Recent Items

"Grim Outlook" for JP Morgan

Posted on by

A hedge fund correspondent pointed us to an article at Institutional Risk Analytics on the Bear-JP Morgan deal. While we don’t subscribe to its view that Bear was “raped” (please, the firm was going to file for bankruptcy a week ago Monday), it contains an intriguing analysis of JP Morgan.

Differing with popular opinion, IRA argues that JPM is far from a financially strong institution. It has the highest gearing of any of the three large US banks (and remember, that includes the CDO-laden, walking wounded Citigroup) and by their measures, also has the highest level of economic risk per their metrics. JPM’s chickens have not yet come home to roost because its book is heavily weighed toward corporate business, and those problems are coming to the fore later. (The cognoscenti may take issue with their use of RAROC as another measure, but I’m not troubled when making cross company comparisons if you have access only to published financials).

Although IRA does not say so explicitly, the reasoning appears to be that the Fed pushed Bear into JPM’s arms as a way to shore up JPM. If asking a firm to take on a $13 trillion derivatives book, of which only $2 trillion is exchange traded, is a favor, I’d hate to see what punishment looks like.

I believe JPM will regret this deal (assuming it comes off) and not simply for the impact it is having on Jamie Dimon’s reputation. Bear is stuffed with the some of riskiest assets in the credit game: mortgage debt credit defaults swaps, JPM is thus increasing its exposures at time when it would be more prudent to reduce risk, effectively doubling down. As Smart Money describes it:

The Martingale, gambling lingo for what experienced traders call “doubling down,” is perhaps the quickest means to a bloody end. I got my first gray hair the day I understood why the Martingale system, despite all its attractions, simply doesn’t work.

The gambling system, which dates back to a London gaming house in the late 1700s, is completely irrational, yet incredibly seductive. The thinking: If you keep doubling your losing bets, eventually a winning trade will make up for the losses. Like making a deal with the devil, the Martingale system will always comes back to haunt you — and often more quickly than you might expect……

Sure, you might win once in a while with the Martingale — perhaps enough to keep you interested in the strategy. But eventually, you’ll lose it all, in a very quick and undignified fashion. Take it from somebody who has tried it — the Martingale will kill you. It has to kill you. Why? The strategy is inherently flawed. It’s designed to have you increase your bet at exactly the wrong time.

From Institutional Risk Analytics:

To understand the grim outlook for JPM, start the analysis with derivatives. Because of its huge market share in all manner of OTC derivatives, JPM represents a “super sample” of overall OTC market risk. In terms of total size vs the bank’s balance sheet, JPM’s derivatives book is more than 7 standard deviations above the large bank peer group.

Because of this huge OTC derivatives book, the $1.6 trillion asset bank can tolerate just a 15bp realized loss across its aggregate derivatives position before losing the equivalent of its regulatory Risk Based Capital (RBC). And much like the GSEs, JPM’s positions are too big to hedge – despite what Mr. Dimon may say to the contrary about laying off his bank’s risk. And note that we have not even mentioned subprime assets yet.

Look at the balance sheet of JPM’s three main subsidiary banks and the mounting stress from loans losses is apparent. At the end of 2007, JPM aggregated 97bp of gross loan charge offs, 1.25 SDs above peer, and produced a Loss Given Default of 85%, likewise well above peer. The Exposure at Default calculated by the IRA Bank Monitor using data from the FDIC was 202%, more than 2 SDs above peer.

At the end of 2007, JPM’s Tier One Risk Based Capital held by its subsidiary banks was just $88.1 billion, a tiny foundation for the bank’s vast trading operations. The Economic Capital (“EC”) simulation in The IRA Bank Monitor generates an EC benchmark of $422 billion for JPM or a ratio of EC to Tier One RBC of 4.79:1, suggesting that JPM needs almost five times current capital levels to fully support its economic risks.

This EC produces a “Stressed” result for JPM under IRA’s Counterparty Risk Rating and a RAROC of just 0.22%.

