Lehman Will Survive

This should be enough to keep Lehman going. The upspin: in the months of December, January, and February, in the face of credit-market chaos, Lehman Brothers still managed to make a substantial profit of half a billion dollars, more or less. The leaner Lehman (the bank’s in the process of laying off a stunning 5,300 employees) looks like a fierce competitor, never mind a survivor. And there’s gold in them thar hills: Goldman made more than $1.5 billion in the same quarter.

The downspin: This is Lehman’s lowest profit number in five years, and it comes in the context of a stock-market atmosphere where it was crucial that the bank beat the Street’s official earnings expectations of 72 cents per share. That it did, but only by nine cents, which is the kind of margin that a CFO can normally engineer out of nothing, if she’s so inclined.

Ultimately, there’s nothing here to cause a run on the bank. Lehman’s strategy of "waging hand-to-hand combat," in the words of CFO Erin Callan, and quashing rumors at the trading-floor level rather than the CEO-press-release level, seems to have been a smart one. "I don’t believe your boss" is always easier to say than "I don’t believe you". Between that and the Fed’s new liquidity facility, I’m calling for Lehman to survive this crisis. And that which doesn’t kill Lehman brothers, as we saw in 1998, has a tendency to make it stronger.

Posted in banking | Comments Off on Lehman Will Survive

Extra Credit, Tuesday Edition

A Subprime Conversation

The Economy of Fear: Cassidy is bearish.

Economics Blogs Search

Bear Stearns tremors – now affecting candle-sticks

Posted in remainders | Comments Off on Extra Credit, Tuesday Edition

Why The Low Capital Gains Tax? (Redux)

Portfolio’s editors, in the April issue of the magazine, tackle the issue of which Bush tax cuts should be left to expire in 2010, and which should be extended. I like the idea of a flat 15% inheritance tax rate on all estates over $1 million. But that’s not the only 15% tax we’re being urged to keep:

The reduction of most capital-gains and dividend taxes to 15 percent, on the other hand, stimulates investment and saving by improving investors’ returns and should remain in place. While we reject the absolutist argument that all levies on investment returns amount to the evil of double taxation, we do believe it makes sense, as plenty of left-leaning European nations have recognized, to tax capital at a lower rate.

I’m glad that the editors are rejecting the double-taxation argument. Tax burdens matter in aggregate: I’d much rather be taxed 10% on my income twice than be taxed 35% on my income once. So just shouting "double taxation" and ending the argument there makes no sense.

But if you’re rejecting the argument from double taxation, what exactly is the reason for keeping such a low capital-gains tax? Is there really any empirical evidence that it "stimulates investment and saving"? Alan Blinder doesn’t think so. I asked this question back in August, and got no good answer: why should capital gains be taxed at a lower rate than income? With a bit of sophistication, it’s often quite easy to convert income into capital gains, by diverting it into a corporate shell, so one would think it makes sense to tax the two equally.

As for the Europeans, they tend to have much higher marginal tax rates for top earners; lower capital-gains rates are a kind of stealth tax cut for the rich. And make no mistake: it’s the rich who pay capital gains taxes, not the poor. So if you want to keep capital gains taxes at half the rate of income taxes, you’re essentially undertaxing the rich.

Posted in fiscal and monetary policy, taxes | Comments Off on Why The Low Capital Gains Tax? (Redux)

The Price-to-Book Lag Table

Last Thursday, I printed a price-to-book league table; I thought it would be interesting to see how it has changed, two full trading days later. But as I click around the internet from WSJ.com to Reuters to Yahoo, they all tell me that Bear Stearns is trading on a price-to-book ratio of 0.3 or higher, which is clearly false given that the shares are below $5 and the book value is above $80.

It seems that price-to-book statistics aren’t dynamically updated with price information, even two hours after the market has closed. Weird. And so my league table from last week must be suspect too, now – I didn’t double-check the numbers. Sorry. I just assumed in the era of the internet that all these things are automatic; do they really have a person somewhere who manually updates these things every day?

