I walked by the Bear Stearns office tower yesterday and there was quite a commotion. A TV crew was on the scene and a hoard of folks had gathered around a large cardboard illustration (like what might be propped up for a kid’s Bar Mitzvah or someone’s anniversary party) of former Bear CEO James Cayne. The idea was that Bear employees would walk out of the building, sign the poster-board and then the artist would auction it off on E-Bay.
I was mesmerized by the board. I leaned in to read all of the comments, some of which can not be printed here. What was interesting was the vast divergence of feelings that were shared. Yes, there were the expletives and the bitter salvos (these were probably the people who purchased t-shirts 5 feet away that said, “I worked at Bear Stearns for 20 years and all I got was Cayned!”), but more often, there was nostalgia. “Thanks for the great years, Jimmy!”, “It was an amazing ride” and “I wish it did not end on March 17th!”
All of this was interesting in light of the three-part series about the collapse of Bear Stearns that was published this week in the Wall Street Journal. If you have not read it, I urge you to do so (www.wsj.com). Reporter Kate Kelly’s attention to detail and ability to paint a vivid story is remarkable. Like a fine journalist, Ms. Kelly is able to rivet the reader, even though we know the ending of the story.
Each participant in the deal was painted with multiple layers, so that it was impossible to come away with a simple “they are all a bunch of thieves” attitude. In fact, the overriding sense I had was that while there were lots of mistakes along the way, the guys running Bear Stearns at the time were desperately seeking ways to save the company. The fact that they allowed themselves to get into the situation in the first place was bad, but each seemed to truly care about the organization.
That is the sentiment that was echoed by my lunch date, who has worked at Bear for 18 years. He recounted his personal experience with me of that fateful week in March – the initial fear that as a 56-year old, he would have to find another job; that he was just another “dopey boomer” who had not saved enough; and then acceptance that although he loved the company, they had screwed up and paid a terrible price. When we returned from lunch, he checked his Blackberry “Well, the deal is done…15 minutes later, the 85-year old Bear is history now.” And those are the Bear facts.
Showing posts with label Bear Stearns. Show all posts
Showing posts with label Bear Stearns. Show all posts
Friday, May 30, 2008
Thursday, March 27, 2008
Bail out Blues
Note to self: do not turn on acerbic talk radio program after leaving a relaxing acupuncture appointment. I wish I knew that before I got into my car last night and tuned into hear a local host ask her listeners: “How do you feel about your tax dollars being used to bail out fat cats on Wall Street?” Almost immediately, I tensed up and felt my blood boil.
I know that talk radio is a bastion for vitriol, but I am getting sick and tired of hearing the Bear Stearns story being framed as taxpayer-financed bail out, as if we had nothing to lose by allowing Bear Stearns to fail. What seems ridiculous is that many of the hosts who are throwing out these types of remarks have absolutely no idea what they are talking about. (I looked up the biography of the host in question and found that her primary career has been as journalist, covering “murder, mayhem and the Mafia for nearly ten years.” While she may have been a capable writer about these topics, it seems almost irresponsible for her to spew opinions without fully understanding the layers of this financial crisis.)
Like most news stories, this one is nuanced and deep, two concepts that normally evade sharp-tongued folks who flood the airwaves. Yes, on the surface you could say that the Federal Reserve helped to save Bear Stearns by assuming $29 billion of hard-to-price securities (in essence, putting billions of dollars of taxpayer money at risk) in order to facilitate the purchase of Bear by J.P. Morgan. You could also argue that due to the interconnected global financial markets, the failure of Bear Stearns would have likely had far-reaching ramifications, some of which the radio host and her listeners may not have liked too much.
One outcome of the democratization of investing is that “the fat cats of Wall Street” now include the vast majority of US employees. Most people own financial assets, either directly or through retirement/pension plans. So let me ask you fat cats how you would have felt if on March 17th you woke to news not of a Bear Stearns bailout, but of its bankruptcy? My guess is that US stocks would have plunged on the news—given the mood on the street the previous week, a Bear bankruptcy could have driven down the Dow Jones Industrial Average by 10%--about 1,000 points.
Some hard core free-market fundamentalists believe that this type of purge would have been the quickest way to get to true “price discovery”. Of course that kind of purge could also have led to a domino effect infecting other financial institutions and miring the US economy into a deep and painful recession. That does not seem like an appealing alternative, does it?
One point that should be raised is that the democratization of investing may necessitate expanded Federal oversight. Once the Fed began to lend directly to investment banks instead of to their normal customers (commercial banks), the central bank made that outcome a fait accompli. I am sure that the radio host will frame this as another example of “government getting into your business,” but perhaps you will see through that kind of rhetoric to understand that there is always more to the story than the simple sound bite.