While JPM currently boasts the highest Tier One leverage ratio of the top three US banks by assets, in EC terms it appears to be the clear outlier in the marketplace with the highest levels of economic risk vs. capital of any large bank in the US — with one exception: Commerce Bancorp (NYSE:CBH). The relatively large MBS holdings of CBH push its ratio of EC to Tier One RBC over 8:1 in the IRA Bank Monitor simulation.

Why do we take such a dim view of JPM and the US banking sector generally? First, because the US real estate market is not yet even close to the bottom. Second, the commercial real estate and corporate credit sectors are being dragged down by the same deflationary forces that are causing the US economy to slow dramatically. When you consider that US real estate markets and bank loan losses are unlikely to bottom before this time next year, you begin to understand our bearish outlook.

JPM has been lucky so far because its risk book is heavily weighted toward commercial rather than consumer risk, unlike our beleaguered friends at Citigroup (NYSE:C). But like last week’s debacle involving BSC, the fast deteriorating situation at C could provide a catalyst that takes JPM down a couple of notches in the next few months.

We hear in the risk channel that the internal situation at C is going from bad to worse as veteran Citi bankers are in near-mutiny against the new, two-headed management team imposed by regulators. Meanwhile, former CEO Chuck Prince, who is a consultant to C, is leading the discussions with regulators on behalf of the bank and is, in effect, acting as shadow chief executive of C. One insider predicts that the C annual meeting in several weeks time will be “very messy” and notes that acting Chairman Robert Rubin is nowhere to be seen.

Keep in mind that C, JPM and many other large banks are still trying to get their arms around the full dimension of the risks facing their institutions, this even as bank loan default rates remain well-below long-term averages. All of the subsidiary banks of C, for example, reported 127bp of charge offs in 2007, a full 2 SDs above peer but well below 1991 loan loss levels.

Click here to see a loan default series for Citibank NA going back to 1989. Notice how low bank loan charge offs were in the 2006-2007 period compared with previous recessions. Of note, the ratio of EC to Tier One RBC for C at the end of 2007 was 3.46:1, significantly better than JPM, but still suggesting that C really needs more than 3x current capital to address its economic risks.

BTW, the maximum probable loan loss (“MPL”) calculated by The IRA Bank Monitor for C over the next 12 months is 400bp or well above 1991 loan default levels. We expect to see the MPL for all of the large money center banks move higher as 2008 progresses.

Print Friendly
Twitter0DiggReddit0StumbleUpon0Facebook0LinkedIn0Google+0bufferEmail

37 comments

  1. a

    Well, grim outlook for all the American banks. Who goes first? is about the only interesting question.

  2. a

    Incidentally I think this is a beautiful quote from 1933 via IRA: “My reason for presenting these hitherto uncorrelated facts of financial history is the hope that they may dispel, in part at least, the miasma of propaganda created by the great minds of Wall Street to divert from themselves responsibility for the country’s present plight. The Federal Reserve System did not fail to function through an inherent weakness. It was debased by minds that were as stupid as they were ruthless and greedy.”

    History may be written by the victors, but economic history is written by those with money – which, I guess, is not much different. Economic historians tell us that the Depression was caused by the Fed. IMHO it was caused by greed and inequality, and the Fed, whatever it did, wasn’t going to be able to right what was a sinking ship. We can already see the same forces at work today, and undoubtedly in thirty years time, when the best mind of that generation, bought and paid for by the moneyed classes, write about these times, it will be the Fed and the government’s fault, yet again.

  3. eh

    (please, the firm was going to file for bankruptcy a week ago Monday)

    I have yet to see an analysis that shows BSC is insolvent, or in more immediate danger of becoming (asset) insolvent than any other Wall St investment bank (see e.g. Will Citibank Survive?). The generally accepted reason for the JPM takeover deal was that BSC lacked liquidity to respond to what was, in effect, a run (perhaps orchestrated). And the Fed has now come up with ways to provide liquidity to PDs like BSC — PDCF and TSLF. So on that basis aren’t there grounds to speculate about what would have become of BSC were they to have had access to that source of liquidity?