Posted in statistics | Comments Off on The Price-to-Book Lag Table

Ben Stein Watch: March 9, 2008

I apologize for completely missing Ben Stein’s NYT column on March 9, telling John McCain to balance the budget by raising taxes on the rich. So, for the sake of completeness, here’s a link to it. You might be surprised – the column seems pretty sensible to me, if a little hyperbolical. It’s not saying very much, but this is probably the best Stein column I’ve covered so far. Thanks to Matt for pointing out the oversight.

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The Perils of Forecasting

Jim Cramer is the new Michael Fish.

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Blogonomics: Should Seeking Alpha Pay its Contributors?

Time for a breather from the credit crunch, I think. Instead, let’s head over to Bill Rempel’s No DooDahs blog, where he rails against Seeking Alpha’s business model, and says that Seeking Alpha gets 66 times as much value from its contributors as the contributors get from Seeking Alpha. Unfair!

Rempel is clearly someone who is looking to monetize his readers through serving up advertisements; in that sense he competes with Seeking Alpha for advertisers, and it makes sense that he might stop posting there. But there are many other reasons to become a Seeking Alpha contributor which present much less of a conflict.

Making money, at least in a direct monetizing-visitors sense, is not the reason that very many people start blogging. Indeed, in the econoblogosphere, there are quite a lot of people like Mark Thoma or Greg Mankiw who run no ads at all. People just want a soapbox in their little corner of the internet, and sites like Seeking Alpha and Huffington Post give them a bigger soapbox.

I have more sympathy with Henry Farrell than I do with Bill Rempel. Farrell asks a genuinely provocative question: Why it is that academics submit to commercial journals that make (in many cases very substantial) profits from publishing their pieces? I can understand why academics like Farrell might object to that, because it involves putting stuff behind a huge subscription firewall. Seeking Alpha and Huffington Post, by contrast, have no firewalls at all, and actively encourage their contributors to put their stuff up on their own blogs.

That said, however, Seeking Alpha doesn’t seem to put much effort into driving any traffic away from its own site and towards its contributors’ sites. Most contributors would really like that, and I think Seeking Alpha’s readers would too, especially since SA doesn’t offer writer-specific RSS feeds. I think prominent links to the same blog entry on its original site, as well as to contributors’ own RSS feeds, would garner quite a lot of good will and would probably only increase SA’s own traffic. As ever on the internet, the more you send people away, the more they come back.

But never mind what I think. I asked Seeking Alpha editor in chief Mick Weinstein what he thought of Rempel’s column, and got this wonderful reply; I’ll let Mick have the last word. For now.

For our contributors, joining SA means much more exposure, reaching a far broader audience, expanding the conversation around their ideas and creating new business opportunities. Sure, we’re building a business of our own, but our success as a company not only can be shared with our contributors – it must. Our contributors are the heart of the site. Our relationship with contributors has always been a win-win, and we’re continually thinking of ways to bring more to our contributors.

For the time being, our model doesn’t involve a revenue share, but (unlike HuffPo, it seems) we haven’t ruled that out for the future.

Here are some of the things we currently do to bring exposure and opportunities to our contributors:

– We recently expanded the area to the left of all article pages that promotes the author’s site, business, book or services – see example for a fund manager here or a book author/newsletter publisher/podcaster here.

– We invest in editorial and tech, so authors’ work appears far more polished and on a sharp, professional and stable website.

– We invest in business development so authors’ headlines appear on Yahoo Finance, E*Trade, Reuters and elsewhere.

– We invest heavily in content, such as 2,500 free, transcribed quarterly conference calls that enrich the overall site and the level of discussion around contributors’ articles.

Is it working for SA contributors? Well, we’ve had over 1,200 authors submit articles since we started (including one-off submissions through our web form). We now have over 300 regular, ongoing contributors, and in the entire 2.5-year lifetime of our site, only a handful of those regular contributors have chosen to stop publishing on SA. These have mostly been writers who found they were more interested in trying to monetize their own sites than they were in the exposure and community on SA. We completely understand this and wish them the best of luck.

