Here Today, Gone Tomorrow
Bear Stearns, the fifth largest investment bank in the United States, had $17 billion in cash and salable assets on March 11. At the close of trading on Friday, March 14, the eighty-five year-old firm had an exchange-listed market capitalization of just $4 billion. Over the ensuing weekend, one of its competitors, JP Morgan Chase & Co., agreed to buy Bear Stearns in a paper transaction backed by financing from the New York Federal Reserve Bank, for just under $240 million.
In under a week, one of the venerable names of American capitalism turned to vapor. Shareholders, fully one third of whom are Bear Stearns executives and employees, whose stock traded less than a month ago at over $80, saw their interest in the company repriced at a mere $2 per share. And the offer was not for cash, but rather for the happy prospect of shares in the savior, JP Morgan!
Of course, news accounts and yammering commentators talking about this story yesterday described it as a ‘bailout,’ with critics of the system saying the bank should have been allowed to ‘fail,’ while government officials like SEC Chairman Christopher Cox rushed to reassure nervous investors, saying, “We have a good deal of comfort about the capital cushions at these firms at the moment.'’
President Bush himself mounted the plunge-protection hustings, gathering Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson, along with Mr. Cox and others in the President’s Working Group on Financial Markets at the White House on Monday for a Sunny Jim cheerleading session designed to shore up public confidence in the orderliness of financial markets. “The United States is on top of the situation, ” he said.
As this is being written, New York markets are trading today with index gains of more than 2%. Another investment bank rumored to have capital cushions not unlike those recently enjoyed by Bear Stearns — Lehman Brothers — is up more than 30%. A third, said to be in even greater peril than Lehman — Merrill Lynch — is up nearly 10%.
Mr. Bernanke will meet later today with the Fed’s Open Market Committee, with the entire universe expecting him to announce further significant reductions in the short-term federal funds rate, designed to bolster an economy that many credible observers believe has already entered a recession.
It’s never advisable to consult a crystal ball when talking about future economic prospects, though, ironically, public confidence in the economy and investor decisions about whether to buy or sell shares in a particular concern are often based, not on things as they are, but on things as corporate executives predict they will be.
For example, one of today’s trading session leaders is Yahoo, the Internet company that was recently the subject of a merger offer from Microsoft valued at $31 per share. Today the company reiterated sunny prospects for the future, saying it expects to roughly double operating cash flow over the next three years from $1.9 billion to $3.7 billion and generate $8.8 billion in revenue excluding traffic acquisition costs in 2010.
While Yahoo is posting a one-day gain of more than 5%, its stock is still trading below Microsoft’s offer price. Founder and CEO Jerry Yang said the company has “a combination of unique assets” whose value “is not fully appreciated.”
Well, maybe so.
Less than a week before his company’s bottom fell out from under him, Bear Stearns’ Alan “Ace” Greenberg responded to concerns about the firm’s liquidity saying, “It’s ridiculous, totally ridiculous.”
Turns out he was right, though not in the way many people thought at the time.
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16 Responses to “Here Today, Gone Tomorrow”
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I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog.
Tim Ramsey
Many progressives are reacting to Bear’s demise with glee. “Couldn’t happen to a bigger set of rats.” Others can only urge that we face the real issue: the corrupt nature of capitalism, the hypocrisy of the unlevel playing field and the insatiable greed of those at the top. A few, like me, are aware of all this but are still heaving a sigh of relief that March 17 was not Armageddon, instead was a “soft landing” on a rung on the ladder heading down.
Count me out for the rapture and a chance to kiss our asses goodbye. With all the problems of “reality,” it’s better than chaos and misery for billions.
are you beginning to see the light at the end of the tunnel? … i’d suggest you all buy some food and water and store it in your basement … and buy a horse cause mad max is coming through!
haha …
I tend to agree the Fed has thus far acted responsibly in the circumstances, that doing “whatever it takes” to avoid a precipitous, catastrophic event in financial markets has been necessary to blunt the near-term effects of the unlevel playing field and the insatiable greed suffusing our capital infrastructure.
Ultimately, people as yet unborn (though also many, many living today) will bear the costs of our willingness to have looked the other way the past 25 or 30 years. But grass will not soon grow in the streets and innovation will not suddenly cease. Chaos and misery for billions may yet be avoided.
But, as Sen. Chuck Schumer says, “When you’re looking into the abyss, you don’t quibble over details.”
