Celtic Diva's Blue Oasis: The dizzying crash of Bear Stearns and why Americans need to read the International Press.

Monday, March 17, 2008

The dizzying crash of Bear Stearns and why Americans need to read the International Press.

As is true every weekend, my husband and I woke this morning and immediately took up our perches at our respective computers.

I'm usually the one who can be heard gasping, sighing and cursing as I scan the news. However, today it was Josh who was aghast at what he was reading. It was this article from CNN Money:

JPMorgan acquires troubled Bear

NEW YORK (CNNMoney.com) -- JPMorgan Chase & Co. said Sunday that it would acquire troubled Wall Street firm Bear Stearns for a mere fraction of what it was once worth amid deepening fears about further erosion of the world's financial markets.

The rock-bottom price left investors feeling queasy. Asian markets tumbled, with Japan's benchmark Nikkei index finishing Monday's session nearly 4% lower. U.S. stock futures plunged, indicating a miserable start for Wall Street.

The all-stock deal values Bear Stearns at $236 million, or just $2 a share. The company's stock had closed at $30 on Friday, down a staggering 47% for the day.

Regulators support the deal and the Federal Reserve provided $30 billion in funding: With the global credit crisis worsening, the Fed has been taking dramatic action to help banks and prevent widespread panic.

Neither of us are particularly educated in the world of high finance. However, I did get the part that JP Morgan's purchase price of $2.00/share probably wasn't good news on many levels and that it demonstrated that things were not "getting better" as Bush would like us all to believe.

But, gee, that's not really a shock anymore. Plus the fourth paragraph sounded like they were "managing" the problem.

I started cruising around my favorite international news sources to gauge their reaction.

The Guardian had it as the first four stories, front page - not tucked back in the "Money" section.

The most frightening were the editorials like the "Comment Is Free" section:
So now we know. At the start of last year a single share in the investment bank Bear Stearns cost $170. Yesterday evening, JP Morgan Chase won control of the venerable Wall Street institution for a price 85 times lower - at just $2 per share.

The self-destruction of Bear Stearns was obvious on Friday, after it announced that its financial position had dramatically deteriorated, and clients and shareholders began to flee. The result is that as of Sunday night the US central bank, the Federal Reserve, is nationalising the debts of a Wall Street investment bank. (They won't call it that, being America, but that's the reality.) I can't think of a parallel in modern US business history. By taking direct control of the Bear Stearns investment portfolio, the Fed will effectively be running the bank (presumably until shareholders finally agree the JP Morgan takeover) as well as intubating it with cash. The word "unprecedented" springs to mind - "highly unusual," said the New York Times.

There's a lot more to be said, and yet to be learned, about the decline and fall of Bear Stearns. But the bigger question is this: what will policy-makers and regulators, both in the US and elsewhere, take from it? Are modern financial markets now so complex and intertwined that no significant investment bank can be allowed to fail because of the devastating consequences that would ensue? If so - and the Fed seems to think so - then surely governments must take a stronger hand in dealing with financial operations and regulation. For a free market this turns out to have a pretty hefty price tag.

Wow...that's sure a different point of view on it. Interestingly enough, it's also a more thorough explanation than the CNN version. That wouldn't be on purpose, would it?

The next paragraph grabbed my attention, as I hadn't seen this information in the U.S. press:
That wasn't the only bombshell the Fed dropped at the weekend. In fact, it may be that the Bear Stearns takeover wasn't the biggest news. The Fed unveiled another of its "money for nothing" schemes - in which the largest investment banks can swap their junk mortgage bonds for the Fed's cash. It started that scheme last Tuesday, when it injected $200bn into the market. But this time the Fed has said the amount it is willing to lend is open-ended - an invitation for the remaining big banks to clean out their books. It's anyone's guess what this will cost in the end, or if it will work. Is piecemeal action like this really the best way to solve an endemic crisis? At this rate the Fed is going to end up holding every useless piece of mortgage security paper going.

