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Bear Stearns’ Bear Market

Penultimate scene from a hackneyed modern horror film: Hot girl and hot guy have finally put a stop to the monster/psychopath/psychopathic monster that's been after them. Sure, some of their friends died horrifically, and that's tragic, but the beast has … Read More

By / March 18, 2008

Penultimate scene from a hackneyed modern horror film: Hot girl and hot guy have finally put a stop to the monster/psychopath/psychopathic monster that's been after them. Sure, some of their friends died horrifically, and that's tragic, but the beast has been slain, the sun will be up soon, and they can finally take a deep breath and relax. No need to check on the fiend's corpse and make sure he's dead, let alone pay heed to the soft, ominous footsteps in the distance — the worst is clearly over.

In defense of unintentionally, comically unaware horror flick characters, they need to be more naive than any actual person realistically could be, in order to advance poorly structured, uncompelling plots. What excuse is there for the hot girl-bald guy pairings of financial broadcasters, who, witnessing one of the oldest and largest banks in America get sold in a panic for less than the Yankees paid for A-Rod, are instantly satisfied that the moment of crisis has definitely passed?

Last Friday, Bear Stearns was nominally worth $3.5 billion. On Monday, under pressure from the Federal Reserve, JPMorgan bought Bear for $250 million, nearly one billion dollars less than the ostensible value of Bear's Manhattan office. The idea is that JPMorgan is big enough to absorb the huge writedowns yet to come on worthless or near-worthless Bear Stearns securities, and that by doing so, JPMorgan can prevent Bear's meltdown from metastasizing throughout the economy.

Maybe it will work. But the fact that the Fed concluded the health of the economy depended on Bear being sold off for a risible $2 per share is hardly cause for confidence. Bear Stearns was not the only bulge bracket holding massive IOUs on dumb bets; it was just the most reckless and most vulnerable of the banks. Which is why the Fed/JPM action on Bear is anything but a bailout. Many Bear employees and shareholders are going to be wiped out by the merger. What Chairman Bernanke is hoping to achieve is a bailout of everyone else. As Clive Crook puts it:

Bankruptcy would surely have recovered more value for shareholders than this give-away-–but the Fed evidently feared that closure and disposal of Bear’s assets would have jeopardized other parts of the country’s teetering financial system. Preventing that was the Fed’s overriding goal. The firm had to be acquired in a hurry, shored up, and then run, so far as counterparties were concerned, as though nothing had happened. By any measure, Bear Stearns was not that big: it was surely not “too big to fail”. Apparently, though, it was deemed too delicately interconnected to fail. One wonders how many such institutions there now are, and who will carry the burden of keeping them in business.

Crook is referring primarily to Lehman Brothers and Goldman Sachs, which face similar if not quite as pervasive exposure to credit market as Bear, and are seeing significant volatility in their stock prices in the wake of Bear's collapse.

This morning, Lehman and Goldman reported declines in first quarter income of 57 and 53 percent, respectively — a terrible performance by any objective measure. But because investors expected the losses to be even more catastrophic, the banks' share prices are rallying for the time being. So never mind that no one knows with any precision just how much worthless paper the bulge brackets are holding onto, not even their own executives. Pay no attention to the footsteps in the distance or foreboding background music.

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