven't a clue as to their personal outcome from all this. Will they wind up selling pencils on street corners? Somehow I doubt it. This is probably the first Krugman article that I've read from beginning to end. $2 a share isn't great, but it still beats zero. But the bailout Krugman is talking about is still in the future, and his concerns that there should be some accountability are valid--and shared by the WSJ.

[GMax]

I moved my whole HSA account from money market funds into stock mutual funds this morning. Since the US did not follow Europe, we may well be at rock bottom. Dow Jones below 11900 and has been to 14000 previously, that is not quite 18% of upside. Not mention future growth. If its not time to buy, its real hard for me to see much more downside. A chartist would look at a triple testing of the bottom as a buy sign, just sayin...

[Rick Ballard]

Kim,

The strong buy was JPM at the open this morning - that would have netted you more than 10% in less than 4 hours. Lehman might be a buy but overall the panic level isn't quite high enough - the ten year bond still hasn't touched the January low, although it's getting close. Asia sold off early last night and then just milled around the rest of the session. A nice panic down below 11K on the Dow would be a real buy signal. We might get there in a few days but I think the economic fundamentals are probably too strong (or not weak enough) for it to happen.

[Charlie (Colorado)]

JPMC is up 10 pct ... someone thinks buying Bear as a fire sale was good.

[Chris]

A,
Yes, accountability is good. I think both are correct that we need a stable dollar. A strong dollar is not imperative but stability is, imo.

[Rick Ballard]

Not just good, Charlie. JPM made one of the all time best deals, period. If I bought equities I'd grab it right now even at plus 10% for the day.

[Charlie (Colorado)]

Yeah, those sorts of comments look like a capitulation to me.

[glasater]

Anduril--

Well, everyone (pundits/whomever) are casting about for some type of solution. Some (Schumer perhaps) are thinking more regulation by government down the road.

The article was just a counterpart--kinda--to that sort of thinking.

[GMax]

As of right now its 54 points down on the Dow. Average days of absolutely no significance have more movement than this. I see nothing other than momentary panic that allowed some folks to scoop up some bargains. Hopefully I am in the second group.

I would love to see a drop below 11k Dow for that very reason, but I just dont think its in the card.

Last I checked Oil was off pretty substantially but no one was talking about it.

[GMax]

Typo 154 points.

[Paul]

From my perspective the underlying causes of the current crisis area:

1. America's vulnerablity in the oil market. Gold has risen to over $900 largely because our economy is vulnerable to an oil shock and Russia, Iran and Venezuela are trying like crazy to create that shock.

The dollar and the "full faith and credit" of Anerican financial system are what the world relies upon for safe, low risk, predictable and profitable investments. We cannot allow our system to be vulnerable, but have done it anyway. We must defend our financial sytem. We are now paying a risk premium for our unsafe world. We should have been drilling for oil in alaska and along our coasts long ago, or at least building refineries to refine our vast oil shale deposits. We have opportunities in other energy fields like nuclear and wind energy that are largely untapped.

2. The Fed has not understood the world we live in. In the nearly 2 1/2 years since Bernacke took over the Fed, the money supply has not grown. The reason supposedly was to fight inflation and counter the rising cost of gold and other commodities. Yet, the price of gold has continued to rise. The tools available to the Fed are just insufficient to fight our oil problem.

However, the Fed forgot that there will always be a severe credit crisis if you don't have a reasonable increase in the money supply. The financial press has not reported this basic fact.

3. The sub prime crisis in itself was caused by the restriction of credit by the Fed in combination with severe relaxation of qualifications for a mortgage by lenders. A disaster waiting to happen. All of above was also accentuated by deriatives that hid the true value of the risk.

These lax standards were imposed by Congress. People forget or perhaps never knew, that the sources of the S&L crisis were also Congressional rules and lack of oversight.

4. The high cost of new housing. The cost of construction of a new home has skyrocketed in the past decade due to planning restrictions in many of the hottest markets and the ever increasing cost of construction.

America is not building enough new homes to house it's people. The number of new units is several hundred thousand short of new family formation every year. Supply is not meeting demand, so the price goes up. The difficulty and cost of securing building permits is some area like California where I work is getting extreme.

The cost of construction has nearly tripled in the last decade. It appears the biggest increases in cost have been in those construction materials that can be sold on the world market like commodities like lumber , steel, plywood, drywall, piping etc.
This rise is still going on; the cost of drywall went up 10% just a few weeks ago in a down market.

These construction cost increases seem caused by again high regulatory costs. Makers of construction materials either cannot increase capacity to meet demand because of regulation, or have chosen because of high regulatory cost and risk not to do so. Again a short supply leads to higher cost.

