Pathetic Bear Stearns Bailout: Who To Blame

Gerald said:

Henry, can you qualify what it means to be "too big to fail?". We hear this a lot and I generally take it as, "do whatever you want, the government has our back because we're too big to fail". But let's take Bear Stearns as an example: What exactly would happen if they go under and is it really worse if they do? (LTC also comes to mind as does S&L)

Henry Blodget said:

Mar. 14, 11:33 AM

Good question. As far as I'm concerned, no one's "too big to fail," (at least not Bear). In my mind, this is the plea of last resort, and it's designed to scare the bejesus out the Fed, government, etc.

The fear is that if Bear implodes, it will have to suddenly sell every asset on its balance sheet at a fire sale price. This will put pressure on the prices of other assets, which will threaten other company's leverage ratios and force them to sell assets, etc. It could cause a violent market plunge, which the Fed is desperate to avoid.

On the positive side, a clearing event like this would force the market to take the bad news all at once--and find a true clearing price for the securities. It would also sends a signal that the Fed won't always be there as a last speculation backstop, etc.

Both choices are unpleasant, but the market's an effective mechanism, and in this case (and many others), I think the better answer is to let firms fail.

Vermont Trader.. said:

Mar. 14, 11:54 AM

Henry -
1. I think that Bear is to big to fail because of the counterparty risk on their massive derrivatives positions.

2. This reminds me a lot of LEH in 1998. Look at a ten year chart for perspective.

3. People have made a lot of $ on shorts here. That combined with energy;s strength and somoeone on the street is having a good quarter.

4. this is a global problem, not just US. BSC paper and counterparties are everywhere.

5. There is a whole new generation of financial companies that will be the leaders in 5 years. Blackstone, Citadel, Fortress, Apollo. etc.. I would advise selling the old guard and investing in these for the next 5 years.

Vermont Trader.. said:

Mar. 14, 11:55 AM

Henry -
1. I think that Bear is to big to fail because of the counterparty risk on their massive derrivatives positions.

2. This reminds me a lot of LEH in 1998. Look at a ten year chart for perspective.

3. People have made a lot of $ on shorts here. That combined with energy;s strength and somoeone on the street is having a good quarter.

4. this is a global problem, not just US. BSC paper and counterparties are everywhere.

5. There is a whole new generation of financial companies that will be the leaders in 5 years. Blackstone, Citadel, Fortress, Apollo. etc.. I would advise selling the old guard and investing in these for the next 5 years.

GJ Wentworth said:

Mar. 14, 12:01 PM

>This is why there is ultimately only one person who
>is responsible for the Bear firesale: Bear's CEO
>Alan D. Schwartz.

You're drinking similar stuff to what you were in 2000, my friend. How, in the space of ~2 months, could Schwartz have righted this ship. The only one person who is responsible is Cayne, asleep at the wheel (of his golf cart down in Jersey) after smoking too much pot.

Cayne is a disgrace. I hope his BSC stake is as worthless as his stake in the NY Sun when this is over.

Henry Blodget said:

Mar. 14, 12:09 PM

Sorry, yes--unfair to place it all on Schwartz.

bw said:

Mar. 14, 12:53 PM

Why place the blame solely at the feet of Bear management? I'm not excusing Bear management, who deserve their fair share of scorn, but this is a systemic problem.

Nobody was forcing investors to pay $160+ per BSC share a year ago -- or to bid up the share prices of the leveraged firms while punishing those that weren't participating in the feeding frenzy. Nobody was forcing PE funds, hedge funds, finance companies etc. to be buying covenant-lite debt at obscenely low spreads (which cannot be laid at the feet of the ratings agencies).

Chuck Prince's "dance until the music stops" was a great statement of financial irresponsibility, but it also contains a nugget of truth about corporate governance and investor relations these days. How long would Prince have remained on the job had Citi not been dancing and C's 2005-1H06 EPS growth lagged its competitors by a factor of 10?

To me, I don't see the market acting as an "effective mechanism" here, when it veered from frothy ebullience to neurotic panic in a matter of a couple of months. Before I would be ready to trust the market to find a clearing price, I would want it to show evidence of recovering from its schizophrenia.

Michael said:

Mar. 14, 2:34 PM

This is absurd. Why doesn't the Fed just bail out all consumer credit and entice people to stay in homes that are facing foreclosure. The bailout needs to be on the consumer side - which is having the greatest impact on the financial firms.

