Comments on naked capitalism: Does Bear Have JP Morgan Over a Barrel?

[Their value is always merely capitalised income, ...

2008-03-24T23:34:00.000-04:00

[Their value is always merely capitalised income, that is, the income calculated on the basis of a fictitious capital at the prevailing rate of interest. Therefore, when the money-market is tight these securities will fall in price for two reasons: first, because the rate of interest rises, and secondly, because they are thrown on the market in large quantities in order to convert them into cash. This drop in price takes place regardless of whether the income that this paper guarantees its owner is constant, as is the case with government bonds, or whether the expansion of the actual capital, which it represents, as in industrial enterprises, is possibly affected by disturbances in the reproduction process. In the latter event, there is only still another depreciation added to that mentioned above. As soon as the storm is over, this paper again rises to its former level, in so far as it does not represent a business failure or swindle. Its depreciation in times of crisis serves as a potent means of centralising fortunes.] - Karl Marx, "Capital" (Vol. III), Chapter 29 - "Component Parts of Bank Capital".

Then there is the BlackRock angle as it was "tappe...

2008-03-24T18:35:00.000-04:00

Then there is the BlackRock angle as it was "tapped" by the Fed to manage the Bear 30 million in illiquid assets. And in a marvelous coincidence:
BOSTON (Reuters) - Money management firm BlackRock Inc (BLK.N: Quote, Profile, Research) and hedge fund Highfields Capital Management are backing a new firm that will buy up distressed mortgages, betting that investors are ready to snap up bargains in the beaten down sector.
The new company, Private National Mortgage Acceptance Company, which will be known as PennyMac, plans to raise capital from private investors and will help borrowers restructure loans to avoid foreclosure."
http://www.reuters.com/article/bankingFinancial/idUSN2433664220080324

Long time reader, first time posting.Excellent com...

2008-03-24T15:23:00.000-04:00

Long time reader, first time posting.

Excellent comments, specifically by Richard Kline.

The Fed is once again suckered into a mob job by the Street. I fully expect more sucker rallies ahead assisted by margin calls and orchestrated buying to continue mesmerizing the public and the other CBs so that they can re-direct their funds towards getting into US equities so that another delusion can surface.

The Fed, the Street and their mamma will do anything&everything to keep their game intact (crony capitalism) especially in an election year.

Merci for an insightful vibrant blog, Yves.

Well 10 USD it is. Gosh, the Fed is looking more ...

2008-03-24T10:05:00.000-04:00

Well 10 USD it is. Gosh, the Fed is looking more and more like an idiot every day. And Wall Street has to get control over its instinct to take everyone to the cleaner; making the Fed appear to be a spineless sycophant may be good in the short-term but when the next problem hits, it does no one no good.

Oh, and let's not forget: Before BS got the knive...

2008-03-24T09:11:00.000-04:00

Oh, and let's not forget: Before BS got the knives the other investment banks couldn't post crap securities for solid treasuries. Now, two weeks later, after 'the fatality,' ALL OF THEM CAN. And they promptly helped themselves to close to $30B 'to show there is no stigma' in stealing from the public. . . . That's the payoff to the other i-banks for helping JPM in this, together with eliminating a competitor.

"Oh yeah, baby, lemme show youse how we do the New York hustle." I think I lost my appetite for breakfast.

ickk, ickk, ickkkk Nothing in this deal seems t...

2008-03-24T08:54:00.000-04:00

*ickk, ickk, ickkkk*

Nothing in this deal seems to be, or have been, on the level; surprise, surprise. Let's see: BearStearns did _not_ max out it's credit lines when on the way down. Right now, it's stakeholders are sure acting like they still have a stake; if BS was reali-o, truly-o insolvent it's very hard to see them holding out like this. Clearly, BS doesn't think it's insolvent; beaten down and wounded, with six knives in its back, yes, but not insolvent. I smell conspiracy, here.

. . . With Carlyle Capital, we watched it's creditors _forcibly render_ it insolvent, then tear it apart for the juicy morsels of its sweetbreads, like big dogs ripping up the littlest dog in the pound. Two weeks ago, it sure looks like Bear's competitors tried to pull the same thing, forcing a run on BS, then ALL OF THEM CALLING PAULSON ON HIS PERSONAL PHONE AT HOME SUNDAY 15 MAR BEGGING 'FOR THE AUTHORITIES TO ACT,' as 'twas reported in the papers. JPM gets the Fed to hand them thirty mega-large to put a rival out of business and hand them the best assets. No wonder Dimon is desperate to have the steal go through before BS's stakeholders, knocking furiously on the inside, can get the law to pry open the lid on this closed casket funeral.

This is just plain fugly. It is also Exhibit A on why, if a firm is about to be insolvent, the gubmint needs to take the miscreant in hand _personally_ instead of letting the plutocrats dictate what is best for them.

*yick, yickk, yicckkkk*

I believe this shows how difficult it is to stop t...

2008-03-24T06:53:00.000-04:00

I believe this shows how difficult it is to stop the bailout process one it begins. Obviously, JPM pulled the wool over the Fed's eyes a week ago, and now is trying to snooker them again. The Fed will acquiesce as they have showed themselves to be completely spineless. All hail crony capitalism.

As much as the prospect of a collapse of Bear appe...

2008-03-24T05:42:00.000-04:00

As much as the prospect of a collapse of Bear appears horrific, I do not see how the Fed can bail out the number of institutions that are going to need support without ballooning its balance sheet, and that risks a dollar crisis. And especially in an election year, there is no way legislation to rescue failed or about to fail banks will come into being either.

So the failure of a large firm seems inevitable, Better to do it sooner rather than later. The longer the delay, the shakier the system will be (I don't see fundamental improvement till the housing mess resolves, which historical precedent plus the degree of overhang and rental vacancy rates says won't be till 2011). Conversely, a failure will lead to price discovery, which may lead to market clearing, and will encourage some of the bolder investors sitting on the sidelines to step forward.

And yes, the political fallout would be considerable, and highly entertaining.

The NYT leak creates a big mess for all the principals. The Bear crowd seems emboldened by JPM's fix. If the deal craters because they overplay their hand or the Fed gets huge heat from the press and behind the scenes from Congress, Bear is toast. I can't see anyone else rescuing them.

For the good of the country, I hope Bear's stockho...

2008-03-24T05:19:00.000-04:00

For the good of the country, I hope Bear's stockholders vote the deal down and file bankruptcy. Then a bankruptcy judgte might throw out all the deal's provisions and leave JPM and Helicopter Ben NOTHING. Should Bear file bankruptcy we may find out what really motivated the deal. Consider, bankruptcy is the deal's counterfactual. This is what the deal was to avoid. Why?
Because a bankruptcy judge should oversee an auction of Bear's assets. This auction would set open prices. Prices which might indicate Citi, JPM, GS, etc., all need to take massive writedowns. That will not do, hence the deal.
By pushing Bear into bankruptcy, we have Wall Street's equivalent of a suicide bomber. I think when viewed through this lens, JPM has no leverage over Bear. With enough disclosure, some people may go to prison. Would Hank Paulson's designated hit man, Mike Garcia send them? No way, but Robert Morgenthau, Manhattan DA, who owes Helicopter Ben nothing might. Remember Morgenthau blew up BCCI in 1991.