Almost all of the commentary I've seen seems unaware of this construction cost problem. The cost of all housing will rise in a market where demand for housing is high because of replacement cost . The price of housing is not likely to fall that far as long as there is not a severe recession. Contrary to national reporting, the cost of housing in better areas where there is limited supply is still rising. Cost is falling in new tract, and low income areas, where there are more foreclosures.

The Fed is way late in addressing this financial crisis. They have let this problem is spiral out of control. However, the underlying problems are not just financial. The underlying problem is that we have let the Environmental loon lobby control too much of our economy. We need to produce more oil and other energy. And we need to produce more housing at a reasonable cost. Until we get back to a reasoable regulatory environment , our problems will continue to get worse.

[Rick Ballard]

Glasater,

The article you cited had more to do with reality than anything Krugman wrote. That Rubin fellow he used as his shield was pretty well known around CITI before it took its 60% haircut.
If Hassett had more room I'm pretty sure he would have gone into the current practice of loading developers fees with stuff that used to be financed by 30 year bond issues - thereby driving developed lot prices up to the point where you get a nice big phony jump in the price of housing. Theoretically, the plus side should be de minimus increases in property taxes. Somehow that never quite works out.

[GMax]

BTW

BS having to take the pain to shareholders of a $2 sale is exactly the market correction needed to end this "crisis" JPM will now have a very low basis in some of these mortgage pools and CMOs and can peddle them off. Once some sales occur and guys start bragging at the Country Club about how much they made on buying some cheap CMOs, then others will want to buy. Now several more hedge funds may need to fail but we at the beginning of the solution. Government needs to stay the hell out of the way and let markets correct themselves, it will happen.

[RichatUF]

anduril-

$2 a share isn't great, but it still beats zero.

It is a stock transaction in which 1 BSC share is traded for .05-ish of JPM. It isn't a bailout, Bear Stearns doesn't exist as an independent entity anymore. The Fed action on Friday in which JPM was used as a conduit for the liquidity issues surrounding an orderly wind down of Bear's positions. If they didn't adopt that structure and Bear collapsed Friday we would probably still be seeing its books unwind and spread to other banks. This is the function of the Fed-an orderly functioning of markets.

The two arguments flying around: a hands off laissez faire approach doesn't exist because of the tools all ready in existence at the Fed and Treasury. The other extreme is to create a host of new rules and regulations in a panic in the face of federal elections making the current legal uncertainty that much greater. New panic made rules (like Sar-Box)would add another level of cost uncertainty on top of the already extreme level of legal risk floating on top of the sub-prime crisis. This cost will drag the pain out, not shorten it.

[Rick Ballard]

GMax,

This is the the other side of that coin. Detroit and Cleveland were the real garbage dumps of sub-prime. As I mentioned the other day, JPM has had four months to assess the change to the loss ratio caused by the expiration of freebie starter rates on the 2/24 series. The very worst months (in quantity terms) were October and November.

If the hit in the worst places is 26% I don't think there's much to worry about.

[glasater]

Rick @ 12:32--"What you said":-)
That's pretty much what is going on in our community.

[GMax]

Well all the talk about rising foreclosures scares folks, but it has been confined in the main to California, Florida and Michigan in large measure. That Michigan is seeing folks snap up bargains is encouraging. That means over time the foreclosures disappear and the market price begins to firm and then rise.

Don't forget that JPM got several platforms, including a retail brokerage platform that has to have substantial value all in itself. I would think that the junk assets all had zero allocated to them with so low of a purchase price. When you have nothing invested in something and you sell it for anything you get a gain. That is why JPM stock jumped.

[anduril]

Thanks to everyone for the comments. glasater, I understood your perspective as to regulation's impact and agree in general, but I suspect there's more to what's going on--while having no expertise. We'll see, hopefully fairly soon, how things shake out.

[GMax]

One of the market commenters I sometimes follow has this nugget from his missive today:

in one fell swoop JPM could get the intellectual capital, the personnel, and a book-of-business that was decades in the making. Furthermore, with JPMorgan’s balance sheet backing them up, many of Bear’s structured vehicles will likely find better “footing.” I think it is a brilliant move on Jamie Dimon’s part. As for the equity markets, they are clearly involved in a “selling panic,” while the commodity and Treasury markets are into “buying panics.”

However, for the well-prepared investor this kind of volatility affords opportunity. Remember, the Japanese kanji symbol for the word “crisis” consists of two characters. One of them represents “danger,” the other “opportunity.” I continue to invest accordingly.

[jimmyk]

I have a hard time accepting planning regulations in 10 states as a global explanation for what ails our financial system.

