Credit crunch Bear Sterns...

[Viv]

The investment bank JP Morgan today raised its rescue takeover bid for Bear Stearns from $2 to $10 a share in an effort to secure a swift deal by averting a lengthy bust-up with disgruntled investors in the crisis-hit Wall Street institution.

Under the renegotiated buyout, JP Morgan will pay nearly $1.2bn in stock for Bear Stearns rather than the $236m agreed a week ago. But the superior price met with resistance at the Federal Reserve which is guaranteeing Bear Stearns' riskiest assets with public money.

To get the transaction done quickly, Bear Stearns' board is to issue 95m new shares allowing JP Morgan to take an immediate 39.5% stake.

"We believe the amended terms are fair to all sides and reflect the value and risks of the Bear Stearns franchise," said JP Morgan's chief executive, Jamie Dimon.

The higher offer sent Wall Street shares sharply higher as it helped to restore shaky confidence in the banking system. By midday in New York, the Dow Jones Industrial Average was up 221 points to 12,582

All week, employees and investors in Bear Stearns have raged against the knockdown price at which the firm was to be sold. Analysts believe up to 8,000 of the bank's 14,000 staff could lose their jobs and many employees had savings and pension funds tied up in Bear Stearns shares.

According to reports in the American media, the degree of fury has been so intense that Bear's 74-year-old chairman, Jimmy Cayne, has acquired an armed bodyguard.

Faced with the prospect of a lengthy legal battle with leading shareholders including the British billionaire Joe Lewis who has a 9% stake, JP Morgan came back to the table with more money.

But the renegotiation met with scepticism from the US authorities who are anxious to avoid setting a precedent of using taxpayers' money to support a deal in which shareholders get significant compensation for an investment in a failed enterprise.

Officials at the Fed and the US Treasury felt that their support for a rescue of Bear Stearns was easier to justify in political terms if a deal was the only option to avert bankruptcy – and if investors got little benefit.

"The Federal Reserve is in a very difficult position here," said Richard Bove, a banking analyst at stockbroker Punk, Ziegel & Co.

"They're defending the US taxpayer, they're defending the banking system. They're looking at what precedents they're establishing in this situation. They have much broader things to think about than this one transaction with Bear Stearns."

Under the amended deal, JP Morgan will take the first $1bn of any losses incurred in Bear's portfolio of derivatives and mortgage-backed securities. The Fed will take the next $29bn.

But the Fed also stands to benefit from any potential upside. It will employ the investment firm Blackrock to "manage" Bear's riskiest assets and the public warchest will collect any profits if the portfolio's value increases.http://www.guardian.co.uk/business/2008/mar/24/creditcrunch.useconomy

I am not sure exactly what is going on here and hope someone with more knowledge can enlighten me.

The article states that the bank is being bought by JP Morgan, so the Fed is involved in what respect? Are JP Morgan to be subsidised by the Fed? Or just the losses will be?

I understood in the UK Northern Rock situation that the bank was a viable going concern and simpler to unload.

[Finny]

I am not sure exactly what is going on here and hope someone with more knowledge can enlighten me.

The article states that the bank is being bought by JP Morgan, so the Fed is involved in what respect? Are JP Morgan to be subsidised by the Fed? Or just the losses will be?

I understood in the UK Northern Rock situation that the bank was a viable going concern and simpler to unload.

JP Morgan and the Fed are two different things. JP Morgan is a Bank that issues Stocks on the Stock Market. The Fed is a US Government Agency. What JP Morgan did was go to the Fed and said "Hey, We'll buy Bear Sterns at discount, to keep it from going under".. and the Fed said "You got our approval to do so, We'll also take on 30 Billion dollars worth of Loans".

So the Fed took the 30 Billion dollars worth of loans and bought them (for the US Taxpayers to pay for). While JP Morgan gets the profitable sections of Bear Sterns.

What happen with Northern Rock was the UK decided to take all of it. Not just the loans. Making it Profitable for the UK Government.

[Viv]

JP Morgan and the Fed are two different things. JP Morgan is a Bank that issues Stocks on the Stock Market. The Fed is a US Government Agency. What JP Morgan did was go to the Fed and said "Hey, We'll buy Bear Sterns at discount, to keep it from going under".. and the Fed said "You got our approval to do so, We'll also take on 30 Billion dollars worth of Loans".

So the Fed took the 30 Billion dollars worth of loans and bought them (for the US Taxpayers to pay for). While JP Morgan gets the profitable sections of Bear Sterns.

What happen with Northern Rock was the UK decided to take all of it. Not just the loans. Making it Profitable for the UK Government.

Thanks. I understand the distinction between the Fed and the bank.

When you say "bought the loans" that entails what? The government (Fed) bought them from the bank. The people who took out the loans will pay the Fed what they owe. The bank has the money up front instead of waiting for loans to be paid. The taxpayer pays the money the government used to pay the bank for the loans?

