Bear Stearns: The Smoking Gun(s)

There are at least two ways in which a failure at Bear Stear might have precipitated a decimation of the Wall Street financial community: counterparty risk and the triggering of a chain reaction of failures.

First, as of Nov 30, 2007 Bear Stearns was counterparty to 13 TRILLION in derviatives contracts, as shown in their most recent public 10K Filing with the SEC. (hat tip to jerrbear from PrudentBear for tracking down the reference page. Great catch!).

As of November 30, 2007 and 2006, the Company had notional/contract amounts of approximately $13.40 trillion and $8.74 trillion, respectively, of derivative financial instruments, of which $1.85 trillion and $1.25 trillion, respectively, were listed futures and option contracts...

The Company's derivatives had a notional weighted average maturity of approximately 4.2 years at November 30, 2007 and 4.1 years at November 30, 2006. The maturities of notional/contract amounts outstanding for derivative financial instruments as of November 30, 2007 were as follows:

The second method would be a failure at Bear Stearns that triggers a cascade of failures in the Credit Default Swaps (CDS) market. This is not counterparty risk. The risk here is of CDS wagers on the failure of Bear Stearns itself. This market consists of derivative 'wagers' on the credit failure of specific companies. This market has become a leveraged nightmare, being so large that the failure of any single significant company such as Bear Stearns could precipate a chain reaction of defaults. As you may recall we pointed out some time ago that after subprime the next area to watch closely as a potential tipping point would be the CDS market.














Notice that Bear Stearns is not EVEN LISTED as holding derivatives in any of the tables we looked at in the OCC Report. Is this because of their 'non-bank' status? We wonder how many other US corporations are quietly loaded up with derivatives risks as well, either as a large counterparty, or the target of a pyramid of wagers on failure risk many hundreds of times their actual net worth. What a monster Wall Street has created for the world.

Credit Default Swaps: Is Your Fund at Risk?

Fed Bails Out Bear Stearns, Uses J.P. Morgan as 'Conduit'

The shock of the morning was the 'news' that the Federal Reserve Bank of NY was stepping in to accept the collateral of Bear Stearns in order to prevent the company from insolvency. The shock was that just yesterday the CEO of Bear Alan Schwartz reassured investors that the company had no problems, that their "liquidity was strong." Today we hear that the situation deteriorated 'overnight.'

You will no doubt hear spin and interpretation about this bailout. Here are a few key points that we can state with some level of confidence.

• The Fed is acting as 'lender of last resort' and saving Bear Stearns from insolvency.


• J.P. Morgan is acting as agent or a conduit for the Fed. They are not accepting the risk.


• Bear Stearns could not wait until March 27 when they would have had direct access to the new TSLF. The situation at Bear is so bad that no other bank on the Street would consider providing funding.


• The Fed stepped up in what can only be described as an extraordinary action not seen since the bank failures of the 1960's and 1930's.


• The Fed decided they could not allow Bear Stearns to go through even a managed, orderly failure because it would have set off a major chain reaction of counter-party risk failures that would have decimated Wall Street.


• The deceit and fraud will continue until stopped by an external regulatory force not controlled by special interests.
  
  
  Bear Stearns Bailed Out by Fed, J.P.Morgan
  Friday March 14, 11:34 am ET
  By Stephen Bernard, AP Business Writer
  Teetering Bear Stearns Gets Bailout From Federal Reserve, J.P.Morgan Chase
  
  NEW YORK (AP) -- Bear Stearns Cos., one of Wall Street's venerable investment banks, received a bailout Friday by the federal government and JPMorgan Chase & Co. in a surprise, last-ditch effort to save the 86-year old institution.
  
  The Federal Reserve responded swiftly to pleas from Bear Stearns that its coffers had "significantly deteriorated" within a 24-hour period. Central bankers backed an arrangement to bolster the company, and stood ready to provide extra resources to combat a credit crisis that now threatens one of America's biggest financial institutions.
  
  Bear Stearns, the nation's fifth-largest investment bank, made its fortune dealing in opaque mortgage-backed securities -- a strategy that might be its undoing amid the worst housing slump in a quarter century. The bank has racked up $2.75 billion in write-downs since last year, and faced a possible collapse without some kind of lifeline.
  
  Bear Stearns lost half of its value within 30 minutes of the market open, before clawing back a bit to be down 41 percent, or $23.51, at $33.49 by midday. The news rattled investors, pushing the Dow Jones industrial average down about 150 points.
  
  JPMorgan Chase, the nation's third-largest bank, agreed to pump more money into Bear Stearns to keep it in business, but did not divulge how much it was spending. Top executives from both companies were in talks, and were even considering the outright sale of Bear Stearns to JPMorgan, according to a person familiar with the talks who was not authorized to speak on the record.
  
  Bear Stearns said in a statement that it is working with JPMorgan Chase to find permanent strategic alternatives to alleviate their cash problems.
  
  JPMorgan Chase -- which has been hurt far less by the mortgage morass than other investment banks -- is providing secured funding to Bear Stearns for 28 days, backstopped by the Federal Reserve Bank of New York. Bear Stearns and the Fed approached JPMorgan Chase about the financing and a potential deal, according to the person familiar with the talks.
  
  Rumors have persisted throughout the week that Bear Stearns was facing major cash flow problems, but the investment bank's chief executive initially denied those rumors.
  
  "Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity," the bank's president and chief executive, Alan Schwartz, said in a statement Friday. "Amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated."
  
  In a memo sent to employees, Schwartz said the temporary financing would allow the company to "get back to business as usual."
  
