I think, instead of all of us crying about getting screwed (as taxpayers and also as people who didn't make foolish home purchases), we need to organize.

There are certainly lots of folks that feel the way we do. Problem is that there's no "lobby" for us. (Homeowners have indirect lobbies, and Wall St clearly has a lobby.)

So will the game be to drag all of the dirty laundry on to the books of the clean moneycenter banks? Or is there little difference between the "regualted"...banks" and the un-regulated "non-bank" entities?

Not at all an unreasonanble question:

Thus again the question to Fed of New York President Tim Geithner: Why was JPM involved in this transaction? Why not simply extend liquidity support to BSC as you now offer to every other primary dealer? As and when BSC shareholders litigate over this mess, Geithner et al may be forced to answer those questions in public. 

So what was the real aim? To 'rescue' BSC, or to facilitate handing it over to JPM?

By definition it wasn't "illegal."

So you're saying if the Fed does it then it's legal? What (other) "definition" are you referring to?

Mutual Funds Abandon Stock Market as Volatility Jumps (Update4)

By Eric Martin and Alexis Xydias

March 24 (Bloomberg) -- Mutual funds are selling stocks and hoarding cash just as trading surges to a record and prices grow more volatile than at any time since the Great Depression.

Forty-three percent of managers surveyed this month by Merrill Lynch & Co. moved more money into cash than their funds stipulated, the highest percentage since the New York-based firm began compiling the data in April 2001. Their cash relative to total assets also rose to a five-year high as managers found fewer stocks to purchase and anticipated redemptions.

Investors who usually ``buy and hold'' are selling as price fluctuations get larger and less predictable. The swings are confounding valuation measures based on earnings after $200 billion of credit losses caused analysts to overestimate bank profits by more than 50 percentage points last quarter.

``If you've been out there playing in traffic trying to trade in this, you'll run out of money before the market runs out of time,'' said James Dunigan, 55, the chief investment officer at PNC Wealth Management, which oversees $78 billion.

Dunigan said PNC has been overweight'' stocks since late last year,although we would have liked not to have been.'' Mutual funds such as those sold by Philadelphia-based PNC don't employ strategies such as short-selling that boost profits for hedge funds when stock swings increase.

Most Since 1938

Daily changes of 1 percent or more in the Standard & Poor's 500 Index, the benchmark index for American equities, have occurred on 54 percent of trading days this year, according to S&P. That's the most since 1938, as hedge funds and other speculators use borrowed money to magnify returns from rapid-fire trading.

One consequence is that volume on the New York Stock Exchange has ballooned to an average 1.75 billion shares a day, the highest on record and 11 percent above last year. More than half of the 10 busiest days in U.S. options markets have occurred in 2008, fueled by strategies designed to profit from rising volatility.

The Chicago Board Options Exchange Volatility Index, a benchmark of price swings used to value options, is averaging 26.15 percent this year, its highest since 2002. Price swings in a gauge of bank stocks in the Standard & Poor's 500 Index surged to the highest since at least 1989, based on 10-day historical volatility, data compiled by Bloomberg show.

Bear Plunges, Surges

Lehman Brothers Holdings Inc., the world's fourth-largest securities firm, lost almost half its market value during trading on March 17 before surging by a record 46 percent the next day. The market value of Bear Stearns Cos., the second-largest underwriter of mortgage bonds, tumbled 84 percent to $655 million last week when JPMorgan Chase & Co. agreed to buy it after a Federal Reserve-led bailout. Bear Stearns rose 89 percent today after JPMorgan quadrupled its offer.

``Trading financial stocks on a daily basis is a very difficult, if not foolhardy, thing to do,'' said Edgar Peters, Boston-based chief investment officer at PanAgora Asset Management, which manages $25 billion. Peters, 55, said the firm's asset-allocation strategies have boosted cash to 10 percent of their holdings from zero at the end of last year. The last time the firm held so much cash was in March 1997, when the S&P 500 tumbled 9.3 percent in about a month.

Biggest-Ever Loss

Citigroup, which has fallen 20 percent since reporting the biggest quarterly loss in its 196-year history, may have writedowns of $15 billion in the first quarter, according to Merrill Lynch & Co. That would add to the $22 billion that Citigroup already lost because of the worst housing slump since the Great Depression. Citigroup, Bear and Lehman are based in New York.

Last week, Citigroup traded at 0.82 times its stated net assets of $113.6 billion, the cheapest since at least 1998. That suggests the biggest U.S. bank would be worth more if shareholders fired management and liquidated it.

