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Monday, March 17, 2008

Bear Stearns is Dead, Lehman is Probably Next

Fed Cuts Discount Rate, Lends More to Avert Meltdown (Update2): “The Federal Reserve, struggling to prevent a meltdown in financial markets, cut the rate on direct loans to banks and became lender of last resort to the biggest dealers in U.S. government bonds.

In its first weekend emergency action in almost three decades, the central bank lowered the so-called discount rate by a quarter of a percentage point to 3.25 percent. The Fed also will lend to the 20 firms that buy Treasury securities directly from it. In a further step, the Fed will provide up to $30 billion to JPMorgan Chase & Co. to help it finance the purchase of Bear Stearns Cos. after a run on Wall Street's fifth-largest securities firm.”

This is historic… and insane. The Fed is taking on real risk now by putting that $30 billion on its own balance sheet. That just screams desperation.

Also, WTF was Bear Stearns into? JPMorgan was obviously unwilling to take ANY risk on Bear Stearns. None. What do they know? Things are obviously quite bad. A couple of detonations in the Level 3 asset sphere perhaps?

“We learned that Bear Stearns's balance sheet on close examination was worth a 10th of its market value.” -Vincent Reinhart, former director of the Division of Monetary Affairs at the Fed and now a scholar at the American Enterprise Institute in Washington.

Yup. Definatley the Level 3 assets bomb.
See my post Level 3 Rules for more on Level 3 hocus pocus.

JPMorgan Agrees to Buy Bear Stearns for $240 Million (Update2): “JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for $240 million, about 90 percent less than its value last week, after a run on the company ended 85 years of independence for Wall Street's fifth-largest securities firm.

Shareholders of Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the New York-based companies said in a statement late yesterday. The Federal Reserve is providing financial backing to JPMorgan, the second-biggest U.S. bank, and also cut the rate on direct loans to banks in its first emergency weekend action in almost three decades to stave off a broader market panic.”

Well, that was quick. The implosion I mean. It took 83 years to build Bear Stearns up to $158 a share and only a year or two to secretly destroy that wealth and take Bear Stearns down to $2 a share.

As far as “staving off a broader market panic”, not going to happen. Lehman brothers is next in line. Rumours already abound that Lehman doesn’t have sufficient liquidity.

Brokerage Stocks May Drop 50% More, Oppenheimer's Whitney Says: “Banks and brokerages may fall by half because Bear Stearns Cos.'s sale to JPMorgan Chase & Co. for $2 a share will create a "major negative revaluation'' of financial shares, Oppenheimer & Co.'s Meredith Whitney said.

“Financial stocks have further downside of as much as 50 percent based upon 1990/1991 multiples of tangible book values,” Whitney, the analyst who correctly predicted Citigroup Inc. would reduce its dividend, wrote in a report today.”

Price in a good 2 or 3 years of recession and you’ve got to seriously cut estimates and multiples.

BOE Offers Banks Emergency Cash to Ease Money Markets (Update2): “The Bank of England offered extra cash to banks, the first short-term emergency operation in six months, to alleviate tensions in money markets.”

More cash and more liquidity is being tossed at the problem. This is yet another attempt to bring LIBOR down and to get the banks lending to each other again.

LIBOR is seriously spiking right now. MASSIVELY.

Related Headlines:
Bear Stearns's Schwartz Fought Collapse as Cayne Played Bridge
Buy Signals Abound in U.S. Stocks Near Bear Market (Update1)