3/17/08…grim and Bear it!
March 17, 2008
TB’s Epitaph of the Day TB: ”Glass-Steagall Act 1933-99…RIP”… and now we are paying for it.
Most of today’s commentary was written on Saturday, On Sunday, it was announced that JPMorgan Chase (JPM) was buying Bear Stearns (BSC), for $2.00 a share which is amazing as Friday’s close at $30 was a 49% decline from the prior day and on Jan. 18, 2007, it hit a record high of $172.61 a share. According to Barron’s the theoretical book value was $84 billion a share in November although they had $28 billion in Level Three ‘mark to market assets’, so that is a very questionable assumption. On Friday, the options price valued the shares at zero but that is theoretical pricing, this is real. While JPMorgan Chase is much bigger in credit derivatives, as a bank they have a better handle of the credit conditions…or do they since there has to be a ‘Chinese wall’ between the bank and the brokerage. Certainly they are better capitalized and much better positioned to weather the storm but it was clearly in their interest to be the one pursuing acquiring the Bear.
A friend called TB yesterday evening saying he heard the Fed had cut the discount rated which seemed preposterous given that the FOMC meeting is just Tuesday. In fact, on Sunday at an emergency meeting, they did cut it in an unprecedented move that does more to worry TB than to console him, and also unprecedented, opened the discount window to non-banks Primary Government Dealers (had they done this three days earlier Bear Stearns might still exist. This is Volcker’s Saturday night special in reverse with equal and opposite reactions. The Fed is also providing $30 billion to JPM to finance the purchase. According to Vince Reinhart, former director of Monetary Affairs at the Fed as reported on Bloomberg “It is a serous extension of putting the Federal Reserve’s balance sheet in harm’s way. That’s got to tell you the economy in a pretty precarious state.” Lender of last resort makes a last resort move?
Meanwhile the currency markets were tanking the dollar…the Index fell to a a record low of 70.698 and has only regained about half the loss, yen hit a 15 year high of 95.78, and Sterling to a record high of $1.5904. Globex futures on DOW, SPX, NDQ were all down 2.5% and Gold soared to $1,033.90 a $33.40 gain and $24.90 above Friday’s record high! Crude bested the Thursday’s high by a more muted 80 cents. Can we not expect commodities prices to continue to rise when the dollar is in freefall?
Keep all of the above in mind and then remember that we repealed Glass-Steagall putting our banks at the same level as risk as broker-dealers. Also, TB was as he always is with the European and Asian coverage of the crisis on CNBC…then this morning he had to wake up to their US counterparts…ugh!
…if that seems a bit “stearn”, then read the report that Paulson referred to in his press conference on Thursday that shook the markets…until S&P tried to tell us there was light at the end of the tunnel, stopping short of telling us that it was an oncoming train. Here is the link:
Meanwhile a rumor circulated late Friday that Bear Stearns employees were buying ‘put’ options in their own stock….or could it have been several hedge funds, canceling their ‘prime broker’ agreements with Bear and simultaneously buying puts as well as selling or shorting the stock? Time will tell but options volatility in BSC early Friday was valuing the stock at ZERO! Later in the day it settled down but remained very high. IF said employees were doing this they may not have seen it as manipulating the stock price which fell by 47% on Friday, but merely diversifying their investments! Perhaps they had watched Angelo Mozillo’s testimony before Congress a week ago when he said he merely stepped up the selling program for his holdings to diversify his investments for his retirement…also interesting since he had just signed a contract giving the founder of the company 40 years ago a signing bonus or more accurately a retention bonus to ‘incent’ him into staying. At the same time CFC was implementing a stock buyback program as that was the best use of the shareholders hard earned money (never give it back to them in the form of dividends as they might squander it on frivolous things like management and the board of directors buy…you know “Giffen goods” where the higher the price goes the more the demand for it increases), besides that is the safest way to get a healthy bonus due to those share price incentives in their contracts…or at least Angelo’s and after all: isn’t it all about Angelo?
Time was, when spreading rumors about the demise of a financial company was a crime and one that was dealt with severely since it could cause a run on the institution. Not so these days when we have a ‘restriction lite’ SEC and Justice Department…even the Great State of New York isn’t much of a factor what with their ‘Starr’ prosecutor now in the hot seat and having proved he is a lousy shopper of pleasure, and at the same time creating a topic of discussion for couples who may not have even spoken to one another for years…and hubby better provide the right answers to wifey’s questions or there will be hell to pay. Memo to husbands: do not, as CNBC’s Charlie Gasparino did, refer to prostitution as a victimless crime. No sir!