Citigroup's book value exceeds its market price only if the bank's $133.4 billion in so-called Level 3 assets are being accurately priced. Those include loans, asset-backed securities and derivatives for which market prices are so scarce that companies use internal models to gauge their worth.

Lots of people are arguing that stocks are cheap,'' said Philippe Gijsels, 37, senior equity strategist at Fortis Global Markets. The problem is that when estimates of earnings and asset values prove unreliable,those measures break down.''

March 2003

Mutual fund managers who invest for pension accounts, insurance companies and individuals raised the cash they held to 4.9 percent of client assets this month, according to Merrill. The last time the level was higher was in March 2003, after the S&P 500 had lost almost half of its value from its 2000 peak.

In the last U.S. bear market between March 2000 and October 2002, when the S&P 500 fell 49 percent, U.S. mutual funds lost 19 percent, including dividend payments, Bloomberg data show. That compares with a 5.6 percent gain for hedge funds, according to Bloomberg data.

Jeffrey Mortimer, chief investment officer of equities at Charles Schwab Investment Management in San Francisco, which oversees almost $40 billion, says investing in stocks now is worth the risk because prices are historically cheap. Companies in the S&P 500 trade at 14.03 times estimated profit, according to Bloomberg data. Index members last traded at a cheaper valuation based on historic earnings in October 1990.

The price of admission for playing is that the market sometimes gets quite violent on the downside,'' said Mortimer, 44.If you're a long-term investor, you should welcome this stuff.''

Stefan Wintner, 25, who helps manage $4.6 billion at Kathrein & Co. in Vienna, disagrees.

We'll wait for volatility to come down, prices to improve across the board,'' he said.Prices look cheap, but if earnings fall 20 percent, then they don't look that cheap anymore.''

...my logic tells me the Fed did the right thing.

So to you a $30b non-recourse 'loan' to JPM to cover junk assets is "right"?

This is the next disaster waiting in the wings for us. It may not be banking, but it sustains us. read the whole article. Scary...

CNN.com - Page not found

I don't give a rat's ass what Dimon wants to pay for Bear. The Fed should have made sure he couldn't pay more than $2.

Tanta, try thinking about it this way: JPM put aside 6B for litigation and other expenses on this deal. That's a lot of coin. If the shareholders had sued, and a fight ensued, how much do you think they would have spent on the battle? What sort of instability would it have lent to the market while all these assets were up in the air?

So, a smart CEO would take a look at all of this, call in his CFO and run the numbers on the costs, NPV of the money etc and figure out "hey, if we tossed 1B at this now and upped the share price, what does the deal look like in the end?" The answer was locking it down, not paying the lawyers, and getting it over with made more financial sense.

The actual spirit of the deal was not violated in any way. The costs were just pushed up-front.

So to you a $30b non-recourse 'loan' to JPM to cover junk assets is "right"?

Given the alternatives? Absolutely.

There is an old Chinese story called four in the morning.
A monkey keeper was trying to trim costs so he started cutting back on the number of peanuts he fed them. Till finally it was just four peanuts in the morning and three at night.
The monkeys ranted. Cramer raved. So the monkey keeper relented and gave them three peanuts in the morning and four at night. Everyone was happy

Lehman got more leveraged, not less.

Angry Saver

I wouldnt even call it a house, more like a shack, nut it too will be saved.

Surely a free market is better than this.

Angry saver, and if Bear had collapsed and the financial markets melted down, everyone here would have been screaming about why the Fed didn't step in. Monday morning quarterbacking at its best. And you really would have been angry if Bear went down and all the counter-party poo hit the fan...as you'd have to change your name to ex-saver.

"Jeebus. Is nothing ever enough for these guys?"

"We make the rules - the news, war, peace, famine, upheaval, the cost of a paper clip... you're not naive enough to think we're living in a democracy are you? It's the free market."

Gordon Gekko

Isn't it wonderful how well good cop works?
First Bernanke was good cop saving the world. Dimon was bad cop at $2. Now Dimon is good cop at $10. Bernanke is bad cop.
Theater of the absurd. Are you so sure when the Second Act was written?

Angry Saver

we are becoming a country of payday loan companies sprouting up everywhere 800% interest on short term loans, no problem. Just see it on Wall Street. Golman sachs with a drive up window for payday loans. thats where the entry level MBA's so cocksure of themselves will start their careers. Not a bad fit.

