I used to work for Bear Stearns, and it is a sad day in Mudville indeed.
I read so many on the Web cheering their demise. I don't know why. When I worked there the folks I reported to were honorable and conscientious. Of course, I did not work in mortgage trading, the area that brought them low.
Here is the thing... Bear Stearns is not likely the last big blow-up. Maybe Hollywood should do a sequel to "There Will Be Blood"... "There Will Be Blow-Ups".
No I ask you - is J.P. Morgan going to be able to take a Lehman Brothers or Citi Group under its wing? They are going to be a bit busy wiping up after Bear's big spill. And where was Goldman Sachs? Why wasn't Goldman tapped to pick up the pieces? Maybe there was an Anti Trust issue... yea, sure....
The American financial system is no better today than it was last week. The dollar is certainly no better fundamentally and home prices are no higher and manufacturing is no more productive. To quote the elder George Bush: "We are in deep do-do".
The Bear Stearns story is going to play out over and over again in Corporate America. Here is how the story goes:
Wealthy shareholders on tuesday won't have 2 nickels to rub together on wednesday. The Federal Reserve will try and bail out their wealthy constituents at taxpayer expense, further devaluing the U.S. $, and making us all poorer in the process.
And the energy crisis has not hit the U.S. with all its fury - yet. When (not if) that comes, the dollar will collapse in earnest and the markets will be decimated. If your portfolio consists of only financial assets you are going to be in a state of shock.
Good luck to all.
Mentatt (at) yahoo (dot) com
7 comments:
Yes, a moment of silence for the 14,000 employees of Bear Stearns whose 401-k's and other assets are down the drain.
Meanwhile, the free market wonderboys who have systematically sold the removal of the New Deal regulatory protections will walk away with millions instead of hundreds of millions.
Greed and retribution. And the energy thing is barely on the horizon.
But since Cheney is over trying to hustle up an Iranian War to salvage the legacy...it could really get going.
Like the previous comment, I feel for the employees. It will be interesting to see if the average American EVER reacts to the continued upward movement of wealth through the use of questionable tactics. I wish the Fed had been interested in saving the economy several years ago instead of utilizing temporary fixes.
Hi guys:
Indeed this is serious. It is hard to see them fixing this one. We are so interconnected now. Even if they save all of the US banks and now it seems they have to save non banking institutions like broker dealers. But hey lets say they can save them all. Can they save all the Japanese, European and Chinese Banks? What about Brazilian and Russian Broker Dealers. What about Monoline insurers, hedge funds,insurance companies, pension funds, municipalities? (Will the sovereign wealth funds help or run in the other direction? Will China and the Gulf States dump the dollars in a panic? Who knows.) And even if they save all those why would anyone invest in a wall st firm now? To see their investments go from 172 to 30 dollars in a year and then to 2 dollars overnight like Bear Sterns? Not likely. But lets say they manage to somehow buy up the stock market in order to keep it up. Bush has met with the Presidents Working Group on Financial markets tomorrow. That is a group which was supposed to not even exist a year ago and was all in the heads of tinfoil hatted individuals. Now Reuters is reporting is an an official meeting. So of course they are going to do everything, to pull out all the stops. But as every church organist knows, once you pull out all the stops there is nothing you can do to make the sound any louder.
And finally the main event the Credit Default Swaps? 43 Trillion dollars in nominal value. That is three times US GDP. What about other derivatives which BIS (Bank of Internal Settlements) says is over 600 trillion dollars but they don't really know how big it is because not every transaction is reported. So could be another 50-100 trillion bigger. Chump change. The total Global GDP is only about 55 trillion dollars. The losses on this stuff could destroy entire markets, countries even. And they probably will.
And for the encore whatever is left standing will be dismantled through class A or criminal litigation. The lawyers, if not yet lynched up to that point, will have a ball suing the remaining players for fraud, failure to disclose risk, being still solvent, or whatever else they can think of which is not to be underestimated.
That being said. These are resourceful people. They are not fools, they have been able to stick a finger in a dike before. Thankfully we don't know the future for we are only human. But it doesn't hurt to be prepared. So get your gardens ready. Get your money safe and good luck to all of us for we live in interesting times.
Best regards,
Chuck H.
