naked capitalism

a says:

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.

TallIndian says:

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.

Yves Smith says:

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).

S says:

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”

Anonymous says:

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.

Yves Smith says:

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.

Yves Smith says:

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.

Yves Smith says:

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.

Yves Smith says:

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.

Anonymous says:

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.”

Anonymous says:

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

eh says:

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.

st says:

“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?

Yves Smith says:

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.

eh says:

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.

sk says:

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

Anonymous says:

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?

Expat says:

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?