Thursday, March 13, 2008

Do you think that after what you did to Han we're going to trust you?

The S&P piece that got the market excited is available here, you have to register but its free. I mentioned some points about writedowns in this post. Basically I think that the most big U.S. brokers have substantially written down what they need to. Doesn't mean they have zero writedowns going forward, just that what they do have will be smaller. My view on this has been bolstered by recent comments from Vakrim Pandit and John Thain, both saying they wouldn't seek more outside capital, as well as Alan Schwartz saying that Bear Stearns' balance sheet was unchanged from the previous quarter. I mean, Schwartz can't come out and say that the balance sheet was unchanged from last quarter on CNBC on March 12, then reveal a $1 billion writedown when they announce earnings on March 20.

As I said in Tuesday's comments, however, that doesn't mean we're out of the woods and the credit bear market is over. It just means that we enter a new phase in the healing process. See, dealer capital is going to be constrained for a while here. I personally wonder if constrained capital wasn't part of the reason why the 10-year auction was lackluster. That means liquidity in all areas of fixed income will be less than you'd otherwise expect. That's the world we're going to be living in for the next year or two regardless of what else happens to the economy.

Anyway, so people love to talk about what inning we're in when it comes to the subprime crisis. But let's be more positive about it, shall we? We're in the first inning of the healing process. The subprime contagion has decimated broker/dealer capital. That phase is probably wrapping up. We've also seen the contagion all but eliminate SIV-based ABCP and auction-rate securities. So that phase is over too.

The contagion tried to really wreck the municipal bond market, but the early indications are that market is starting to function more normally. The contagion is also trying to really wreck the agency MBS market, but even in the face of Carlyle's liquidation, MBS spreads actually tightened today. So maybe, maybe, that's another area where the contagion will be contained.

To say things are getting better is a bad way of thinking about it. The data continues to be bad. But in order to move forward, we've got to contain the contagion. Once the unbridled fear subsides, then we can get to the business of properly pricing various risks. We're getting there. Slowly.


Editor said...

If you think Alan Schwartz is telling you the whole story why are credit default swaps on Bear Stearns bonds now trading close to 700 bps and if you look at page 97 of their 10-K filed just 6 weeks ago on January 29, 2008 it shows Level 3 assets (aka as toxic waste with no bids and no market for these securities) have increased to $28.169 Billion. They have capital of only $11.793 Billion with leverage of 33:1.

Fitch (via RGE): At the beginning of the turmoil Bear Stearns had the highest toxic waste ("residual balance") exposure as percent of adjusted equity on balance sheet: BSC = 54.5%; LEH = 53.3%; GS = 21%; MER = 17.8%; MS = 8.3%.

Imagine a write down required under FASB 157 of only 25% or $7 Billion plus the exposure on Carlyle's hedge fund of $1.7 Billion.

Your guess that they can't now report a writedown next Thursday needs a little bit of rethinking as the plunge in the stock suggests everything is not well at the Bear.

Anonymous said...

Random question, but this would be the place to ask. I need to identify both AR Bonds and Preferreds in Bloomberg. What would be the fields to look at? I've given live help all I can to no avail.

Anonymous said...

Here's my take - they are predicting 285 billion in just subprime losses. They say that 150 billion has been written off by the big banks and that the big
banks don't have much more left to write off. That sounds like great news - but is it??? There is 135 billion more to write off - who owns it?

Well S&P says : We believe that the difference between the $150 billion in losses from write-downs in market value disclosed to-date and our global estimate of $285 billion will come not just from additional write-downs at banks, where additional losses should be limited, but from write-downs at hedge funds, monoline insurers, other insurers, and other financial institutions

This is very troublesome. The hedge funds use leverage that is borrowed from the big banks and brokers
to buy this stuff. That means when they explode as they have over the last two weeks - the securities go right
back on to the big banks books. So the big banks own it after the hedge fund capital dissolves.
Same with the monoline insurers. If their CDSs are no good, it goes right back on the banks books.

So another 135 billion of losses in subprime is waiting to be disclosed. Great news!

