The Financial Times has in-depth coverage of Bear Stearns attempt to sell itself to JP Morgan to avoid seizing up with a lack of capital.  (h/t Calculated Risk).  The biggest fears are that a meltdown by Bear could trigger a system-wide run on banks and capital, acting as the oft-coined “tipping point” to a system-wide panic and subsequent crash.

From the article about Bear Stearns lack of capital and sale to JP Morgan:

The Federal Reserve, which on Friday provided emergency funds to Bear, and the Treasury are watching the situation closely. The authorities fear that, unless the crisis is resolved promptly, traders may turn their sights on other US and European banks.

“The Fed is most nervous about the systemic risk,” said one senior executive at Bear, the fifth largest investment bank in the US. “The government needs to stabilise the financial system.”Hank Paulson, Treasury secretary, on Sunday sought to allay fears that the crisis of confidence that hit Bear - which was undone by clients’ rush to withdraw funds amid rumours over its financial health - would spread to the rest of the financial sector. “The government is prepared to do what it takes to maintain the stability of our financial system,” he said. “That’s our priority.”

More as it develops.

Share This

Filed under: Citigroup Inc. (C), Goldman Sachs Group (GS)

It’s been almost two years since Hank Paulson took over as Treasury Secretary. I was not sure why he wanted the job, but I speculated that he might have taken it because it would give him a chance to outshine fellow Goldman Sachs Group (NYSE: GS) alumnus Robert Rubin when a financial crisis arose.

Well, he’s got his crisis now. Today, The Associated Press reports that Paulson spent quite a bit of time on the news shows talking about how the The Bush administration will “do what it takes” to stabilize chaotic markets and minimize the economic damage. But his plan to save Structured Investment Vehicles (SIVs) dissolved, his subprime rescue plan fizzled, and subprime refused to remain contained as he said it would last spring.

Rubin demonstrated his mettle in handling several financial crises such as the Mexican financial crisis and the Russian financial meltdown in 1998. While Rubin has hardly distinguished himself at Citigroup (NYSE: C), nothing can take away his finesse in handling those financial crises.

I wish Paulson had such skill because the crisis we now face is immeasurably more challenging than the ones that Rubin solved.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup stock and has no financial interest in the other securities mentioned.

Permalink | Email this | Comments

Share This

Filed under: Citigroup Inc. (C), Goldman Sachs Group (GS)

It’s been almost two years since Hank Paulson took over as Treasury Secretary. I was not sure why he wanted the job, but I speculated that he might have taken it because it would give him a chance to outshine fellow Goldman Sachs Group (NYSE: GS) alumnus Robert Rubin when a financial crisis arose.

Well, he’s got his crisis now. Today, The Associated Press reports that Paulson spent quite a bit of time on the news shows talking about how the The Bush administration will “do what it takes” to stabilize chaotic markets and minimize the economic damage. But his plan to save Structured Investment Vehicles (SIVs) dissolved, his subprime rescue plan fizzled, and subprime refused to remain contained as he said it would last spring.

Rubin demonstrated his mettle in handling several financial crises such as the Mexican financial crisis and the Russian financial meltdown in 1998. While Rubin has hardly distinguished himself at Citigroup (NYSE: C), nothing can take away his finesse in handling those financial crises.

I wish Paulson had such skill because the crisis we now face is immeasurably more challenging than the ones that Rubin solved.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup stock and has no financial interest in the other securities mentioned.

Permalink | Email this | Comments

Share This

Filed under: Federal Reserve

The Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days

The board also authorized “the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities.” This may mean that the Fed will be exchanging capital for paper worth much less than a dollar being currently held on bank balance sheet.

The moves by the board are now a full bail-out and the only open question is how much money the agency will provide.

Douglas A. McIntyre

Permalink | Email this | Comments

Share This

Filed under: Federal Reserve

The Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days

The board also authorized “the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities.” This may mean that the Fed will be exchanging capital for paper worth much less than a dollar being currently held on bank balance sheet.

The moves by the board are now a full bail-out and the only open question is how much money the agency will provide.

Douglas A. McIntyre

Permalink | Email this | Comments

Share This

Filed under: JPMorgan Chase (JPM), Bear Stearns Cos (BSC)

JPMorgan Chase & Co. (NYSE: JPM) CFO is giving a conference call now regarding its $2 a share deal to buy The Bear Stearns Companies (NYSE: BSC). JPMorgan thinks the Bear deal adds to its investment banking, prime brokerage, and commodities units and the price is so low that there is a margin for error.

Here are highlights:

• 12 to 18 months from now, the Bear Stearns prime brokerage, equity, and commodities businesses will add $1 billion to JPMorgan’s earnings
• The Fed is making a $30 billion non-recourse loan to JPMorgan against Bear’s mortgage-related assets. That means if the mortgage assets default, the Fed takes the hit, not JPMorgan
• JPMorgan is guaranteeing all the trading obligations of Bear Stearns
• JPMorgan plans to “deleverage” its balance sheet by $5 billion to $6 billion to maintain its 8% Tier One capital ratio
• JPMorgan will shed assets but its Fed financing will enable it to sell the assets “in an orderly fashion” rather than a “fire sale.”

