March 17, 2008. The St. Patty’s Day Massacre on global stocks. Bear Stearns, as predicted, is gone for good, sold to JP Morgan for $2 a share.
It was $30 a share on Friday, $88 a share on Dec 31 and as high as $165 a share back in June. It’s now toast.
Just four days after Bear Stearns Chief Executive Alan Schwartz assured Wall Street his company was not in trouble, he was forced Sunday to sell the investment bank to rival JPMorgan Chase for a bargain-basement price of $2 a share, or $236.2 million.
The stunning last-minute sale was a move to avert a Bear Stearns bankruptcy and a spreading crisis of confidence in the global financial system sparked by the collapse of the subprime mortgage market.
Bear Stearns was the most exposed to risky bets on the loans. It is now the first major bank to be undone by that market’s fall.
What will happen today on Wall Street? The St. Patty’s Day Massacre.
Keep in mind that sentence: “It is now the first major bank to be undone by that market’s fall.”. Bear Stearns is the first. It will not be the last.
The next one by all accounts will be Lehman Brothers.
Lehman Brothers Holdings Inc. Monday said the bank’s liquidity position remains strong, as the fire sale of Bear Stearns to J.P. Morgan to prevent bankruptcy increased speculation that other big U.S. brokerages would come under pressure.
“Our liquidity position is and continues to be strong,” said Matthew Russell, head of corporate communications for Lehman Brothers Asia Pacific.
His statement came after people familiar with the situation said DBS Group Holdings, Southeast Asia’s biggest bank by market capitalization, has asked several traders not to enter new transactions with Lehman Brothers.
“DBS has sent an internal e-mail saying it would not deal with Lehman Brothers from now on. It said DBS shouldn’t enter into new dealings with Lehman or Bear Stearns,” one person said. Another person said that the email didn’t mention anything about closing existing positions with Lehman, which appear to remain in place for now.
Bear Stearns said the same thing last week a mere 96 hours before it folded and became a casualty. That $2 a share price for Bear Stearns is a major alarm bell ringing that the end of the global game is imminent, especially when coupled with a depression-era discount window offering from the Fed.
The Federal Reserve, struggling to prevent a meltdown in financial markets, cut the rate on direct loans to banks and became lender of last resort to the biggest dealers in U.S. government bonds.
In its first weekend emergency action in almost three decades, the central bank lowered the so-called discount rate by a quarter of a percentage point to 3.25 percent. The Fed also will lend to the 20 firms that buy Treasury securities directly from it. In a further step, the Fed will provide up to $30 billion to JPMorgan Chase & Co. to help it finance the purchase of Bear Stearns Cos. after a run on Wall Street’s fifth-largest securities firm.
“It is a serious extension of putting the Federal Reserve’s balance sheet in harm’s way,” said Vincent Reinhart, former director of the Division of Monetary Affairs at the Fed and now a scholar at the American Enterprise Institute in Washington. “That’s got to tell you the economy is in a pretty precarious state.”
The move is Chairman Ben S. Bernanke’s latest step to alleviate a seven-month credit squeeze that’s probably pushed the U.S. into a recession. The dollar tumbled to a 12-year low against the yen and Treasury notes rallied as traders increased bets that officials will reduce their main rate by 1 percentage point when they meet tomorrow.
This is the big one folks. The Fed is clearly throwing the dice on a last ditch effort to save the financial system. The Derivative Armageddon is just around the corner. Forget recession. The Fed is pulling out the Great Depression playbook at this juncture.
Asian stocks are down anywhere from 3 to 5% today. They know the jig is up. There’s a real possibility, if not a near-certainty, that after this week’s massacre in the markets that the world’s central banks will have to coordinate a dollar buy to prop up what’s left of the greenback after Tuesday’s expected 100 basis-point rate cut.
And of course, that won’t work. By Thursday and Friday it will be painfully clear that the US is on the edge of the abyss. From this point out, all bets are off. The bank runs won’t start immediately, but we’re looking at the beginning of the end of the US economy.
This is no longer just a financial disaster, but a political one as well. The steps the Fed is taking is not that of a central bank trying to save an ecomony, but of a central bank trying to keep people in their seats while the captains of industry get to the exits first. Wall Street players are quietly being told to start making for the doors with their pick of the loot that’s left, and to do it today. That’s all the Fed can do, hold back the dam for another month at the most.
Remember folks, as much as a third of Bear Stearns outstanding stock was held by it’s 14,000 employees. That stock has just lost 97% of its value from just last Monday. Those employees are out an estimated $5 billion dollars. They were fucked over royally for a few pieces of silver.
The Fed doesn’t care. Wall Street is now eating its own. You’re on your own now. My advice to you is to be prepared. Cash, food, water, a plan, and the discipline to keep that emergency stash handy and to keep it there. The emergency in question is coming soon.
