Join Early Retirement Today
Reply
 
Thread Tools Display Modes
Bear Sterns, the airlines even The Donald should have gone bankrupt.
Old 03-24-2008, 04:32 AM   #1
gone traveling
 
Join Date: Nov 2005
Posts: 2,146
Bear Sterns, the airlines even The Donald should have gone bankrupt.

Why should taxpayers bail any of them out?

Bear Stearns should be toast. Today they want it at 10 dollars a share instead of 2 dollars!!

Uh let them sink!
dumpster56 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 03-24-2008, 05:32 AM   #2
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Quote:
Originally Posted by newguy888 View Post
Why should taxpayers bail any of them out?

Bear Stearns should be toast. Today they want it at 10 dollars a share instead of 2 dollars!!

Uh let them sink!
I know you're baiting, but the simple answer is this.

The market is very shaky now (duh). On top of this BSC is (was) a large player in the prime brokerage and swap markets. Them failing could have caused a wave which might not have been able to be stopped. It could have caused a run on the other brokers and led to a total meltdown.

I think that the brokers will and should fall under much more regulation, but this bailout was very necessary.
saluki9 is offline   Reply With Quote
Old 03-24-2008, 06:05 AM   #3
Thinks s/he gets paid by the post
Spanky's Avatar
 
Join Date: Dec 2004
Location: Minneapolis
Posts: 4,455
It is not considered as a bailout since the share holders and the employees will suffer big losses from the liquidation. As saluki9 points out, allowing BSC to bankrupt will lead to massive instability in the global financial market.
__________________
May we live in peace and harmony and be free from all human sufferings.
Spanky is offline   Reply With Quote
Old 03-24-2008, 09:20 AM   #4
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 4,629
Quote:
Originally Posted by Spanky View Post
It is not considered as a bailout since the share holders and the employees will suffer big losses from the liquidation. As saluki9 points out, allowing BSC to bankrupt will lead to massive instability in the global financial market.
But, today's deal shows that the Fed went too far. JPM is saying that they were willing to pay more for BSC. That means they would have done the deal without the $30 billion guarantee, or with a smaller guarantee.
Independent is offline   Reply With Quote
Old 03-24-2008, 09:36 AM   #5
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,433
Quote:
Originally Posted by Independent View Post
But, today's deal shows that the Fed went too far. JPM is saying that they were willing to pay more for BSC. That means they would have done the deal without the $30 billion guarantee, or with a smaller guarantee.
It appears that "smaller" guarantee is now $29 billion.
FIRE'd@51 is offline   Reply With Quote
Old 03-24-2008, 10:39 AM   #6
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 4,629
This is pretty basic, but I still haven't seen an answer. I keep seeing phrases like "total meltdown" and "massive instability", but I don't know what people really mean.

So Bear Stearns files bankruptcy. A court freezes their assets and liabilities while they come up with a work-out plan. Probably all the creditors eventually get close to 100 cents on the dollar, they just have to wait until Bear’s assets turn into cash.

Of course, Bear Stearns' creditors (A) have creditors of their own (B). A has trouble paying B because A can’t get cash from BSC. However, A should have some capital and liquidity. Unless A’s position with BSC was awfully big, A should be able to pay off B. Maybe we can find one or two other brokers that end up with bankruptcy “protection”, but not everybody.

What does this have to do with the rest of the economy? The rest of us are still making stuff and selling stuff and getting paid.

I can see some psychological impacts. Consumers and businesses are a little more cautious, and that leads to a recession. But, so what? We had a bunch of supposedly smart people make some really dumb decisions, it’s no surprise that would have some fallout. Maybe next time we’ll be a little more careful.

I guess I’m saying that I have trouble seeing an inevitable path from “Bear Stearns declares bankruptcy” to “massive depression”, and I’m having trouble justifying the Fed diving into this just to avoid a recession.
Independent is offline   Reply With Quote
Old 03-24-2008, 10:44 AM   #7
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Quote:
Originally Posted by Independent View Post
This is pretty basic, but I still haven't seen an answer. I keep seeing phrases like "total meltdown" and "massive instability", but I don't know what people really mean.

So Bear Stearns files bankruptcy. A court freezes their assets and liabilities while they come up with a work-out plan. Probably all the creditors eventually get close to 100 cents on the dollar, they just have to wait until Bear’s assets turn into cash.

Of course, Bear Stearns' creditors (A) have creditors of their own (B). A has trouble paying B because A can’t get cash from BSC. However, A should have some capital and liquidity. Unless A’s position with BSC was awfully big, A should be able to pay off B. Maybe we can find one or two other brokers that end up with bankruptcy “protection”, but not everybody.

