EMERGENCY: FEDERAL RESERVE WEEKEND RATE CUT; JPMORGAN BUYS BEAR STEARNS FOR $2 PER SHARE
March 17th, 2008WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
I’m Through Calling it for Now
Well, guys, it looks like the Plunge Protection Team is out in force this morning, as we knew they would be. As I sign off, the Dow isn’t even down 1%. HAHA. The Dollar is off its lows. Gold came down a bit. In other words, the jugglers are managing to keep several chainsaws in the air. One slipped and decapitated Bear Stearns, but what the hell, the show must go on!
I’ll be looking forward to Helicopter Ben’s rate decision tomorrow.
Gold Has Closed the Gap 13:20 GMT
Trying to find support at $1000.
Buying a Little Gold Here 12:57 GMT
Just a little at $1008.50.
CONCERTED CENTRAL BANK INTERVENTION TO HALT DOLLAR’S COLLAPSE
Gold is catching some good sized red candles from this one. Filling the gap back down. Intraday chart is a classic top hat.
Gold crossing below $1007 now. On the 15 minute chart, this will be the first time the stochastics have fully unwound since the open in Asia.
Via: Reuters:
The dollar’s sharp slide to 13-year lows against the yen and fresh all-time lows versus the euro on Monday is stoking jitters about the possibility of joint central bank intervention to prop up the dollar.
“The speed of the slide in the dollar/yen is so rapid that U.S. action alone can no longer stop the dollar’s downward trend,” said Koichi Ogawa, chief portfolio manager at Daiwa SB Investment.
“The time is ripe for coordinated intervention by U.S., European and Japanese authorities.”
Remarks on Monday by Japanese Finance Minister Fukushiro Nukaga also kept investors on their toes.
“We will cooperate with European and U.S. currency authorities and will monitor markets very carefully,” Nukaga told reporters, adding that the latest moves in currency markets had been excessively volatile and that he would watch markets carefully.
Nukaga’s comments gave a slight lift to the dollar, which last traded near 97 yen after earlier dropping by over 3 percent to a 13-year low of 95.77 yen on electronic trading platform EBS.
“His comments were different from usual so that led to some speculation about joint intervention,” said Hiroshi Yoshida, a forex manager at Shinkin Central Bank.
Yoshida said, however, that while some traders thought coordinated intervention was a possibility, there weren’t many who believed that the chances of such action were high.
Lehman Brothers Gapped Down in Premarket Trading 12:00 GMT
Friday’s close: $39.26
Premarket trades going off at: $27.50
European Markets 11:15 GMT
At this time, none of the European markets are down 5% or more. Orderly trade across the board.
EUR/USD is 1.5775
Thinking Outloud in Email
This is an excerpt from private correspondence between me and a Cryptogon reader earlier today. I wrote:
JPM paid $2/share for Bear.
I’m trying to get my head around that.
You know how the theory says that “the market” is best at pricing in news…
But “the market” was very wrong on Bear. As much as the stock had declined… It was nowhere near what the actual value was.
$2.
For JPM to have paid only $2 for Bear means that Bear was making a point of hiding ALL kinds of shit that “the market” had no idea about.
There is no way to fathom out what the consequences of this will be, or who else is going to get hit.
Think about it! As badly as Bear’s shares got whacked on Friday, THAT WAS NOTHING COMPARED TO THE REALITY OF WHAT EMERGED OVER THE WEEKEND.
$2.
This is an unprecedented situation is so many ways; do we have any analogies from history to draw upon here?
Jim Cramer on March 11: “No! No! No! Bear Stearns is not in trouble… Don’t move your money from Bear.”
Mmm hmm.
Via: CNBC:
Dear Jim: Should I be worried about Bear Stearns
Bear Stearns Co Inc in terms of liquidity and get my money out of there? –Peter
Cramer says: “No! No! No! Bear Stearns is not in trouble. If anything, they’re more likely to be taken over. Don’t move your money from Bear.”
China May Use Focus on Global Financial Crisis to Carry Out Atrocities in Tibet
Via: Times Online:
Amid claims that many people have been killed in the most dramatic backlash against Chinese rule for almost 20 years, a showdown looms tonight. The rioters must turn themselves in by midnight or face the consequences.
Things began to look different, and much more frightening, late on Saturday. The troops armed with batons who were ringing the old Tibetan quarter began to carry rifles instead.
