Friday, March 14, 2008


Bear Stearns

Bear Stearns has fallen because of a liquidity crisis that is gaining momentum and spreading. This thing is moving so fast it is hard to keep up.

``If you have leverage, you're stuffed,'' said Alex Allen, chief investment officer of London-based Eddington Capital Management Ltd., which has $195 million invested in hedge funds for clients. He likens the crisis to a bank panic turned upside down with bankers, not depositors, concerned they won't get their money back.

The lending crackdown is the worst to hit the $1.9 trillion hedge-fund industry since Russia's debt default in 1998 roiled global credit markets and required the U.S. Federal Reserve to pressure the securities industry to arrange a $3.6 billion bailout of Greenwich, Connecticut-based Long-Term Capital Management LP. Today, hedge funds are being forced to sell assets to meet banks' margin calls, resulting in the dissolution of the funds.

``There has to be more in the next weeks,'' Allen said. ``There are people who have been hanging on by their fingernails who can't hold on much, much longer.'' [Emphasis added.]

Now we know that one of the banks that is holding on by its finger nails was Bear Stearns. But don't worry, the Fed is using it's ability to devalue the U.S. dollar to prop them up.

Specifically, J.P. Morgan will borrow funds from the Fed's discount window and relend them to Bear Stearns for 28 days. The borrowings from the Fed will be secured by collateral furnished by Bear Stearns, and the Fed, not J.P. Morgan, is bearing the risk of losses if that collateral falls in value. The size isn't predetermined, but is limited by the available collateral. [Emphasis added.]

This are my questions: that the size of loan depends on the amount of collateral, who values that collateral and based on what criteria? Is it illiquid mortgage backed securities? I think the answers are the Fed, whatever keeps Bear Stearns afloat, and yes plus a load of other asset backed crap that no one else wants to buy at any price.

So the Fed is guaranteeing that Bear Stearns won't be liquidated and everyone is hoping that this is the last crisis because it sure is taking a toll on the value of the dollar. That link should really scare the pants off you because there are billions of dollars under beds in third world countries and if they decided to convert to the euro then we are in real trouble. The Fed has completely abandoned the idea of maintaining the value of the dollar and that is making Americans poorer and poorer.

Ok, back to the credit crunch. Bear Stearns will be sold but it probably won't be sold for a dollar like Barings. What the Fed really wants to do is prevent Bear Stearns from being forced to sell it's inventory of debt instruments onto a weak market which would probably force other banks/ hedge funds into margin calls and liquidation. Still the news is not good for BSC and their shareholders are going to get the short end.

The developments could mean the end of independence for Bear, founded in 1923. J.P. Morgan said it is "working closely with Bear Stearns on securing permanent financing or other alternatives for the company" -- Wall Street lingo for a sale or other strategic-level change -- and CNBC reported that the bank is "actively being shopped" to potential buyers.

Buying this stock even though it has had a massive drop is not a solid investment. More shoes will be dropping and the Fed is running out of solutions. That is also something that should scare your pants off.

Update: It is now pretty clear that the Fed rally caused by the announcement that the Fed was going to expand it's targeted liquidity program was probably timed with the idea that this Bear Stearns news was going to hit the market soon. A preemptive strike, IOW.



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