But if you’re an aspiring market journalist considering SA, you have Jim Cramer’s ear for one – Cramer calls Seeking Alpha a "farm team for future TheStreet.com columnists".

If you are a fund manager, you reach a savvy readership that’s ideal for attracting new clients.

If you are a sector-expert blogger, you can reach a completely new readership pool that finds your insight incredibly valuable. (Here I’m thinking someone like Michael Arrington of TechCrunch, a SA regular contributor.)

If you are a book author, you get ongoing publicity for your book. And if you’re none of the above, but rather an insightful individual investor who does rigorous analysis and just wants to share that with the world, you get 2.6 million monthly unique visitors reading and responding to your work. That’s a nice incremental supplement to a Blogger blog, no?

Bottom line: We have become the leading site to read opinion and analysis on the market, written from an investor’s (rather than a traditional journalist’s) perspective. We offer our contributors an opportunity to contribute while gaining exposure for whatever service they may be wish to promote. But we fully recognize that SA doesn’t work for every writer, and wish Mr. Rempel the best of luck in whatever his goals may be at ‘AbsolutelyNoDooDahs.’

Posted in blogonomics | 1 Comment

Good News on the Credit Front

Accrued Interest has some numbers on banks’ credit spreads, and the news seems to be bad, but manageable. Crucially, they’ve tightened in from the open, and are now only a little bit wider than they closed on Friday.

Elsewhere in the world of credit, swap spreads are tighter across the board, which is definitely good news. And agencies have been doing a very good job of keeping up with soaring Treasury bonds and then some – agency spreads are actually tightening too.

So the verdict on the Fed’s weekend intervention? After one day, it seems to be working. But of course it’s still really too early to tell.

Update: More good news on stocks, too. Lehman’s now up $10 from its intraday lows, and is now down less than 20% on the day.

Posted in bonds and loans | Comments Off on Good News on the Credit Front

Why is Bear Stearns Trading at $5?

bearst.jpg

Bear Stearns shares are now trading at $5 apiece: clearly there’s a reasonably large constituency of investors who simply don’t believe that it’s going to be bought for $2 per share. This is definitely one of the weirder merger-arb situations I’ve seen. So what’s going on?

Well, the deal is subject to shareholder approval. According to the merger agreement:

Stockholder Approval. Company shall call a meeting of its stockholders to be

held as soon as reasonably practicable for the purpose of obtaining the requisite stockholder

approval required in connection with the Merger, on substantially the terms and conditions set

forth in this Agreement, and shall use its reasonable best efforts to cause such meeting to occur

as soon as reasonably practicable. The Board of Directors of Company shall use its reasonable

best efforts to obtain from its stockholders the stockholder vote approving the Merger, on

substantially the terms and conditions set forth in this Agreement, required to consummate the

transactions contemplated by this Agreement.

"As soon as reasonably practicable," however, could be a little while off yet – and in that time JP Morgan will have been aggressively deleveraging and downsizing Bear Stearns. Or, to put it another way, making Bear Stearns a much less risky proposition. Which means that come the date that shareholders have to approve the deal, JP Morgan is likely to be getting even more of a bargain than it is now.

So shareholders could vote against. If Bear Stearns then declared bankruptcy, the systemic consequences might be much smaller than if Bear declared bankruptcy today. The bank could possibly be liquidated in a relatively orderly fashion, and shareholders could end up with a lot more than $5 per share – eventually.

What about rival offers? Well, they’re going to have to be unsolicited: the merger agreement basically says that Bear can’t shop itself around, but it can consider other offers if and when they arrive. I’m pretty sure that Jimmy Cayne, as chairman of the bank, can’t make a rival offer himself. But I’m unclear about the status of all the potential bidders who kicked the tires this weekend – did they sign something which precluded their making an unsolicited offer in the next few weeks?

On the conference call, JP Morgan’s executives seemed pretty confident that the deal would go through at $2 a share, and that there wouldn’t be any other offers. The reasons for that confidence, though, were not easy to discern. Anybody have any insight?