Oil: New Record High on Dollar Crash
Via: Reuters:
TOKYO (Reuters) – Oil jumped to a record above $111 a barrel on Monday, as a surprise weekend cut in the Federal Reserve discount rate and the fire sale of stricken U.S. investment bank Bear Stearns sent the dollar to all-time lows.
Crude for April delivery was up 95 cents at $111.16 a barrel by 10:35 p.m. EDT, after hitting $111.42 earlier. May London Brent crude was 55 cents higher at $106.75 a barrel.
“The recent oil prices have been swayed by the currency moves, including this latest rally to a record,” said Tony Nunan, risk management executive at Tokyo-based Mitsubishi. “The dollar weakness is the factor at the moment.”
Asian Markets: 03:15 GMT
At this time, none of the Asian markets have lost 5% or more. Orderly trade is proceeding across the board.
USD/JPY hit a low of 95.80 (woh!) but is, at least temporarily, filling the gap. Current quote is 96.64.
Update on Gold and U.S. Dollar: 02:50 GMT
Gold gapped up and hit a high of $1032.20. It is rangebound now with the intraday lower band around $1022.75.
EUR/USD rose sharply to touch 1.5903. It has backed off to 1.5867.
Federal Reserve Aims to Prevent Panic With More Direct Borrowing
Via: Wall Street Journal:
The Federal Reserve Board, aiming to alleviate the deepening crisis in financial markets, is expanding its reach as a lender and taking emergency action to encourage direct borrowing from the central bank through lower rates.
In an unprecedented Sunday night announcement that underscores the depth of the market fears, the Fed said it has authorized a new lending tool to help its network of primary dealers — including firms that interact with the Fed daily but don’t fall under its direct supervision — to provide financing in securitization markets. Growing worries about securities backed by mortgages has been exacerbating the credit-market upheaval and threatening the overall economy.
The initiatives are “designed to bolster market liquidity and promote orderly market functioning.” the Fed said in a statement. “Liquid, well-functioning markets are essential for the promotion of economic growth.”
The Fed governors in Washington also approved a request by the Federal Reserve Bank of New York to lower the rate at which it lends directly to banks by a quarter percentage point to 3.25%. That narrows the gap between the discount rate and the federal funds rate, for overnight lending between banks, to a quarter point. It also extended the length of those direct loans to 90 days from 30 days.
The discount window is often seen as an emergency tool for banks to borrow from the Fed, which acts as the nation’s lender of last resort. The central bank last August halved the spread between the discount rate and federal funds rate to encourage direct borrowing as the credit crisis flared. The 12 reserve banks around the nation, which make the direct loans to institutions in their regions, submit discount-rate requests to the governors in Washington for approval. The Fed was expected to lower the discount rate in lockstep with the federal funds rate after its policy meeting on Tuesday. Futures markets are expecting at least a half-percentage-point reduction in the federal funds rate, with some investors betting on as much as a one percentage point cut.
JP Morgan Buys Bear Stearns for $2 Per Share
Bear Stearns stock holders facing nearly a total loss.
Also, Lehman CEO cut short a trip to India over the weekend to fly back to New York…
Via: Wall Street Journal:
Bear Stearns Cos. reached an agreement to sell itself to J.P. Morgan Chase & Co., as worries grew that failing to find a buyer for the beleaguered investment bank could cause the crisis of confidence gripping Wall Street to worsen.
The deal calls for J.P. Morgan to pay $2 a share in a stock-swap transaction, with J.P. Morgan Chase exchanging 0.05473 share of its common stock for each Bear Stearns share. Both companies’ boards have approved the transaction, which values Bear Stearns at just $236 million based on the number of shares outstanding as of Feb. 16. At Friday’s close, Bear Stearns’s stock-market value was about $3.54 billion. It finished at $30 a share in 4 p.m. New York Stock Exchange composite trading Friday.
Effective immediately, J.P. Morgan Chase is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations. The deal isn’t subject to any conditions, except shareholder approval. It is expected to close before the end of the second quarter.
Government regulators, including the Federal Reserve and the Office of the Comptroller of the Currency, have given their blessing to the transaction
Many well-known investors, from billionaire Joe Lewis to Bruce Sherman, the head of Legg Mason Inc.’s Private Capital Management Inc. money-management firm, have seen the value of their stakes in Bear Stearns plummet. The pain could be most acute for Bear Stearns’s employees, who are steeped in a culture of personal ownership — and hold about a third of the firm’s shares outstanding.