    Too bad the earlier discussion about this seems to have outlived its ‘discuss by’ date.

  4. TallIndian

    Also, filing for bankruptcy doesn’t always mean share holder euqity goes to 0.

    It affords shareholders protection while they attempt to orderly meet their liabilities.

    We Hindus have a saying, “karma is a bitch”.

    What happened to BSC was not unlie what BSC inflicted on David Askin nearly 14 years ago (to the date.)

    His fund was liquidated by BSC at what many termed were bargain basement prices when BSC cut off their lines of credit to his fund.

  5. eh

    Also, filing for bankruptcy doesn’t always mean share holder euqity goes to 0.

    I asked a question about that as well — see the 2nd link in my first comment. I think in this case especially there are reasons to wonder about this. From the IRA link:

    Thus again the question to Fed of New York President Tim Geithner: Why was JPM involved in this transaction? Why not simply extend liquidity support to BSC as you now offer to every other primary dealer? As and when BSC shareholders litigate over this mess, Geithner et al may be forced to answer those questions in public.

  6. Yves Smith

    I have not had a chance to go through Lehman’s 10-Q to confirm what I was told, but a buddy gave me some notes from the conference call and some comments on accounting changes that say that Lehman’s supposed “earnings” were in fact entirely a product of accounting changes which seem a bit suspect at this juncture, But no one on the call questioned the accounting changes. Ditto Goldman, although the changes were fewer and not as aggressive.

    My point is that I don’t buy, nor to I see any reason to presume, that Bear was solvent. Its management called JPM for help, remember, JPM called the Fed.

    If Bear thought the firm was fundamentally sound, but just needed some extra funding to tide it through a pinch, why were they unable to persuade JPM, the Treasury and Fed of that fact? This is an enormous regulatory stretch, and the Treasury heretofore has been pushing tis famed “private sector solutions.” The $30 billion, now $29 billion line to JPM can be justified only if there was a very big hole in Bear’s balance sheet; the move was unprecedented enough that the powers that be anticipated it would be scrutinized and criticized.

    The Bear, according to its latest 10-K, had $28 billion of Level 2 assets ad $17 billion of Level 3. And the 10-K was as of the end of November.A lot can happen in three months. The CDS markets have gone haywire since then and Bear was a huge protection writer, Those alone could lead to a bona fide solvency problem that I am certain Bear could have papered over for public consumption in it 10-Q (remember, quarterlies are not audited).

  7. S

    See CR comments on Wells Fargo CEO. Not encouraging but muight as wll get long WM for the trade is coming. Then there is Fuld. Lehmann EPS were a joke. They changed their tangible capital ratio and not one analyst asked after their professing lower leverage why total assets went UP ($786B vs $681B – vs equity capital of $25B?) Doesn;t look so good when you consider the $90 billion mortgage portfolio and the other corpses that are burried in the “asset” pile. Lehman is a house of cards and the irony is their gloating about being the second to GS – I don’t think so. Lehman management must be in awe of the likes of DLJ management which managed to sell at the peak and then go on and sell again at the peak (BX).

    LEH Q1
    “Net revenues for the first quarter of fiscal 2008 reflect negative mark to market adjustments of $1.8 billion, net of gains on certain risk mitigation strategies and certain debt liabilities.”

    “Prior to fiscal year 2008, our definition for tangible equity capital limited the amount of junior subordinated notes and preferred stock included in the calculation to 25% of tangible equity capital. The amounts excluded were approximately $237 million, $375 million and $117 million in the fourth, third and second quarters of 2007, respectively; no amounts were excluded in prior period”

  8. eh

    …why were they unable to persuade JPM, the Treasury and Fed of that fact?

    This presumes that Wall Streeters are all good guys who just want to help.

    I don’t think so.

    Paulson’s gift to his bankster buddies

    Anyway, given the introduction of the PDCF and TSLF at about the same time, you have to wonder…

    Maybe in the end BSC would have proven too weak to withstand the run, given its assets. But at this point I have not seen that case made definitively — as one of your comments put it (so well): to date it’s been the equivalent of closed casket funeral.