Posted in banking, stocks | 3 Comments

The Dow-S&P 500 Divergence

dow2.jpg

Financial sophisticates know that the Dow Jones Industrial Average is a bit of a joke: it’s only 30 stocks, and it’s not even an index. But for historical reasons it retains a grip on the public imagination that the S&P 500 has never approached.

Most of the time, this doesn’t matter a great deal: the Dow and the S&P move pretty much in line with each other. But today, with Dow component JP Morgan rising by $3.40 per share, the Dow is actually up, even as the markets generally are significantly down. I wonder: when was the last time there was a gap of over 100bp between the daily movements on the Dow and the S&P 500?

Update: Zubin Jelveh answers! Apparently it was July 18, 2002, when the S&P 500 fell 2.7%, but the Dow fell only 1.56%. And it happened again on September 13, 2002.

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JP Morgan-Bear Stearns: Good News for Architecture

In the April issue of Portfolio, Paul Smalera contrasts two new bank headquarters: those of Goldman Sachs, downtown, and Bank of America, in midtown. It’s no contest, really: Bank of America wins hands down.

The best news on the bank-headquarters front, though, is the JP Morgan purchase of Bear Stearns. The new JP Morgan headquarters downtown were going to be cheap and ugly and generally bring down the tone of the World Trade Center site by quite a few notches. Now that Jamie Dimon can just move a block or two west into the shiny new Bear Stearns building, he’ll surely put his downtown plans on ice.

Posted in architecture | 1 Comment

Bear Stearns: Let the Lawsuits Begin!

That was quick. This morning Paul Kedrosky found some Google ads by lawyers wanting to represent Bear Stearns shareholders; by this afternoon, BearStearnsInvestors.com is up and running. There doesn’t seem to be much hard information there about grounds for any lawsuit, but the web page certainly looks pretty.

Alea has advice for lawyers interested in this case:

Current increase in [JPM’s] market cap after the Bear deal: around $11 billion

I will add that this number happens to be very close to Bear Stearns book value.

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Whither Wall Street’s Most Powerful Woman?

Erin

"Wall Street’s Most Powerful Woman" is the headline in the April issue of Portfolio, which has yet to hit newsstands. The question is whether she’ll still be there by the time most people pick up the magazine, for the woman in question is Erin Callan, Lehman’s CFO. And the CFO is often the first to shoulder the blame when the stock price plunges 40% in one day.

What Lehman needs right now is someone who knows the nitty-gritty of bank accounting and can rescue the bank from the fate which befell Bear Stearns. And it’s not clear that Callan is that person. This kind of thing doesn’t read well in a crisis:

She doesn’t have an accounting background, which is increasingly key for C.F.O.’s as such regulatory requirements as Sarbanes-Oxley have upped companies’ financial-reporting demands. But she’s already trying to position herself as a big thinker rather than a bookkeeper.

"I see myself in more of the strategic camp," Callan says. "When you don’t grow up in the accounting profession and you grow up more as a deal person, your bias is to look much more at the big picture." Otherwise, she says, "you really could consume yourself entirely just staying in the weeds."

(Photo: Jeff Riedel)

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Lehman: Battered Hard

Now that European markets have closed, it seems that the US markets are taking a decided turn for the worse, with Lehman Brothers unsurprisingly leading the way down: it’s dropped more than 40% so far today and no one knows where the floor might be.

Meanwhile, my hopes that JP Morgan might keep most of Bear Stearns as a going concern in the hope at least of selling the bits it didn’t want are rapidly going up in smoke: CNBC is now reporting that JPM plans to fire half of Bear’s 14,000 employees, a truly drastic swing of the ax.

In the UK, MF Global took by far the biggest hit:

A firm that was worth $3.6bn at the end of February, was worth $2bn on Friday and then $600m on Monday. Without any news.

We always knew the markets today were going to be volatile, so it’s probably worth not reading too much into movements in Lehman’s share price in particular. Lehman’s reporting its earnings tomorrow, that could be its big opportunity to redeem itself. But Accrued Interest asks a pointed question: did we need to go through all this at all?

