Bear Stearns, the prominent investment bank and brokerage house based in New York, is being bought out by JP Morgan for about $2 a share, and with the assistance of the US Federal Reserve which is supplying $30 billion to “Bear Stearns’ less liquid assets” the first time since the 1920’s that the Federal Government has stepped in to bailout a brokerage firm. Last year Bear Stearns’ shares were worth as much as $170 a share for a total value of roughly $20 billion. The price is 93% of the value of those shares as of the market’s close on Friday when the share price was still $30 a share. In short, Bear Stearns is being auctioned off at fire sale prices.
This news led European stocks to lose as much as 3.2% of their value overnight, Japanese stocks to drop by 3.5%, the dollar to hit new lows, gold to hit new highs ($1030 an ounce) and crude oil to rise to $112 a barrel. God only knows what the US markets will do this morning. There is a word for situations like this, which brings me to my quote of the day from Michael Klawitter, “FX strategist at Dresdner Kleinwort” a German investment bank:
“The markets are in a complete state of panic and in such situations there is no such thing as valuation or value in any asset.”
The key word there is panic. That’s the word used to describe past market collapses. Panic is the opposite of rationality. Then again, the fact that many observers have been warning about the problems with all the funky assets financial institutions have acquired for several years now with little or no effect on the world’s stock markets (which continued to rise despite this knowledge) doesn’t exactly make past decisions by investors appear all that reasonable. They gambled that the big boys on Wall Street and at the Federal Reserve knew what they were doing. They gambled that deregulation of financial institutions, and accounting rules that let those institutions place unrealistic values on all the questionable assets they acquired during the US real estate bubble, wouldn’t hurt them.
Well guess what? The bubble has burst, the big boys on the Street and at the Fed weren’t all that smart and the gamble didn’t pay off, at least for anyone who hadn’t already sold out their positions. The cost of their mistakes and their unmitigated, unregulated greed, however, will have far reaching consequences far beyond the pain investors and investment bankers may be feeling today, and all the emergency quarter point cuts in the federal funds rate and relaxing the rules on who can pony up to the Fed’s window to buy all that cheap money won’t make a damn bit of difference. The levees have already been breached.
On the other hand, it’s likely to be a great day if you own oil stocks. Energy company stocks were big winners in Europe, and I suspect they will be big winners today in the American markets. Funny how that works out when you have a President and a Vice President tied so closely to the oil industry, isn’t it?
Update [2008-3-17 8:55:39 by Steven D]: Please also read Zandar’s recommended diary on the Bear Stearn’s debacle and his prediction for who is the next domino to fall.
Second Update [2008-3-17 9:38:3 by Steven D]: US Markets currently falling as of 9:38 am.
Third Update [2008-3-17 11:2:58 by Steven D]: Dow rallied but is still down from it’s close on Friday. NASDAQ has lost over 1% of its value, slightly better than it was earlier this morning. Federal Reserve is expected to lower rates again today.
Steven D,
Good of you to front page this. Thank you.
But with all due respect, it baffles me that you’ve ignored commending our own diaryist; Zandar1’s diary on the subject. Everyday for the past weeks man, and on Friday – still up “Global No-Confidence Vote: The Bear Naked Truth
Zandar1 has done a running series in a great effort to alert and educate the community on the unfolding financial meltdown.
Give Zandar1 a heapful of hugs.
Considering the implications for the economy and our pockets, you could have promoted Zandar1’s piece. It’s plainly written for all to comprehend.
Sometimes I get the sense front pagers ignore, and or don’t read the columns to the right of this page…ya know those thingys named ‘Recent Diairies, World Diaries, Recommended Diaries.’
My apologies to Zandar. I don’t always have enough time to read all the regular diaries though I try when I can. My health is poor and I spend most of my energy reading stories and blogs looking for something to write about and/or taking care of my daughter. I’m on some new medication that I hope will help me reduce my symptoms to a more manageable level, but when I am not online I’m usually in bed resting or attending to parental duties.
I’ll add an update pointing to Zandar’s diary here on the front page.
Be Well. Take care.
Have a plan for your family. It’s not too late.
Thanks for the heads up, I have to say I have been lazy and not read his diaries so look forward to it.
I agree idredit, Zandar has been doing a masterful job with his diaries, even I can understand this whole mess and I am absolutely braindead when it comes to trying to understand financial numbers.
Funny thing about lowering interest rates: zero is the limit, then you’re literally giving money away. So the Fed can pull a few more rabbits out of the hat before it bangs into a cinder block limit. It’s like the 24/7 hype of the 1990s: after that there’s nothing more left. The sky is not the limit. Can’t you just ……. (fill in for yourself) the ayn rand two-bit, gasbag intellectual alan greenspan and his duplicitous sidekick george 2. And by the way, happy fifth anniversary of the glorious invasion of Iraq. After five years no one has figured out to solve that self-inflicted wound. Couldn’t it just be that georgie’s tax cuts, the enormous expenditures on Iraq and the loss of respect for the US (read dollar) are more responsible for the whole financial mess than anything else? You won’t hear the financial wizards of the day drawing such simple-minded conclusions.
I’m torn here. I’m not sure whether I should hang on to my money in the hope that I’ll be able to buy a few things when prices collapse, or whether I should spend it now while it’s still worth something. What’s a member of the working poor to do?
Good question. I wish I had the answer.
Buy silver coins. Less than gold, tradeable, they’ll let you take them home instead of locking in a vault at … a BANK! Our local gold/silver trader gave that advice. He also said that once gold jumped the $1,000 mark, contrary to the myth that it will go back down, it won’t. For what it’s worth.
I’ve been watching my 401k drop. The “return” this year is roughly -11%. I’ve lost 11% of my retirement money in one year. I fear that is going to drop much lower before things begin to improve.
Worldwide, the banking system is based on money that doesn’t entirely exist, thanks to fractional reserve banking, and every now and then, that catches up with us.
Welcome to the ownership society. We all own stock now.
Now we really see how the older generations are a bunch of suckers, huh? With their pensions and health care and a robust social security system. They put their money in safe investments and missed out on the awesomest equity market the World Has Ever Seen.
We’re fucked. Again.
yeah. And they did not have our ultimate Masters sign off on the Bear deal
Chinese Firm Wants to Change Bear Deal
kiss that money bye, bye.
Implications for the economy are huge. Goners.
That’s interesting. So, the Chinese Co was trying to buy BS, backed out, JPM struck a basement deal w/help of us taxpayers and now is the Chinese group thinking the playing field wasn’t level and that they should have a crack at BS?
They could wait another day and sounds like Lehman will be up for it.
The quote of the morning that just knocked the wind out of me…another Bush dreamfailure:
From Publius over at Obsidian Wings
“It’s too bad we didn’t invest 1/3 of the Social Security System in the market.”