But subprime is only 8% of the 11 trillion real estate mortgage market. So the rest of the market is 11X the size of subprime. Well yesterday I sent the foreclosure rates
on the rest of the market. Conventional prime is currently foreclosing at a 0.41% per quarter rate or (1.64% per year). Subprime is foreclosing at a 3.44 per quarter rate
or 13.76% per year rate. So if you take the 1.64 for prime and multiply by 11 for the size of the market in comparison to subprime - you get an 18.04 equivalent to subprime's 13.76.
Does that mean another 285 billion x 18.04/13.76 = 373 billion in losses for the rest of the mortgage market?????? Probably not - because the houses may be nicer, or nicer neighborhoods
with smaller write offs. Or maybe people put more down on the mortgage. But I bet you it could be at least another 150 billion if not more! Fannie and Freddie own 4 trillion of this stuff....
They are leveraged to the hilt with only 80 billion in capital total for about 40% of this 373 billion in losses. So its pretty obvious why their stocks are tanking.....

So we are now up to another 135 subprime + 150-373 billion prime left to write off and this doesn't take into account commercial real estate losses that will be hitting big time in 9 - 12 months. Or credit card loans, car loans that will hit during the recession. Or the leveraged loans to companies as they start going bankrupt.

Bottom line - the news is not getting any better. At least not until residential real estate turns around.....

Mortgages in Foreclosure (%)

4Q '07

3Q '07

4Q '06



All Mortgages






Conventional Prime 0.41 0.37 0.24 1.30 0.77 0.72
Fixed Rate 0.22 0.22 0.16 0.79 0.56 0.61
ARM 1.06 1.02 0.41 3.23 1.19 0.75
Subprime 3.44 3.12 2.00 11.71 7.23 5.66
Fixed Rate 1.52 1.38 1.09 5.55 4.24 4.33
ARM 5.29 4.72 2.70 17.08 8.80 6.07

Anonymous said...

The problem is that income is illusory, jobs are illusory, and what jobs there really are are disappearing.

The consumer is starting to save.

1929 is going to look like Disney World.

Unknown said...

"I mean, Schwartz can't come out and say that the balance sheet was unchanged from last quarter on CNBC on March 12, then reveal a $1 billion writedown when they announce earnings on March 20"

CET time


Anonymous said...

AI, interesting piece. My understanding is that the write-downs are tied to defaults and interest rate resets. Given that several more mortgages are going to reset in this year and going ahead, and that the number of foreclosures is possibly going to rise (from its already historic highs), how is it banks can conclude that the "large" write-downs are done ? Your title indicates a bit of skepticism in S&Ps statement. How large do you think the final write-downs will be - and what is the size of the write-downs to come ?

Unknown said...

R.I.P. Bear Sterns

Accrued Interest said...


Well in fairness to me, I said BSC couldn't announce a writedown of assets given what their CEO said on CNBC. And I still think that's true. But if people lose confidence in you and you can't borrow then liquidity can dry up over night. And it really sounds like that's what's happened. How much of the fear over BSC is real and how much was just speculation, we may never know for sure. And it doesn't matter either. As soon as Bear Stearns can't get liquidity, the game is over.

My guess is this will end in a merger. Think Countrywide. BSC's stock is like $35 right this moment. It probably trades into the 20's in the next week or so, then JPM announces they are buying it for $27.

Another possibility that's been reported is that JPM decides they want BSC's prime brokerage unit only. It might come down to where just buying the whole company is worth it for just a few parts. Who knows.

I strongly suspect that the Fed wants someone like JPM to buy Bear. We don't want to find out what happens when a major counter-party fails. I know the Fed can't force anyone to do anything, but they might be able to work out a way to make it extra special attractive for JPM.

Anonymous said...

I mean, Schwartz can't come out and say that the balance sheet was unchanged from last quarter on CNBC on March 12, then reveal a $1 billion writedown when they announce earnings on March 20.

maybe the balance sheet didn't shrink cos 1) they couldn't sell what they owned and 2) they just left it marked at Par.

If neither, someone call the cops!

i think you're right, someone must take them over, what a mess cleaning up all those derivatives books if it was to fail.

Anonymous said...



I'm interested in your take on this Bloomberg article re: ARS collapse is costing local governments.

You indicated last week that retail was returning to munis. What's the real state of the market?

Anonymous said...

Hmmm, wasn't JPM on the short list to buy WaMu? If they are now buying Bears, wouldn't that preclude them buying WaMu? Methinks, such might cause the speculative bid in WaMu to go away.