Be prepared.
I’ll be updating today’s St. Patrick’s Day wake for Wall Street as the day goes on.
I’m betting it’s gonna be a long day and folks are going to be hitting the bar well before quitting time. Feel free to drop in observations, tips, comments.
Big hugs Zandar1.
Financial Markets are shit scared. DJ Futures showing down 223 and dropping as I write. Thought St. Patty’s color was green but not today.
This Is It!
That Bear Stearns could have a 93% haircut over the weekend sets up a domino effect imho. JPMorgan got coerced to take on bankrupt Bear. The $2 price a giveaway. Some economists think JPM made a bad toxic move.
B/c it’s a Solvency problem and cutting interest rates when faith and confidence is shot just won’t rescue this titanic.
btw USDX broke .71
Well done. Incisive and insightful. People should really heed you advice to prepare.
I’ve been filling the pantry for the last month, but food prices have gone frigging nuts. Yesterday I went to the grocery store to pick up another few dollars of cheap stuff, knowing prices would be higher by the next visit.
Know what I found? Insanity.
Product pricing on items right next to each other is bizarre, indicating that as stock runs out and is replaced prices are going through the roof.
Examples? A small bag of store brand spaghetti is still 61 cents, at least until I cleared the shelf. The next size up- about 3 times the weight and still store brand- $3.99. The kicker? A bag 6 times the original weight was selling for $5.99.
I went over to check out cooking oil. 6 weeks ago I could buy 48 ounces for $1.97. Now the same size was $3.99. However, the new stock of 48 ounces of safflower oil was “on sale” for $6.49, “down” from $6.99.
Go get your groceries today. Good luck, all.
If they’re available in your area I’d try the bigger retailers and restaurant supply houses. There are two I use regularly, Costco and Cash & Carry. Cash & Carry is open to the public and they have much better prices on some things. F’rinstance if I go to my local supermarket butter these days hovers around $3-3.50/lb. At Cash & Carry it’s still about $1.70 for the one-pound uncut chubs of butter. Guess what we buy. Eggs are similarly much cheaper — less than $2 a dozen, which is still exorbitant but still cheaper than retail.
(We also have a Sam’s club in the area, right down the street from Cash & Carry. We do not shop at Sam’s Club.)
Even the mark-downs on items going “off-date” are decreasing. A few weeks ago we could get a 1# bag of lettuce for 79¢, less than a head of lettuce. Now we’re lucky to find the same bag with fewer days until it “expires” for $1.29. Beef, even on mark-down or on sale is ridiculous. Chicken is going up, fish already is out of sight and pork will probably follow. No chance of starting a garden here in Michigan until almost June because of late frosts, plus last year the deer ate all of my three dozen tomato plants. I stocked up on pasta last week at Trader Joe’s – 89¢ for a 1# bag, up from 69¢ a couple months ago.
Okay, seriously scared now. Does this mean I should not leave my money in a bank?
Your money is safe in an FDIC insured account (checking/savings/CD, etc) at a regular bank – up to $100,000. It is not safe in a “Money Market” account or at a brokerage firm.
If a bank fails and for some reason doesn’t open for withdrawals, you may need some cash handy to get through until the FDIC comes in to pay out the insured funds to account holders.
I read somewhere(and didn’t save article) that the FDIC is looking to hire lots of people who know what to do when banks fail….they are anticipating that possibly several hundred banks will fail. I just read of two failing I believe in Missouri.
I remember during the S&L meltdown of the 80s, people were wearing T-shirts that said something like
I may just have to have one of those printed up soon.
Bear Stearns, Lehman Brothers, Goldman Sachs. Then we may also see some really big regular banks fail. Citigroup? Bank of America? Wachovia? Washington Mutual? who’s next?
Note that a few weeks back, word got out that the FDIC was staffing up and issuing contracts for assistance in an expected rash of bank failures.
Stuff to think about.
Roubini echoes Whitney: the other non-banks and as well regular banks are at serious risk.
As for FDIC that insures the regular banks, yeah, your account is insured but how long can you wait for the FDIC payout considering (FDIC) they’re short of cash for their coverage exposure. Think Katrina – people still waiting for checks.
At the rate the digi money is being issued…coming soon is Hyper-inflation.
The best investment now is food securities…stock up. Price increases will out-pace the interest rates offered on savings. BTW, interest rates will continue to go negative; below rate of inflation at the mo.
this is awful.
Glad we started a victory garden this year, and that the little woman has been stashing canned goods and pasta.
Do you really think it’s going to crash that badly?
We belong to the local community farm, and I just got my garden planning book out this morning, because it’s obvious we’re going to need to need to supplement some garden stuff here at the house just for freezing for the winter. And my chickens just started laying eggs again, which is nice.
