Jump to content
House Price Crash Forum
bpw

Why Did The Feb Bail Out Bear Stearns?

Recommended Posts

The Federal Reserves bailout of Bear Stearns has been criticized here in the USA - a lot. Mainstream news-fodder mongers have even joined the band wagon. So why exactly did the fed bail them out?

Is there truth in the rumor that many of the rich and infamous had placed huge shorts on the markets with BS and that had the bank failed they would have lost large amounts because the bank would have paid-off its higher priority creditors first ?

Its an intriguing thought

Edited by bpw

Share this post


Link to post
Share on other sites
The Federal Reserves bailout of Bear Stearns has been criticized here in the USA - a lot. Mainstream news-fodder mongers have even joined the band wagon. So why exactly did the fed bail them out?

Is there truth in the rumor that many of the rich and infamous had placed huge shorts on the markets with BS and that had the bank failed they would have lost large amounts because the bank would have paid-off its higher priority creditors first ?

Its an intriguing thought

Well, there's something in the fact that the fed was willing to lend $30Bn to a company valued by JPM at $250M!!!

Share this post


Link to post
Share on other sites
The Federal Reserves bailout of Bear Stearns has been criticized here in the USA - a lot. Mainstream news-fodder mongers have even joined the band wagon. So why exactly did the fed bail them out?

Is there truth in the rumor that many of the rich and infamous had placed huge shorts on the markets with BS and that had the bank failed they would have lost large amounts because the bank would have paid-off its higher priority creditors first ?

Its an intriguing thought

I think the main reason they decided to bail them is because they are counterparties to some multiple trillion dollars of notional in derivatives deals of one sort or another. The consequences of that lot unwinding are basically unknowable, so the Fed took the safe option.

Share this post


Link to post
Share on other sites
Is there truth in the rumor that many of the rich and infamous had placed huge shorts on the markets with BS and that had the bank failed they would have lost large amounts because the bank would have paid-off its higher priority creditors first ?

I might be being slow... but, I don't understand the accusation. Can you walk me through it, please?

What was being shorted?

How did the bale out benefit them?

Under what circumstances, exactly, would these unnamed rich have lost money?

Share this post


Link to post
Share on other sites

I think JP Morgan "had" to take them over because if BSC failed then JP Morgan would have went with them. Something to do with derivatives exposure. Should be interesting if Lweis tries to legally block JP Morgans take over from going through.

Share this post


Link to post
Share on other sites

The rumor was stated by Ann Lee on TV here in the USA. She has a blog at Huffington Post and a pretty good pedigree with degrees from Berkeley, Harvard and Princeton. She posts here as well:

http://www.annsjournal.sampasite.com/

(She is also hot BTW)

I can't see her accusation on the web, but think her point stems from the fact that it's now clear that the current crises was scripted back in around 2006 when Hank Paulson was asked to leave his job as head of Goldman Sachs. It was no secret that Bush twisted Paulsons arm to take the role of Treasury Secretary - the reason stated around that time was his leadership skill and ability to understand the then unfolding credit scares. I've repeatedly read hints in the the WSJ that the Republicans were aware of the end game bought about by the credit binge and suspect that many of the rich and infamous were starting to hedge on there being a downturn. When you know you're near the peak of a bubble it makes sense to plan for the burst. Lets face it. Those of you who read my earlier posts that reference Stoneleighs blogs on OilDrum will now see how accurate his predictions were. If a blogger knew what the end game would be in 2006 then so did the establishment. Of course, there is no sense in telling everyone the bubbles about to burst and it pays to tell people one thing when you think another - Cramer is a case in point - see his devious lies here and recall he is a hedge fund manager:

http://hotair.com/archives/2008/03/18/jim-...iction-whatevs/

So, in answer to your question - I think its very plausible that many rich and well informed investors were shorting various types of investments, and that Ann Lee may be correct in stating that they were using BS (which is solely an investment bank). You have to buy shorts just like you buy shares and I suspect that a failed bank may have higher priority creditors than those with shorts. Once the bank failed the short might be worthless even though the markets are down and you bet was correct. Letting the bank fail may well have exposed many with large bets - and who alone can make a large bet - the rich.

All speculation, which is why I'm interested in others opinions.

I might be being slow... but, I don't understand the accusation. Can you walk me through it, please?

What was being shorted?

How did the bale out benefit them?

Under what circumstances, exactly, would these unnamed rich have lost money?

Share this post


Link to post
Share on other sites

The problem i see if something like this happens ( liquidity crunch) its better to sell your stock, there were 3 chances to pull out last year. what someone said in a post LLR is there to stop a bankrun by the public.

Share this post


Link to post
Share on other sites
All speculation, which is why I'm interested in others opinions.

Thanks for the additional information - things are a little clearer now... I'm insufficiently informed to have a contrary opinion, I'm afraid.... I can offer inquisitive ideas though...