What does this have to do with the rest of the economy? The rest of us are still making stuff and selling stuff and getting paid.

I can see some psychological impacts. Consumers and businesses are a little more cautious, and that leads to a recession. But, so what? We had a bunch of supposedly smart people make some really dumb decisions, it’s no surprise that would have some fallout. Maybe next time we’ll be a little more careful.

I guess I’m saying that I have trouble seeing an inevitable path from “Bear Stearns declares bankruptcy” to “massive depression”, and I’m having trouble justifying the Fed diving into this just to avoid a recession.
How about the millions of uninformed (but panicky) investors who all start fearing for the health of their brokerage houses and start selling so they can get their money out?
saluki9 is offline   Reply With Quote
Old 03-24-2008, 11:30 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 17,203
Just a thought...... maybe with a week or so past the 'crisis', some people were able to take a closer look (not in a weekend) at the assets and saw some more value in them...

So, to make the deal go smoother, they upped the offer....

But.. who knows for sure why the did it...
Texas Proud is offline   Reply With Quote
Old 03-24-2008, 11:50 AM   #9
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,433
Quote:
Originally Posted by Independent View Post
This is pretty basic, but I still haven't seen an answer. I keep seeing phrases like "total meltdown" and "massive instability", but I don't know what people really mean.

So Bear Stearns files bankruptcy. A court freezes their assets and liabilities while they come up with a work-out plan. Probably all the creditors eventually get close to 100 cents on the dollar, they just have to wait until Bear’s assets turn into cash.

Of course, Bear Stearns' creditors (A) have creditors of their own (B). A has trouble paying B because A can’t get cash from BSC. However, A should have some capital and liquidity. Unless A’s position with BSC was awfully big, A should be able to pay off B. Maybe we can find one or two other brokers that end up with bankruptcy “protection”, but not everybody.

What does this have to do with the rest of the economy? The rest of us are still making stuff and selling stuff and getting paid.

I can see some psychological impacts. Consumers and businesses are a little more cautious, and that leads to a recession. But, so what? We had a bunch of supposedly smart people make some really dumb decisions, it’s no surprise that would have some fallout. Maybe next time we’ll be a little more careful.

I guess I’m saying that I have trouble seeing an inevitable path from “Bear Stearns declares bankruptcy” to “massive depression”, and I’m having trouble justifying the Fed diving into this just to avoid a recession.
I believe the real problem was Bear's derivative book, which someone posted on the other thread had a notional value of some $13 trillion. If Bear fails, their counter-parties become unhedged and, in the aggregate, would have exposure to the tune of the notional value. They could suffer enormous mark-to-market losses, which could lead to a domino effect of failures of other financial institutions. This is what the Fed was trying to prevent. And, you better believe, this would have a very big effect on the world economies.
FIRE'd@51 is offline   Reply With Quote
Old 03-24-2008, 12:01 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Mar 2003
Posts: 18,085
Quote:
Originally Posted by FIRE'd@51 View Post
I believe the real problem was Bear's derivative book, which someone posted on the other thread had a notional value of some $13 trillion. If Bear fails, their counter-parties become unhedged and, in the aggregate, would have exposure to the tune of the notional value. They could suffer enormous mark-to-market losses, which could lead to a domino effect of failures of other financial institutions. This is what the Fed was trying to prevent. And, you better believe, this would have a very big effect on the world economies.
Sounds about right. Also, what would happen in BK would be a very nasty game of cherry-picking. Example:

You have two swaps open with Bear when they go bust. One is a gain to you, the other is a gain to them. When they enter bankruptcy protection, they aggressively pursue the swap that is in their favor, and tell you to get in line with all their other creditors when it comes time to pursue the one in your favor. Oh, and sorry, you cannot have the excess above the margin deposit in your accout - protected by the BK court, sorry.
__________________
"All animals are equal, but some animals are more equal than others."

- George Orwell

Ezekiel 23:20
brewer12345 is offline   Reply With Quote
Old 03-24-2008, 01:51 PM   #11
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 4,629
I don't get the "exposure to the tune of the notional value". For example, I've got an interest rate swap with a notional of $100 million, and Bear owes me, they only owe the difference in interest rates, maybe 1-2%, times the $100 million. That means I'm out $1-2 million. I'm not short the whole notional amount.

I don't know what the ratio of "cash needed to settle" vs. notional amount is on typical derivatives. I've only seen a few of these, and the numbers I've seen have been just a couple percent of the notional.

