Bear and Stearn going down?

[kmguru]

From The Sunday TimesMarch 16, 2008

UK tycoon Joe Lewis loses $800m on Wall Street
Bear Stearns on brink of break-up
Dominic Rushe, Iain Dey and David Smith
JOE LEWIS, the secretive British billionaire, has lost an estimated $800m in the collapse of the American investment bank Bear Stearns.

The 71-year-old currency trading tycoon, who runs his empire from the Bahamas, holds almost 10% of the bank's shares. Bear’s shares fell 40% on Friday to $27, after it secured a 28-day credit lifeline to stave off collapse.

Lewis began building a stake in Bear last September, when the shares were changing hands for more than $100.

The huge paper losses could force Lewis to sell out of some of his other positions, according to traders, in order to meet margin calls from his lending banks.

Bear Stearns stands on the brink of collapse or break-up this weekend. The bank’s woes come as Wall Street braces itself for another week of pain.

Some of America’s biggest financial institutions are set to announce first-quarter figures showing fresh losses and write-downs of billions of dollars.

The disclosures come amid desperate attempts to bail out Bear Stearns, which secured a 28-day lifeline on Friday to stave off collapse. That would have caused a sale of Bear’s $42 billion (£21 billion) of loans and $176 billion of securities that could have triggered a meltdown in the financial markets.

On a Friday conference call, Bear’s chief executive Alan Schwartz said the bank was considering a full range of options - a statement many took to mean the bank is on the block. Lazards is advising Bear on its options.

JP Morgan Chase has stepped in alongside the Federal Reserve Bank of New York to provide emergency funding.

Jamie Dimon, JP Morgan chief executive, is interested in Bear’s prime brokerage business and parts of its mortgage operations, according to sources.

“Bear Stearns is over,” said one banker. “By the end of the month - if not this weekend - someone is going to come up with a plan to take it out or break it up.”

Wachovia, the giant American retail bank, is also said to be interested in parts of the business and so is JC Flowers, the private-equity group that attempted to buy Northern Rock.

A takeover is not expected to place a high value on Bear Stearns shares, which lost almost half their value on Friday.

Richard Bove, a banking analyst at the Punk Ziegel investment bank, said he thought a buyout was likely to fail, as it did with Britain’s Northern Rock. “I don’t think the Fed will approve a purchase,” he said. “Customers are leaving in droves, so what would they be buying?”

Bove said Bear was “a new Northern Rock” that would be propped up by the government as it dwindled away. He predicted the bank will limp on, losing clients, until it ends up being a regional broker.

Bear’s woes come as its blue-chip rivals prepare to announce first-quarter results. Analysts have cut their 2008 earnings outlook for Bear Stearns, Goldman Sachs, Lehman Brothers and Morgan Stanley. Bove said the results were less important than the strategy the banks were now following. “We have a totally mismanaged economy in America and that has been allowed to happen because the rest of the world accepted our debt.

“Well that’s over and now, like a banana republic, we are going to have to prove we are sorting out our act.”

The Bear Stearns crisis has reinforced the view that the Federal Reserve will cut interest rates this week by 0.75 percentage points, rather than 0.5, which would take the Fed Funds rate down to 2.25% – three points below last year’s peak.

Some analysts even think that the Federal Reserve may try to calm the markets by cutting rates by a full percentage point at its Tuesday meeting.

“We now expect the Fed to cut by 75 basis points on March 18, 50 in April, 50 in June and by a final 25 in early 2009, bringing the Funds rate back down to 1%,” said Ethan Harris, an economist with Lehman Brothers. “Who says history does not repeat itself?”

In Britain, nerves could be set on edge if the February inflation figures – also due out on Tuesday – show a decisive rise above 2.5%, from 2.2% in January.

While Mervyn King, the Bank of England governor, has primed the markets to expect a significant rise in inflation in the coming months, any sign that it was moving higher at an unacceptable pace would be seen as limiting the Bank’s room for manoeuvre on interest rates.

BANK LOSSES KEEP RISING

GOLDMAN SACHS is this week expected to reveal write-downs of more than $3 billion, as Wall Street begins another turbulent quarterly reporting season.