??

[Finny]

When you say "bought the loans" that entails what?

It means the Fed took on the risk of owning the loans. Its part of the Fed's portfolio, by extension, its part of the US debt, which is paid off by the US Taxpayer.




The taxpayer pays the money the government used to pay the bank for the loans?

Yes, but in this case the Bank didn't make any money. As the Bear Sterns is not a bank anymore. It defaulted (went belly up). But when the Taxpayer due to the Fed taking on these Loans, puts the American Taxpayer at risk as these loans were being defaulted on already.

[Viv]

It means the Fed took on the risk of owning the loans. Its part of the Fed's portfolio, by extension, its part of the US debt, which is paid off by the US Taxpayer.

Yes, but in this case the Bank didn't make any money. As the Bear Sterns is not a bank anymore. It defaulted (went belly up). But when the Taxpayer due to the Fed taking on these Loans, puts the American Taxpayer at risk as these loans were being defaulted on already.

The bank defaulted (went bust)/The loans were being defaulted on.

The loans were being defaulted on already by whom?

So they bought loans which will not be repaid?

[Finny]

The bank defaulted (went bust)/The loans were being defaulted on.

The loans were being defaulted on already by whom?

So they bought loans which will not be repaid?

The loans were being defaulted by other Americans who couldn't afford to pay the loans in the first place (people making less then 50,000 dollars).

Yep, they took on loans were most of them will not be repaid. Which is a loss for every American, not just those who took the loans.

[Viv]

OK Fin, I've got it. Thank you;)

Bad situation for the employees, the taxpayer, everyone I guess. Who profits most in the end? The new owner? Or it is high risk for them even after the Fed take the loans out of it?

[Finny]

OK Fin, I've got it. Thank you;)

Bad situation for the employees, the taxpayer, everyone I guess. Who profits most in the end? The new owner? Or it is high risk for them even after the Fed take the loans out of it?

JP Morgan, as they bought Bear Sterns for less then 1/3rd of its Market Value. Nope, its a safe bet. They'll post record profits in about year.

[Viv]

Newly-nationalised bank Northern Rock has promised to repay its £24bn state loan by 2010 despite warning that it would not break even for three years.

The bank said it would be significantly loss making in 2008, after posting a pre-tax loss of £167.6m in 2007.

Northern Rock also revealed that it will pay former chief executive Adam Applegarth a total of £785,000 as part of his severance agreement.

Shareholders have criticised the payout after the bank ran into problems. http://news.bbc.co.uk/1/hi/business/7321995.stm

How they justify that payout is beyond me...:mad:

The Fed has avoided lending Bear Sterns in the same way by selling to JP Morgan?

[Finny]

LOL... 785,000 pounds? Thats only 1.5 million. Thats nothing for CEOs in the US. IBM's CEO gets paid $24,463,788.

[Viv]

LOL... 785,000 pounds? Thats only 1.5 million. Thats nothing for CEOs in the US. IBM's CEO gets paid $24,463,788.

Oh do excuse me, I forgot that in the U.S. everything is bigger and better...:p

No, I realise it's not much but the point is it should be NOTHING. He should be prosecuted for incompetence, other people are losing their jobs, why is he being paid for not doing his job? Sure if the other employees did not do what they were contracted to do, they would be sacked on the spot. Why are the upper echelons treated differently? This happens again and again in business..

You will say there are extenuating circumstances...?

[Finny]

If the world could prosecute for incompetence... the world would be a different place. That would mean... no Maggie for you..

Now a CEO usually has others do the day to day work. Like a COO,CMO, CFO and the likes. The CEO takes the information provided by those to the Board of Directors who make the final descisions. Employees at the bottom just has as much sway in taking blame as well. As the Employee does the actual tasking.

Cutting 2000 jobs is not that bad, if they did it while a Private Bank.. nobody would blink an eye at it. CEO's are given contracts and packages when hired. Those Contracts and packages are legally bound no matter the outcome of the business. That's the law, law outrules circumstances everyday of the week.

[Viv]

If the world could prosecute for incompetence... the world would be a different place. That would mean... no Maggie for you..

Now a CEO usually has others do the day to day work. Like a COO,CMO, CFO and the likes. The CEO takes the information provided by those to the Board of Directors who make the final descisions. Employees at the bottom just has as much sway in taking blame as well. As the Employee does the actual tasking.

Cutting 2000 jobs is not that bad, if they did it while a Private Bank.. nobody would blink an eye at it. CEO's are given contracts and packages when hired. Those Contracts and packages are legally bound no matter the outcome of the business. That's the law, law outrules circumstances everyday of the week.

Hahh I'd like to see anyone sue Maggie succesfully, for incompetence or anything else...but I do not support anything that woman ever did.

Mmm...I think you did not address the question...why are higher managers treated differently from normal workers? The lower levels carry out the business plan cascaded from above, so they should not be held as liable and the managers should have a risk assessment in place to prevent lower levels from making a mess...if they did not, they are responsible.

