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Bear is Saved for JP Morgan to be Saved

Fed saved Bear Stearns by guaranteeing 29 billion of their bad paper in order for JP Morgan to be saved since Bear going down would have in effect allowed JP Morgan to fail due to the credit swaps problem which JP Morgan was holding lots of Bear's swaps. So essentially The Fed bailed out JP Morgan via the Bear guarantees. If there wasnt any liability to JP Morgan if Bear has gone out; then they would have let Bear Stearns file for Bankruptcy and that would be that. The increased offer by JP Morgan to the stockholders is a token of JP Morgan's own appreciation for allowing this deal to go through. The Bear stockholders know JP Morgan is not going to flinch over $10 per share since the damage to JP Morgan if the Bear deal falls apart is exponentially much greater than any sweetened offer. The Fed and JP Morgan knew the $2 original share offer was their initial low ball deal and were expecting to have to sweeten the offer.It will be interesting to see if this latest offer is good enough for the shareholders since the shareholders know both the Fed and JP Morgan cant afford for the deal to fail. What is the highest price JP Morgan will have to pay per share?

Who knows where the next problem is and what the ramifications are for other banks but to think the very same people who created the problem are now going to be part of any long term solution is delusional. The very fact that no one has proposed investigating why this over all financial debacle happened and who caused it should give everyone pause. Of course they have already started proposing 'solutions and possible regulations' without any due diligence by a totally independent commission, to the reasons why the whole mess happened.

The Fed, banks, financial entities etc. are hoping to delay the damage with the wish there be no transparency and enough time for the assets to gain value and make the balance sheets healthy.

What I cant understand is how come shareholders and district attorneys around the country arent suing civilly and indicting them all for fraud, respectively. It would seem easy to indict for fraud and many other criminal charges when Bear and other companies' executives make public statements their businesses are fine only days before they are bailed out by the Fed or declare bankruptcy.  Or when executives take huge bonuses knowing full well their companies' balance sheet problems will be public knowledge in a short period of time is also fraudulent.

Anotherwards many people should be going to jail or be forced into bankruptcy just defending themselves.

by An American in London on Mon Mar 24th, 2008 at 01:47:09 PM EST
An American in London:
What I cant understand is how come shareholders and district attorneys around the country arent suing civilly and indicting them all for fraud, respectively.

There was that Spitzer character who could have been interested in doing this.

Does anyone remember him?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Mar 24th, 2008 at 02:07:19 PM EST
[ Parent ]
Of course we do.  His hooker was really hot, and we're obsessing over her.  So his name still pops up here and there, and we remember.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Mon Mar 24th, 2008 at 02:13:58 PM EST
[ Parent ]
Andrew Cuomo, the son of ex Governor Mario Cuomo, took over Spitzer's old job as Attorney General. Last November; he was making big noises about cleaning up the New York based financial industry etc.

Haven't heard a peep from him since and was wondering if the reason was he has locked up his own future campaign financing for future public offices he may aspire to, via commitments from many of the same players he would have had to investigate.

You really do need an independent commission made up of retired financial experts, attorney generals above repute etc. to get to the bottom of this debacle. It would eventually shine a light on the corruption which is endemic throughout the entire government and capitalistic system as we know it today.

It is the reason 10% of the US population control 75% of the wealth in America and the highest inequality of income ever.

by An American in London on Mon Mar 24th, 2008 at 02:49:03 PM EST
[ Parent ]
Wikipedia: Credit default swap

In 1995, J.P. Morgan's Blythe Masters (a 26-year old Cambridge University graduate hired by the bank), developed the first Credit Default Swaps and Collateralized Debt Obligations (CDO). On April 2nd, 2007, Masters (who by then was the head of J.P. Morgan's Global Credit Derivatives group), helped introduce CreditWatchTM to help evaluate credit swaps among other financial instruments.

By the end of 2007 there were an estimated USD 45 trillion worth of Credit Default Swap contracts.[2]

Sow the wind, reap the whirlwind.

It'd be nice if the battle were only against the right wingers, not half of the left on top of that — François in Paris
by Carrie (migeru at eurotrib dot com) on Mon Mar 24th, 2008 at 02:15:52 PM EST
[ Parent ]
An American in London:
Fed saved Bear Stearns by guaranteeing 29 billion of their bad paper in order for JP Morgan to be saved since Bear going down would have in effect allowed JP Morgan to fail due to the credit swaps problem which JP Morgan was holding lots of Bear's swaps.
Is this based on public information, or an educated guess?

It'd be nice if the battle were only against the right wingers, not half of the left on top of that — François in Paris
by Carrie (migeru at eurotrib dot com) on Mon Mar 24th, 2008 at 02:24:23 PM EST
[ Parent ]
that An American in London quoted:


The Truth and Consequences
Of $172 Trillion in Derivatives

Derivatives are essentially bets ... and ... debts.

As an illustration, if you and I were players, I could bet you that a particular firm will go bankrupt between now and year-end ... and you could bet me that it won't.

Or I could bet you that interest rates on junk bonds will rise more than interest rates on Treasury bonds ... and you could bet they will rise less, or not rise at all.

We could bet on virtually any market that moves, or even bet that it won't move.

For each wager, we'd likely borrow huge amounts of other people's money. And in each case, we'd have a contractual obligation (or right) to consummate the deal: To pay up if we lose (or collect if we win).

That's the essence of each transaction in the frenzied, hectic world of derivatives.

But what was once a small sideshow in the traditional world of stocks, bonds and loans has become the towering center ring in the big-top: The derivatives market has now ballooned into a monster of unimaginable dimensions.

At U.S. commercial banks alone, the total notional value of the derivatives is $172.2 trillion, according to the latest report by the U.S. Comptroller of the Currency (OCC). Plus, the OCC reports that:

  • In over 90% of these derivatives, there is no established exchange that helps protect either party from default.

  • Just FIVE major U.S. banks control 97% of all the bank-held derivatives in the United States, a concentration of power -- and risk -- unsurpassed in the history of finance.

  • All five of these major players would likely be severely crippled, or even bankrupted, by the default of just a few major counterparties like Bear Stearns.

  • Four have more credit exposure to counterparty defaults than they have capital.

  • Two have over four times more credit exposure than capital. (More details in a moment.)

Go read the rest at the link.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Mar 24th, 2008 at 03:29:31 PM EST
[ Parent ]
Thanks Jerome for the link.
by An American in London on Mon Mar 24th, 2008 at 04:02:56 PM EST
[ Parent ]
I prefer to define derivatives as insurance policies written by people too dumb and too cheap to pay for an actuary.

Car accidents and home fires are highly decorrelated. Car accidents and home fires can be insured.

Market bets gone wrong are highly correlated. Market crashes cannot be insured.

Simple, no? And yet they keep trying.

by Francois in Paris on Mon Mar 24th, 2008 at 04:26:54 PM EST
[ Parent ]

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