First, you've pointed out that the characters who head-up Wall Street and the Fed are certainly interesting. I feel as if I want to watch a good documentary which shows the connections between them all - rather like that BBC2 program which shows how all our television comedy is hugely incestuous and all originates from the footlights-club at Cambridge university. My gut instinct is that there is something rotten in the Bush-lead government... but, of course, I'm light-years away from being able to put my finger on anything concrete... it is just an instinct. Bush, however, isn't going to be president much longer - and we're looking at John McCain; Hillary Clinton or Barack Obama... I wonder if any of them has a different agenda? I'm disturbed by Hilary Clinton - since of all the bad/corrupt influences of politics on the financial world that I've discovered to date - the Gramm-Leach-Bliley Act (1999) signed by Bill to repeal the Glass Steagall act which had been in place since the 1929 catastrophe that lead to the great depression. On a tangent, the media says that Bernanke wrote his PhD thesis on how to avoid a repeat of the Great Depression... the thesis is available from MIT as an on-screen-preview... and I've scan read it... I can see no tangible link with the great depression... it appears to be far more abstract that the thesis the media imply.

With respect to Bear Sterns, I think it would be extremely interesting to review what the liabilities taken on by JP Morgan actually were. I strongly suspected that derivative trading had something to do with JP Morgan taking over Bear Stearns - but I'd assumed that it would be JPM who stood to loose as a counter party if BS was declared insolvent. If this had been the case, no-one would else would have bid to take on BS - and JPM accepted the costs (financed using credit that would have been available to anyone willing to pay a positive sum for BS) in order to avoid the liabilities JPM would suffer in the face of a disorderly fire-sale of BS's assets. My instinct tells me that the Bank of England is broadly honest - but I have less confidence in the Federal Reserve... My research into Greenspan leaves me with the impression of a man without deep empthy, morals and/or fundamental insight - beyond his fascination in world supply of raw materials. I'm also suspicious of Ben Bernanke - as, while I understand him to be a mathematical genius, that does not necessarily qualify him (in my opinion) to make good economic decisions... I wonder if, like Greenspan, his interest lies in the details rather than the big, long-term picture. While the idea that the Fed is corrupt and malevolent is an awesome conspiracy story... I'd need a lot of convincing... sure, there's corruption - it is human nature, after all, but I remain to be convinced that anything brazen has been committed.

Share this post


Link to post
Share on other sites

What is amazing is that a bank the size of Bears got wiped out by a comparatively small $500 million margin call. Couldn't find a measley $500 Mill? Even though they are worth billions (On paper) and FED pumping money into the markets left, right, sideways?

A billion used to be alot of money not long ago, now the press are reporting in Trillions? What is all that about?

If the market for your assests is gone, then effectively your assests are worthless, no buyer = WORTHLESS!

Scary times and I really hope the FED have nailed this one shut... But the ammo is running low, US employment still climbing and although Comods took a beating today, they are still no where near 'out of the woods teritory'.

IF they have your looking at a big commod fall and a HUGE/EPIC climb in the FTSE and DOW if they haven't we are all fooked.

Share this post


Link to post
Share on other sites
The Federal Reserves bailout of Bear Stearns has been criticized here in the USA - a lot. Mainstream news-fodder mongers have even joined the band wagon. So why exactly did the fed bail them out?

Is there truth in the rumor that many of the rich and infamous had placed huge shorts on the markets with BS and that had the bank failed they would have lost large amounts because the bank would have paid-off its higher priority creditors first ?

Bear Stearns were a very large counterparty in CDS trading, their notional exposure was about $45 trillion. Banks that had hedged positions with Bear would suddenly find themselves unprotected if the bank collapsed.

This situation is quite similar to the situation in 1998 when LTCM went down. (except they were playing with options, not credit derivatives)

The heads of the main Wall Street banks were called into a special meeting with the New York Fed and told they each had to contribute $250 million to stop the hedge fund imploding.

Allowing the fund to collapse wasn't an option (excuse the pun).Their total notional exposure was about $1 trillion.

Preventing the collapse of Bear Stearns was more about preventing the banking system failing than about saving a single bank.

This is worth a watch...

Edited by BandWagon

Share this post


Link to post
Share on other sites
JPM are one of the main stake holders in the Fed.

The Fed giving tax payers money to JPM is essentially the same as the Fed giving tax payers money to themselves - despite any paper shuffling/name changes designed to hide this basic fact.

Yup.And it gets better.

This is a case of afters from the LTCM thing from 10 years ago.

Bear sterns wouldn't play ball with that bailout....so I guess the rest of the fed kingmakers decided it was time to cut them out.

This is a consolidation exercise,simple as that.The big boys don't want too much competition,so you can expect the DRASTIC reduction in the number of companies willing and able to lend.