Someday when we really know everything about what really happened at Bear Stearns, it will be interesting to see whether Bear would have survived if they had access to the discount window and/or the TSLF. In other words, had the Fed acted quicker to extend liquidity to dealers, would be have been better off?

My feeling, looking at Lehman’s share price today, is no. After all, Lehman has access to the Fed’s 3.25% discount window, which means it isn’t at risk of suffering the same liquidity crunch which did for Bear. But the markets don’t seem to care. Only the truly brave and/or foolhardy are buying financials at this point.

Posted in banking, fiscal and monetary policy, stocks | Comments Off on Lehman: Battered Hard

Is the Bear Collapse Good for Clinton?

Might the Bear Stearns collapse be good for Hillary Clinton’s presidential campaign? John McIntyre thinks so:

The very serious meltdown in the financial markets is likely to focus the country’s attention on the health, stability and future of the American economy. Fairly or unfairly, Senator Clinton will benefit from her association with Bill Clinton’s administration in the prosperous Nineties, and that perceived experience on the economy will stand in stark contrast to Senator Obama’s dearth of experience.

Fred Wilson seems to be on a similar page:

We need someone who deeply understands markets and global economics. We need someone who has actually governed a large group of people.

McCain is allright but he doesn’t show any inkling that he understands economics. Hillary might be the best of the three but her own party has deep reservations about her. And Obama, as inspiring as he is, is looking more and more like the politician that he is.

The big question is the degree to which upheaval on Wall Street feeds through into the broader economy. My feeling is that when people say they’re worried about the economy, they mean just that – and not that they’re worried about counterparty risk or agency spreads. Real people don’t care about finance, they just look at the Dow. And the Dow actually peeked into positive territory earlier today. For the time being, there’s no meltdown there.

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Bear Karma

I just received an IM from a friend:

I know some employees at Bear who are truly wiped out. They think it is revenge by the Fed for 1998.

He’s talking about the rescue of Long Term Capital Management, which Bear famously refused to participate in.

I think that the Bear employees are half right. Yes, it can be seen as revenge for 1998. But it’s not revenge by the Fed. It’s revenge by the rest of Wall Street.

Another IM I got this morning:

We still don’t understand (i.e. the media haven’t informed us) how exactly they came unstuck. It’s not like they take deposits, right?

They don’t take retail deposits from individuals: there’s no such thing as a Bear Stearns checking account, as far as I know. But that doesn’t mean they can’t suffer from a bank run. Except in this case it wasn’t individuals withdrawing money, but hedge funds and other banks.

Bear had a large balance sheet, full of highly-rated bonds. If it ever needed cash, it could go to the repo markets and essentially borrow money against its own balance sheet: it would sell the bonds to a counterparty, and promise to buy them back at a slightly higher price the following day or the following week.

But then, last week, the repo window slammed shut for Bear. Other banks would no longer accept Bear Stearns as a counterparty, which meant that Bear couldn’t use its balance sheet to raise cash.

Then, to make matters worse, the hedge funds all started deserting Bear as well. Bear has a large prime brokerage operation: it looks after hedge funds’ assets, basically, and will lend them money against those assets as needed. But the hedge funds, worried that Bear didn’t have the money to lend, started moving their assets elsewhere, and Bear’s highly profitable prime-brokerage franchise started spiralling downwards.

Without the trust of other banks or hedge funds, Bear was toast. And the famously sharp-elbowed Bear was never much loved on Wall Street to begin with. Maybe it’s true that the rest of the Street was simply waiting for an opportunity to get back at Bear for real and imagined slights, including the refusal to play ball in 1998. But I don’t think the Fed was bearing any grudges; its job was simply to mop up in the aftermath.

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Lehman Thinks Bank Bonds are Cheap

Fixed-income analyst Ashish Shah of Lehman Brothers has put out a report this morning urging investors to buy bank debt. "The Fed has finally intervened with overwhelming force," he writes;

the regulatory authorities now

understand that the time for half-measures is at an end. With today’s moves, the Fed has

signaled a major campaign – and we believe the Fed will win the liquidity battle…

in our 2008 outlook, we stated that we believed 2008 would provide the best buying opportunity in financials in

the past decade. For the reasons mentioned above, we believe that that opportunity has

now presented itself.