I think we’re in for a big mess.
As I’ve said, all bets are off from here on out. We’re in largely uncharted territory here.
Dow’s off 165 points in the first 15 minutes of trading. We’re in a situation where everyone is asking everyone else “So now what?” Right now it’s “milling about smartly” as a friend of mine would put it.
People are looking for an answer right now. When folks realize there’s no answer, that the answer is “Hell, I don’t know, I thought you knew!” then the orderly milling about becomes a stampede.
Right now I foresee a holding pattern before tomorrow’s rate cut. When it sinks in that the rate cut will only make things worse, that the problem is solvency and not liquidity, then the hammer drops.
I’m not sure that’s entirely accurate. There probably is an answer, but it’s the same kind of financial/political sledgehammer FDR wielded in the Great Depression. And Bush is simply not willing to do that – it’s anathema to conservative philosophy. They’ve spent the past 70 years trying to prove that FDR was wrong, and admitting that he was right is possibly the only thing that could guarantee a Republican defeat in November.
Fair enough assessment. You’re right…even if there was an answer, we’re depending on Bush and crew to execute it, not to mention Bush being responsible, admitting his policies were wrong, and that he’s going to take the blame and then use sheer political will to fix the issue.
That of course will never happen.
Bush will bail out his buddies and leave the next President holding the bag.
On the other hand, it’s hardly the first time. While Bush is a good deal more incompetent and malicious than Hoover, “left holding the bag” can be a great opportunity for the right President.
The pressure’s on, America. Can you elect another FDR in November? 😉
I think that one of the major criteria in choosing candidates for office this November — especially in the White House and Senate, but also the House and for local positions — is going to have to be, “How well will they be able to respond to the upcoming crisis?”
Remember, inauguration day is January 20th. As of Thursday we will still have ten months to go for this thing to get worse before the President gets to touch it. Slightly less than that for Congress, although even the most lopsidedly Democratic congress won’t be able to do anything for a couple of weeks until His Nibs is back clearing brush. Whoever we elect, they are going to have to rebuild Humpty Dumpty.
Do you think McCain can do it? Nader? Neither do I.
In other words once again the theme of this election is going to be, “It’s the economy, stupid.” I just hope President Obama is as good as I think he’s going to be in choosing economic advisors, because IMO we are looking at the return of the 1930s.
According to my Bush Countdown Plugin for Firefox, we have 308 days to go. A whole lot can happen in that time. God help us…
I think I need one of those if it won’t slow Firefox down any more than it already is, although really I need to get rid of some of the 3,315 extensions I’ve installed already — my poor Linux box at home shows a huge system load whenever Firefox is running, and I know it’s not because Firefox itself is a resource pig.
Honestly, I’ll be surprised if we all end up in soup lines. Though deregulation has managed to create a suprisingly accurate recreation of 1929, this is still a very different world. Panic won’t help the proles any more than it is helping the bourgeois now.
That said, frugality and planning ahead are always good ideas, even in good times.
Hey everybody! It’s all gonna be just fine! You know how I know? Dubya just made an appearance on my Teevee with a freaked out Treasury Secretary by his side. He insists that our economy is STRONG and our Financial institutions are in GREAT shape! The financial markets are functioning efficiently, too! Move along people, nothing to see here…
SEE! Nothing to worry about!
.
(BAGHDAD) — Sen. John McCain stressed the importance of a U.S. commitment to Iraq during talks with Iraq’s prime minister, and explosions struck Baghdad during twin visits by the presumptive Republican presidential nominee and Vice President Dick Cheney.
Helicopter gunships circled over central Baghdad and the heavily fortified Green Zone, but no details were immediately available on the cause of the explosions. McCain, who has linked his political future to U.S. military success in Iraq …
Robert Gates and Condoleezza Rice come to Moscow for nothing
"But I will not let myself be reduced to silence."
Dow is turning around as JP Morgan is rallying. People figure if there’s any one stock that’s safe, it’s the Fed’s poster boys and proxy. They figure there’s no way they’re gonna let the banks fail, so they’re buying.
Too big to fail…too bad Asia and Europe aren’t buying it. Stocks there are down 2-4% in Europe and 3-7% in Asia on Monday. Shares of Lehman Brothers are down 15-20%.
Bush is opening his mouth still not mentioning recession, still telling the world everything’s okay.
Do you believe him?
No one listens to Bush anymore. Bernacke is the de facto ruler of the US economy, and his powers are quite limited. I suspect we’ll hear a new round of “make the tax cuts permanent” bs from Bush and the repubs. That’s their snake oil cure all for everything. The only solution they understand. Bush isn’t even the captain on the Titanic, he’s just the guy who announces to the passengers there’s no need to panic as the ship starts to sink.