  The company has struggled since the middle of last year because of the fallout in the mortgage and credit markets. Last summer, two hedge funds worth billions of dollars managed by Bear Stearns collapsed because of bad bets on securities backed by subprime mortgages -- loans given to customers with poor credit history.
  
  JPMorgan Chase said the financing would not expose its company to any material risk, though its shares dropped 1.4 percent, or 53 cents to $37.58.
  
  AP Business Writers Madlen Read and Joe Bel Bruno in New York and Martin Crutsinger in Washington contributed to this report.
  
  
  JPMorgan Chase and Federal Reserve Bank of New York To Provide Financing To Bear Stearns
  
  NEW YORK -- (Business Wire) --
  
  Today, JPMorgan Chase & Co. (NYSE: JPM) announced that, in conjunction with the Federal Reserve Bank of New York, it has agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days. Through its Discount Window, the Fed will provide non-recourse, back-to-back financing to JPMorgan Chase.
  
  Accordingly, JPMorgan Chase does not believe this transaction exposes its shareholders to any material risk. JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company.
  
  JPMorgan Chase & Co. (NYSE: JPM) is a leading global financial services firm with assets of $1.6 trillion and operations in more than 60 countries. The firm is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management, and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase serves millions of consumers in the United States and many of the world's most prominent corporate, institutional and government clients under its JPMorgan and Chase brands. Information about the
  firm is available at http://www.jpmorganchase.com/. Contacts: JPMorgan Chase & Co.
  Investors: Julia Bates, 212-270-7318 or Media: Kristin Lemkau, 212-270-7454

Standard & Poor's Sees "Light At the End of the Tunnel"

If you were watching the US equity markets today and wondered what caused the sharp short-covering rally off the big gap down open due to the Carlyle Group hedge fund failure, it was the report issued by Standard & Poor's cited below that indicates that they see 'light at the end of the tunnel.'

Tanya Azarchs, the S&P analyst who helped Scott Bugie to write the report, appeared on a live interview on Bloomberg Television and reiterated the key points of the report, and the optimistic view they have.

There was one important caveat she mentioned. They assume that the housing markets will not continue to deteriorate, with an eye to the credit indexes in particular. There is one important caveat that we will stress, that the S&P report addresses ONLY what they perceive to be the subprime mortgage debt market.

When pressed by Deidre Bolton, the Bloomberg interviewer, that this seemed like a big assumption and that some have already said that this call is premature, Tanya justified S&P's research conclusions by saying, "Well, this is our best guess."

You can't make this stuff up.

In all fairness to Tanya, who seems like a very nice, intelligent person and an excellent analyst, no one really knows when this will end. And in fairness to the midnight riders of Wall Street, the S&P report was the trigger, but the fuel was provided by reckless piling on the leveraged short side by bear speculators, particularly in the options market. They received a proper beating. Remember, bear markets are triple black diamond trades.


Standard & Poors Sees Light At The End Of The Write-Down Tunnel

3/13/2008 3:02:44 PM A report from Standard & Poor's Ratings Services Thursday that financial companies are nearing the end of the massive asset write-downs sent stocks soaring. These write downs have roiled the stock and credit markets in recent months, and the news boosted investor confidence.

The forecast, titled “More Subprime Write-Downs To Come, But The End Is Now In Sight For Large Financial Institutions,” estimates that write downs could reach $285 billion for the global financial sector, although it noted that the end is in sight for major financial institutions.

“The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation write-downs of subprime ABS," said Standard & Poor's credit analyst Scott Bugie, lead author of the report.

The reluctance of major financial institutions to lend money has frozen credit lines and forced the Federal Reserve to intervene on several occasions in an effort to inject liquidity into the market. Although it states that there is a light at the end of the tunnel, the S&P report warns that investors should expect further write-downs in the near future.

“Right now, market forces are placing further downward pressure on valuations, and we expect to see more write-downs related to these pressures in coming weeks and months,” Bugie said. “We believe that any near-term positive impact of reducing subprime risk in the financial system via increased disclosure and write-downs will be offset by worsening problems in the broader U.S. real estate market and in other segments of the credit markets.”

In an additional report, S&P states that the majority of write-downs related to subprime securities may be behind the banks and brokers that have already announced their full year 2007 results.

“There may be some additional marks to market as market indicators have shown deterioration in the first quarter,” said Standard & Poor's credit analyst Tanya Azarchs. “However, when we dissect the percentage of write-downs taken against various types of exposures, in our opinion the magnitude of some write-downs is greater than any reasonable estimate of ultimate losses.”

Scott Bugie
Managing Director, Financial Services Ratings
Standard & Poor’s Ratings Services (Paris office)

Scott Bugie joined Standard & Poor's in New York in 1987 and currently is a Managing Director in Financial Services Ratings. Based in France since 1990, Scott is the Regional Practice Leader for Financial Institutions Ratings in Eastern Europe, Middle East, and Africa (EEMEA), a position he has held since 1998. Scott is also the European Criteria Officer for Financial Institutions Ratings. Before this, he managed Financial Institutions Ratings for southern Europe. Prior to joining Standard & Poor's, Scott worked for the Federal Reserve Bank of San Francisco for six years as a senior financial analyst in the Department of Supervision, Regulation, and Credit.

Scott holds Master of Business Administration degree in International Finance from the University of California at Berkeley, and a Bachelor of Arts degree in Soviet Studies and Russian Language from Ohio State University. He also studied Russian language and history at the Pushkin Institute in Moscow,