Note that Shah is talking about bonds here, not stocks. I’m inclined to agree with him: if the Fed wouldn’t let Bear Stearns default, it’s unlikely to let other banks default either.

On the other hand, the report does come from Lehman Brothers, the one bank which has the most to gain from a rally in bank debt, and the most to lose if bank spreads continue to widen. Buying bonds at this point is only for the very strong of stomach.

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Chart of the Day: Fed Lending

borrow.jpg

WCW has this chart, and says of it:

Any time that a properly normalized series starts rivaling the freaking Depression, you have to worry.

Worry? Yes, I’m worried. But not so much because banks are borrowing from the Fed again after a long Great Moderation in which they didn’t. Historically, the Fed has been happy to act as a counterparty for banks; the fact that it didn’t for a while is no reason why it shouldn’t right now, when it’s needed.

When fears of counterparty risk roil the markets, it’s great that the Fed can step in with its zero counterparty risk and act as the counterparty of last resort. I am slightly worried about this weekend’s announcements, which seem to make the Fed the counterpart of first resort: that spike might yet grow significantly larger.

The Fed has been reasonably imaginative in its response to this crisis. Think of what would have happened if it had stuck to its standard Fed funds instrument: it would have cut interest rates, but the discount rate would still be 100bp north of Funds, and investment banks would have no access to it in any event. The result would have been chaos in the markets: everybody refusing to trade with everybody else.

Instead, the Fed stepped in and said, in effect, we’re here to trade with, we have liquidity, come and get it. Once the money starts flowing around the financial system again, it might be able to take a few quiet steps out of the game. But for the time being, anything which encourages banks to trade with each other and trust each other is a good thing. If it’s really lucky, the Fed might not even have to take any losses on that $30 billion of non-recourse financing that it gave to Bear Stearns yesterday.

Posted in fiscal and monetary policy | Comments Off on Chart of the Day: Fed Lending

Credit Markets: Very Cautious

John Jansen is of course the place to go for updates on the credit markets, and something very interesting seems to be happening right now, which is that nothing

very interesting seems to be happening right now. Says Jansen:

Many traders have been forewarned to keep their activity to a minimum. Senior mangement does not want someone lobbing a plugged in toaster into the crowded swimming pool. So until participants can figure out how the next act unfolds liquidity should be impaired and activity subdued.

I thought that European credit traders would follow the lead of their US counterparts; in reality it seems that the opposite is true, and that US traders too are stepping very gingerly right now. The upshot: no one’s panicking, but there’s no relief rally either, and credit spreads are still wide. Things could still get ugly when volume returns: the Fed at this point will be hoping that activity picks up relatively slowly, and that traders ease gently back into confidence in markets and financial institutions.

Steve Waldman is also worth reading, and has reason to be hopeful that Bear will be the last bank to collapse, now that the Fed’s lending to investment banks:

If this had been in force last week, Bear Stearns would still be a proud Wall Street titan, and we wouldn’t have heard a thing…

Given the Fed’s new facility, if you think (as I do think) that the Fed would lend taking a 15% haircut from par on Monopoly money to prevent another major firm from falling, I have a hard time seeing Lehman going under.

If Lehman survives the week, we might even be able to begin to hope that the Bear collapse really did mark a market bottom in terms of confidence and liquidity.

Posted in bonds and loans | Comments Off on Credit Markets: Very Cautious

You Might Not Own Your Investment Securities

One of the weirder aspects of this financial crisis is that in most cases the amount of harm suffered by any given entity seems to have been directly proportional to the degree of financial sophistication that entity had. Structured products and statistical-arbitrage firms were the first to get hit; investment banking companies are next on the list. Meanwhile, dumb retail investors with S&P 500 index funds might not exactly be loving their returns, but have basically seen the value of their investment drop to 1300 now from 1400 a year ago.

