Bear Sterns, the airlines even The Donald should have gone bankrupt.

[saluki9]

Also, profits from the sale? you must be kidding

Don't confuse value with liquidity.

Do a little checking into what happened to the assets purchased after the LTCM meltdown.

 

[brewer12345]

Don't confuse value with liquidity.

Do a little checking into what happened to the assets purchased after the LTCM meltdown.

Yup. And I would not be the slightest bit surprised if AAA rated tranches from the vast majority of Alt A securitizations eventually pay out full par plus all coupons. These are the same bonds you would be thrilled to get 85 cents on the dollar for today, if you could find a buyer.

 

[al_bundy]

What has happened is unprecedented on any scale. Simple as that. The set of regulations that might have prevented this might well put a serious damper on US economic growth.

As for regulations, I expect we will see securities firms like Bear get regulated by the Fed in the future. Kind of goes with giving them access to the discount window, IMO. But beyond that, exactly how do you propose to regulate private companies? What jurisdiction does the Fed and the SEC currently have over private partnerships domiciled offshore (i.e. hedge funds)? Unless Congress passes some very different laws than we curently have, I don't see it. If they do pass such laws, the US is likely to lose a lot of financial services jobs and GDP (and I might well end up working in London, Bermuda, etc.). In any case, regulations are always made to be arbitraged/gotten around, so its only a matter of time before creative people find new ways to blow themselves and others up in size.

i don't buy it

NYC real estate market is 75% co-op apartments where you need 20% down and a background check in order to buy property. yet prices quadrupled in the last 10 years.

i bet if we had common sense regulations like anyone getting an ARM mortgage has to qualify at the highest indexed rate or a requirement to verify income by at least looking at bank accounts we wouldn't be in this mess. we might have had less growth in some years, but it would have been made up by a smoothing of the growth and less risk of downside

 

[brewer12345]

I guess I would argue that NYC RE is "special." Kind of like HI and SF in that regard. So I would be wary of extrapolating anything based on the NYC market.

I think forcing qualification at the highest possible indexed rate is overly restrictive, personally. But I would have liked to see stated income loans restricted to the self-employed only, and I think a return to 20% down or the use of mortgage insurance will prove to be healthy in the long term.

Actually, I think that the full weight of all the shite tat is flowing down hill is likely to land right on top of the rating agencies. That will be fun to watch.

 

[Independent]

What has happened is unprecedented on any scale. Simple as that. The set of regulations that might have prevented this might well put a serious damper on US economic growth.

As for regulations, I expect we will see securities firms like Bear get regulated by the Fed in the future. Kind of goes with giving them access to the discount window, IMO. But beyond that, exactly how do you propose to regulate private companies? What jurisdiction does the Fed and the SEC currently have over private partnerships domiciled offshore (i.e. hedge funds)? Unless Congress passes some very different laws than we curently have, I don't see it. If they do pass such laws, the US is likely to lose a lot of financial services jobs and GDP (and I might well end up working in London, Bermuda, etc.). In any case, regulations are always made to be arbitraged/gotten around, so its only a matter of time before creative people find new ways to blow themselves and others up in size.

Are you talking "economic growth" in terms of "sustainable improvements in the number of widgets produced per hour of labor"?
or do you mean the boom portion of periodic boom/bust cycles? I like the first but not the second.

I'm sure that the gov't currently regulates every private company in the US that hires workers, so I don't think that regulation is impossible.
The question is whether it does more harm than good.

If an electric utility is putting up a power plant in my neighborhood that could blow up and kill us all, I think it would be okay for the gov't to force them to change their design.
If that means more expensive power, that's a trade-off we'd probably make. (I would want to see a cost/benefit using reasonable probabilities of the explosion first.)

So the questions here are
"What's the exact mechanism that can turn an ordinary bankruptcy of a middling sized firm (14,000 employees) into a complete meltdown of the US economy?"
"Where is the most efficient spot to change the system to prevent that from happening?"
"How much real, sustainable economic growth are we giving up if we mandate that change? and how much does that reduce the chance of a meltdown?"

I really don't care if a few jobs go overseas (sorry, but remember you'll still have internet access) if the value of what we gain is more than what we lose.

 

[brewer12345]

Indy, I gather you are not a fan of Schumpeterian economics? If you restrict the growth of credit, you restrict economic growth.

So I think heavy-handed regulation would reduce both economic growth and also push one of the most globally competitive US industries (finance) to start moving elsewhere. Why do you think there are more IPOs in London than NYC these days? Hint: Sarb-Ox.

If the regulatory authorities wanted to try to ensure no more blow-ups, there are lots of things they could do, all of which would come with a cost. And I don't think they could prevent problems anyway. So I'd like to see some common sense regulations handed down, but I think that we are likely to overdo it and suffer as a result.

 

[Independent]

Of course credit helps produce growth.

So do:
a healthy, well educated workforce;
political stability;
free trade;
economic stability (the confidence that if you save/invest today the economy will be healthy enough in the future that you can harvest returns);
property rights.
And the first property right is the belief that you will get the benefit of what you produce - rewards go to productive workers, not to people who happen to be politically connected, (as has been true in most nations at most times in human history)

I got wordier on 4 and 5 because those are the things we can lose when people are told that the gov't has to take extraordinary action, even doing things that have an appearance of "bailing out" the wealthy, because the system we've got is so fragile that the alternative is a complete economic meltdown.

Everybody wants "common sense" gov't, and nobody wants the gov't to kill the goose that laid the golden egg.

All industries that generate negative externalities argue that they would be more efficient if the gov't didn't try to reduce those externalities. Some even feel they'll have to find a friendlier gov't somewhere else if the gov't tries.

