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Sunday, March 16, 2008

Massive Intervention By The Fed

Bear goes to JPM for $2.00 a share, which is only about a $28 discount from Friday's closing price. But BSC opened over $50 on Friday, so a BSC owner's net loss since Thursday close is over $50 a share. Kind of painful, huh? The 52 week high was over $159. If JPM does well, the BSC shareholders will eventually get a little more out of the deal.

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.

Comments:
Thank you MoM,a historic day today,George Bush's legacy is secure for all time.
 
I think Ben's going to need a bigger helicopter.
 
Back in the 30s Dogma dogged the Fed and in theory made the "Great Depression' Very Bad.

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.
 
Oh, the palm for this one goes to Greenspan and Congress. Bush really didn't have much to do with it. He can only get a dishonorable mention. Everyone, left and right alike, needs to snap out of their partisan yammering and get serious.

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.
 
Greenspan, Congr., Clinton, and Bush backs and gutting our production and exports ( and for a war piled on U.S. taxpayers backs and not paid by increased war levy on those not serving ...nor paid for by several other countries ) .......

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.

Independent
 
MoM, yep there are limits to what the Fed can do. I was being a bit tongue-in-cheek there -- if this continues to unfold as it has, Ben will find out that there is no helicopter big enough.
 
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