Eventually, however, even dumb retail investors can be hit. And in a rather scary post this morning Herb Greenberg warns everybody with a brokerage account that they don’t own their securities. He quotes a letter from Mike Offit:

Contained in virtually every brokerage firm’s standard Account Agreement (generally a Margin Account) is a provision that allows your brokerage to register all your securities in street name, meaning their own. Every security you buy, even if you pay for it in full, might technically belong to your brokerage firm. It could be that all you really own is a claim on the firm for those stocks and bonds. When securities in your account are held in street name, says Eric Brunstad, Visiting Lecturer in Bankruptcy Law at Yale Law School, it’s really not your property. It’s like depositing money in a bank account. Your cash isn’t sitting in the vault in a box with your name on it. You are simply a creditor of the bank.

If Bear Stearns had gone bankrupt, then, everybody with a Bear Stearns brokerage account would have ceased to meaningfully own "their" securities. Instead, they would have had to join the line of creditors snaking out the front door of the courthouse.

If this kind of information becomes more widely known, could there be a wave of panicked selling? I don’t think so: Offit suggests not that you sell your securities, but rather that you move them to a custodial account at a Trust Bank. Still, a huge number of investors all trying to close and open brokerage accounts simultaneously is the last thing anybody needs right now.

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Market Open: So Far So Good

So that’s not nearly as bad as it might have been. As of 10:00, the S&P 500 is down 1.6%, and the Dow is down less than 1%. JP Morgan is up – that’s really good news. The financials are ugly, but not apocalyptic. Bear Stearns is at $3.70, which implies that the sale might not go through at $2 a share as everybody except Bear’s shareholders would like. Citigroup is now worth less than $100 billion (and much less than Apple). Lehman is down "only" 15%, which doesn’t seem too panicky to me and is frankly better than I’d expected; it’s now trading more or less at a price-to-book of 1.

If stocks are holding up this well, I think that Bernanke might just have managed to dodge a particularly lethal bullet here. But it’s still going to be a very long day before we know for sure.

Posted in banking, stocks | Comments Off on Market Open: So Far So Good

Is Bear Really Worth Only $2 Per Share?

Around the world today, people are looking at each other with a semi-glazed expression on their face, and saying something along the lines of "Dude. $2 a share." As Dennis Berman says, this is what they call on the Street “going donuts.”

If you think that $2 represents a valuation for Bear Stearns, then things are very bad indeed. But in reality it doesn’t: it represents a nominal price paid to Bear’s shareholders in the absence of any alternative.

John Carney was uncharacteristically pessimistic this morning:

Bear Stearns was sold JP Morgan Chase for less than the value of its real estate assets. This negative valuation, in turn, suggests JP Morgan is accepting huge liabilities from Bear.

Which prompted the following IM exchange:

Felix Salmon: I think you’re wrong to read much more into the negative valuation of Bear except for the fact that JPM was in a position to demand whatever it wanted, including a $2 purchase price

Felix Salmon: it’s not like there was an underbidder, beggars can’t be choosers

John Carney: That might be true.

John Carney: I mean, yeah. Probably anything over zero was better than nothing.

Felix Salmon: bankruptcy would have been a nightmare

John Carney: yeah. even if shareholders could have gotten more out of liquidation through bankruptcy, that would have taken a long, long time.

Felix Salmon: it’s SO not about the shareholders

Felix Salmon: this is what happens when you’re at the bottom of the capital structure, you get shafted in a crisis

John Carney: It’s only about the shareholders to the extent that the board still has fiduciary duties to them.

Felix Salmon: That and a coupla bills will buy you a share of stock in BSC

Of course the shareholders themselves can still revolt. As Andrew Clavell says,

If you are Joe Lewis, surely you would want bankruptcy, and the optionality that thereby remains in your stock position in Bear Stearns (BSC) rather than giving up at $2…who cares about the $2?

But I have a feeling that Bear’s shareholders simply don’t have much power in this situation. Yes, there will be lawsuits: that’s a 100% probability. But they will come later, after the acquisition has closed. Jamie Dimon seems to have played his hand very well, maybe because he was there talking to Bernanke and Geithner even as Jimmy Cayne was still playing bridge.