Huge loans for private-equity deals, coupled with a loss on its holding in the Chinese bank ICBC, are behind the write-downs. Goldman is also expected to unveil a 60% drop in earnings.

Lehman Brothers, which secured a new $2 billion credit line on Friday, is expected to reveal write-downs of more than $1 billion.

Morgan Stanley, meanwhile, is poised to reveal a further $500m in write-downs.

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It seems like financial meltdown keeps on going....what is going on? Is this all due to the mortgage fiances or there is more no one is talking?

[nirakar]

Why did the private equity deals go bad? Are adjustable interests rates hurting these deals. Were they like home buyers buying a house that they could only afford if the home rose in value and refinancing was easy? Were buyers overpaying to take companies private? Why did they do that?

[kmguru]

Just like the home mortgage market, I am sure there are two sides to the story. In case of Home mortgage, the reality is people lost their jobs so they defaulted in the payment. But that would say our economy tanked. So, they came up with an answer that people could not pay the mortgage among high gas price etc....

I am sure there is a deeper cause with the financial market...that may point to greed and lack of oversight....it may be like a pyramid scheme....but no body is talking...

[kmguru]

Here is what I do not understand. As per one CSPAN discussion yesterday (I think the CEO of JP Mrgan Chase) that our biggest export is the financial instruments. And the fact is institutions make a lot more profit in loaning and investing money than selling groceries (2% profit). So, how come this mess?

I was told by a friend who works in the financial market is that it is a very complex process when you deal with inter-country money transfers and currency adjustments. Since real money does not transfer but only book entries, it is easy to manipulate those numbers by super huge financial institutions sometimes with wink-wink approval from Federal Reserve. When people start taking money that the bank does not have...then the house of cards come crashing down....

[nirakar]

In home mortgage in California I don't think it is about losing jobs as much as it is about the teaser rates ending without a refinance being available.

People were being told by mortgage brokers and realtors that they should lie about their income. Their income was not being checked. People thought that buying a home with little money down and a teaser rate was the only way they ever would be able to buy a home.

Housing prices were rising faster than people could save up down payments. As long as housing prices kept rising quickly you could afford a house that you could not afford by refinancing when the teaser rates ended. People should have been scared that housing prices would not rise quickly forever, but most people in the deal ignored that fear.

I suspect that the same thing might have happened in private equity. As long as the company values kept rising you could refinance later at a lower interest rate when you had more equity in the company.

I don't like the idea of a government bail out of private equity deals in order to stop to many assets from being put up for sale at one time and thereby crashing the market for those types of assets. I say it is better for Americans if we let Bear Sterns go bankrupt, but I might be wrong.

[nirakar]

I was told by a friend who works in the financial market is that it is a very complex process when you deal with inter-country money transfers and currency adjustments. Since real money does not transfer but only book entries, it is easy to manipulate those numbers by super huge financial institutions sometimes with wink-wink approval from Federal Reserve.

My worst financial mistake was buying Calpine stock. Calpine was selling for well below book value. What I learned is that "Book Value" is meaningless garbage made up numbers. A Calpine power plant was worth what somebody would pay for it, not what it's construction costs were. I came to the conclusion that nobody, not Calpine management, not the lenders, not the bankruptcy judge, and certainly not the ratings agencies, had any chance in hell of coming up with a semi-realistic valuation of Calpine's assets.

A package of financial instruments is worth what people would pay for them. How do you project the default rates on the components of the financial instruments? Add leveraging, derivatives bought and sold, changes in interest rates, changes in inflation rates, currency exchange rates, and currency hedges and what do you have but a gambling instrument?

[kmguru]

In home mortgage in California I don't think it is about losing jobs as much as it is about the teaser rates ending without a refinance being available.

If job is not at issue, can you provide an example what is going on? I wanted to get a stat where taking the default one and analyzing why someone defaulted before the local house price dropped 30%. I can not find a detail analysis on the changes of income and the duration of the steady payment before default, as if no one cares about that. Most data people are interested is items such as percent down payment, interest rate, credit score, etc....