Editor said...

After my comment to everyone last night at 7:03 PM as to why I thought the rumors were true at Bear Stearns I have only one more thing to say and I will quote Ace Greenberg on Monday:
"It's ridiculous, totally ridiculous."
By the way the March 30 put option was up 19 times early this morning for anyone brave enough to have taken a position yesterday!!

Accrued Interest said...

I'd guess that if JPM buys BSC, they aren't buying WM. You sure wouldn't try to integrate both those mergers at once.

SGC: The fixed-rate muni market is clearing fine and the previous problems of extreme volitility have subsided. At least for now. I've also seen an increasing percentage of non-student loan ARS succeed. (Student loans have the most investor un-friendly max-rate rules, so they are almost universally failing). So I still think that muni market is healing.

Under normal circumstances, Treasury rates kind of act like a weak gravitational force on munis. So if Treasuries rally one day, munis will tend to rally also, but maybe to a greater or lessor degree depending on conditions in the muni market specifically.

At the height of the TOB liquidation, that trend completely broke down, with muni rates just moving higher no matter what.

Now that trend seems to be coming back. I think given the large supply volume (from refinanced ARS) coming over the next 6 months or so, munis will struggle to get below Treasury rates. You can't expect muni/Treasury ratios to get back into the 80's too quickly. But I do think that over time it will inch toward 100%, eventually getting back to normal levels as supply subsides.

Anonymous said...

i think alan schwartz is telling the truth and Bear isnt in trouble but really i just woke up from a coma and havent looked at the news yet....wait...just looking....wait...bear bnk...?...?............f**k me!

Anonymous said...

As an investor my interest today is keeping my principle intact. No desire for timing markets and other market babble generated by CNBC, FOX etc. Plenty of time to wait on the sidelines, no hurry, no need to be in the middle of the credit problems at this time.

Superbear said...

I read your blog regularly.

The only problem I have found is that you are fantastically bullish.

We are in a situation which none of us have experienced and it is going to be extremely ugly.

BTW, we still have LEH, MS, MER, GS which at some point in time may face a similar (or somewhat milder variation) of BSC situation. What happens then?

What happens when banks start failing?

Instead of reducing rates all this time, the Fed should have kept them high, let the equity markets correct and have foreign buyers provide equity to these players at sharply reduced equity values.

Based on the deterioration in BSC, do you seriously think that any foreigners (or other investors for that matter) would step up to provide equity?

Apolitical said...


Word is (reliable source) that BSC hasn't been posting margin to some of it's counterparties for at least the last 5 days. There's NO WAY this happened over night and everyone suddenly lost confidence yesterday requiring the bail out.

People lost confidence because Bear wasn't paying them.

They're also done. No one is going to trade with them going forward. They either get bought out or file Chap 11.

Anonymous said...

Thank you!

Accrued Interest said...

Hey I'll freely admit that I was too sanguine on this market during the summer. The contagion has spread to areas I'd never have imagined.

Anyway, about BSC not posting margin for 5 days, that's amazing if its true. Listen, the comments I made in this post were before I knew all the facts, so obviously I was wrong here as well. Again, I was merely pointing out that BSC couldn't announce an asset writedown when they did earnings. But that's WAY besides the point now.

I'm hearing that a deal for JPM to buy BSC will be done over the weekend. CNBC reported there would be some effort to find an outside source to put capital in, but that its doubtful that happens.

As for the same thing happening at other dealers... I think the Fed needs to make a public statement to this effect:

"The Federal Reserve will begin allowing primary dealers to participate in a term loan facility in the next two weeks. At that time, any primary dealer with quality capital to pledge will have access to significant liquidity to meet customer needs. The Federal Reserve also encourages primary dealers to bolster their liquidity by securing additional bank credit lines or raising equity capital. A combination of these programs will ensure that customers of all primary dealers can feel confident in continuing to conduct normal transactions."

Anonymous said...

Hey I'll freely admit that I was too sanguine on this market during the summer. The contagion has spread to areas I'd never have imagined.

You and me both, AI, you and me both.

I think it's mainly your March 12 comments that are applicable here ... the ones about the power of rumour in a fear-driven environment.

Still, for BSC bond-holders (they have a Maple issue) this run is probably a good thing to happen, ultimately ... provided I'm right in my assumptions.