I know that talk radio is a bastion for vitriol, but I am getting sick and tired of hearing the Bear Stearns story being framed as taxpayer-financed bail out, as if we had nothing to lose by allowing Bear Stearns to fail. What seems ridiculous is that many of the hosts who are throwing out these types of remarks have absolutely no idea what they are talking about. (I looked up the biography of the host in question and found that her primary career has been as journalist, covering “murder, mayhem and the Mafia for nearly ten years.” While she may have been a capable writer about these topics, it seems almost irresponsible for her to spew opinions without fully understanding the layers of this financial crisis.)
Like most news stories, this one is nuanced and deep, two concepts that normally evade sharp-tongued folks who flood the airwaves. Yes, on the surface you could say that the Federal Reserve helped to save Bear Stearns by assuming $29 billion of hard-to-price securities (in essence, putting billions of dollars of taxpayer money at risk) in order to facilitate the purchase of Bear by J.P. Morgan. You could also argue that due to the interconnected global financial markets, the failure of Bear Stearns would have likely had far-reaching ramifications, some of which the radio host and her listeners may not have liked too much.
One outcome of the democratization of investing is that “the fat cats of Wall Street” now include the vast majority of US employees. Most people own financial assets, either directly or through retirement/pension plans. So let me ask you fat cats how you would have felt if on March 17th you woke to news not of a Bear Stearns bailout, but of its bankruptcy? My guess is that US stocks would have plunged on the news—given the mood on the street the previous week, a Bear bankruptcy could have driven down the Dow Jones Industrial Average by 10%--about 1,000 points.
Some hard core free-market fundamentalists believe that this type of purge would have been the quickest way to get to true “price discovery”. Of course that kind of purge could also have led to a domino effect infecting other financial institutions and miring the US economy into a deep and painful recession. That does not seem like an appealing alternative, does it?
One point that should be raised is that the democratization of investing may necessitate expanded Federal oversight. Once the Fed began to lend directly to investment banks instead of to their normal customers (commercial banks), the central bank made that outcome a fait accompli. I am sure that the radio host will frame this as another example of “government getting into your business,” but perhaps you will see through that kind of rhetoric to understand that there is always more to the story than the simple sound bite.
Tuesday, March 18, 2008
The Bear Necessities
I thought that I had accomplished a lot over the weekend, until I read about the stunning Bear Stearns deal. In a remarkable turn of events, Bear agreed to sell itself two days after receiving emergency funds from J.P. Morgan Chase & Co. and the Federal Reserve Bank of NY.
Actually, the sale wasn’t the shocking part, but the price was: after closing down 47% on Friday to $30 per share, the 85-year old investment banking firm will sell itself for $2 per share to JP Morgan. To help grease the wheels of the deal, the Fed approved a $30 billion credit line to JP Morgan and said that it would effectively take over the huge Bear Stearns portfolio.
Separately, the Fed also lowered the rate for borrowing from the discount window by a quarter of a percent to 3.25%, in order to facilitate smoother financial market operations and further expanded last week’s $200 billion liquidity injection by creating the Term Securities Lending Facility (TSLF). The TSLF will make money available to the 20 large investment banks that serve as primary dealers and trade Treasury securities with the Fed. This program will allow the Fed to hold as collateral a wide array of investments, including the now-tarnished mortgage backed securities, and will have no limit on the amount of money that can be borrowed.
While I understand how many believe that those who created this mess should suffer, officials are thankfully pushing aside the worries about “moral hazard” so that financial system does not become crippled altogether. I see the Fed actions as necessary to help halt the forced sell-off of high quality mortgage backed securities. These moves are less financially-motivated than confidence-builders. Clearly the root of the economy’s fundamental problems can not be solved by the Fed. After all, the central bank can not stop housing prices from falling. But what it can do is provide liquidity to financial institutions which might prevent what is known on the street as a “death spiral”, or a bank run.
If you do not own Bear Stearns stock (which you may, because it was part of the S&P 500 Index), how is all of this going to affect you? Well it has created a ripple throughout the entire financial services industry. Shares of investment banks in the S&P 500 are down almost 30% this year, the overall market (as measured by the S&P 500 index) is down over 12% this year and over 17% from its most-recent high last October. But in a larger sense, the events of the past week imply that the Fed will do everything in its power to stave off financial instability and that is actually a good thing.
Actually, the sale wasn’t the shocking part, but the price was: after closing down 47% on Friday to $30 per share, the 85-year old investment banking firm will sell itself for $2 per share to JP Morgan. To help grease the wheels of the deal, the Fed approved a $30 billion credit line to JP Morgan and said that it would effectively take over the huge Bear Stearns portfolio.
Separately, the Fed also lowered the rate for borrowing from the discount window by a quarter of a percent to 3.25%, in order to facilitate smoother financial market operations and further expanded last week’s $200 billion liquidity injection by creating the Term Securities Lending Facility (TSLF). The TSLF will make money available to the 20 large investment banks that serve as primary dealers and trade Treasury securities with the Fed. This program will allow the Fed to hold as collateral a wide array of investments, including the now-tarnished mortgage backed securities, and will have no limit on the amount of money that can be borrowed.