OT: We recently hired a former CFO of a now defunct sub-prime lender (one you know) for a project. Got a question for him?

Not really. Just walk up and slap him across the face for me and say nothing.

Tanta,

Yes I did read the post. There is no demonstration of insolvency there. Only a flat statement that BSC was going to declare bk on Monday (maybe so), but the ostensible reason for this was the run -- they did not have, and could not get, the needed liquidity (in time) to meet the run. So why not put up that $30b as a loan to BSC to help with that problem?

I still think that in the short term the most important thing was to prevent asset liquidation or bk so that things would not get marked to market, since so many other Wall St players hold similar assets.

I thought Dimon made it quite clear he was trying to increase their payout to "keep them on board."

CEO-speak for "getting the deal done as quickly as possible". Frankly, I think it was brilliant. He just locked down the shareholder vote for 1B of the 6B he thought he'd spend leaving him 5B to unwind and take losses on. People can sue, but they can't stop the deal and it can get done quickly. I know you're going to hate me for saying it, but from a management perspective, it was a high-five move. I got a little misty-eyed thinking about it

Why is this not appalling?

I'm more appalled spending the money on wall-street lawyer types...this seems to be less evil to me somehow

he, i just held some for a short time while this was playing out i may be many things, but stupid i ain't

The Fed is obligated to deal with the moral hazard problem.

I agree. Which is why Stumpff should be treated by the Fed as if he were radioactive. The same goes for other banks. He's now the poster-boy for moral hazard...the corporate equivalent to a house owner maxing out the refi and then asking for a bailout for the loan from the government.

Lawyers don't go away until price equals zero... you just have to plan to fight the lawyers no matter what the price is.

By doing what they just did, the legal case is very difficult. The majority of the shareholders will vote for it. Some legal clean-up is inevitable, but not money and time wasting. They knew what they were doing. And as far as I can see, no one stepped up to the plate to make a better offer.

What's your definition of "insolvent"?

What is the purpose behind the PDCF and TSLF? Are institutions that use it just as (technically) insolvent as BSC then?

Tanta, you have come nowhere close to resolving or explaining the glaring 'peculiarities' around this JPM/BSC deal.

tanata thanks... whats rtpf?

STUMPF is an acronym.

Another POV (not that I necessarily agree with it in all aspects):

Paulson's gift to his bankster buddies

The run on Bear began around midday on Wednesday, when a series of banks and hedge funds started a whisper campaign against the firm. The firm was doomed, they said. It was almost broke. But some of the money managers were clearly talking their book. They were obviously shorting Bear’s stock, betting it would decline...How do I know? Because I was on the receiving end of a handful of phone calls from the Gang of Wall Street Whisperers. All of them offered a variation on the same theme: Bear Stearns is toast; no one is trading with the firm; clients are pulling their money out.

Is this more or less what happened? The 'orchestration' (my word earlier). If so, couldn't the same thing happen to other vulnerable (liquidity) investment banks? Lehman, for example, was, until earnings came out (they fell by more than half, but that got short attention), strongly rumored to be next. And isn't this what the PDCF and TSLF are designed to combat?

1. Agree with Randy.
2. The fact that even seemingly reasonable people think that Fed did the right thing with BSC shows where the true priorities of most people lie. The only thing you are all worried about is that your precious market doesn't stop functioning for a single day, like that would be the end of the world or something. Volcker was right, it takes a lot of courage to do the right thing, and this country has
   no spine left. All it wants is to make sure the creature comforts keep coming in a steady stream.

Missed Information

you can speak for me , too.

From Bloomberg
""Medvedev said that Russia's economy was ``insured'' against fluctuations on the commodities and financial markets by its vast currency reserves, the world's third largest.

``Our financial and reserves, our gold and currency reserves, are higher than ever before and reflect the state of the Russian economy,'' Medvedev said.

However he warned that the country wasn't closed off'' completely from the turbulence.Russia has an open economy today and we have to think about this, he said."
First major retreat from global economy?

The No Income, No Assets, No Employment mortgage programs are now creating an America with people that have No Income, No Assets, and No Jobs.

It's one thing to want a bargain. It's another entirely to start a run on an insured bank so that you can get it on the cheap.

And it's another thing to come out and say you're looking for a bailout in public. When you are the CEO of a major company (ESPECIALLY) a bank, there are some rules of decorum. One of them is you NEVER comment on your stock price. Ever. The second is that, even if you are looking for a deal, you never admit to it until it is in play.