I went back and searched CNN Money again and found this article:
The Federal Reserve, in an extraordinarily rare weekend move, took bold action Sunday evening to provide cash to financially squeezed Wall Street investment houses, a fresh effort to prevent a spreading credit crisis from sinking the U.S. economy.

The central bank approved a cut in its lending rate to financial institutions to 3.25% from 3.50%, effective immediately, and created another lending facility for big investment banks to secure short-term loans. The new lending facility will be available to big Wall Street firms on Monday.

"These steps will provide financial institutions with greater assurance of access to funds," Federal Reserve Chairman Ben Bernanke told reporters in a brief conference call Sunday evening.

And U.S. reaction:
Treasury Secretary Henry Paulson said he was pleased by Sunday's developments.

"Last Friday, I said that market participants are addressing challenges and I am pleased with recent developments. I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets," he said.

"We appreciate the actions taken by the Federal Reserve this evening," said White House press secretary Dana Perino. "Secretary Paulson and Chairman Bernanke are actively engaged in addressing issues affecting our financial markets. Secretary Paulson has kept the president briefed on recent developments."

Ummmm...are they even talking about the same thing?

So I went to the more conservative paper in GB, The Independent, and read this in an article describing the Brit and Asian markets' horrible reactions:
Terry Smith, chief executive of specialist inter-bank broker Tullett Prebon, said on BBC Radio 4's Today programme: "It does scare me. I have been working in finance in the City and worldwide for 34 years and I have never seen anything like this.

"I don't think anybody alive has seen events of this seriousness and magnitude affecting the financial markets."

Mr Smith said that, with banks increasingly reluctant to lend to one another, it was becoming more difficult for individuals and businesses on either side of the Atlantic to obtain loans and mortgages.

"The cuts in interest rates are unlikely to have any effect," he warned.

"High interest rates didn't cause this problem, so lowering interest rates isn't going to solve it. It is hard to see exactly what tools the authorities do have."

OK...that makes sense to me, but then we go back to another article at CNN:
Two widely accepted beliefs about the upcoming Federal Reserve meeting Tuesday are that the central bank is worried about the country falling into a recession and that it will again slash interest rates sharply.

But should the Fed stop worrying and love a recession?

Several economists, including one member of the Fed's policy-making committee, have argued that more rate cuts are the wrong solution to spur economic growth. Some even believe a recession might be the best answer for the economy in the long term. That's still a minority view though.

Federal funds futures on the Chicago Board of Trade show investors betting that there is a 100% chance of at least a three-quarter percentage point cut at Tuesday's meeting, and a 52% chance of a full percentage point cut.

Like I said, I'm not educated in the ways of high finance, but it sure sounds like the International press is pissed off at us and that they are boggled as to why the U.S. public hasn't raised a ruckus.

From another Guardian article, "America was conned...who will pay?"
Ultimately, though, action will be taken because there will be political pressure for it. Indeed, it is somewhat surprising that there is not already rioting in the streets, given the gigantic fraud perpetrated by the financial elite at the expense of ordinary Americans.

The US has just had its weakest period of expansion since the 1950s. Consumption growth has been poor. Investment growth has been modest. Exports have been sluggish. But if you are at the top of the tree, the years since the last recession in 2001 has been a veritable golden age. Salaries for executives have rocketed and profits have soared, because the productivity gains from a growing economy have been disproportionately skewed towards capital.


For ordinary Americans, though, it has been a different story. Real wages have been growing slowly; at just 1.6% a year on average over the latest upswing, well down on the experience of earlier decades. Business, of course, needs consumers to carry on spending in order to make money, so a way had to be found to persuade households to do their patriotic duty. The method chosen was simple. Whip up a colossal housing bubble, convince consumers that it makes sense to borrow money against the rising value of their homes to supplement their meagre real wage growth and watch the profits roll in.

As they did - for a while. Now it's payback time and the mood could get very ugly. Americans, to put it bluntly, have been conned. They have been duped by a bunch of serpent-tongued hucksters who packed up the wagon and made it across the county line before a lynch mob could be formed.

And we told them "Ya'll come back now, ya hear?" as they were leaving.


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