The conference call indicated a book value in the mid $80's, and while there are inevitable slips and exuberances, the brokerage industry is (a) the most heavily regulated industry on the planet and (b) has been under heightened scrutiny for many months.

From which I conclude that there has not been massive jiggery-pokery with the books and there is still significant book value at the firm as well as franchise value. I find it hard to believe they could get away with overstating book value by $11-billion. One or two billion, maybe, there's a lot of estimates involved (particularly on the "toxic waste") which may be optomistic ... but not $11-billion.

So there's a lot of value in the firm, the firm's still profitable on a current operations basis (I don't think anybody's disputing the latter point) ... this is not a Quebecor World situation, where the firm's been drifting slowly, unprofitably and inevitably towards bankruptcy for years.

Right now, the bosses and owners
(i) have a lot of money on the table, which
(ii) is going to turn into zero if they don't announce something soon, like before next Friday.

I'd say it tends to concentrate the mind, and helps keep the world safe for bond investors.

There will be charges of bail-out and moral hazard, but really! Market Cap has declined by something like $20-billion in the past year. That's a pretty fair whacking.

Apolitical said...

"The Federal Reserve will begin allowing primary dealers to participate in a term loan facility in the next two weeks. At that time, any primary dealer with quality capital to pledge will have access to significant liquidity to meet customer needs. The Federal Reserve also encourages primary dealers to bolster their liquidity by securing additional bank credit lines or raising equity capital. A combination of these programs will ensure that customers of all primary dealers can feel confident in continuing to conduct normal transactions."

They've already made that announcement. The TSLF is intended for broker/dealers (differing from the discount window to which only depository institutions ala JPMorgan can pledge to).

It's not going to help. Having access to liquidity might prevent another Bear from happening, but having funds available does not mean you have a willingness to lend or a credit worthy borrower to use that new-found liquidity on. So the broker/dealers have liquidity from the TSLS, but what do they use it on?

If the Fed really wants this to be over all they have to do is announce that they are willing to tender for RMBS, CMBS, and CDOs. You're probably thinking up a million reasons of why that's a bad idea, but it doesn't have to be. No one is suggesting they buy these things at par. They should be bought at their market value. If the Fed were willing to buy this stuff at what they believe its market value is, we might start figuring out where the market clearing price for this stuff is and we might have orderly functioning markets in these assets again.

The banks don't need to be able to sell this at par, they need to be able to sell it at some reasonable price and this crisis is going to continue until they are able to do so. Interest rate reductions or lending facilities won't do that, making a market in these issues will.

The Fed is the lender of last resort, why can't it also be the market maker of last resort? And it's not a government bail out. If the Fed's brain trust can figure out the price of these securities better than the Street, this could end up making money for taxpayers. Knowledge that there now exists a solid two-sided market in these issues will bring hedge funds and other players back into the game.

And they should be good at this. After all, collateral pledged at the discount window is pledged at its market value, not its notional so they already have staff and a process in place for determining what the market value of something is. Put all those phds to good use.

Market maker of last resort sounds like a much more reasonable role for the Fed to play than lender of last resort. And if they get stuffed, maybe they should have priced better.

Anonymous said...

apolitical @ 1:36am...

The Federal Reserve is not supposed to be a market maker. Its powers are very clearly spelled out, and market making is clearly not in there. Do your homework before making silly comments.

Your last paragraph makes me very afraid for the future of the United States. If "they" get stuffed? If you won't bother to read the Federal Reserve's mandates, at least try to read the first three words of the U.S. Constitution: "We the People..." That's who will get stuffed with your foolish idea. We the taxpayers.

Either get a clue or go comment on the Yahoo boards with the other idiots

Anonymous said...

Hi AI, another good post... I think you have explained (perhaps unintentionally?) why prices of many mortgages are justifiably and rationally trading poorly: lack of trust.

Consider the CPI numbers we got this week. As you probably have already guessed, I fall into the inflation camp. None the less, I have heard very intelligent arguments for deflation that I can't readily dismiss, even though I disagree with them.

But this CPI number? Even my deflationist friends aren't buying it. The BLS says energy was flat and food up 0.1%??? On what planet? Look at crude prices. Look at wholesale gasoline or heating oil prices. Look at the retail gasoline indexes from AAA, or the Dept of Energy. Agriculture commodities are at all time highs and every company from Hershey to Kelloggs is raising prices.