I see the possibility of being on two contracts with Bear and owing on one while I can't collect on the other. That has to be very frustrating. But if the amount I can't collect is less than my capital, then I'm still solvent.

So if Bear has $13 trillion of derivatives, and half of them are in the money for the other party, and on average Bear owes 1-2% of the notional, then Bear owes $65-130 billion. That's a lot of money, but it's spread across dozens of companies, most with substantial capital. In most cases, derivatives are just a small part of their business.

It seems that companies have to have some combination of extreme leverage and/or lots of concentration in Bear, in order for Bears demise to put them at serious risk. How many really really took on that level of risk?

I suppose (hope that) somebody did the calculation and actually identified the other parties and figured out how many would be underwater.
Independent is offline   Reply With Quote
Old 03-24-2008, 01:57 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Mar 2003
Posts: 18,085
Suppose, for a moment, that your $65 billion estimate is true. So Bear blows up and takes that much out of the hides of its counterparties. Now knowing that all the parties trading such derivatives have just suffered a large loss, what do you think the remaining derivatives dealers will do, especially in a very stressed market? Simple: raise margin requirements. So you now have a massive margin call going out to every participant in the capital markets. Those receiving margin calls have to raise cash to meet such calls, so they sell securities into a no-bid market. The ensuing plunge in prices begets yet another margin call. Rinse and repeat until there is no functioning capital market system, banking system, economy, etc.
__________________
"All animals are equal, but some animals are more equal than others."

- George Orwell

Ezekiel 23:20
brewer12345 is offline   Reply With Quote
Old 03-24-2008, 03:28 PM   #13
Recycles dryer sheets
barbarus's Avatar
 
Join Date: Aug 2007
Posts: 433
What happens to a house-of-cards if you pull out one of the bottom cards?

What happens if everybody acknowledges that the emperor has no clothes all at once?
__________________
Consult with only myself as your adviser or representative. My thoughts should be construed as investment advice of the highest caliber. Past performance is but a pale shadow and guarantee of even greater results in the future.
barbarus is offline   Reply With Quote
Old 03-24-2008, 04:51 PM   #14
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
Quote:
Originally Posted by Independent View Post
But, today's deal shows that the Fed went too far. JPM is saying that they were willing to pay more for BSC. That means they would have done the deal without the $30 billion guarantee, or with a smaller guarantee.
That about says it all. Unbelievable, JP now wants to pay $10 when the taxpayer are left on the hook for $29B. I cannot believe what this country is coming to, free market capitalism, my *ss. JP should buy them without any guarantee and then they can pay whatever they want, I would not care. Moral Hazard is out of control. Who is next in line with their hand out? It make me sick.
RockOn is offline   Reply With Quote
Old 03-24-2008, 06:28 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 7,733
Quote:
Originally Posted by RockOn View Post
That about says it all. Unbelievable, JP now wants to pay $10 when the taxpayer are left on the hook for $29B. I cannot believe what this country is coming to, free market capitalism, my *ss. JP should buy them without any guarantee and then they can pay whatever they want, I would not care. Moral Hazard is out of control. Who is next in line with their hand out? It make me sick.

RockOn how old are you? If you are over 30 and haven't figured that the system is stacked in favor of Wall St. firms, and big banks you haven't been paying attention. I guess there is an argument to be made for Ann Rand fans for unfettered capitalism, but I think that has been tried and failed.

When I lived on the mainland, I owned a couple of Mazada RX-7, and when I got out in country, I drove well over the speed limit at times.
I have to admit seeing the guard rails on the curving mountain roads probably encouraged me to drive faster. Moral Hazard being out of control I guess. Thank god I never used the guard rails, but I did see others saved by them, including one guy who passed me going way to fast.

Are you really saying remove the guard rails to teach the speeders a lesson?
clifp is offline   Reply With Quote
Old 03-24-2008, 07:06 PM   #16
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
Quote:
Originally Posted by clifp View Post
RockOn how old are you? If you are over 30 and haven't figured that the system is stacked in favor of Wall St. firms, and big banks you haven't been paying attention. I guess there is an argument to be made for Ann Rand fans for unfettered capitalism, but I think that has been tried and failed.

When I lived on the mainland, I owned a couple of Mazada RX-7, and when I got out in country, I drove well over the speed limit at times.
I have to admit seeing the guard rails on the curving mountain roads probably encouraged me to drive faster. Moral Hazard being out of control I guess. Thank god I never used the guard rails, but I did see others saved by them, including one guy who passed me going way to fast.