I don't think it makes sense either--the claim is that it drives up prices by restricting new construction. But that's a local issue; the problem on the national scale has been (with hindsight) overbuilding.

I think the problem has been the Fed--first keeping interest rates so low in the early part of the decade, then overreacting by inverting the yield curve in 06-07, and waiting too long to bring rates back down again. (Full disclosure: I used to work there, and was complaining about these things at the time, but no one listened.)

[anduril]

jimmyk, this story seems to support your view:

Foreign investors veto Fed rescue

By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 1:13pm GMT 17/03/2008

As feared, foreign bond holders have begun to exercise a collective vote of no confidence in the devaluation policies of the US government. The Federal Reserve faces a potential veto of its rescue measures.

Asian, Mid East and European investors stood aside at last week's auction of 10-year US Treasury notes. "It was a disaster," said Ray Attrill from 4castweb. "We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed."

The share of foreign buyers ("indirect bidders") plummeted to 5.8pc, from an average 25pc over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns.

Rightly or wrongly, a view has taken hold that Washington is cynically debasing the coinage, hoping to export its day of reckoning through beggar-thy-neighbour policies.

It is not my view. I believe the forces of debt deflation now engulfing America - and soon half the world - are so powerful that nobody will be worrying about inflation a year hence.

Yes, the Fed caused this mess by setting the price of credit too low for too long, feeding the cancer of debt dependency. But we are in the eye of the storm now. This is not a time for priggery.

The Fed's emergency actions are imperative. Last week's collapse of confidence in the creditworthiness of Fannie Mae and Freddie Mac was life-threatening. These agencies underpin 60pc of the $11,000bn market for US home loans.

With the "financial accelerator" kicking into top gear - downwards - we may need everything that Ben Bernanke can offer.

...

Is this the moment when America finally discovers the meaning of the Faustian pact it signed so blithely with Asian creditors?

As the Wall Street Journal wrote this weekend, the entire country is facing a "margin call". The US has come to depend on $800bn inflows of cheap foreign capital each year to cover shopping bills. They may have to pay a much stiffer rent.

As of June 2007, foreigners owned $6,007bn of long-term US debt. (Equal to 66pc of the entire US federal debt). The biggest holdings by country are, in billions: Japan (901), China (870), UK (475), Luxembourg (424), Cayman Islands (422), Belgium (369), Ireland (176), Germany (155), Switzerland (140), Bermuda (133), Netherlands (123), Korea (118), Russia (109), Taiwan (107), Canada (106), Brazil (103). Who is jumping ship?

The Chinese have quickened the pace of yuan appreciation to choke off 8.7pc inflation, slowing US bond purchases. Petrodollar funds, working through UK off-shore accounts, are clearly dumping dollars amid rumours that Gulf states - overheating wildly - are about to break their dollar pegs. But mostly likely, the twin crash in the dollar and US agency debt reflects a broad exodus by global wealth managers, afraid that America is spinning out of control. Sauve qui peut.

The bond debacle last week tallies with the crash in the dollar index to an all-time low of 71.58, down 14.6pc in a year. The greenback is nearing parity with the Swiss franc - shocking for those who remember when it was 4.375 francs in 1970. Against the euro it has hit $1.57, from $0.82 in 2000. Against the yen it has smashed through Y100. Spare a thought for Toyota. It loses $350m in revenues for every one yen move. That is an $8.75bn hit since June. Tokyo's Nikkei index is crumbling. Less understood, it is also causing a self-reinforcing spiral of credit shrinkage throughout the global system.

Japanese investors and foreign funds are having to close their yen "carry trade" positions. A chunk of the $1,400bn trade built up over six years has been viciously unwound in weeks. The harder the dollar falls, the further this must go.

It is unsettling to watch the world's reserve currency disintegrate. Commodities from gold to oil and wheat are taking on the role of safe-haven "currencies". The monetary order is becoming unhinged.

I doubt the dollar can fall much further. What is it to fall against? The spreading credit contagion will cause large parts of the globe to downgrade in hot pursuit - starting with Europe.

Few noticed last week that the Italian treasury auction was also a flop. The bids collapsed. For the first time since the launch of EMU, Italy failed to sell a full batch of state bonds.

The euro blasted higher anyway, driven by hot money flows. The funds are beguiled by Germany's "Exportwunder", for now. It cannot last. The demented level of $1.57 will not be tolerated by French, Italian and Spanish politicians. The Latin property bubbles are deflating fast.

The race to the bottom must soon begin. Half the world will be slashing rates this year to stave off credit contraction. The dollar will have a lot of company. Small comfort.