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Another related view:
>The Federal Reserve System tried to reshuffle the financial deck
>late March 16. For the next 24 hours, the global financial markets
>tried to figure out where the Fed's action left the system. At the
>end of the day, they were not happy. But at the same time, they were
>not suicidal. That represents a victory for the Fed.
>
>It is important to understand what the Fed was trying to achieve. In
>essence, its goal was not complicated. It was trying to manage the
>collapse of a financial institution -- Bear Stearns -- such that it
>did not default on its clients, individual and institutional. The
>threat it faced was of bank failures, in which depositors would lose
>their savings. If Bear Stearns had been unable to carry out
>financial transactions on Monday morning because of a lack of cash,
>its clients effectively would have found their assets frozen. And
>that would have touched off a ripple through the financial system
>that might have caused a series of uncontrollable failures.
>
>The Fed did two things to prevent this scenario. First, it
>engineered a buyout of Bear Stearns by JPMorgan Chase at $2 a share.
>The Fed was not at all interested in protecting investors in Bear
>Stearns, who were nearly wiped out. Nor were they interested in
>protecting Bear Stearns employees. The Fed was interested in having
>JPMorgan Chase -- a huge bank with a strong balance sheet -- in
>effect guarantee the liquidity of Bear Stearn's account-holding
>clients, thus avoiding the threat of falling dominoes.
>
>The Fed's second move was to redefine the rules of access to
>low-cost, short-term financing from the Federal Reserve.
>Historically, such financing has been confined to banks. It has now
>been extended to brokerage houses. By doing this, the major
>brokerage houses can access money from the Fed for 90 days, up from
>30. That sets the stage for an orderly consolidation of the system,
>in which major banks with strong balance sheets use short-term Fed
>money to acquire weak and failing institutions without having to
>pull liquidity out of the system by using their own money or trying
>to borrow money from banks. In effect, the Fed created a situation
>where other institutions in the same condition as Bear Stearns can
>be merged into healthier entities without the need for this
>weekend's urgent scramble.
>
>JPMorgan Chase got a pretty good deal out of the move. For less than
>a quarter billion dollars, it acquired the marketing strength and
>customer base of a major financial institution, something that could
>well be valued in the tens of billions once things settle down. We
>are not clear on what Bear Stearns' debt structure was but its
>Manhattan building alone is said to be worth three times what Bear
>Stearns went for. Obviously there are a lot of liabilities traveling
>with Bear Stearns, but we suspect that given Fed financing, JPMorgan
>Chase was not engaging in charitable activity. Indeed, there already
>are rumors that Bear Stearns' shareholders might resist the
>takeover. But by the time that happens, if it even does, the deal
>will be well down the road. In the meantime, its clients were served
>Monday morning.
>
>The Fed is working to create a system for dealing with weak
>institutions that neither allows defaults to clients nor sucks
>liquidity out of the system as acquiring institutions raise money to
>make acquisitions. Just as the Fed effectively brokered this
>acquisition, we expect it to be brokering other ones in the coming
>days and weeks using its new tools. Alternatively, now that it is
>known that the Fed will protect clients as it would protect bank
>depositors, there will be fewer failures than otherwise. This is
>because the kind of pressure that built up on Bear Stearns last week
>may not happen again.
>
>Those old enough to remember companies like Bache remember similar
>actions before. What the Fed has done is in fact not unprecedented.
>What is new is that it now regards brokerage houses and equity
>markets as being on par with banks and money markets. That is
>important, but not earthshaking.
>
>The S&P 500 has shed about 20 percent of its value since October
>2007. In 2000-2001, the S&P fell about 40 percent before beginning
>to recover -- and the 2001 recession was not a transformative event.
>It was just another recession and a mild one at that. Obviously, the
>markets may continue to fall. But we are still struck by how well
>they are holding up in the face of remarkably negative sentiment and
>a sense of intense crisis.
>
>We do not predict the market, but we do regard the equity markets as
>a guide to future behavior of the economy. Given negative sentiment
>and the failure to fall more than it has, it seems to us that the
>markets are saying that the liquidity crisis is being managed. For
>all the apparent gloom, the markets are doing surprisingly well.
>Between this liquidity crisis, soaring oil prices and the falling
>dollar, the equity markets are in fact remarkably calm. But that is
>a leading indicator and it might change on a dime.
>
>We continue to believe that petrodollars and Chinese dollars are
>stabilizing the American system. And the Fed now has reduced the
>threat of structural failure of financial institutions. As we have
>said, a recession is to be expected after six years of expansion.
>But the latest actions by the Fed strike us as evidence that while a
>recession may be likely, it won't be catastrophic.
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