If we're rationale (unfortunately, I don't have a lot of faith in that), we'll ask the three questions I asked above and come up with an approach that balances costs and benefits. If the industry position is "All possible changes will hurt our profits or efficiency, therefore we shouldn't change anything", then I think the rest of us should acknowledge the premise is probably a true statement but the conclusion isn't, and continue to look for the best trade-offs.

 

[RockOn]

Don't confuse value with liquidity.

Do a little checking into what happened to the assets purchased after the LTCM meltdown.

So you think the FED can make a profit by backing Bear's assets? I cannot see any possibility of a profit. Only a possibility of not having a large loss. The FED is not buying the assets at a discount and getting a profit if the discount diasppears. Am I wrong? They are taking the assets on at full face value and the best they can do is if the assets retain their value and pay the coupon. That is not likely, IMO, I'm sure the FED is standing behind the lowest quality assets on Bear's book, not the higher quality. The FED has to take the first $29B of loss, the lowest quality will fail first.

 

[Texas Proud]

Rockon...

under the new deal... Chase takes the first billion hit... but I am sure they have planned to lose the whole amount... so the FED did buy 30 billion of assets for 29 bill... will they lose money... IMO, yes... will they lose 29.. nope...

And I am one that thinks the deal was pushed through and it should not have been... they could have done a packaged bankruptcy and gotten some relief in some of their problems.... the firm would have come out in the end a much smaller company, but it would have 'fixed' some of the leverage that is not good in the system.... because the true risk of investing would now be shown.... people would demand a higher return on their money with the risks.... people ignored the risk and bid down the yields... sorry, you lose... and I am sure I do also as I am in the market... but it would have been good in the long run... I do not know if this will really change people in the long run...

 

[al_bundy]

Rockon...

under the new deal... Chase takes the first billion hit... but I am sure they have planned to lose the whole amount... so the FED did buy 30 billion of assets for 29 bill... will they lose money... IMO, yes... will they lose 29.. nope...

And I am one that thinks the deal was pushed through and it should not have been... they could have done a packaged bankruptcy and gotten some relief in some of their problems.... the firm would have come out in the end a much smaller company, but it would have 'fixed' some of the leverage that is not good in the system.... because the true risk of investing would now be shown.... people would demand a higher return on their money with the risks.... people ignored the risk and bid down the yields... sorry, you lose... and I am sure I do also as I am in the market... but it would have been good in the long run... I do not know if this will really change people in the long run...

it wasn't the liabilities that anyone cared about on the balance sheet, but the derivative book. a bear stearns BK would have hit every large bank worldwide

 

[Texas Proud]

it wasn't the liabilities that anyone cared about on the balance sheet, but the derivative book. a bear stearns BK would have hit every large bank worldwide

And Chase took all this on....

But in BK, they would handle this also... and as others have pointed out... if a BS BK would have 'crashed' the market like some think... then we have a heap of a lot of trouble....

I tend to think that the system would be able to handle it well...

 

[semtex]

Our company leverage ratio is around 80. Same time, we tag our strategy as "conservative".

 

[Independent]

it wasn't the liabilities that anyone cared about on the balance sheet, but the derivative book. a bear stearns BK would have hit every large bank worldwide

Not only banks, but a lot of other firms that were simply using derivatives to "hedge" real business risks.

In my simple way, I thought that the more firms invovled, the better off we would be. If there are a lot, than no single firm would see a big hit from a BS bankruptcy.
I understood that all prudent players diversify just so they can't be pulled under by on bad player.

But I'm interpreting Brewer's post to say that some of BS's creditors (I don't think it would be commercial banks, but I'm not sure) are so heavily leveraged that the safety in large numbers doesn't apply. Even though these leveraged firms have just a small percent of the total BS book, it still is enough to overwhelm their capital.

So I get -
Old thinking: Large number of creditors => safety,
New thinking: A few creditors with high leverage => a chain reaction that could get out of control.

 

[Patrick]

And Chase took all this on....

But in BK, they would handle this also... and as others have pointed out... if a BS BK would have 'crashed' the market like some think... then we have a heap of a lot of trouble....

I tend to think that the system would be able to handle it well...

I think Chase is only on the hook for the first $1B. The Fed is guaranteeing the next $29B. But it's not a "bailout!"

 

[Texas Proud]

I think Chase is only on the hook for the first $1B. The Fed is guaranteeing the next $29B. But it's not a "bailout!"

I guess a difference in what we read...

My reading.... The FED 'bought' $30 bill of securities and Chase is on the hook for the first $1 bill loss... the FED is on for the rest of only this portfolio...

BS has a LOT of derivatives that al_bundy mentioned... this Chase is on the hook for 100%... that is what I was talking about...

 

[RockOn]

I think Chase is only on the hook for the first $1B. The Fed is guaranteeing the next $29B. But it's not a "bailout!"

Chase? I thought JP took on the first $1B. Is that a typo or do I have it wrong?

 

[Texas Proud]

Chase? I thought JP took on the first $1B. Is that a typo or do I have it wrong?

It is JPMorganChase.... some call it JP, others call it Chase... depends on which one you know best...

 

[RockOn]

It is JPMorganChase.... some call it JP, others call it Chase... depends on which one you know best...

I forgot they were also Chase, thanks.

 

[barbarus]

Mr. Bear avails himself and the little woman of the opportunity to bail.

Bear Stearns' Cayne sells over $60M in stock - Mar. 27, 2008

 

[Independent]

Of course, Mr Cayne had prudently diversified his personal investments before 2008.

"Since 2000, Cayne has sold 2.37 million shares worth about $182.7 million, while Schwartz has sold more than one million shares for roughly $67.2 million."

So he cashed out enough on the way up that the ride was definitely profitable for him. Yesterday's $61 million was a nice addition.

Bear Stearns execs sold some stock in December, data show - MarketWatch