Pretty much encapsulates my thinking.
http://www.321gold.com/editorials/harris/harris031408.html
Of course he is talking about a hyperinflationary outcome here. But I am not sure about that. In my humble opinion what we could have and are probably having right now is a mid stage hyperdeflationary implosion. This is where money is whisked out of existence by a destruction of credit. Sort of what happened to Bear Sterns. From $172 in Jan 2007 to $150 in Aug 07 then to $130 in October through Jan. Then $60 on Monday of last week $30 on Friday and $2 dollars this Monday. The Fed didn't save the equity holders did they? However they did pledge 30 billion dollars of US taxpayers money to make sure the Bear Sterns derivative exposure (its equivalent to the entire US GDP) didn't drag their boys at JP Morgan down.
The more I think about it the model looks like this:
The fractional reserve system is by nature impossible to balance and has no steady state. Therefore it must continuously grow to perpetuate itself. Inflation must continuously get higher and higher but not to high. Because if it gets too high it goes Weimar and collapses in too short order. Inflation is necessary because it allows loans to be paid back with interest. Deflation must be avoided at all costs because it leads to default. Default implodes the fractional banking system by destroying the banks. Time to start over again ... usually after a war to clean things up. Its OK because who ever is left is scared and very cheap to employ and will build any system they want to build as long as they pay anything at all. All natural systems are self balancing and must reset once is a while. There is no permanent plateau of prosperity in a changing world. No Goldilocks economy is possible. Boom and bust are natures way to return to the mean - and it always overshoots both on the upside and the downside.
So here is the cycle:
1. First inflation destroys savings. People are crazy to save when their money loses purchasing power so speculation in assets is the result. Its a lot of fun at the beginning but its a horror show at the end.
2. Deflation/Depression destroys equity built up during this speculative phase. All remaining cash and equity is pulled out to pay mortgages or other debts.
3. With people broke, Comercial banks fail and people loose everything. Yes probably gold will also not get a bid in that case.
4. The top consolidates power and take over the best assets.
5. The whole thing starts again if there are any resources left to allow for a complex system.
This is just an academic exercise on my part you understand. BTW i still believe in gold but it shouldn't be measured in Dollars. Only in ounces and grams.
Yours,
Chuck H.
A couple of interesting points here;
The Fed is running into limits of how much it can lower interest rates; maybe 1% today, but then only another 2% to go to zero. What then?
But the markets are pricing risk differently, and if you want to borrow money, its either not available or very expensive. When Abu Dhabi rescued Citigroup last November they recieved an 11% return on investment. Banks in Europe are trying to get savings in by offering up to 8% return. In each case, to lend that money at a profit would indicate 10 or 12% interest - THAT'S the real price of money!
There is now an inevitablity about this downward spiral. i'd guess Lehmans will follow Bear Stearns in the next week or so, and then who's next? Citigroup? And when will retail customers wake up and read what's written on the wall, and start pulling their life savings out of the high street banks?
I cannot see an exit from this path. Nothing can happen that can counter the impetus of this collapse in confidence. We are all just spectators.
Thank you for your comments - and excellent comments all!
Chuck, I see that you are a fan of Marc Faber and Gary Shilling. Me, too. Although I do not agree with EVERYTHING shilling says, I would not want to take the other side of a trade against him in anything but commodities... His calls on housing and interest rates were a bit early and, as it turns out, prescient.
IF, and it is big IF, the oil import declines into the U.S. could be put off for several years, the Fed might be able to avert real trouble (I said might) and inflate a turn around.
The $64,000 question is: how does the impact of a permanent decline in volumes of imported oil work in all of this? How far does the $ fall? How do our oil export partners react to the falling $? How far can our trade deficit go and how will that story end?
Jeff,
They might. And of course I totally agree with you that behind all of this is the most important development of our lifetimes which is Peak Oil. That is the 87 million barrel elephant in the room. It has the power to bring the whole criminal enterprise which is the global monetary system to an end. Now that being said, I would want this sideshow to continue for as long as possible. When it blows apart it will be a an awful thing for everyone. It works badly and is corrupt, very much like the Roman Empire but at lease it keeps the roads safe and the borders relatively impermeable.
All I can say is that once the wolves start tearing each other apart and eating each other (the banks and broker dealers) it is certainly NOT the time for the sheep to start feeling safe and go back to grazing. Its time to get the heck out of dodge before the the wolves attention gets turned back to the sheep again.
Chuck H.
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