More on Bear Stearns

According to CNN, it appears that the deal bailing out Bear Stearns is costing JP Morgan a lot more than the $236.2 million that the $2 per share announcement would lead you to believe.   According to CNN:

The Fed also approved the financing arrangement announced Sunday in which JPMorgan Chase & Co. will acquire rival Bear Stearns Cos. The deal valued at $236.2 million, a stunning collapse for one of the world’s largest and most venerable investment banks. The Fed will provide special financing to JPMorgan Chase for the deal, JPMorgan Chase said. The central bank has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets.

In other words, the Fed just printed another $30 billion in fresh money to loan to JP Morgan.  JP Morgan will use that money to buy up the Bear Stearns “assets” – and I use that term loosely – and give them to the Fed.  In other words, the US taxpayers are now on the hook for the defaults looming in Bear Stearns portfolio.

Hmmm….  How is JP Morgan going to make the payments on that $30 billion loan?  Think that has anything to do with the discount rate cut from 3.5% to 3.25%?  I wonder what interest rate that $30 billion loan carries…. 

Of course it doesn’t really matter, as when you always lose in the long run when you borrow money short term to pay back long term debt. 

Now the question is who’s next?  There’s a lot of chatter about Lehman, but there’s going to be bigger fish to fry soon.  JP Morgan may be safe for now, but I think we’re going to see some chinks in the venerable Goldman Sachs’ armor soon. 

I’m going to try to total up the amount of money the Fed has injected into the markets over the past 6 months or so;  regardless of the amount, it dwarfs the $160 billion stimulus package to taxpayers coming in a few months. 

If the hundreds of billions (it’s got to be over $500 billion) that the Fed has put into the economy hasn’t solved the crisis, do you really think another $160 billion is going to do it?

gk

What liquidity crunch?

Just two days ago on Wednesday, March 12th, Bear Stearns CEO Alan Schwartz said (I’m quoting from a Reuters story) “We don’t see any pressure on our liquidity, let alone a liquidity crisis.”

He also said “We have $17 billion or so excess cash on the balance sheet.”

Today he said “Our liquidity position in the last 24 hours had significantly deteriorated.  We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.”

Bullshit.  Rumours about Bear Stearns and their problems have been circulating for quite awhile.  I even mentioned it here on Monday in a post titled “Who is this guy Margin – and why does he keep calling?” 

To put it bluntly, Schwartz lied.  He knew he was lying when he said it.  He should be fired immediately and prosecuted for fraud.

The bailout of Bear Stearns by the Fed today is the tip of the iceberg.  This will get worse, and the Fed has now set a precedent of bailing out non-banks.  Here’s a quote from a CNN story today. 

“The crisis, however, is not isolated to Bear Stearns, said Christopher Whalen, managing director of Institutional Risk Analytics, who predicts that the liquidity crunch will only get worse. The heart of the problem is that no one knows how to value the assets these Wall Street firms are carrying so noone wants them.  A lot of firms are right behind Bear,” he said”

gk