  9. Anonymous

    NYT article this morning says that Fed did not disclose that discount window would be open to Bear until after the deal was signed. If Fed were private, that would be known as a failure to disclose a material fact.

  10. Yves Smith

    eh,

    JPM maybe, but the Treasury and Fed were exposing themselves to a lot of criticism by getting involved. JPM bought something it had no time to evaluate. Their is no way you could do due diligence on a reasonable sized industrial operation over a weekend, particularly if they hadn’t been planing for it, much the less something as complex and with as many valuation issues as a securities operation.

    If you are going hat in hand to someone because you have managed your affairs so badly that you have a liquidity problem (and by all accounts, Bear did a terrible job of addressing the concerns), the onus is on you to say how much you will need, why you think it will be enough, why you are good for the loan, and how long you think it will take you to pay it back. The reports on what transpired all indicate that Bear realized it was in deep doodoo on Thursday at 4:30 PM and called JPM. It also sounds as if they threw themselves on the mercy of JPM and the Fed and were not at all prepared.

    They threw themselves on the mercy of the court. They have only themselves to blame for the outcome.

    $30 billion is a huge amount of support for a single player. The original TAF was only $40 billion, and that was for the entire US banking industry. Similarly, Lehman got only $2 billion in additional backup lines. yet the press reacted as if that was a good number (as in it was enough to be useful). I have trouble believing the Fed would pony up that much if it didn’t think there was risk.

    Conversely, Diimon had to say the deal is good for JPM to his shareholders. All acquisitions by definition are good for shareholders. One can also argue he felt he had to pay more because he knew he’d have employee revolt. In a securiites firm, your most important assets ride up and down in the elevator. If he lost key people in the operation he wanted to keep (and even the ones he wants to integrate), he’d have an enormous operational mess on his hands, and could lose boatloads. The employees were in a position to extort him, and Bear has a particularly high level of employee stock ownership.

    I also note, although I do not know when they called him in, that Bear was represented by Rodgin Cohen, who is arguably the best bank regulatory lawyer in the US and has worked extensively with the Fed (he would undoubtedly have had many dealings with Paulson; Goldman also uses his firm heavily). If anyone could have gotten the Fed and Treasury on Bear’s side, it would have been Cohen. He has enormous credibility.

  11. Yves Smith

    Anon of 11:14 AM,

    With all due respect, I don’t deem that to be relevant. Do you expect the IRS or the cops to be fair? You play by their rules. It is not a level playing field in dealing with regulators, nor should it be. The Fed has zero obligation to Bear, it isn’t a regulated entity, its only concern was the financial system, and in my view, Bears’ shareholders should have gotten zero. This is a terrible precedent. The only previous bailout I can think of where the Feds did not require the stockholders to be wiped out was the Chrysler loan guarantee in the early 1980s. It was hugely controversial at the time. At least Lee Iacocca took a $1 salary.

    By definition, the government has more power than private actors. That’s the name of the game. No private actor would or even could have given a $30 billion backup over a weekend either.

    Tallindian,

    The Fed is generally described as quasi public. From Palgrave’s Dictionary of Money and Finance:

    The Fed was a compromise between two earlier central banking traditions in America. Each was tried for extensive periods and then rejected. The first was the tradition of a corporate central bank, chartered by the State but owned wholly or greatly in part by private investors……After the corporate central bank was rejected, the USA flirted for seven decades with a second central banking tradition, namely, having the government’s fiscal authority, in this case, the US Treasury Department, serve also as the central bank.

    For instance, the twelve regional Feds act as fiscal agents for the Treasury….

  12. Yves Smith

    Anon of 11:14 AM,

    Even if the Fed were private, it did not sign the merger agreement with Bear and therefore has no disclosure obligation. The Fed’s deal is a securitized debt facility with JPM. Thus even in that scenario. the Fed would have no obligation to Bear, since it is party to no deal with Bear.