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Permalink | Email this | Comments

Share This

Filed under: JPMorgan Chase (JPM), Bear Stearns Cos (BSC)

JPMorgan Chase & Co. (NYSE: JPM) CFO is giving a conference call now regarding its $2 a share deal to buy The Bear Stearns Companies (NYSE: BSC). JPMorgan thinks the Bear deal adds to its investment banking, prime brokerage, and commodities units and the price is so low that there is a margin for error.

Here are highlights:

• 12 to 18 months from now, the Bear Stearns prime brokerage, equity, and commodities businesses will add $1 billion to JPMorgan’s earnings
• The Fed is making a $30 billion non-recourse loan to JPMorgan against Bear’s mortgage-related assets. That means if the mortgage assets default, the Fed takes the hit, not JPMorgan
• JPMorgan is guaranteeing all the trading obligations of Bear Stearns
• JPMorgan plans to “deleverage” its balance sheet by $5 billion to $6 billion to maintain its 8% Tier One capital ratio
• JPMorgan will shed assets but its Fed financing will enable it to sell the assets “in an orderly fashion” rather than a “fire sale.”

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Permalink | Email this | Comments

Share This

Filed under: JPMorgan Chase (JPM), Lehman Br Holdings (LEH), Bear Stearns Cos (BSC)

With this evening’s $2 a share deal for JPMorgan Chase & Co. (NYSE: JPM) to acquire The Bear Stearns Companies (NYSE: BSC), we are now seeing what Wall Street is really worth. After Friday’s close, for example, Bear Stearns traded for $30 — but this evening’s deal means it’s really worth 93% less.

Does this mean that the next most vulnerable bank, Lehman Brothers Holdings Inc. (NYSE: LEH), which ended last week at $39.26 is really worth $2.75 a share, a 93% discount to its current price? It probably does not make sense to apply exactly the same discount to Lehman Brothers. But, as I posted earlier, there is very little accurate, timely information for investors to use in order to assess whether Lehman is really worth $39.26.

After all, Bear Stearns indicated in its most recent report that its book value was $100 a share and it closed Friday trading at 30% of that value. By contrast, Lehman closed Friday at 98% of its book value of $40 a share. This is a much higher valuation — suggesting that as of Friday’s close, Lehman had yet to experience a run on the bank as did Bear. As long as Lehman customers are not worried about a Bear repeat, they may decide to keep their money right where it is.

But I am wondering whether any company or investor would want to take the chance of seeing whether their money might get tied up in a run on the bank.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Permalink | Email this | Comments

Share This

Filed under: JPMorgan Chase (JPM), Lehman Br Holdings (LEH), Bear Stearns Cos (BSC)

With this evening’s $2 a share deal for JPMorgan Chase & Co. (NYSE: JPM) to acquire The Bear Stearns Companies (NYSE: BSC), we are now seeing what Wall Street is really worth. After Friday’s close, for example, Bear Stearns traded for $30 — but this evening’s deal means it’s really worth 93% less.

Does this mean that the next most vulnerable bank, Lehman Brothers Holdings Inc. (NYSE: LEH), which ended last week at $39.26 is really worth $2.75 a share, a 93% discount to its current price? It probably does not make sense to apply exactly the same discount to Lehman Brothers. But, as I posted earlier, there is very little accurate, timely information for investors to use in order to assess whether Lehman is really worth $39.26.

After all, Bear Stearns indicated in its most recent report that its book value was $100 a share and it closed Friday trading at 30% of that value. By contrast, Lehman closed Friday at 98% of its book value of $40 a share. This is a much higher valuation — suggesting that as of Friday’s close, Lehman had yet to experience a run on the bank as did Bear. As long as Lehman customers are not worried about a Bear repeat, they may decide to keep their money right where it is.

But I am wondering whether any company or investor would want to take the chance of seeing whether their money might get tied up in a run on the bank.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Permalink | Email this | Comments

Share This

Filed under: JPMorgan Chase (JPM), Bear Stearns Cos (BSC)

BusinessWire reports that JPMorgan Chase & Co. (NYSE: JPM) has closed a deal to acquire The Bear Stearns Companies (NYSE: BSC) for $2 a share — 99% below its all-time high of $167 a share in February. On the face of it, this sounds like a low price — $236 million. But the Fed is kicking in $30 billion to fund Bear’s “less liquid assets.” Taking into account the $1 billion value of its headquarters, this deal values Bear at negative $764 million.

And then there’s the question of risk. According to JPMorgan, “Bear Stearns’ clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns’ counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner.” I guess this means that JPMorgan’s biggest “price” is the counterparty risk risk it’s assuming.

I guess that explains why JPMorgan is paying $1.76 billion less than the $2 billion figure being floated earlier this evening. Nevertheless, I think the markets will like the fact that JPMorgan and the Fed have decided not to let Bear’s blood drift around in those shark invested waters for more than a few days.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Permalink | Email this | Comments

Share This