Home › Forums › Housing › JPM offers to buy Bear for $2/shared; Fed cuts discount rate › ltokuda – first off
ltokuda – first off drunkle’s post is filled with some many grandiose statements and inaccuracies I don’t know where to start. JPM might have been counterparty to “some” of the trades, but certainly not all. That is ludicrous to assume that JPM was Bear’s sole trading partner. JPM desire to own Bear – publicly written about or not, probably didn’t want to buy Bear Stearns entirely outright…they probably only wanted certain pieces they didnt’ have such as prime brokerage and clearning. JPM and Bear have many overlaps – they don’t need duplicates. What the Fed did was arrange a fire sale in an orderly fashion – without allowing Bear to go into bankrupty- which would have meant default on all its trades, PLUS the 30B in assets under management in their wealth management business – another thread Daniel wrote about the implications to individuals brokerage accounts with SIPC if Bear had gone bankrupt.
I don’t know a better way to explain all the interdependencies the banking sector has, so I’ll use a really simplistic example. You bank of BofA – therefore you give them your money in the form of deposits. How do they pay you an interest rate on say your savings account? They either invest those dollars hoping the investment will appreciate. Or, they lend out those dollars, and charge someone interest – greater than what they pay you. So BofA lends money to Bear Stearns, if Bear Stearns goes bankrupt, they default on not only the original loan amount, but they no longer pay interest on that loan. You hear rumors about BofA having problems – maybe failing – and you panic, you decide to pull your money out of BofA – maybe bank it elsewhere, maybe stuff it under your mattress. Lots of other people begin doing this, and as more people withdraw funds, it fuels the panic and liquidity crunch that BofA experiences. Maybe their lenders stop lending them money. If BofA becomes insolvent and has to declare bankruptcy- this would mean those savers who didn’t withdraw their funds now have to figure out how to get their money back via FDIC – how do you think that will rock the confidence of people? Again – this is all a really simplistic view and worst case scenario- but this is akin to what happened to Bear Stearns in very short period of time – they had a run on the bank and liquidity crunch from their institutional counterparties, investors, clients (hedge funds) etc.
See article from WSJ and I extracted this paragraph for you:
A trigger point was looming for Bear Stearns in the so-called repo market, where banks and securities firms extend and receive short-term loans, typically made overnight and backed by securities. At 7:30 a.m., Bear Stearns would have to begin paying back some of its billions of dollars in repo borrowings. If the firm didn’t repay the money on time, its creditors could start selling the collateral Bear had pledged to them. The implications went well beyond Bear Stearns: If other investors questioned the safety of loans they made in the repo market, they could start to withhold funds from other investment banks and companies.
How might this ripple through the economy, see Ben Stein’s viewpoint – he’s certainly not the Fed and take him for what he’s worth. As others have pointed out – this isn’t about saving 1 bank, or fixing any of the “real underlying” problems – its trying to create order so that it doesn’t take out innocent casualties that have nothing to do with mortgage backed securities. For instance many businesses across sectors are having difficult times securing loans to fund their business – if no one will make loans, then some businesses who are not cash rich will fail.
DISCLAIMER: This is not my endorsement of what the Fed did, this is not my endorsement of any financial institution…these are merely various points of view – mine or cited third parties- all whom I have no affiliation and also do not endorse.