While I understand how many believe that those who created this mess should suffer, officials are thankfully pushing aside the worries about “moral hazard” so that financial system does not become crippled altogether. I see the Fed actions as necessary to help halt the forced sell-off of high quality mortgage backed securities. These moves are less financially-motivated than confidence-builders. Clearly the root of the economy’s fundamental problems can not be solved by the Fed. After all, the central bank can not stop housing prices from falling. But what it can do is provide liquidity to financial institutions which might prevent what is known on the street as a “death spiral”, or a bank run.
If you do not own Bear Stearns stock (which you may, because it was part of the S&P 500 Index), how is all of this going to affect you? Well it has created a ripple throughout the entire financial services industry. Shares of investment banks in the S&P 500 are down almost 30% this year, the overall market (as measured by the S&P 500 index) is down over 12% this year and over 17% from its most-recent high last October. But in a larger sense, the events of the past week imply that the Fed will do everything in its power to stave off financial instability and that is actually a good thing.
Monday, March 17, 2008
Grin and Bear it
Alan D. Schwartz, the CEO of Bear Stearns seemed stoic as he conducted a conference call Friday to explain the nation’s fifth largest investment bank’s dramatic move: it had received emergency funds from J.P. Morgan Chase & Co. and the Federal Reserve Bank of New York to meet its obligations and to protect against rumors that have been swirling around the firm for the past week. Whether or not the rumors became self-fulfilling prophecies are not yet known, but what is crystal clear is that Bear’s liquidity has fallen so much that it needed cash.
The mainstream media jumped on the story with headlines that repeatedly said the government is “bailing out Bear”. How unfair, said CNN’s Lou Dobbs! Your taxpayer money should not be used to ease the pain of Wall Street-ers! Before you go too crazy with that line of thought, let’s remember that a liquidity crisis that is not contained at Bear could easily spread to other banks, investors or industries, which is why the Fed, the Treasury Department and the SEC were all involved.
Authorities needed to step in because Bear does business with so many large firms (counter-parties) and is a significant player in markets for debt, particularly for securities backed by mortgages. If Bear were to fail, many of the counter-parties would become ensnared, prompting a potential domino effect throughout the brokerage and banking industries. And to the “rescue” of Bear, let’s remember that the stock fell 47% on Friday to a nine-year low of $30 per share and is down a staggering 79% from 52-weeks prior. That seems like a healthy dose of pain and suffering.
The mechanics of the deal involve using a little-used Depression-era provision of the Federal Reserve Act. J.P. Morgan will borrow directly from Fed's discount window and relend to Bear Stearns for 28 days. (Unlike investment banks like Bear, JP Morgan has the advantage of being able to borrow directly from the Fed.) The money that is borrowed will be secured by collateral furnished by Bear, but here is where the accusations of “bail-out” come to light. Under terms of the deal, the Fed, not J.P. Morgan, bears the risk of losses if the Bear Stearns collateral falls in value.
CEO Schwartz noted that the firm is seeking sources of permanent financing “or other alternatives for the company.” In other words, Bear needs a buyer-and fast. The assumption is that this deal is likely to lead to JP Morgan’s acquisition of Bear Stearns, and in a broader sense, perhaps this is the beginning of the bottoming process of the credit crunch.
The mainstream media jumped on the story with headlines that repeatedly said the government is “bailing out Bear”. How unfair, said CNN’s Lou Dobbs! Your taxpayer money should not be used to ease the pain of Wall Street-ers! Before you go too crazy with that line of thought, let’s remember that a liquidity crisis that is not contained at Bear could easily spread to other banks, investors or industries, which is why the Fed, the Treasury Department and the SEC were all involved.
Authorities needed to step in because Bear does business with so many large firms (counter-parties) and is a significant player in markets for debt, particularly for securities backed by mortgages. If Bear were to fail, many of the counter-parties would become ensnared, prompting a potential domino effect throughout the brokerage and banking industries. And to the “rescue” of Bear, let’s remember that the stock fell 47% on Friday to a nine-year low of $30 per share and is down a staggering 79% from 52-weeks prior. That seems like a healthy dose of pain and suffering.
The mechanics of the deal involve using a little-used Depression-era provision of the Federal Reserve Act. J.P. Morgan will borrow directly from Fed's discount window and relend to Bear Stearns for 28 days. (Unlike investment banks like Bear, JP Morgan has the advantage of being able to borrow directly from the Fed.) The money that is borrowed will be secured by collateral furnished by Bear, but here is where the accusations of “bail-out” come to light. Under terms of the deal, the Fed, not J.P. Morgan, bears the risk of losses if the Bear Stearns collateral falls in value.
CEO Schwartz noted that the firm is seeking sources of permanent financing “or other alternatives for the company.” In other words, Bear needs a buyer-and fast. The assumption is that this deal is likely to lead to JP Morgan’s acquisition of Bear Stearns, and in a broader sense, perhaps this is the beginning of the bottoming process of the credit crunch.
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