Are you really saying remove the guard rails to teach the speeders a
lesson?
I'm 53. I believe when risk is taken, a reward should not be underwriten by the government. Bear was a highly leveraged risk taker.

I think the guard rails should be removed. Lots of money had been made for years at these large brokers at their customers expense. It is a lot more serious than speeding, more like felony theft. They were making huge profits/commissions, some of what they were selling was garbage and they knew it. Now when the piper is to be paid, Uncle Ben steps in. I don't mind the government helping to stop a meltdown but there were other choices, the FED could have provided short term liquidity to Bear and left it at that. The same way they are helping out other companies. If that wasn't enough, let them go. Companies have been liquidated many times before, nobody watched out for the stock/bond investors in Enron. In this case, the stock holders did lose money, but from what I understand, the bond holders are 100% whole. Their equity should have been used before the the customers get $29B of garbage debt on their account.
RockOn is offline   Reply With Quote
Old 03-24-2008, 07:36 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 7,733
53, pretty much what I figured a few years older than me. I don't disagree in principal with what you are saying.

The problem is the Fed is in a panic mode. To continue my corny analogy, there has been a disaster and only one lane is open out of town. The government is desperate to keep the road open and let traffic get through, so not only will they pad the guardrails, but the aren't enforcing seatbelt laws, and encouraging people to get out of town as quickly.

You are right they Fed didn't do this for Enron, and probably could have saved Bear at much less cost to the taxpayers. As I've said the guys running the show (The Fed, Treasury) are bankers, and the probably didn't understand or care how important Enron was to say California. They do understand Bear, Citigroup, even Countrywide and they believe if the don't rush to shore up these guys, the whole system will collapse. They will consistently over react to every problem until they feel the system is more stabilized. As side benefit, they are also helping out their friends and fellow bankers. I guess you can rant about, me I just bought banks stocks and I'm going along for the ride.
clifp is offline   Reply With Quote
Old 03-24-2008, 07:57 PM   #18
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
You make good points, I agree that the FED proably thinks they had to do this. I have money invested that is going up because of the bailout also. I still think what they did is wrong. Prices must be allowed to go up and to go down, the government should not get involved in market pricing. In the long run there might be a price to pay for this meddling, we shall see. When Nixon in he early 70's put on wage and price controls a price was paid. History can repeat.
RockOn is offline   Reply With Quote
Old 03-25-2008, 12:16 AM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 17,203
Why are most people thinking that the FED is out $29B

They bought the securities.... but they probably will get most of it back.. and Chase just stepped up and took the first $1B loss of the $30B...

Even in a horrible possibility... I would bet no more than a 50% loss... and without knowing what they bought it might be as low as 10%.... so only a $2B loss... and even that might not happen...


NOW, I do agree that I think the bondholders should have taken a haircut of say.... 10% which would have paid for the whole loss... OR structured like a BK where the bondholders get full payment if the $30B has only certain amount of loss...
Texas Proud is offline   Reply With Quote
Old 03-25-2008, 06:07 AM   #20
Recycles dryer sheets
 
Join Date: Jun 2007
Location: Oklahoma City
Posts: 338
Quote:
Originally Posted by clifp View Post

The problem is the Fed is in a panic mode. To continue my corny analogy, there has been a disaster and only one lane is open out of town. The government is desperate to keep the road open and let traffic get through, so not only will they pad the guardrails, but the aren't enforcing seatbelt laws, and encouraging people to get out of town as quickly.
Analogy breaks down ....

If the guard rails are removed then a couple risky drivers crash and others take notice as they see and hear of the crashes....


and do folks continue to speed?

No --- The vast majority take note and take responsibility for driving resonably ---

A strong case can be made for the notion that guard rails will only increase risky behavior in the longrun ---- Oh by the way --- installation and upkeep of guardrails is expensive ---- Put up a caution sign and let individuals take responsibility for the privelege of driving.

Can you imagine the expense of guardrails at every dangerous corner in the financial world or real world ....
militaryman is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
What happens if lifetime annuity issuer goes bankrupt? mark FIRE and Money 82 06-06-2012 05:00 PM
Wow, Bear Sterns dumpster56 FIRE and Money 11 06-26-2007 10:30 AM
Public Pensions Bankrupt??? jerryo FIRE and Money 46 08-12-2006 06:20 AM
NewZealand Airlines gwix98 Other topics 9 01-31-2006 10:08 AM
Donald Trump University? wildcat Other topics 29 06-04-2005 12:40 PM

» Quick Links

 
All times are GMT -6. The time now is 05:10 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.