Thoughts on the Bear Stearns Salvage Operation

March 14th, 2008 1:44 pm | by John Jansen |

 Here is an interesting thought (at least to me). JPMorgan is the white knight aiding and abetting the Fed in the salvage mission at Bear Stearns. I doubt that Jamie Dimon volunteered for that role. I would suspect that the Fed brought the parties together in a room and showed them a script. Today’s action is a result of that meeting of the minds.

The interesting point to me is that among the  mega banks JPMorgan was pretty much the only one which could play this role. Citibank is a basket case and Wachovia has its own set of problems. B of A is up to its eyeballs in the mess that is Countrywide and the Fed needs them to consumate that transaction. If we come into work on Monday and somebody else is teetering on the edge the only counterparty who could perform a function similar to the role of JPM is Wells Fargo. After that institution the line grows short .

At every turn this crisis has unfolded in the most pessimistic way. I think we are approaching much more quickly than I ever would have thought possible the time when the US Treasury will be stepping in to my buy mortgages directly.

Seperately,the severity of the problem augurs for the FOMC doing more rather than less next week. They will force rates down and kep them there longer until the system reliquifies. At the rate this is going that will take some time.

JJJ

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  1. 3 Responses to “Thoughts on the Bear Stearns Salvage Operation”

  2. By matt on Mar 14, 2008 | Reply

    What you are describing (meeting, script) sounds awfully similar to what was described in When Genius Failed: The Rise and Fall of Long-Term Capital Management. Then, the Wall Street banks all had exposure to LTCM. Ironically, Bear Stearns was the one firm who declined to participate in the LTCM bailout.

    The Wall Street banks are still interdependent. I’m not sure that the Fed was calling the shots here (does it ever?). JPMorgan has the largest derivatives book in the world. Counterparty exposure is becoming more concerning each day and all of the players in high finance have some degree of interest in liquidity of their counterparties.

    Rumors around the trading desks are that JPMorgan has been pressuring a lot of clients lately and I would suggest that the agency of JPMorgan for the New York Fed is entirely compatible. JPMorgan gets a non-recourse loan from the Fed (cheap money and it doesn’t affect Tier 1 capital) and Bear gets a secured loan from JPMorgan. This is really just a means by which JPMorgan can legally loot Bear Stearns (and Bear can die without forcing a firesale).

    So, like you said, JPM is not a white knight; but, isn’t it more likely that the Fed was on its knees begging JPMorgan to do something that was entirely palatable anyway with the Fed’s lending facilities.

    What do you think? Am I out of my gourd here? Too much tinfoil-hat stuff?

  3. By John Jansen on Mar 14, 2008 | Reply

    That is an interesting point of view that I had not considered. The one bit of phraseology that you use with which i can concur is that it is a way for JPMorgan to legally loot Bear Stearns and I would add pick the carcass clean without being disturbed.

    I spent 11 years at JPMorgan before Chase bought them. It was the best place i ever worked and was there during the Long Term Capital crisis.

    Someone ( my son actually) just asked me how i ranked this in terms of financial crisis. This one would seem to be the worst since the Depression and hopefully a central bank with more dexterity this time as opposed to the bungling Fed of that era will prevent a similiar outcome.

    It sure seems as though we are heading to the juncture will the Treasury asks the great mass of investors to show offerings of MBS and they will let the taxpayer foot the bill.

    When I first learned the business in the late 70s and through the 80s it was much simpler. The trading mantra in those days was I like em i buyem or i dont like em i sell em. YOu didnt need a computer to run scenarios or analyze risk. It was pretty straight forward and when you were wrong you got out quickly.

    Have a great weekend

  4. By postmaster on Mar 15, 2008 | Reply

    According to WSJ, Schwartz calld Dimon at 6:00pm on Thurs realizing that they’re doomed. Dimon got Fed involved, culminating in an announcement next morning. So, Dimon in a way volunteered for this (could be due the “blessed looting of Bear” aspect).

    Again, no word about precisely what type of collateral or haircut. Not entirely surprising considering the whole thing (the Fed bailout part of it) unfolded in just over 12 hours.

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