Now, I could forgive Stumpff (yes the two f's are a joke if this were a sarcastic quip. You know, I might say something like this if I were tossing a barb at Jamie, as if to say "Yeah, well, I'd do a deal like this too if the Fed lent me 30 big ones". But somehow I didn't get the sense of irony here. Unless I missed it.

You sound like you're rationalizing the robbery of your own house to your family.

This is no sense to go along to get along Marcus. I have every reason to believe that the Fed just averted something that you didn't want to see happen no matter what you post here. Your assessment might be different, so be it. But mine was flashing DEFCON 3 on the screen in vivid red at the possibility of BSC BK.

You say you want these things to fail, but I don't think many of you understand the true implications of what you are suggesting. Because from my understanding of all of this, the direct analogy would be what happens after the first nuclear bomb is tossed.

I think you miss my point: We are beyond what we "want". The outcome will be worse in the end if we don't take the hit. Do I "want" to get hit? Hell no! But I refuse to be robbed AND beaten without resistance. DEFCON 3? WTF? This ain't a Tom Clancy novel, it's a back-alley mugging.

Isn't Peat Marwick technically a what, not a who?

Thornburg Offers $1.35 Billion of Debt Paying 18%

Thornburg Offers $1.35 Billion of Debt Paying 18% (Update7) - Bloomberg.com

an 18% yield? can someone explain this to me. How do they make it with 18%. Why not just go out and get some credit cards?

Tanta
Yeah. Thats about right. When my son was in Grade school I often picked him up to walk home. When he was about eight or nine he had play-yard last period. Now my son is visually handicapped. It was a good school so the other boys let him run around with them, but obviously not as a peer.
One day they were getting ready to play some variation of tag with a ball. Where It would have the ball thrown at him. Joe who had the ball and declared the game was getting ready to declare Sam It by throwing the ball at him. Sam ran over and grabbed the ball from Joe and ran toward my son. "Raphy is It."sam cried.
Didn't work as the gang wouldn't accept Raphy as It. Sam was It and got hit with harder thrown balls then usual.

Anyways thats what I thought of about when I read of Herr Stumpf's move. Tried to pull a Sam. Since no Raphy it had to go"It to be named later"
IMHO won't work.
If you think the playground analogy is absurd, think of the common gossip that BSC was being punished by Wall St. for not joining the gang to bail out LTCM

ipodius,

You write "Now, I could forgive Stumpff (yes the two f's are a joke if this were a sarcastic quip."

Why is the sarcasm necessary? If Stumpf thinks Dimon managed to get a good deal out of this, even at $10, why wouldn't he try to get the same? That doesn't mean the Fed has to backstop every banker coming to the door looking to get a better return. BSC was a biggie in a number of markets, broader in scope than NCC. At the same time, NCC has a deposit base and a backstop on it in the form of the FDIC. Maybe Ben says "no".

Ralph,

I get that allowing Bear to fail may have caused panic and further runs on other institutions - and such an outcome is to be avioided.

But if the Fed is going to put $30BN at risk anyway, why didn't the Fed just provide the guaranty to Bear counterparties? Allow the Bear shareholders and bondholders to cushion the losses (instead of just taking them first dollar) and hold on to the upside?

Because we live in a world that is dominated by an ideology that protects the wealthy at the expense of evryone else. Its ridiculous.

why wouldn't he try to get the same?

Because to get the same would require him keeping his trap shut. You really don't think that the Fed can now touch anything to do with him with a ten foot pole, do you?

So that's why I said it was either incredibly, monumentally stoopid, or he was taking a swipe at Jamie, as if to say "what idiot couldn't make this work with a 29B cushion from the Fed?".

My understanding is that the Fed doesn't have a mandate to help the "dead" - only the "weak", by providing liquidity support.

Does the Fed actually have a mandate to bail out the "dead"? If so, its news to me.

I don't see how it could be snark at Jamie. Snark at Bernanke, maybe.

While were at it, let's make sure the collar is designed to provoke very unpleasant feelings of strangulation whenever deviant behavior is performed.

Professor Pain has been MIA on Wall Street for too long.

Tanta,

Just in case we haven't yet beaten this one to death:

Even if Stumpf actually intended to suggest that some FDIC insured banks will probably fail, that is hardly news.

Didn't some govt org just hire a whole bunch of guys to deal with exactly this scenario.

It's not a secret that certain banks are weak.

Stumpf didn't name institutions and he didn't set out any timelines, so I hardly think his comments are going to spark a bank run.

