Sunday, March 16, 2008
Massive Intervention By The Fed
There were 118.09 million BSC shares out according to Google. 77% of those are owned by institutions.
It is a stock swap, and JPM gets another 30 bil to cover with. So basically JPM got 230 bil in cash to take this turkey off the Fed's hands. The real question is "WHAT HAPPENED?" How did Bear lose so much so quickly?
Just to keep everyone from obsessively speculating about the answer to that question, the Fed is also cutting the discount rate (not Fed Funds) 25 bps and allowing primary dealers to use the window (usually just banks), plus the term is extended to 90 days.
One would guess that's to cover margin calls. As a result of Bear's demise there would be some.
There's a pretty good Wikipedia entry on primary dealers, which are basically the Fed's trading partners. Also see FRB NY. Primary dealers have to participate in Treasury auctions. There is another potential problem relating to hedging mortgage bonds with Treasuries.
Is the JPM/Bear deal a surprise? No. Not really. It was obvious last week that the Fed had to act quickly.
There is truly excellent coverage of this unrolling at Calculated Risk. There are multiple posts, so refresh and graze. Nikkei is collapsing - it has fallen below 12,000. Yikes.
For meditation material, see the sage advice of Thailand's PM - eat chicken to beat inflation. To really beat it you'll have to raise them, of course. There is an interesting post on financial institution fire sales up at the WSJ blog.
Soooo lots of very intelligent folks figured on what the Fed did wrong and what they should of done.
At the moment it looks like the 30s fed just got dealt a bad hand, because the new folks cannot seem to be doing anything better with their dealt hand. Now all this might be academic, except for the fact that if the folks in charge don't know the solution, then we are all in trouble.
Bush did not even have a chance to change Fed Chairs until 2004. There is no way that Bush COULD have avoided the build up to the housing crash.
Here's the truth: The big changes to law happened in the late 90's. Both Congress and Pres. Clinton signed. Please read this NPR summary of the history.
John, there are limits to the ability of the Fed. They'll keep acting, but each action will have less and less impact. They need to do something about munis. The biggies have filed saying that they are cooperating with requests for info from various agencies. I bet that the investigation has something to do with munis.
Jim, this is pretty classic stuff, but the Fed is following the basic lines. For instance, you can't let everyone be caught by margin calls.
A lot of what wasn't done then has been done now. But IMO it is not early intervention that is the answer. I believe that letting financial companies go vertical is suicide. It makes the entire system unstable. When you are cruising along at 30,000 feet and all the engines go, it is not just a matter of skill that allows you to get on the ground without killing all the passengers. There is also a huge element of luck.
Think everything should take a hair cut, including fraudulent munis used by politicos & financial crooks for own profits.
And, with a hybrid Parliamentary system we could have gotten rid
of Bush & co. after a year into
his second term.
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