Bare Stearns
Much has gone down in the financial markets over the last week. The Fed first moved to increase liquidity by injecting $200bn. worth of credit to the big banks - and allowing them to borrow for four weeks instead of the traditional overnight window. This came as good news to the Dow, which jumped 400 points in the same day. It’s been pretty much downhill from there.
One minor aspect of these loans that was paid little attention when they were announced was that they would not become available until March 27, once the auctioning begins.
Today, March 14, is a particularly interesting day because Bear Stearns, who ran two major hedge funds specializing in mortgage securities, came to the realization that it could no longer continue normal operations without an infusion of cash. Of course, Bear Stearns was telling us unequivocally that there was “absolutely no truth to the rumors of liquidity problems” on March 10 in an official press release. Four days later, they are being bailed out by the Federal Reserve and JP Morgan. The involvement of JP Morgan is particularly interesting - like a vulture circling a dying carcass.
It is shocking that Bear Stearns could not hold its breath for two weeks and eek out until the $200bn was released by the Fed. Instead, their stock was halved in one day, now trading at $30, off its 52-week high of $160.
Expect to see the rest of that $400 single-day gain of the Dow erode even more on Monday, and the Fed will probably cut rates .75 percent again to 2.25 because they cannot seem to tolerate a sub-12,000 Dow. They’ll be able to do so without worrying about inflation because the CPI, as it is conventionally reported, showed very little uptick in February. Unfortunately, the CPI measure of inflation is a sham.
Update: Bear Stearns sold to J.P. Morgan on Monday for $2/share.
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