  13. Anonymous

    Yves–come on now, the Fed was a party to the JPM takeover. It wouldn’t have happened without Fed support (now twice).

  14. Yves Smith

    Anon of 12:07 PM,

    You invoked a legal concept that is not applicable.

    The Fed has no contract with Bear. Any duty to disclose would arise only via a contractual relationship. It has no derivative duty to disclose by being a party to an agreement with JPM.

  15. Yves Smith

    sk,

    With all due respect (and I appreciate that you comment regularly), why should primary dealers have access to the discount window at all? These are private entities that are not regulated by the Fed. At least banks are subject to capital requirements, more extensive regulation than securities firms, and regular proctological exams as conditions of being eligible for emergency help,

    The average annual pay across the securities industry in New York (mind you, this includes secretaries and back offices staff) was $387,000 last year. And you think it’s OK to let these guys socilaize their losses? They have so conned you that you feel sorry for them?

    The Fed clearly needs a better PR agent. The Street has really managed to spin this one.

    As much as I hate handouts, I’ll take handouts all day to homeowners over this. At least they made no claims as to their financial expertise.

  16. Yves Smith

    eh,

    Thanks for putting the link up. I did see the Interfuidity post, which is very good. There is something that doesn’t pass the smell test about the Feds using Bear’s marks as of March 14 for the purposes of valuation (as opposed to as of the time the assets are transferred to the facility, which would be the normal way to do this), but I haven’t focused enough to figure out what this is trying to finesse.

  17. Anonymous

    You say JPM hasn’t been hurt yet because its book is heavily weighted toward consumer business, but the article reports that “JPM has been lucky so far because its risk book is heavily weighted toward commercial rather than consumer risk.”

  18. Anonymous

    That kind of conceptual typo can be hard to catch, even working on one short document while wide awake. Keep up the good work!

  19. sk

    No dispute, Yves, since the broker-dealers(I’ve tightened my category there ) don’t have to meet Fed regulatory requirements and don’t have Fed examiners in situ , then why should they have access to the discount window ? My issue is that the _others_ have been given access ( which they are using ) and BSC doesn’t get to play cos well it was red-carded before this new game started – and that’s playing favorites, not just protecting against systemic risk; they also played favorites by backstopping JPM but for JPM, being teacher’s pet may not work out so well ( IMO and also as per some analysts ).

    Its beating a dead horse I know and I’ve always had issues with the Fed but this particular lot dismay me especially when they get involved in the rough stuff – I have an image of some kindly headmasterly type being brought in to solve a dispute amongst some kids in Borstal ( do they have that institution anymore? ) – it doesn’t work and they’ll take his cap and gown off, chalk his back and all along, pour ink in this briefcase and all the time he’ll think he’s succeeded. I _hope_ BB reads this – this is the contempt I hold him in.

    -K

  20. eh

    There is something that doesn’t pass the smell test about the Feds using Bear’s marks as of March 14 for the purposes of valuation…

    Yves,

    Well, I would agree. But I would go further and say that about the whole deal.

    It makes perfect sense if you believe — like I do — that 1) the Fed is actively involved in propping up Wall St (see your later post) in manifold ways, and 2) one way to do that here was to, at all costs, avoid bk so that no marking to market of BSC assets took place. Because too many other players hold similar paper.

    I read recently that it was the Fed and Treasury who pushed for the low share price. And this makes sense too if you accept that the Fed was looking for a ‘sacrificial lamb’, a company they had (practically, I mean $2/share is nothing) let go under, so it will be easier later to deflect the ‘bailout’ accusation. Now they can say ‘See, we didn’t bailout Bear Stearns’.

    The media dereliction in bringing these issues to the fore has been shocking. But most of it is buffoonish cheerleading anyway.

    I really thought there was a chance here that Americans would wake up to the folly of a FIRE economy. Now I’m not nearly so optimistic about that.

  21. Lune

    2 comments-

    1) Citigroup is being managed by the regulators? I’m not a banker but I thought this was only done when a company is dangerously close to being declared insolvent and taken over. Is C in that dire shape? I figured at some point they’d be bailed out, but didn’t think it was coming this quickly.

