$30 Billion Bear Meltdown

No Doubt, It’s BS

It was only a little over a year ago that Bear Stearns traded around $170 a share. With about 118 million shares outstanding as of last Friday, the company agreed to a sale with a share price of just $2, a 99.99% drop in value since those glory days of early 2007. Let the doubt in your mind disappear: We are in a recession, and maybe worse.

The BS problems began several years ago when they became a major player in the so-called “sub-prime” housing market. They heavily gambled in that market with several hedge funds, which went belly-up in 2007. By the end of trading last Thursday, their stock was still trading above $51, but early Friday morning, the final “run on the bank” began, and the stock entered a free fall. At the close of trading, the stock had barely held on above $30 per share. If you want to see what a run on the bank looks like, check out the free falling graph in that Bear Stearns link up there.

So what prompted the weekend emergency deal? The New York Times described it this way:

The price represents a startling 93 percent discount to Bear Stearns’ closing stock price on Friday. 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.

Everybody’s A Little Bit BS

But Bear Stearns is just one company, right? Well, not quite so right anymore, in this ever more interconnected global marketplace. The subprime calamity had been marketed to investment firms worldwide, and BS was a large part of that. Business Week explains it this way:

It would have been highly risky for other Wall Street firms if Bear Stearns had been allowed to go under because Bear is tightly interconnected with them as both a borrower and a lender. Any firms that are owed a lot of money by Bear would have fallen under suspicion, on grounds that they might not be able to pay their own debts if Bear failed to pay them. That could have triggered a dangerous wave of defaults. The rescue by JPMorgan Chase gives the financial system breathing room to pay off Bear’s debts gradually.

The Federal Reserve has agreed to back the deal with JP Morgan to the tune of $30 billion. This is the first time since 1998 that the Fed has gotten involved with a plan to salvage a failing company, and is thought to be the largest bailout in history. As we learn from Wall Street Journal:

To help facilitate the deal, the Federal Reserve is taking the extraordinary step of providing as much as $30 billion in financing for Bear Stearns’s less-liquid assets, such as mortgage securities that the firm has been unable to sell, in what is believed to be the largest Fed advance on record to a single company.

Interestingly, in the 1998 bailout of Long Term Capital management, many sources report that BS refused to help. For instance, from the New York Times:

When the Federal Reserve helped plan a bailout in 1998 of Long Term Capital Management, the hedge fund, Bear Stearns proudly refused to join the effort.

At The End Of The Day

This didn’t happen overnight. And it is somebody’s fault. For half a decade firms like BS have pushed lousy loans on unwary consumers with no regard for the obvious consequences. Many of those people had much more money last week than they have today, and I truly don’t care. It’s their greed that brought this calamity on us all. The quote below from The Wall Street Journal says that BS was left with a “horrible choice”. I’m certain that those few who made that horrible choice aren’t the ones who lost their cash in this fiasco.

Bear Stearns had a stock-market value of about $3.5 billion as of Friday — and was worth $20 billion in January 2007. But the crisis of confidence that swept the firm and fueled a customer exodus in recent days left Bear Stearns with a horrible choice: sell the firm — at any price — to a big bank willing to assume its trading obligations or file for bankruptcy.

“At the end of the day, what Bear Stearns was looking at was either taking $2 a share or going bust,” said one person involved in the negotiations. “Those were the only options.”

I am Jon, and I think the whole thing is BS.

If you’d like to read more about the mortgage crisis, the credit meltdown, the financial fiasco… cick HERE.