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The Fed Needs Credit Confidence to Return. Today.

Today could be the single most important day in the history of this credit crunch. Up until now, every major Fed announcement has resulted in a market pop, at least for one day. If in the wake of $30 billion and a bunch of extra liquidity the credit markets still crunch further, there’s a very good chance that the Fed is beginning to run out of firepower. And absent the Fed’s ability to rescue us, the future looks bleak indeed.

Don’t worry too much about stocks. The stock market can go down, can even go down quite a lot, with little in the way of extra systemic risk. The credit markets are where the real risk is, and the Fed is desperately hoping right now that its action over the weekend – to open its discount window to investment banks for the next six months – will help prevent a credit-market collapse.

So far, things aren’t looking great. Libor has gapped out to 5.5875% from Friday’s 5.31375% – those 25 basis points are important, and they’re in the wrong direction. If there’s a silver lining to this cloud, it’s the fact that correlation is going down: people are more concerned about individual names <cough>Lehman</cough> than they are about a generalized collapse.

One thing that’s clear is that it’s going to take the US market being open for a little while before we get any real prices in the credit markets. European trade has been thin and nervous, and the rest of the world is clearly going to take its lead from what happens in New York over the course of the day. And no one will be following the markets more avidly than Ben Bernanke and Tim Geithner.

Posted in bonds and loans, fiscal and monetary policy | Comments Off on The Fed Needs Credit Confidence to Return. Today.

Vikram Pandit Ousts Investment Banking Chief

Today is a great day to bury news if you’re an investment bank which isn’t directly caught up in the Bear Stearns collapse. After being forced to bail out his own alternative-investments unit, Vikram has now promoted the head of that unit, his BFF John Havens, to run the entire Citigroup investment bank. Michael Klein, who was co-CEO of the investment bank and recently received a $13.8 million "retention" award, is now a non-executive chairman of the bank’s Institutional Clients Group, whatever that means. (I think it means spending a lot of time on airplanes, while not worrying about the nuts and bolts of how things get done.)

It’s worth recalling Dear John Thain’s advice to Pandit:

End the war on morale. Really. Do I really have to point to examples? Naming old co-workers to key roles? Acquiring hedge funds that haven’t even raised money (well, $150MM)? Buying an odd-fitting shop comprised of former colleagues and giving them the same seat at the table as a large, much more established, group already operating within the firm? Siding with your old shop in a dispute, and agreeing to a worse deal (paying the other shop’s expenses!) than if the original trade has just been pushed through (and destroying value for third parties whose money you are supposed to be managing)? Seriously?

Pandit seems to have no respect for any of the Citi employees he became the boss of when he took over as CEO. Which bodes ill for his ability to lead from the front in his attempts to regain Citi’s former stature.

Update: Eric Dash is more sympathetic to Pandit, and has less sympathy for Klein.

Posted in banking | Comments Off on Vikram Pandit Ousts Investment Banking Chief

The Repo Market Crunch

Not very long ago, when the market in Fannie and Freddie debt went pear-shaped, I tried to look on the bright side, saying that at this point we’d pretty much run out of formerly-liquid securities which have now gotten credit-crunched: what other fixed-income markets were left to suffer a sudden liquidity crunch?

Today the WSJ tells me the answer: I’d forgotten about the repo markets. "In normal times, these loans are inexpensive and roll over easily," write Serena Ng and Randall Smith. "As with other kinds of short-term financing recently, the money is drying up."

Most investors don’t rely overmuch on repo-market liquidity. But Bear Stearns did, and investment banks in general do, and insofar as Lehman Brothers is going to be attacked today, repo-market weakness is going to get a large share of the blame. Mortgage-backed bonds account for 29% of Lehman’s total assets. Lehman might have been able to repo those assets out last week, but today the only entity willing to lend against them is likely to be the Fed, at 3.25%. Which admittedly is hardly punitive.

Posted in bonds and loans | Comments Off on The Repo Market Crunch