Friday, March 14, 2008

Bear Stearns Shocker

Well inflation came in at 0.0 which was way below expectations. The pre-market stock market flew up 150 points on the futures based on the low inflation #. Then about 10 minutes into the trading day CNBC comes out and reports that Bear Stearns in coordination with the FED gained financing from JP Morgan for 28 days. The initial reaction was positive because many thought Bear Stearns simply got some help from JP morgan.

Now if this was the situation then why did the Fed have to be involved? Why couldn't JP Morgan and Bear Stearns have talked and worked it out themselves? The answer most likely is Bear Stearns became insolvent in a matter of days and went to the Fed and said we are insolvent unless we get some help. The Fed then obviously called JP.

So enter JP Morgan, who after a little push from the Fed decided it was in their own best interest to keep the financial system solvent. This is huge news guys. Bear Stearns is a primary lender and is in the world's top 20 among primary lenders with over 200 billion in loans and risk on their books.

JP Morgan HAD to step in because if they didn't then Bear goes under and Bears assets would then be on sale to the highest bidder. The risk here is all the bad debt that Bear owns then gets priced to market(the wolves would be out picking up scraps) which would force the other IB's to lower the value on the debt that they have on their books. If Bears assets went to market the people like Wilbur Ross and Buffet would be out slopping up A credit and BBB credit for .10 on the dollar. It would have created a financial disaster threatening the solvency of more banks.

The humurous thing in all of this is Bear Stearns CEO was just on CNBC 2 days ago saying that the company was in great financial shape. The frightening thing here is the speed at which this happened. It started with a bank overseas that deciding not to trade anymore with Bear for counter party risk because they didn't trust their books. Goldman did the same thing a few days later and then VOILA INSOLVENCY. It took DAYS.

I expect going forward that you will start seeing primary lenders start to pressure the hedgies lthat bought with great leverage to either pay your margin calls or give us your assets. This happened a few days ago with Carlyle Capital. This could have a huge SNOWBALL effect folks.

As I said this market is very unpredictable and be conservative with your investing. BTW since I started writing this post the DOW has dropped 200 points. I guess Wall St. doesn't like insolvencies.

The ending effect of this is a big negative on the housing market because it will further reduce lending until this crisis is over.

What a start to the day. I have been warning about this kinda thing for weeks. Be careful and safe investing everyone.


Anonymous said...

Nice work. I enjoy reading the blog. You make the info a bit more user friendly for us newbies

Jeff said...

Thanks anon

I am glad you are enjoying the blog. I am glad as a newbie that you are finding the information helpful. Its been a crazy day in the markets today!!