Ex Sovereign Wealthy said:

Mar. 14, 4:22 PM

Unlike a commercial or savings bank, Bear Stearns is an investment bank and trading house that offers little or no services (or benefit) to the Main Street economy. I don't see why the government is involved in this bailout at all. If this country is truly a market economy, then Bear's highly-paid traders and bankers gambled and lost, and the firm should suffer the consequences. I don't want my tax dollars paying for Jimmy Cayne's new condo at the Plaza.

Timothy Sykes (URL) said:

Mar. 14, 9:37 PM

Yes, let's let them ALL fail, sometimes you gotta be cruel to be kind. Time to build an ark...

druce said:

Mar. 14, 10:12 PM

'emergency funding' is to 'bank' what 'going into rehab' is to 'politician caught molesting little boys'.

merely delaying the inevitable.

as we speak the Fed is doing some arm-twisting and they will split up the carcass for pennies on the dollar.

if they don't unwind it gracefully and instead just let them default... others who are owed by the Bear will be ruined, no one will know who is ruined, no one will trade with anyone, and the markets will crash.

(as Vermont Trader rightly notes. But Bear is not too big to fail, just too big to fail catastrophically, like Enron, so the Feds should intervene to let it fail gracefully like LTCM).

some guy said:

Mar. 14, 11:46 PM

I sincerely hope Bear's rotting corpse soon graces the landfill soon.

It would be a fitting end to a firm that leveraged itself so massively with such little disregard for risk.

I think it would be good if Merrill, and Lehman joined it in the cesspool.

Maybe it would teach the surviving companies a lesson in limiting risk.

brian g said:

Mar. 15, 12:43 AM

I think your all missing the big picture --this is the big one! the money funnel from the masses is dead, a decade of real wage loss -pension loss silent inflation -zero savings -huge debt -has taken its toll -the masses have been living on spec and bubble juice,its now an upside down pyramid --these bail-outs of major players will only make matters worse --snl scandal under gbush senior was minor-- tech bust of late nineties was mainly spec money---- but this one is the american dream turned nightmare! millions who did nothing wrong have seen their retirement vanish, a service based economy cant work--and there is a lot of foreign interference--your american pesos cant buy countries off anymore --and believe it or not most of the world is enjoying this --good luck bananna repuplic

nyongesa said:

Mar. 15, 6:00 AM

brian g,

You started strong and faded fast....fundementals are fundementals, and a good chasis is just that in a fender bender. The country has good bones and just needs a swift kick in the ass to start getting into shape. Compare, germany and japan 1946 and the present. Bananna Republicanism is a state of mind, over-indulgernce on bubblicous (consumer, Main Street, feds, wall Street) is what we have now, and that just needs a good long stint in rehab....hopefully this is a bottom...if the feds could quit their enabling co-dependancy.

jim australia said:

Mar. 15, 6:43 AM

It is getting very serious out there...but will get worse

the property bubble pops the same time as teh credit bubble oh dear...i think you will find things will slowly crumble.

have a look at this vid for more. http://www.youtube.com/watch?v=8Ze0qjjGA-8

Steve Maneli said:

Mar. 15, 9:24 PM

What rate did Bear borrow at from Fed?

Jeff H said:

Mar. 16, 3:20 AM

Henry, you are dead right of course with one very scary exception—its not the Government, or the tax payers who will cough up the dough to cover Bear Sterns, but ultimately the Central Banks of Oil Rich nations and the Chinese who are currently financing the lions share of our national debt. And with our credit system now in full-blown crisis, the United States treasury, ironically, could fall victim to the same set of circumstances as Bear Sterns—a loss of confidence—real or perceived—begets a loss in lender willingness to provide debt financing. Blame the managers.

EasyMoney said:

Mar. 16, 9:24 PM

I'm guessing $2/sh is pretty much a collapse w/o collapsing. My sympathies to those that lost their fortunes here. My eyebrows raised for those large puts/shorts last week.

Marah Marie (URL) said:

Mar. 17, 12:48 AM

brian g, I could not agree more - you summed up the current situation and it's inherent problems perfectly. nyongesa, I want to have your optimistic view, but...it's going to take more than a swift kick to smooth out the fenders and the chassis looks rusted, too.

hi_there said:

Mar. 17, 11:04 AM

i read a cheerleader last week saying that BSC was too big to fail. his/her advice was to buy call options a year out. that was friday, hope he/she didn't buy too many.

Another Question said:

Mar. 17, 12:16 PM

If Bear stock is purchased now, Would the holder get shares of JPMorgan or would they be out of luck when the sale goes through???

Judy Wyler said:

Mar. 21, 2:33 AM

Whom to blame.
Words are the tools of your trade.
If you are so unprofessional as to use basic words wrongly, how can I trust you've written rightly?

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