Through the weekend, Bear Stearns bankers were summoned to the company’s headquarters on New York’s Madison Avenue, where they were told to prepare lists of ongoing deals and business relationships. Representatives from prospective buyers circulated through conference rooms, with J.P. Morgan executives asking questions of Bear Stearns’s senior management. A separate bidding group, including J.C. Flowers & Co. and Kohlberg Kravis Roberts & Co., also was in the mix, said a person familiar with the discussions.
Bear Stearns shares, which traded as high as $170 in January 2007, fell 47% on Friday after the firm was forced to seek emergency funding from the Federal Reserve and J.P. Morgan to stay afloat amid a severe cash crunch.
One stumbling point for a sale appeared to be the amount of risk that J.P. Morgan would absorb in any type of transaction. While J.P. Morgan was eager to snap up some of Bear Stearns assets — such as its prime brokerage business that caters to hedge funds — Chief Executive Officer James Dimon was reluctant to pursue the deal without certain assurances that would protect his firm’s exposure, said people familiar with the matter. Spokesmen for Mr. Dimon couldn’t be reached yesterday.
Despite the emergency funding from J.P. Morgan and the Federal Reserve that was announced Friday and gives Bear access to cash for an initial period of 28 days, the clock is ticking on the 85-year-old firm. Late Friday, credit-ratings firms downgraded Bear Stearns to two or three levels above junk status. The downgrades also had a big impact on Bear Stearns’s viability, as they severely crimped the firm’s number of potential trading partners.
Regulators, bankers and investors are concerned Bear Stearns’s stock could plummet even further when the stock market opens today. A continued exodus by parties with which the investment bank trades could even cause it to collapse. Still, unwinding Bear Stearns could be a nightmare because of the plethora of Wall Street firms with which it has dealings.
Analysts and investors are bracing for more bad news as securities firms report earnings this week, though Bear Stearns’s results are expected to surpass the average estimate from analysts surveyed by Thomson Financial, say people familiar with the matter. A Bear spokesman declined to comment.
Meanwhile, worries are deepening that other securities firms and commercial banks might be on shaky ground. Lehman Brothers Holdings Inc. Chief Executive Richard Fuld, concerned about the markets and possible fallout from Bear Stearns’s troubles, cut short a trip to India and returned home Sunday, ahead of schedule, according to people familiar with the matter. The decision came after a series of calls Saturday to both senior executives at the firm and Treasury Secretary Henry Paulson, these people say.
More: New York Times:
Bear Stearns, pushed to the brink of bankruptcy by what amounted to a run on the bank, agreed late Sunday to sell itself to JPMorgan Chase for a mere $2 a share, narrowly averting a collapse that threatened to cascade through the financial system.
The price represents a startling 93 percent discount to Bear Stearns’ closing stock price on Friday on the New York Stock Exchange.
Bankers and policy makers raced to complete the deal before financial markets in Asia opened on Monday, as fears grew that the financial panic could spread if Bear Stearns failed to find a buyer.
The deal, done at the behest of the Federal Reserve and the Treasury Department, punctuates the stunning downfall of one of Wall Street’s biggest and most storied firms. Bear Stearns weathered the vagaries of the markets for 85 years, surviving the Depression and a dozen recessions only to meet its end in the rapidly unfolding credit crisis now afflicting the American economy.
Reflecting Bear Stearns’s dire straits, JPMorgan agreed to pay just $236 million for the firm, a figure that includes the price of Bear’s soaring headquarters on Madison Avenue in Manhattan. At $2 a share, JPMorgan is buying Bear Stearns for a third of the price at which the troubled firm went public in 1985. Only a year ago, Bear’s shares fetched $170. The cut-rate price reflects deep misgivings about the firm’s prospects.
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Ok, we’ll be running in EMERGENCY mode here. I’ll post links related to this situation as updates to this post. Newer stories will be on top.
For years it has been predicted that the sh*t would hit the fan because of derivatives and moral hazard. I believe this is the real deal, the panic of ’08.
I am actually shocked how quick (4 days) Bear imploded. I had expected it to take longer. If I were stupid enough to be still holding Lehman Brothers stock right now, I would be puking.
Wonder if we will see bank and investment house runs starting tomorrow? It does my heart good to see a bunch of fat-cat douche-bags get theirs, even though this panic will eventually kick most of our tails. At least we witnessed one group of the ‘super-smart’, the arrogant, the pompous get what they all have coming. No more vacations in the Hamptons. Maybe their pals at Wendys and Walmart will hire their smiling genius faces.