There were two bright spots last week: the first being l’affaire d’Spitzer (which hardly qualifies as an affair since it could only have been in his fantasies…play for pay is not an affair…OK, at least not when there is an exchange of money rather than expensive gifts), as it took attention away from the presidential campaign…wonder which will win on the Sunday funnies…er, talk shows; the second was that Bear Stearns saved two purposes by taking attention from the Spitzer story, and away from Paulson’s one hour press conference which was based on op cit above. Please get the spelling of Spitzer’s first name correctly, you wouldn’t spell idiot, idiiott would you? More importantly, the embarrassing speech by Dubya at the Economics Club of New York (”there have been several crises in my Administration and somehow the American people have always comes thru,” the assumption being that you can come to the trough an infinite number of times and we will do what Americans do best…shop until we drop…dead, this time). Can you blame him as even some well-known economists have said “for 25 years every time there is a crisis we think consumption will slow but it doesn’t.” You can see the logic: as Frank Zappa and the Mothers of Invention said in one of their songs “it can’t happen here.” But it can and only hasn’t due to the flawed logic of trickle down theory, better known as supply side economics or Reaganomics, which worked so long as we kept borrowing and spending more. That, along with the help of the Great Facilitator, Sir Alan Greenspan, it worked, never mind that over the last ten years we have had an Asia/Russia crisis cause by the moral hazard (not to be confused with the moral turpitude conducted by Governor Eliot), created by the Fed Chairman and Treasury Secretary Rubin, then the collapse of LTCM, followed and caused by the former along with 10+ times leverage, the stock market implosion after he poured gasoline on the fire by making all NASDAQ listed stocks marginable the day after issuance which caused a record increase in margin borrowing even though only the electronic trading firms that catered to day traders did so…and to the most credit unworthy people. Then to his credit he did get us through y2k and 9/11…with the help of the Spitzer defrocked, Dick Grasso. That was followed by telling homebuyers to use adjustable rate mortgages which he later modified…much later, and then went on to ignore the stern warnings of Fed Governor Ed Gramlich who then spent the last six months of his life while dying of cancer, writing a book on the dangers since Alan wouldn’t listen and would only say: we have no expertise in controlling credit…wait, Alan? YOU are the head banker!
Then, like a runner in a two man relay he handed off the baton to Ben Bernanke, a scholarly type, who seemed the proper choice as he had extensively studied the errors of the Fed in the 1930’s which managed to turn a major recession of global proportions (it didn’t start here, only the 1929 stock market crash…it began in Austria with the collapse of the largest bank in the world, Credit-Anstalt in 1931 which caused losses in banks around the word), and then raised reserve requirements three times causing more loans to be called each time and that folks (if Dubya can say it, so can TB), was the beginnings of The Great Depression! It is depressing to even think of it. But the problem today is we are a generation not of haves and havenots, or haves and have mores that are Dubya’s supporters, but a nation of gotta haves! It began in the ’70’s with inflation rising due to the costs of the Viet Nam war and Johnson’s guns and butter approach and as prices rise we saw credit cards come into vogue…the first was actually Diner’s, then American Express morphed from travelers checques to plastic, then the banks not to be outdone created MasterCard and later Visa, which only became widely accepted in Europe after the French bank Societe Generale (you surely have heard of them?), endorsed them. Then, as France went so did all of Europe and the globe. Now you could finally finance your trip to Europe as well as your car, your home…eventually even groceries…with plastic. Then came tapping home equity for all of the above and to pay off those costly credit cards. In turn, the credit card companies resorted to teaser rates…sometimes even zero interest for a year…but be sure to read the fine print.
So now, 10 years later we have Team Bernanke/Paulson replacing Team Greenspan/Rubin but there are no easy solutions. The standard of living in the US is rapidly eroding, financial markets and institutiones are near ruin, deficits and inflation are rising, unemployment and consumption are slowing, and the dollar index is at a record low just as margin requirements for hedge funds are being increased even as asset price declines are causing more margin calls (if this sounds familiar refer to the paragraph above and you will see exactly why Bernanke, despite his calm exterior, is clearly concerned… a helicopter is not big enough to hold enough dollars to drop meaningfully. The only solution, and it is a painful one is to start living within our means but it we do that we will most likely have a global depression which would be a failure of the noble experiment. Whereas, Credit-Anstalt (now Creditantalt) was the catalyst the first time, lax regulation is the culprit this go around…and now we have the government issuing regulations for stricter credit…it is impossible to comprehend. But, we are Americans and some way we will rise to the occasion…as will our financial institutions so long as there is a buck in it…it’s the American way.
Now we don’t have just Fannie and Freddie, as Alan Abelson wrote in Barron’s, now we have Feddie!
Yesterday, Treasury Secretary Hank Paulson was on This Week and started out very calm and collected. Then as George Stepanopolous began to ask questions he began to stammer again…the same way he does at press conferences suggesting he is out of his element in this crisis…hopefully he is not.Obama is now in the hot seat and TB. who likes him. wants to know how he could have spent 20 years attending a church with a pastor that is a racist and America hater…what could he have possibly seen in this man? Also, he says he never heard the man talk this way…very doubtful and you can bet the Clinton camp is researching his days of attendance and what was said. More importantly, it calls into question the type of appointments he might make…we need change but that kind of change? Not for TB.
This will be a very trying today so never a buyer or a seller be if your stock is in freefall…too late for that. At dinner Saturday night with friends the subject of taxation came up and TB has done a reversal on increasing the taxes to the wealthy having been watching this situation closely. They should have been raised long ago when the economy rebounded…not raised but merely had the cuts restored. It was amazing how upset they became at the suggestion…it really is later than we think.
Erin go braugh…and TB wishes he were in Carrickfergus!
TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint…sometimes…usually? Hope you find it useful.
Copyright TBD Capital LLC March 17, 2008
March 17, 2008 at 7:06 am
Once again TB has it right concerning Greenspan’s follies. What a disaster he was as fed chair. We will be living with his legacy for years to come.