    2) I’m a contrarian at heart, and I too think JPM might end up on the losing end of this deal. Their best case scenario was to have wrapped this up last week, with a $2 share price and an ironclad Fed guarantee of taking the first loss on $30bil Then execute the repo and absorb the employees as fast as you can before anyone in the press or the regulatory world has time to analyze what you’ve done. But in these deals, the slower things go, the slower they go, and eventually, the deal dies.

    The real kicker here is what happens when the Congressional hearings start. They do not want this deal to be picked over by Congress. If you think the Fed was being unfair to Bear, wait until Congress gets in front of the TVs in an election year. I think Bear and JPM will be made very public whipping boys (the former for failing, the latter for trying to profit from the failing).

    The hearings where banking CEOs were hauled in about executive pay were largely ceremonial, as Congress has little authority to force compensation standards (yet…). But Congress has tremendous influence on the Fed (both hard statutory authority and soft pressure) and can force this deal through on much more favorable terms to the general public. My best guess at to what they might do: either force BSC into bankruptcy court, and auction off pieces, thereby starting the mark-to-market firesale that everyone is afraid of, or force JPM to takeover BSC, but without any public (i.e Fed) guarantee about taking losses.

    Either situation will be bad for IBs in general. But it will make for great TV! (I need to start Tivo’ing CSPAN :-)

  22. st

    “There is something that doesn’t pass the smell test about the Feds using Bear’s marks as of March 14 for the purposes of valuation”

    When I read Whalen’s view that the Fed had be “rolled” by JPM, I thought, if true, that’s a dumb thing to do to a regulator. It also occurred to me that since undoubtedly it’s the least liquid of assets that JPM will want to put to the Fed, the Fed could just insist on a 95% haircut. (I.e. if the Fed felt rolled, it could back out of the deal without backing out of the deal.)

    My guess is that the 3/14 valuation date is JPM’s insurance against making a deal like this with a quasi-governmental institution.

    “I have an image of some kindly headmasterly type being brought in to solve a dispute amongst some kids in Borstal ( do they have that institution anymore? ) – it doesn’t work and they’ll take his cap and gown off, chalk his back and all along, pour ink in this briefcase and all the time he’ll think he’s succeeded.”

    I think you underestimate the wilyness of this Fed. Yes, the Fed gave up some credibility with the $2 to $10 switch, but this Fed is playing to win the war not the battles. What makes you think the Fed didn’t see that coming — and accept the cost?

  23. Anonymous

    JPM had to take over Bears because JPM derivative counterparty risk needed to be contained. Now for the value of the Bear going from $2 to $10 per share. That is pretty simple. Bear employees need to have a incentive to stay, what would happen to their Bear’s deriviative portfolio, if the bankers there “walked away”. Also the short sellers of other counterparties to Bear would have something to gain if the Bear went bankrupt.

  24. Yves Smith

    sk,

    I see your point, but this may be an unintended consequence again. Remember, the Fed has never had this kind of program for primary dealers, and there was language in their initial press release that suggested they wanted the dealers to act (effectively) as conduits for customers (which means the Fed was offering to let hedge funds, among others, have access to the Fed window. I failed to make noise about that at the time. Big omission).

    Thus the Fed has announced a delayed implementation of the facility, pending dealer comments. I had the impression there were bona fide mechanical issues to be sorted out. Thus Bear’s fate may have merely been hugely bad luck intersecting with less than stellar management. Recall the saying, ‘Never attribute to malice that which can be explained by incompetence.”

    Lune is right that if JPM did a dirty to the Fed, that would be a world class strategic error, particularly in this deteriorating credit and increasingly pro-regulatory environment. You do not mess with your primary regulator.

    Having said that, it is also entirely possible that JPM did play the Fed. Those weekend negotiations were rushed, there was a great deal of panic. All JPM would have to do is fan existing worries. And by virtue of being Bear’s clearing bank, and therefore perceived as having insight, they’d be taken very seriously. And I also think it is well within the realm of possibility that the mistakes in the contract were by design to force the price to be retraded (although if the worry was employee retention, you’d think cash offers to the important people would do. Why enrich Joe Lewis?)