Sure am glad I have my meager savings in gold. Now, I’m hoping that Bear was short gold and JPM will have to cover for them.
Uh, for the last two weekends I’ve been thinking about walking calmly into the bank and withdrawing large amounts of cash. Guess I’ll start to do so this week at about $6 k at a time. Better under a mattress than behind locked and closed doors.
And how bout that gold? And silver? Weehah!
Oh, and I also am going to buy a few containers for gasoline. Buy those tires I need for the car.
And stock up propane, etc, etc, etc.
Not many know that ALL SIGNS ARE FLASHING RED. Run inwardly on full steam. Walk and do very calmly.
BREATHE through the nose! Exhale through the mouth.
Best of luck friends.
And thanks for everything.
Does anyone have a suggestion as what to do with a large amount in a money market fund ASAP?
As of Monday morning, I’m going to be pretty much out of the stock market. “Why aren’t you out already?” Remember that I’m the guy with the Boomer brother with the amazing ability to insist the building is not on fire as flaming beams and girders crash to the floor around him and the heat singes his eyebrows, BECAUSE HE SAID SO.
Whoops, must remember to make sure I’ve completed the thought before hitting submit. I’m already most of the way out. I may be overly cautious, but I’m not a drooling idiot. Good point about money markets, Eileen. My big concern is that dropping out of the financial markets will only be a stopgap measure due to the currency devaluation that will undoubtedly occur. Helicopter Ben is said to be a student of the Depression Era in this country. I wonder if he shouldn’t also be a student of the Weimar Republic Era in Germany?
LOveandlight,
Hahaha.
Been there and done that with family.
Glad you “pretty much” got out of the market.
I still have some things to do.
Knowledge is power and responsibility.
Have to have the balls to act on what you know.
Toscafund, a British hedge fund, seems to be urging WAMU bank to refinance with them? I can’t tell how serious that is. http://www.reuters.com/article/businessNews/idUSN1220302720080313
My mom lived through Germany WWII and experienced no food, and she’ll occasionally say that the mormons are clever with their 7 yr stockpiles. Stored gas doesn’t keep longer than 6 months, supposedly
LoveandLight,
That is Ben’s logo (prempture? can’t find the dictionary) – a student of the Great Depression?!
That is NOT giving me ANY COMFORT in these times.
I was in continuing education from about the age of 18 until I was 34 and now have a Master’s of Science!!!! WHeeeee. Now that’s being a STUDENT! AND NOW I GET TO.. well nevermind that.
Ben is a MONDAY MORNING QUARTERBACK if he claims his expertise is being a student of anything. He must DO SOMETHING NOT AS A STUDENT, but as SOMEONE WITH KNOWLEDGE.
He’s been doing his Helicopter Act.
I will be SHOCKED if he comes up with anything new.
For now, his astrology is on his side. I have read he will pull a cat from the majic hat long enough to send a chill on all this REALITY.
In the interest of fairness, Jim was correct about the likelihood of a BSC takeover 🙂
Kevin posted a while back on finding a pig to short. Now whilst all pigs are born equal, some pigs are more equal than others.
How useful it is being on the inside track at the Fed when the fire sales start.
This is how entities like JPMC have become as powerful as they are.
Sorry, shouldn’t that should read JP MorganChaseManhattenChemicalTexas CommerceManiHaniBear Stearns?
For years, i have been the nut who told people that derivatives were gonna get us all. everyone laughed.
well.
all i can say is that there is a HUGE amount of money to be made if you can trade futures and u r any good. simply short the es or the nq or the ym. If u r any good at all at timing overbought / oversold conditions, you will be in the very rare position of being able to make money faster than even bernanke can devalue it.
cybele
boooooooom.
not sure if this will be the artillery shell that takes out the long positions on USDX and the credit markets in general, but the reverb from this hit will echo down through history.
“Events move much faster than anyone expects, and the barbarians are on top of you before you can escape.” – Barton Biggs from _War, Wealth and Wisdom_
good time to be long on gold, grain and guns 🙂
Gold looks like the only commodity in the green. M-M-M-MARGIN CALL!!!
re:Kevin’s last update about What will BB do tomorrow
I read somewhere they already cut rates in RARE
Sunday special meeting of gov’s. or something.
Why save in an ordinary bank account when interest is so low?
Answer to drive everyone to markets,so EVERYONE
can get fleeced when they pull the disappearing act.