When the BLS said last year that hotel prices were down, it didnt tie with my own travel experiences, but I readily admit that I don't visit every city every month.

But energy prices??? Energy prices are extremely liquid and widely available, and easy to track. The BLS simply got these prices dead wrong. If they can't get something liquid and easily observable correct, its hard to TRUST anything they have to say about less observable prices.

Bernanke has access to all published government statistics (and arguably a lot of unpublished stats too) -- but his economic predictions since becoming Fed Chairman have just been wrong.

And this week, those helpful folks at S&P downgraded Bear Stearns credit rating -- AFTER the stock tanked and AFTER Bear said it had liquidity problems. You may remember S&P also downgraded Orange County, California AFTER it declared bankruptcy-- much like it downgraded a whole list of CDOs AFTER they collapsed.

In the mortgage world, far too many lenders played fast and lose when filling out mortgage applications. Obviously, there are complete liar loans out there -- already well documented and discussed. But plenty of other applications weren't exactly lies but they were, ahem, "enhanced". Home appraisals, even the honest ones, relied on comparison prices that have been proven wildly optimistic.

So in a world where investors are asked to price things based on economic statistics that are known to be optimistic at best, and demonstrably wrong at worst -- its perfectly rational and prudent for investors to offer a much lower price.

If I am not really sure what I am buying, then there is legitimately a lot more risk involved. If there is more risk, I need a higher return to make the investment worthwhile.

Current prices are very rational-- although sellers (aka Wall Street) don't agree (lets just say their opinion is a wee bit biased).

I am sure you will try to argue that some mtge bonds are backed by FNMA, FHLMC and in some cases Uncle Sam (aka the taxpayer).

Well, read Barrons. FNMA's future solvency is anything but certain. FHLMC is a little better, but it isn't a sure thing either.

And Uncle Sam? The CEO of FHLMC recently said this mortgage mess is only about 1/3 over. If you take my guestimate that the mortgage market is about 15% overvalued (see earlier posts to this blog for reasoning) -- that works out to $14 trillion times 0.15 or $2.1 TRILLION... The total liabilities of FNMA and FHLMC are about the same number.

We don't know what recovery rates will be, but if homeowners are in trouble they aren't going to be paying 2006 prices for anything. I am thinking recovery rates optimistically might be 50% overall (some better, some worse, but 50% on average). I could certainly see an argument for 40% recovery.

That's a $1 TRILLION dollar loss.

FNMA and FHLMC aren't too big to fail-- they are too big to save, even for Uncle Sam.

And before you scoff at that idea, take a look at the CDS prices for U.S. Treasuries. Yep, markets are starting to price the possibility of Uncle Sam going the way of the British and Roman empires. Its still considered very unlikely, but I find it alarming that anyone is even thinking about Uncle Sam defaulting.

CDS on US treasuries were quoted last week at 16bp, versus 15bp for Germany. Both prices suggest default is unlikely -- but the world's super power (militarily and economically) is priced as slightly more likely than a second tier economy.

I assume I don't have to tell you how the US dollar is doing in FX markets.

Giving people a helping hand when they are down is one thing, but bailing out banks that obviously failed risk management 101 is totally different. And the size of the problem is so big that it threatens even the US government. Its not obvious how Uncle Sam is going to pay for all the entitlements we have promised ourselves -- that's **conservatively** a $40 trillion unfunded liability. Adding an additional trillion or two will just make it that much harder.

But what will make it absolutely impossible is if (when?) the Fed destroys all trust in the market place.

Publishing statistics that are obviously wrong does not build trust.

Saying everything is OK (like the Fed did in November) and then easing the next month does not build trust.

Easing between meetings because a French bank had no position controls does not build trust.

Bailing out politically connected bankers who don't do their job does not build trust.

The market is pricing in lots of additional uncertainty (aka risk) because we know the books are cooked. Its a perfectly rational (and expected) response.

Anonymous said...

BTW, I should have mentioned that a $1 trillion loss is about 4 months of Uncle Sam's annual spending. He is already running a $400B deficit.

$1 trillion is a little less than one full month's GDP.

$1 trillion is a bit more than the total USD holdings of the Bank of China -- they aren't about to double their holdings to bail us out. If anything, they are trying to reduce their USD exposure.