    In the end, we are arguing from different assumptions about the facts, and if you differ on facts you can never reach agreement.

    We are very unlikely get the information that would enable us to determine whether Bear shareholders were screwed (or victims of bad luck), whether the Fed was taken, or whether JPM has just bought a big turkey.

    The missing facts were

    1. What were Bear’s assets really worth on the day they called JPM? Given the Level 3 and CDS exposures, there is a great deal of uncertainty in whatever numbers Bear had. And as a public company, Bear had every reason to use flattering assumptions to the extent permissible (you’d be far less likely to see this sort of monkey business in a privately owned firm).

    2. How bad did things look to JPM and the Fed when they came in? The $30 billion backup screams that something did indeed look dreadful.

    Unless Bear in the end is forced to go BK, this will remain an unsolved mystery.

  25. Yves Smith

    Lune,

    Good point re Citi and the regulators, and you are correct. I completely missed that.

    It may be possible that the Fed has lowered its danger threshold due to the scary environment, but I wouldn’t count on that.

  26. eh

    My guess is that the 3/14 valuation date is JPM’s insurance against making a deal like this with a quasi-governmental institution.

    But there’s a far more obvious/transparent reason for doing this: because JPM and others hold similar securities, and no one wants to ‘mark to market’, since this makes it a LOT more difficult for the others to avoid doing the same. So this is one big not-so-ulterior motive for getting this deal done, and doing so quickly, i.e. before it gets too much scrutiny.

    For the same reason the Fed announced it will accept fictitious valuations (from “pricing services”) of TSLF collateral.

    It’s all part of huge charade going on to string out the days of reckoning.

  27. sk

    re: Yves

    I agree with just about all of the facts you’ve reviewed there and have little to argue about your speculation around it.

    I look forward to watching this unfold – I dropped reading true life books about serial killer a long while ago when I discovered how evil business is :-) (Chungi Jim Slater, deLorean shakedown of the British govt, Barbarians at the Gate )

    Its all grist to the mill.

    -K

  28. Yves Smith

    Anon of 9:38 PM,

    Little pigs get fed, big pigs go to slaughter. They are risking having this deal upended and winding up in bankruptcy, which is fine by me. They are assuming that they can break as much china as they want and the deal will go through, now that it has been demonstrated that they are too big to fail.

    This sort of behavior is what got them in trouble in the first place (LTCM, their conduct in their hedge fund failures alienating everyone on the Street). The securities industry is an odd one in that your competitors are your customer and partners (Goldman has invited management from other Wall Street firms to its leadership development programs, for instance. You’d never see GM do that for Ford). Other broker dealers could have easily killed the whisper campaign against Bear via a few raised eyebrows and belly laughs. They remained silent instead and look what happened.

  29. Anonymous

    Jamie Dimon is a director of the New York Fed. Go to he New York Feds website and look at the list of directors. His term expires December 2009. Yves, Is this a conflict in your opinion?

  30. Yves Smith

    Anon of 11:27 PM,

    If the Fed were a normal corporation, yes, and it certainly does not look right.

    But a colleague of mine (one of the key actors in the RTC) was a director of the Boston Fed. He made it sound like a ceremonial post, that the directors were pretty removed and not involved in anything consequential. And in his current role, he’d have an incentive to play that up rather than down, so I believe him.

  31. Expat

    Citi could be managed by crack whores and be a better run company than it was under Chuck “the Dancing Fool” Prince. Can anyone name one competent, honest manager in the entire institution?

  32. eh

    (LTCM, their conduct in their hedge fund failures alienating everyone on the Street)

    Maybe a case can be made that Bear behaved responsibly then, in a market sense, and the others did not. Especially if you consider how harmful (‘moral hazard’) an expectation of intervention can be, and this expectation of intervention is sort of anchored in LTCM.

Comments are closed.