This brings to mind a great line from M*A*S*H. Hawkeye was writing a letter to his dad, and said that being stationed at the 4077th M*A*S*H and working for Henry Blake was like “being on a burning ship, and you rush to the deck only to find that the captain is Daffy Duck.”
Naturally JPM and will be rallying. The investors think JPM got a steal and the PPT is in there wrestling the market up with our tax dollars. Easy thing to do.
Bear Stearns’ shareholders are calling their lawyers to initiate claims of fraud. Good Luck.
Just four days after Bear Stearns Chief Executive Alan Schwartz assured Wall Street his company was not in trouble, he was forced Sunday to sell the investment bank to rival JPMorgan Chase for a bargain-basement price of $2 a share, or $236.2 million.
This is what Shrub has been doing for seven years. He just says whatever bunk he’s pulled from his nether regions, whether it has any basis in fact or reality or not. It’s more “truthiness.” It doesn’t matter what is, it matters what he believes.
Someone elese who’s showing that they, too, can declare that “it depends on what the meaning of ‘is’ is” is Hillary Clinton. It doesn’t matter if this is a delegate fight and she can’t catch up. She gets to pull excuses out of her nether regions and break any and all rules to fit her “reality.”
We literally can’t afford this tripe anymore. I am honestly Scared. To. Death. I’m working now, so things are OK, but hey…if that were to change…!
I want folks who deal in reality, and I want more of the public to deal in reality. No more BS. No more lies. No more escapist happy talk. Deal with the real.
No need to apologize for posting a political comment like that in a financial post like this…at this point the political bullshit created the financial disaster in the first place. Lack of regulation, lack of oversight, lack of any semblance of social morality. The regulation system has been dismantled over the last 20 years, and really the system itself has been returned to the Gilded Age of inequality. The micro stuff is financial. The major, macro level stuff, that has always been political.
Now we’re going to see if there’s the political will to fix it. The person we elect President, not to mention the people we send to Congress, must have the will to rip out the cancer and start fresh.
Dow’s back down 150 points. The rally for JP Morgan is being offset by the loss in the rest of the financials.
Also, this AP article isn’t helping, saying that Arab oil states may have no choice but to drop the dollar peg.
Kuwait de-pegged from the dollar in May. Their currency has gone up 8%. Everyone else is stuck on the dollar down there and it’s killing them with double-digit inflation. That would be one of the next shoes to drop, and it may drop soon.
Oh, and did I mention the commodities market is coming apart now too?
Another bubble, another crash.
Pop.
Being a relative economics noob, I have a question. The past few years have seen a ridiculous increase in the price of commodities, and I’ve read a lot of analysis saying that much of that is due to inflation and the dollar’s free fall. If commodities prices fall based on a (perceived or real) future stall in demand, doesn’t that actually work as a counter to inflationary pressure?
(ps – I think your link is broken)
To answer, yeah, here’s the actual link.
And the problem here is that commodities are a hedge against inflation and also rising after demand generated by the ethanol boom and China and India’s growing populace.
But like everything else that’s gone to crap in this economy, the price of commodities was pushed up by speculators who figured the price would keep going up…at least long enough for them to make money before getting out.
China needed lots of raw materials so they could use them to manufacture and feed their billion plus people. But the value of those raw materials was terribly overpriced. Who buys those things that China makes? America does, overwhelmingly.
Since Americans are now buying fewer goods, and that includes Chinese goods, the Chinese need fewer commodities. The problem is that the price of these raw goods has been increased dramatically by people betting that the price would go up…it was a self-fulfilling prophecy. People would then invest in the companies that produced that commodity and the companies would make money. Everybody was happy…except for the people on the end of the chain who were buying the finished product.
The price got so high that tiny changes in the market would cause massive changes in the price of the commodity. Gold, Oil, Platinum, Silver, Coffee, Sugar…the list goes on.
So now we’re seeing a sharp drop in demand. That means over-leveraged companies who bet big on commodities going up are losing their shirts. Prices went up as long as everyone believed prices were going up. Now everyone is sure prices are going to drop…and lo and behold, they are falling like, well, lead.
It’s just like any other Greenspan bubble. Yes, falling commodity prices are a lowering of price pressure on the dollar.
But you have to keep in mind how many dollars are outside the US. We’re the world’s reserve currency. So the dollar is worth as much as other countries and investors are willing to pay for it.
The latter’s influence is much much larger than the price of commodities on the dollar.
And one gobsmacking observation on this whole mess from Brad at Sadly, No…
That’s pretty fucking insane, really.
Jack Balkin over at Balkinization has a fascinating take on the power of the Fed vs our unitary executive.
http://balkin.blogspot.com/2008/03/world-financial-crisis-and-unitary.html