[kmguru]

A package of financial instruments is worth what people would pay for them. How do you project the default rates on the components of the financial instruments? Add leveraging, derivatives bought and sold, changes in interest rates, changes in inflation rates, currency exchange rates, and currency hedges and what do you have but a gambling instrument?

Several years ago, I was inundated with offerings from a stock broker. He rattled off all the numbers of a company like P/E, EBTDA, Beta and a whole lot of numbers saying why that company is such a good buy. Once upon a time, Smith Corona Typewriter company, Digital Equipment Company, Global Crossing, Wang, Wordstar etc were Wall Steet darlings too before crashing big time. I think what happens is that the companies do not tell you when they have a Cancer and they keep selling the stock till death. It is very difficult for an outsider to figure out what is going on.

For example, if there is a major hit by a drug company...things would look wonderful until a year down the road 50 people die. Just one published report could kill that company (if it is a one horse company)....

By the way, I was involved with the Global Crossing as a consultant. They had a lot of potential but had stupid people in the marketing department. So, it crashed.

[nirakar]

My mom has a Smith Barney account. Her broker talked her into buying Global crossing. Smith Barney analyst Jack Grubman was publicly praising Global Crossing at that time while privately saying something like Gloabal Crossing is a dog. Apparently Smith Barney's parent company Citi-Group was earning large fees from Global crossing.

It is my understanding that Global crossing Chairman Gary Winnick was part of Michael Milken's junk bond Ponzi scheme. If I had known that my mom was thinking of buying stock in a company chaired by a Michael Milken associate I would have told her not to do it.

We had a glut in fiber-optic cables. I think that glut is gone now. Demand for fiber-optic cables improved. It is not good enough to be right about future demand. You have to get the timing right.

[S.A.M.]

I was just discussing the economy with a civil engineer today and according to him, construction lags behind the market by a few years while construction plans four years or so ahead for projects. So construction projects may not relfect market losses for some time.

This will affect how the market mirrors economic losses, IMO.

[nirakar]

If job is not at issue, can you provide an example what is going on? I wanted to get a stat where taking the default one and analyzing why someone defaulted before the local house price dropped 30%. I can not find a detail analysis on the changes of income and the duration of the steady payment before default, as if no one cares about that. Most data people are interested is items such as percent down payment, interest rate, credit score, etc....

I would also like to see a good article on this. If you see one please post a link to it.

If housing prices in Stockton CA fall to near construction costs, then I will buy a house there. I need another 35% drop in the Stockton housing prices.

There were always individuals who lost jobs and defaulted.

The SF bay area has had insane housing prices for decades now. California foreclosure capital, Stockton was on the edge of the Bay Area. People who could not afford houses in the SF Bay Area started buying in Stockton. Median house prices in Stockton went from about $135,000 in 2000 to about $400,000 in 2006.

The Mortgage brokers were giving loans to people who had little or no money down and they were taking the customers word for what their income was. I heard that if the customer said he was earning $30,000 a year the loan broker would say, "just just put $50,000 down as your income" so you qualify for the loan. If the customer says, "but how will I pay the mortgage in two years after the teaser rate goes away", the mortgage broker tells him, "don't worry everybody does this; you just refinancing in two years and please come back to me I would like to do that deal."

If somebody got behind on there mortgage payment in 2004 there was no problem. They just refinance and they get to take part of the 2002 to 2004 increase in equity out to buy a new car with. We were all buying swamped with unsolicited offers to refinance our homes in the bay area.

Mortgage originators never had a problem selling their mortgages so they kept on writing more mortgages that never should have been written.

As long as housing prices kept on going up there was no reason why anybody needed to have a decent job in order to buy a house. It didn't matter if you fell behind on mortgage payments. Just keep refinancing and let the rising housing prices take care of everything.

But housing prices couldn't go up fast enough, long enough, forever. When you could no longer get your future mortgage payments from your past increase in equity through refinancing then you have to default because you never really could afford the mortgage and they pay raises you hoped for did not happen.

When places like Stockton failed, that spread to other parts of the country.