And all this doesn't get around the fact that the initial cashflow necessary is likely to be closer to $2 trillion (and roughly half will be recovered over time as seized property is sold off).

If the politicians want to forgive big chunks of this debt, recovery rates might very well be lower -- and the cost higher.

Imprudent investors who got over leveraged and failed to practice risk management are just too big to bail out -- even if you ignore the obvious moral hazard issue.

And for capitalism to work, we must have risk AND reward. Its not just a moral hazard being proposed here, people advocating a bail out are basically saying to give away a free call. Black Scholes may not be perfect, but you don't belong in this industry if you are giving away calls for free.

Anonymous said...


Where does this data come from?

CDS on US treasuries were quoted last week at 16bp, versus 15bp for Germany. Both prices suggest default is unlikely -- but the world's super power (militarily and economically) is priced as slightly more likely than a second tier economy.


Anonymous said...

Your point is accurate: I think it's called the end of capitalism.

Anonymous said...

Lots of sources for CDS prices... not sure which ones are available to the public vs requiring a subscription.

Here is a news story from Bloomberg that mentions them (and happens to have the same quotes I saw!).

Neither price suggests the market is expecting imminent collapse -- I just thought it is remarkable that people overseas are worried enough that someone is making a market for it.

Lets not over-react here. There is no need to start wearing tin foil hats or digging bomb shelters (didn't Barton Biggs or Byron Wein suggest something at New Years?).

Its just that the unthinkable (U.S. collapse) isn't so unthinkable anymore.

Anonymous said...

There is a very funny post over on Calculated Risk that is titled the economics of trust, but is basically two funny stories showing why big banks "don't get it". Click here to read it.

There is all this talk about merging Bear Stearns into JPM or RBS or some other already colossal bank.

I don't know if all of capitalism is doomed like anon 2:05 says -- but I feel pretty safe in saying the top banks of Wall Street will not be the top banks in a few years.

Anonymous said...


Gasoline prices were down c. 15 cents/gal nationwide in February below the January high. That corresponds pretty well with what I paid in the Boston area.

I agree with you that overall inflation is high as a kite, but I also expect to see a bit of noise in the monthly numbers, and that's what happened with the February release.

Apropos Bear Stearns, I just looked up the numbers and as of Feb 29 my money-market fund had about 1.3% of NAV loaned to them.

Anonymous said...

Anon 5:04

I clicked on your link to the EIA data. The last reading for January was 303.0 (cents) and the last reading for February was 318.0 -- up 15 cents?

The EIA data shows a dip in late Jan/early Feb, but the broader trend (from the first week of Jan at 315.9 to the last week of Feb at 318.0) is still up.

If you filled your gas tank at "the right time", perhaps you caught the dip. Bull markets have periodic pullbacks -- but the broader trend is up. According to the EIA numbers you linked, nationwide gasoline averages (Feb07 -> Feb08) are up 31%, which is a lot more than any CPI print. I know energy is only part of the CPI, but with the obvious exception of housing -- everything else is going up more than double what CPI is suggesting.

A few people have suggested to me that both Jan and Feb were "anomolies" (one too high, one too low) and we should look at the average of the two months. So that means 4.1 + 0.0 = 2%

I agree with you that there is a lot of noise in the numbers -- but a broader trend of 2% is wrong. Even a 4% broader trend doesnt tie with actual experience.

Anonymous said...

I am going to leave the AI blog with one final thought for this weekend...

20 yrs ago, the dominant (national) airlines were Pan Am and Eastern. American and UAL were still up and coming, Delta was a regional, USAir was several regionals. Southwest and JetBlue were not yet even a twinkle in someone's eye.

Pan Am and Eastern did some foolish things. The Lockerbie bombing arguably sealed Pan Am's fate, but they were already circling the drain before that.

The great central planners (aka "The Feds") made several fruitless attempts to save these "American icons" before finally conceding to the inevitable. Both airlines are gone... and yet the world did not end, and we still have airlines.

I know, Bear and Citi and Countrywide and whomever is too big to fail. They are too important to the economy. Too many counter-parties. Blah. Blah. Blah.

The saying goes: this too shall pass.

