Fears That Bear Stearns Downfall May Spread

[Joanne98]

The cash squeeze that brought Bear Stearns to its knees is fanning fears that other investment banks might be vulnerable to the crisis of confidence gripping Wall Street.

Investors are bracing for another volatile week in the markets as bankers and policy makers deal with the fallout from their bid to rescue Bear Stearns.

For now, the prospect of a new wave of consolidation in the beleaguered financial services industry seems remote. That is because would-be acquirers and everyday investors alike have lost faith in the values that Wall Street firms are placing on their own assets.

Of particular concern are the so-called marks placed on mortgage-linked investments like those that undid Bear Stearns, prompting a run on the firm that led the Federal Reserve and JPMorgan Chase to throw Bear Stearns a financial lifeline last week.

James E. Cayne, the chairman of Bear Stearns, mused eight years ago that he might consider selling the 85-year-old bank for a lofty price of four times what it values itself on its books. But now such a notion seems absurd — and not just for Bear Stearns.

The unhappy experience of Bear Stearns proves that it is a lack of confidence, not capital, that ultimately topples even the savviest financial institutions.

“Once you have a run on the bank you are in a death spiral and your assets become worthless,” said David Trone, a brokerage analyst at Fox Pitt Kelton.

In all-day meetings over the weekend, Alan D. Schwartz, the chief executive of Bear Stearns, met with his top executives at the firm’s Madison Avenue headquarters, trying desperately to persuade skeptical potential suitors that the firm was worth buying.

But the market had already passed a harsh judgment on Bear Stearns. On Friday, its stock plunged 47 percent, closing at $30. At that price, its shares were trading at a gaping 62 percent discount to the $80 book value that the firm has reported, reflecting the broad view that the fallout from the credit crisis had permanently devastated Bear Stearns’s core mortgage operations.

In Washington, the Treasury secretary, Henry M. Paulson Jr., signaled strong support for the Fed’s role in supplying a lifeline to Bear Stearns during the crisis negotiations, saying that his priority was to stabilize the financial system and to worry less right now about the problem of avoiding a “moral hazard” by bailing out errant institutions.

“We’re very aware of moral hazard,” Mr. Paulson said in a television interview with George Stephanopoulos on ABC. “But our primary concern right now — my primary concern — is the stability of our financial system, the orderliness of the markets. And that’s where our focus is.”

Indeed, investors are taking a grim view of the prospects for other investment banks like Lehman Brothers and Merrill Lynch. Managers of hedge funds and mutual funds say the problems at Bear confirmed their worst fears about the brokerages — that they have relied too much on leverage and have done a poor job managing the risks they took on during the boom.
http://www.nytimes.com/2008/03/17/business/17econ.html?_r=1&ref=business&oref=slogin

[Nay]

1. Oh, bullshit. Bear Stearns had about $11 billion in real money to cover

$395 billion of tarted up "assets." They thought it could go on forever, which NOTHING does, and they got caught. Despite the warnings that have been sounded for several years, and despite the fact that a number of institutions didn't fall for the get-rich_quick scheme.

[dkf]

2. Thanks for the articles. Very nervewracking reading.

[fasttense]

3. If those bad, bad consumers who took those

ridiculous mortgages would just pay up, then we would not be having this problem. So the only real solution is for Paulson to buy, at the original full loan amount, the houses about to be foreclosed upon. Then all those risky bundled securities and mortgage backed loans would be worth just what they were worth before all the bad, bad consumers defaulted on their crappy loans. It also has the upside of giving the government some real property for their bailout money instead of just more crappy paper.

It makes much more sense then just continuing to funnel all the money to the uber wealthy.

Doing the same thing over and over again and expecting different results is the meaning of insanity.

[Hannah Bell]

4. I want to throw something into this mix

Somewhat forgotten point in the enron debacle: the participation and profit of the big banks - under the table:

"Citigroup and JPMorgan Chase repeatedly used these deceptive prepays to issue Enron huge loans that were disguised as energy trades, which enabled Enron to misstate the loan proceeds as cash flow from business operations. Investors and analysts were misled, along with the many employees who lost their life savings and jobs...

In both hearings, substantial evidence showed that the financial institutions involved in the deals knew exactly what was going on – they structured the transactions, signed the paperwork, and supplied the funds knowing that Enron was using the deals to report that the company was in better financial condition than it really was."

I suggest that perhaps there's a good deal going on under the table that would change the picture we're being given of this financial crisis - in the relationships between the players especially.

http://www.conspiracyplanet.com/channel.cfm?channelid=105&contentid=695&page=2