Isn’t it interesting how financial conservatives are all in favor of a bail out of their friends but see no need for a safety net for regular folks like you and me?
“Open” Mike Fleming
Thanks to Andrew Leonard at the indispensible How the World Works, have a look at The World’s Scariest Chart.
This reminds me of the S&L debacle.
Anyone still losing sleep over that?
While perhaps reminiscent of the S&L debacle and also likely to be looked back upon twenty-odd years hence (by some) as a mere kerfluffle, the fallout from our presently unfolding financial catastrophe will dwarf the unintended consequences of that Reagan-era experiment in deregulation.
The decoupling of this nation’s financial house of cards from its foundation of fictitious capital has only just begun.
Bailing out corp executives is wrong they were incompetant. But there are many persons who had their retirement accounts disapear.it is those persons being bailed out. And that is right! Doc
Darn. Another post vanished.
Reconstructing …
the fallout from our presently unfolding financial catastrophe will dwarf the unintended consequences of that Reagan-era experiment in deregulation.
Maybe, maybe not.
It all depends on confidence in the credit markets, which the Fed has done a reasonably good job supporting.
It is worth keeping in mind that, unlike tulip and dotcom bubbles, people actually have to have a place to live.
The latest Economist magazine has a very extensive section on the causes and outlook — it is well worth reading.
not sure which section you’re referring to, but this quote from an article in the Finance & Economics section with a 3/27 dateline puts it in a nutshell:
The Fed may have underwritten the solvency of the banks but the economic problems haven’t gone away.
Fasten Seatbelt sign is ON.
Of course the economic problems of an asset bubble have not gone away. But so long as the Fed prevents a credit panic, there is no reason to believe the outcome will be particularly serious, or long lasting.
Yesterday, Bernanke warned that recession remains a risk.
Yesterday, a survey of private employers showed an increase of 8,000 jobs over the previous (IIRC) month. Given the overall size of the economy, that is tolerably close to zero, so it is hardly anything to brag about.
But neither is it a sign that disaster is around the corner.
The Economist is still predicting just under 2% GDP growth in CY 2008.
Disasters aren’t generally given to produce many signs when they are around the corner. At that point, they tend to just happen, leaving many fumbling about and asking, “who could have predicted…”
When they are further away, however, and potentially avertible, there do tend to be signs, if one is only willing to look for them.
Sort of like this one.
I’d say if the Economist is “predicting” 2% GDP growth in 2008, it virtually guarantees the real numbers, and we shall only know them as “adjusted” or “revised” sometime well into 2009, will indicate negative GDP in 2008.
Welcome to what the IMF is already calling the most serious financial shock since the Great Depression.
Fasten Seatbelt sign is still ON.
I’ll bet you dinner that GDP will not shrink by more than 1% by Jun 2008, and that by Dec 2008 the US GDP will be at least 1% larger than it was in Dec 2007.
So, you see the economy as basically flat since last summer and believe it will turn in a basically flat performance for CY08. That’s a modest revision downward of your more optimistic view of things from several months ago, which is prudent given the avalanche of bad news that’s hit the wires since Thanksgiving.
I’ve been calling for the piper to be paid for quite a while, myself, and though my pessimism has yet to be borne out by the ‘official numbers,’ I remain confident that we have yet to be asked to digest the worst of the news.
As for the dinner bet, it’s an intriguing proposition, one I’ be inclined to take if we could agree on a few items:
- is that <1% shrinkage in GDP by June08 as measured YOY, or from Dec07?
- whose GDP number, and at what interval of revision, will determine the outcome of the wager?
- does the winner travel to the loser’s state to claim his prize, or do we agree on the cost of a meal and the loser send the winner a check?
…I’ve always wanted to visit Alaska….
… which is prudent given the avalanche of bad news that’s hit the wires since Thanksgiving.
Somehow, I don’t see an economy that is essentially flat for a couple of quarters to be anything like a disaster.
Perspective is handy. We are having the vapors over the unemployment rate rising to 5.1%.
There is scarcely a country in the EU that has gotten anywhere close to that number since who-the-heck knows when.
E.G., at the moment the FRG’s unemployment rate is 7.8%.
While a little OT, the global reaction to a US economic slowdown is decidedly unhappy.
Funny, that. Since all those same countries love to heap opprobrium upon the US when it comes to global warming.
Should the US actually take the IPCC’s reports to heart, our economy would tank.
Be careful what one wishes for …