White & Co was a huge financial player in the 1960s. Salomon Bros WAS the Goldman Sachs of the 1970s. Continental Illinois WAS a major money center bank. Drexel Burnham Lambert WAS irreplacable. So was Kidder Peabody, Paine Webber, EF Hutton, Shearson Lehman... The list of "irreplacable" and dominant players that no longer exist is much longer than any of my posts on this blog.

I suspect (but don't know) that Bear is finished. It wouldn't surprise me if a second major player yet to be named also fell.

FNMA used to be formally part of the government. It was spun off in a very SIV like moment in the late 1960s ... get this... to help balance the budget. It really isn't a big leap to think it could end up re-nationalized.

These people freaking out over the loss of some supposedly irreplaceable financial house should consult their history books. It has happened many many times before, and it will happen again.

Bear and FNMA may fall. I wouldn't be surprised if many of today's top houses survive as small shadows of themselves today. Smarter and more nimble financial houses will take their place.

But if the Fed destroys the currency with foolish economic policies, our history may follow the path of the British or Roman empires.

Anonymous said...


I've heard that BLS measures energy early in the month. I was looking at 315.9 - 301.1 to get diff from Jan high to Feb low.

Anyway, I'm quibbling over details even though I agree with you on the big picture.


Anonymous said...

Bloomberg is reporting that Bear Stearns Chairman Jimmy Cayne was playing bridge in Detroit Thursday and Friday of this week.

If the Chairman is too busy playing cards to manage the company through a crisis -- why wouldn't creditors pull their money?

And more importantly, why is the Fed risking tax payer money on this?

Anonymous said...

Gramps, Al
thanks wonderful insight. Do keep us posted ...

nice weekend

Anonymous said...


Suggestion: start a blog...really. Your insights are really and truly worth it.

But if the Fed destroys the currency with foolish economic policies, our history may follow the path of the British or Roman empires.

That's the big one. And it is very resonant and even more interesting.

What got us into the Iraq morass?

Simple: the belief that the US could do anything it wanted to.

And now...well, now, the Fed seems to be taking the same arrogant, unilateral view: the currency doesn't matter, all that matters is whether the movers and shakers at Bear Stearns get to keep their ocean-front estates in the Hamptons.

If that analysis is correct, you have been all too prescient. All too prescient.

Anonymous said...

What the Fed is saving:

Jimmy Cayne Closes on Sweet Plaza Pad

Photo: Getty Images
Former Bear Stearns CEO Jimmy Cayne is apparently feeling pretty mellow about the fact that Bear Stearns stock is at an all-time low; the 74-year-old bridge-master and alleged pothead and his wife, Patricia, just closed on not one but two adjacent apartments at the Plaza for $28.24 million. Altogether, they'll have 6,000 square feet, plus room service, maid service, and unparalleled views of Central Park. Yeah. And if you think that sounds sick, you should check it out after a few hits of the Purple Haze. Neighbors include foundering real-estate developer Harry Macklowe, Tommy Hilfiger, and a noted egg lover Joanna Cutler. Which reminds us: Cayne might want to be careful when he's all stoned up and taking out the garbage. We hear that the trash room on that floor can be kind of a bad trip.

At some point, the peasants are going to storm the castle.

Anonymous said...


Supposedly JPM is going to buy Bear Stearns for $2 per share.

Only last Tuesday, senior management at Bear was saying everything was just fine and "book value" was supposedly $80 per share.

Why would these supposedly intelligent men accept $2 per share when they just told us the place was worth $80?

Plenty of people in academia and business have said Sarbanes Oxley was just a very costly joke aimed at creating unnecessary jobs for lawyers.

If Bear's management isn't held responsible for their public statements...

Anonymous said...

Fed eases on a Sunday, two days before a scheduled meeting?

Bernanke has lost it

Anonymous said...

“Never pay the slightest attention to what a company president ever says about his stock.” – Bernard Baruch

Anonymous said...

You know, I have begun to pray that they are trying to save "The Lifestyle of Jimmy Cayne", because if they aren't we are completely [rhymes with trucked].

Anonymous said...

The Fed's mission is the banking system. What Bernanke has done is redefine the banking system to be congruent with the regulatory pattern that preceded him.

In my opinion, history will treat him very well. Very, very well.

After all, if you are served a plate of shit for lunch, you cannot be criticized for how you eat it.