I take his comments at face value. WFC is a strong bank, and if some govt body wants a strong bank to take on the assets and liabilities of weaker banks, WFC is a good a candidate as any. However, WFC has its own internal hurdle rates, and it's not going to sacrifice those. Hence the comments about govt support.

As a previous poster pointed out, if the Fed or whomever does not think a brokered and backstopped deal with WFC is in the national interest, it can just ignore Stumpf.

Absolutely outstanding blog, by the way...

Also, the relationship between WFC and the change in price from $2 to $10 on BSC is tenuous.

I don't see any direct relationship.

Once again, other then not liking the deal.

And the news in the Stumpf quote, or at least the only surprise, is that they said they were willing to lose their AAA rating to do a deal.

The Fed is letting Bear shareholders walk away with cash, is letting Bear bondholders walk away unscathed,...

But the Fed's main concern was Bear's customers. There were other beneficiaries, and the Fed's concern for a non-member's customers is a debating point.

Merrill Rumored to be Planning Layoffs, Facing Huge Writedown

By Paul Jackson •

March 25, 2008 •
Merrill Lynch — a relative paragon of silence during the credit crisis, while competitors have been dealing with pricing issues, layoffs, and more layoffs — now appears as if it’s about to join into the Wall Street fray. The firm is planning to cut its investment banking staff by as much as 10 to 15 percent, according to a report published Tuesday morning by Dealmaker.

The alleged reductions would affect roughly 300 bankers, and Dealmaker’s sources suggested that high-level executives would not be immune from a reshuffling of the proverbial deck at Merrill. The publication reported that the firm has been identifying candidates for cuts since the earliest part of this year, and that “cuts are expected to be the heaviest among its senior officers.”

Driving the job cuts is a likely large write down when the firm reports its first quarter results, Dealmaker senior editor Erica Copulsky notes:

In addition, three people close to the situation say Merrill also is preparing another major write-down. While visibility on the timing and size of the loss is not fully clear, some people familiar with the matter estimate the number could be as high as $8 billion.

The cuts at Merrill would come as the Street deals with a bloodletting not seen since the dot-com era market troubles; Housing Wire reported last week on similar layoffs at Citi and Goldman Sachs.

re: ipodius

Because from my understanding of all of this, the direct analogy would be what happens after the first nuclear bomb is tossed.

wow they really did convince you that life on Earth as we know it would stop if only Wall Street did not manage our wallets for us.

Just to let you know, I, too, am waiting for the explanation of how this strategy would have been just as bad as nuclear war

You'd find out if all those counter-party contracts started unwinding uncontrolled. Right down to every last bit of anything you have tucked away anywhere. Ask BSC shareholders how they feel now. Imagine that across the whole financial system. Yesterday you had 100 in the bank. Today you have 10. And not due to inflation either. That would be happening as unemployment climbed to depression levels due to no one being able to get credit to finance daily operations.

National City, if allowed to go TU, wouldn't start a chain reaction big enough for the Fed to care about, unlike BSC. Stumpff should know that. And if he doesn't he shouldn't be in the executive suite. If he didn't play another suitor would be found. And possibly be a bigger competitor for Stumpff.

"The American financial-services industry's share of total corporate profits rose from 10% in the early 1980s to 40% at its peak last year. Its share of stock market value grew from 6% to 19%. These proportions look all the more striking—even unsustainable—when you note that financial services account for only 15% of corporate America's gross value added and a mere 5% of private-sector jobs." from The Economist

All,

Lets be really clear. However you want to explain it, the Fed is taking the first $29BN of losses on Bear's assets minus the first billion, which will be absorbed by JP Morgan.

That is a subsidy to JP Morgan. It is also a subsidy to Bear bondholders and a small subsidy to Bear shareholders.

JP Morgan gets all the potential upside of Bear with a $29BN buffer.

In my book that's as good as "paying" JP Morgan $29BN.

The market would have been just as satisfied with a Fed guaranty as it was with a JP Morgan guaranty. The only question is whether the Fed could have taken control of Bear on its own for a cheaper amount.

you do avoid that problem of the kid who murdered his parents getting a scholarship because he's an orphan.

God I love that. I'm going to have to use that somewhere in the next meeting I have to run to! I'll credit Tanta of course!

Have't been able to read all the posts. Sorry if this is a repeat.

B of A was given a sweetheart deal on Countrywide. Now JPM gets a similar deal on Bear. Maybee Stumpf is registering his displeasure with nationalizaion of his competetors.