Same applies with us.You can now get a frikkin mortgage with your weekly groceries,not good for margins is it??

Share this post


Link to post
Share on other sites

There's more on itulip concerning the dodgy looking insider options trading......

Prior to 3-11-08, the following April puts did not exist. These came into existence as a result of a request to an options exchange(s) to create these series. That request was made by someone who felt that there would be some substantial activity in those series and were able to convince the responsible options officials to list the new series.

itulip

Share this post


Link to post
Share on other sites

I gather BS was broken by an old fashioned run on the bank - I read one customer withdrew 25bln dollars of institutional money a few days before their demise. This failure would have been even more dramatic had there been customers lined up outside during the week before (just like NR)

Ann Lee mentioned on TV that we are in the midst of a once in a lifetime event. She may well be correct and at the very least you should all have defensive investment positions.

Clearly, US treasuries are backed by lies like Paulson and Bernanke's belief in a strong dollar. There is only one way to invest hard earned dollars sat in sovereign wealth funds and that is to buy US assets backed by commodities or Intellectual Property. Copper mines, computer companies and aerospace should be on every arab and asians shopping list.

What is amazing is that a bank the size of Bears got wiped out by a comparatively small $500 million margin call. Couldn't find a measley $500 Mill? Even though they are worth billions (On paper) and FED pumping money into the markets left, right, sideways?

A

Share this post


Link to post
Share on other sites
I gather BS was broken by an old fashioned run on the bank - I read one customer withdrew 25bln dollars of institutional money a few days before their demise.

$25bn with one institution? Do you remember where you saw that? It is the kind of risk taking I have never come across before, by either lender or borrower.

Share this post


Link to post
Share on other sites
$25bn with one institution? Do you remember where you saw that? It is the kind of risk taking I have never come across before, by either lender or borrower.

it was the WSJ

Share this post


Link to post
Share on other sites

Draw your own conclusions

Bernanke's Own Home on Capitol Hill Shows Housing Boom and Bust

By Brendan Murray

March 20 (Bloomberg) -- The U.S. housing recession has arrived literally on the doorstep of Federal Reserve Chairman Ben S. Bernanke.

Bernanke lives in Washington's Capitol Hill area in a four- bedroom, 2,600-square-foot house he bought new in May 2004 for $839,000. Almost four years later, it may not be worth any more, according to real estate records and local agents.

Bernanke's timing wasn't the best -- values in the area peaked a year later -- and he is hardly alone among Americans living in an investment that's turned cold. His situation shows that the slump that began with distress in the subprime market is now engulfing wealthier neighborhoods, including some in the nation's capital.

``Even though he's the Fed chairman, he's going to get hit -- but I think lot of people will in Washington,'' said William Wheaton, an economist at the Massachusetts Institute of Technology. The value of Bernanke's home ``probably went up to $1.1 million and it's probably back down to $840,000,'' because prices in Washington just a couple years ago ``got out of control,'' Wheaton said.

Share this post


Link to post
Share on other sites
I think JP Morgan could have went bankrupt to, if not Bear Stearn had been saved, these things goes like chain reactions.

I'm sure that was it. JPM just too big to be allowed to fail. Bear owing JPM more than Bear's total value. The default by Bear being so large that it would have meant JPM falling too. So the FED bailed out JPM ( by preventing Bear defaulting), using the excuse of saving Bear.

What else can the FED do though. Much as I dislike the bail-outs, the alternative must be total collapse of the dollar and sterling, with attendent riots.

Share this post


Link to post
Share on other sites

Many years ago I was involved in setitng up risk managment systems for large investment bansk and other trading houses. At the time, the concept of Value at Risk was only just becoming a topic of common discussion among investment banks - and the idea of what was caled Credit Equivalent Risk and how to value it was really a difficult concept for many bankers to grasp let alone calculate.

Credit Equivalent Risk is the potential exposure to your conterparty when you enter a hedging contract with them. At the moment of entering a hedging contract both counterparties take on Credit Equivalent Risk. That is the risk that the underlying matrket will move gainst either counterparty and that they will be then dependent on the other counterparty to pay out on the hedging contract at maturity.

This Credit Equivalent Risk increases dramatically when market volatility rises as underlying market prices shift sharply up or down and simultanmeously the creditworthiness of counterparties declines. In the case of Bear Sterns many conterparties would have bene exposed to their potential default through derivative contracts. With market prices of all kinds of assets deviating sharply from their prices say 6 - 12 montsh ago the Credit Equivalkent Exposures that many counterparties had to Bear Sterns would have been very large.

The entire system would have been exposed to Bear Sterns default through this Credit Equivalent Exposure and so in the end the Fed had very little option than to carry out an orderly closure and liquidation of the bank.

Edited by Wad

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 297 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.