I guess if they were held liable they would not take risks and then business would have no entrepreneurs and the economy would cease to function?

What is going on with the Fed at the moment? I understand there was some sweeping change to how things work in that area.

[Finny]

Hahh I'd like to see anyone sue Maggie succesfully, for incompetence or anything else...but I do not support anything that woman ever did.

Mmm...I think you did not address the question...why are higher managers treated differently from normal workers? The lower levels carry out the business plan cascaded from above, so they should not be held as liable and the managers should have a risk assesment in place to prevent lower levels from making a mess...if they did not, they are responsible.

I guess if they were held liable they would not take risks and then business would have no entrepreneurs and the economy would cease to function?

What is going on with the Fed at the moment? I understand there was some sweeping change to how things work in that area.

Why quote her then? :rolleyes:

It does, they have ironclad Contracts. No civil court is going to rule against it. He keeps his money.

The Fed has its hands tied. Yeah, they (Congress and the President) want to give the Fed more power. Basically controlling the whole market, stuff like including the SEC (Securities and Exchange Commission) and FHLB (Federal Home Loan Bank).. its moving the US slowly to Socialism. Many on here would like the idea.. While I hate it.

[Viv]

Why quote her then? :rolleyes:

It does, they have ironclad Contracts. No civil court is going to rule against it. He keeps his money.

The Fed has its hands tied. Yeah, they (Congress and the President) want to give the Fed more power. Basically controlling the whole market, stuff like including the SEC (Securities and Exchange Commission) and FHLB (Federal Home Loan Bank).. its moving the US slowly to Socialism. Many on here would like the idea.. While I hate it.

Quote her?...you assume much, Fin. Yet you know that many times I propose and support a view I do not personally hold, simply to facilitate discussion and analysis. Keep trying to figure me out though, you are good at those kind of things, I think...:p;)

The quote is witty and a good one to demonstrate the futility of personal insult during debate. Her use of it does not detract from the message and I do not dislike her, but her policies. Scots still do not vote for her political party due to her treatment of Scotland...

Socialism v Capitalism is a tricky one. Socialism brought this country to its knees, so although the theory has morality, it does not seem to work in practice.

I have heard the communist/socialist war cry that their political systems have never been properly applied and cannot be judged by the failed attempts in the past, but IMO that does not stand up. If a system is not sufficiently robust to withstand the norms, why risk your country with it?

Capitalism, however, is currently displaying many flaws...in your own country's economic situation. I am not convinced by other aspects, such as the lack of social care within that political system in any case.

Why is socialism the end of the world to you?

[White Rabbit]

...Yeah, they (Congress and the President) want to give the Fed more power. Basically controlling the whole market, stuff like including the SEC (Securities and Exchange Commission) and FHLB (Federal Home Loan Bank).. its moving the US slowly to Socialism. Many on here would like the idea.. While I hate it.
Interesting.

I don't see the motivation of the Bush Administration giving these powers to the Federal Reserve as anything even remotely connected with 'socialism' at all. It looks far more suspiciously fascist (in a strict sense of the term - referring to the 'blurring' of the line between state and corporate authority, giving private corporations the legal authority to act in the name of the state).

I'm a liberal - that means I'm as anti-socialist as I am an anti-fascist. They are just flipsides of the same coin to me. ;)

[Finny]

Interesting.

I don't see the motivation of the Bush Administration giving these powers to the Federal Reserve as anything even remotely connected with 'socialism' at all. It looks far more suspiciously fascist (in a strict sense of the term - referring to the 'blurring' of the line between state and corporate authority, giving private corporations the legal authority to act in the name of the state).

I'm a liberal - that means I'm as anti-socialist as I am an anti-fascist. They are just flipsides of the same coin to me. ;)

Both are the same to me. Socialism can come from the "working councils" or the State. The Fed is a "Governmental" agency.

[White Rabbit]

Both are the same to me. Socialism can come from the "working councils" or the State. The Fed is a "Governmental" agency.
The US Federal Reserve is NOT a government agency. It is a privately held corporation.

[Finny]

The US Federal Reserve is NOT a government agency. It is a privately held corporation.

Its debatable. The Chairman is accountable to Congress. But its Private banks that put the money with Interest to loan the US Government..

[White Rabbit]

Its debatable. The Chairman is accountable to Congress. But its Private banks that put the money with Interest to loan the US Government..
It is entirely a privately owned corporation.

Any governmental oversight comes from the authority granted to the private corporation by the government.

[Finny]

It is entirely a privately owned corporation.

Any governmental oversight comes from the authority granted to the private corporation by the government.

And what part are we disagreeing about? It takes Congress to give the power, the President to pick the Board members and the Chairman. After that it's left to its own doing. With hearings in Congress for the Fed to explain it's actions.