That is my anecdotal version of what happened. I wish I could find a good statistically based version of what happened.

[kmguru]

The primary problem with Global Crossing was in marketing bandwidth to major corporations and other telecomm companies. They thought someone else would come and snap up the band width. At the time, data center outsourcing and disaster recovery was being designed. Because GC was the middleware, they should have aggresively promoted the communication growth - which they did not.

At the time Korea was aggresively constructing fiber to home. So, GC messed up.

Bottom Line: If you have more than $10K in any company, read annual reports and match that with what the company does. Be more knowledgeable about that business and their competitors. Call up the company asking basic questions and see how they treat you. If you do not get a good treatment, you know that company wont last very long.

Most American public companies are too busy spending public money such that they do not have time to mind their store. Same thing happens to the governments who spend your tax dollars in useless wars. Only people who get benefits support that. The same way those financial brokers....

[kmguru]

I thought, if economy is good, there are plenty of people ready to buy the house that was in default and had to be sold by the homeowner or pushed by the bank. But the demand went away even in California meaning - economy tanked. So, when demand falls, there is price pressure...

Is not that is what happened? Low demand? Rather than over building? Especially California the #1 economy in USA?

[nirakar]

There was a low demand for the median house when the median house cost more than $700,000 Median wages in the SF Bay area might be the highest in the USA but they have not kept up with housing prices.

Median Home Price Comparison - 2nd Quarter 2006
Locations Median Price
Stockton (August 2006) $355,000
Tracy (August 2006) $525,000
Manteca (August 2006) $425,000
Lodi (August 2006) $350,000
Sacramento $380,600
Los Angeles-Long Beach-Santa Ana $576,300
San Diego-Carlsbad-San Marcos $613,100
Anaheim-Santa Ana $726,200
San Jose-Sunnyvale-Santa Clara $748,200
San Francisco-Oakland-Fremont $751,900
Pleasanton $785,000
California $576,360
National $227,500

There is not much reason to live in Stockton other than not being able to afford a house in the Bay Area. People in Stockton often drive an hour each way to and from work. So much of the Bay area is zoned as open space and the Bay itself takes up a lot of space. Towns and neighbors fight high density building.

[cosmictraveler]

Is not that is what happened? Low demand? Rather than over building?

Actually they both happened simultaneously in this recession.

[kmguru]

In California, some places your mortgage payment could be $9000 per month. If you go by 25% rule, that means you must earn $36,000 per month. Even two people working, that is difficult to do when you work for a company. The only people that can afford is those who own their business and have a million plus company income. So, with economic downturn, things have a tendency to fall apart.

[nirakar]

Even without an economic downturn the housing bubble would eventually have to burst.

[cosmictraveler]

Even without an economic downturn the housing bubble would eventually have to burst.

So that regular working class people could actually afford housing.

[nirakar]

Is JP Morgan ripping off Bear Stearns shareholders? Bear Sterns shareholders might have gotten a better deal in bankruptcy. Bear Sterns employees own a third of the company and would lose their jobs in bankruptcy. JP Morgan was up on Monday.

[nirakar]

At $2 a share I thought Bear Stearns share holders might be getting cheated. At $10 a share JP Morgan Chase is gambling with their share holders money; but the gamble maybe a good calculated risk because it seems the US Taxpayer have been obligated to insure JP Morgan against losses larger than a billion dollars. I don't think the benefit of this deal to the average American outweighs the risk that every American might have to pay an average of $96 to JP Morgan if housing prices continue to fall.

Below is from: http://www.expertclick.com/NewsRelea...etail&ID=20798
Background: It was announced today (Monday) that after another weekend of hard work, a revised dark-of-night deal resulted whereby the shareholders of Bear Stearns shall receive not the $2.00 per share negotiated the prior weekend, but, instead, five times that amount, or $10 per share.

JP Morgan Chase shall pay $10 per share and take on the first $1 Billion of losses. The other $29 Billion shall be guaranteed (operative word: GUARANTEED) by the taxpayer, who, without Congressional oversight, public exposition and comment, and/or regulatory approval through normal channels, is potentially on the hook to JP Morgan.