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

[dumpster56]

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!

 

[saluki9]

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.

 

[Spanky]

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.

 

[Independent]

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.

 

[FIRE'd@51]

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.

 

[Independent]

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.

 

[saluki9]

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?

 

[Texas Proud]

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...

 

[FIRE'd@51]

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.

 

[brewer12345]

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.

 

[Independent]

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.

 

[brewer12345]

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.

 

[barbarus]

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?

 

[RockOn]

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.

 

[clifp]

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?

 

[RockOn]

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.

 

[clifp]

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.

 

[RockOn]

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.

 

[Texas Proud]

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...

 

[militaryman]

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 ....

 

[brewer12345]

Their equity should have been used before the the customers get $29B of garbage debt on their account.

So you think that the people who paid $100+ for the stock and are now being offered $10 didn't get punished? Remember, like most of the big firms, Bear paid out much/most of those big bonuses in company stock.

I would also suggest that you are deluded if you think the Fed got lumbered with low quality securities. What they got are illiquid securities, not necessarily lousy ones.

 

[Independent]

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?

Maybe I'm being dense here, but don't the brokerage houses just sell the stock and give the proceeds to the investors?

I understand that if 10 million of us all call our brokers on the same day, that overwhelms the mechanical capacity of the system. But I really have trouble believing that was going to happen last Monday. Assuming there were "a lot" of sell orders, trades pile up waiting to be executed, people see prices dropping, some rethink their decisions and cancel the sell order before the broker gets to it. Others bring cash in looking for bargains.

Stocks have their worst single day since 1929. People who panicked lose money. Cooler heads prevail as the week goes on. People who didn't panic do fine.

What am I missing?

 

[brewer12345]

What am I missing?

What you are mising is that many of these investors are leveraged, so a relatively small drop in asset prices causes nsolvency, which impacts everyone in the lender-borrower conga line. Equity market drops have been notthing comparred to falls in the prices of credit derivatives, asset baced securities, etc.

 

[Independent]

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.

I think I'm learning stuff here. You seem to assume that the dealers have a unilateral right to raise margin requirements. I would have guessed that they were fixed by contract (maybe the initial margin plus accumulated losses). So in my world, the total real value of derivatives isn't impacted by all this (any losses are offset by some gains elsewhere) and so no additional margin is needed.

I can see that in yours, dealers can just panic and call for more total cash than we have.

We should be looking for system-wide changes coming out of this. We shouldn't be in the position where one, not terribly big player, can set off a chain reaction that brings down the whole economy. Is there some change in the margin rules that you can see?

(Note, I'm assuming here that "margn account" means some cash held by the dealer that assures the dealer that you will make good on anything you owe if the derivative value goes against you. I'm not thinking of a "margin account" that indicates you borrowed money from the dealer to buy the derivative.)

Now I'm on to your next step, where people have to sell "securities" into a no-bid market. What type of securities are they selling? At first, I thought you meant bonds and stocks. But then you go on to say "the ensuing plunge begets yet another margin call". Why? If the sellers owned the securities, why do dropping prices create another margin call? Even if the "securities" were derivatives, that doesn't change the type of margin account above.

 

[Independent]

Brewer,

To head off some confusion, I finished my post #24 before I read your #23.

I think I may have mis-interpreted "margin account". Maybe you can clarify.