March 17 – 20, 2008

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March 17, 2008

Over the weekend, the Fed arranged the sale of Bear Stearns to JP Morgan Chase Bank (JPMC) for $2.00 a share while providing $30 billion in financing, with a $1.0 billion deductible from JPMC to give them a clear incentive to have the loan repaid. While my boss had to work all weekend (and I think I’m overworked, yikes!), I actually first heard about the transaction from my nephew, who is not only living with me but is also working as a temporary employee … at Bear Stearns!    

I do wonder whether the deal that the Fed arranged is ethical / legal, etc?  Basically the Fed arranged / (maybe directed ?) JPMC to buy a dealer that can’t pay its bills on time for $2.00 a share.  I hope the transaction is both legal and ethical.   The legal part is probably OK, since the Fed has great lawyers J  I think the Fed has done a great job with the financial crisis so far, but this Bear bailout deal, in particular, looks like it might be right on the line.  It may even go over the line by a tiny bit in the slow-motion replay, but I’m not sure of the camera angle.  From one viewpoint, the Fed is acting totally appropriately by promptly mitigating the fall-out / contagion from the collapse of a large broker dealer. In doing so, however, the Fed’s actions maybe taking away value from Bear’s existing shareholders. Note that Bear’s current stock price of $4.80 a share is now off more than 95% from recent levels.  In keeping with the theme of bad news for Bear’s owners and good news for Bear’s creditors, Bear’s CDS narrowed dramatically from 750 basis points at Friday’s close to as low as 350 basis points intra-day today before settling down to close around 435 basis points.  Lots of jobs are now in jeopardy, though, not just my nephew’s. Many people will be losing their jobs at Bear and JPMC, for sure.

Oh joy!  I get to go back “Desk Rotation” tomorrow – the return engagement of a ‘PM Briefing’ authorship.  There’s also an FOMC meeting tomorrow to cover, no doubt the meeting will be dominated by discussion of the Bear loan / bail-out / take-over.

March 18, 2008

I read in the Wall Street Journal this morning that the Fed (ultimately the US taxpayer) stands to profit (or lose) if the total liquidation value of the assets that collateralize the loan exceeds (or fall short of) the Bear loan amount plus interest.  I thought, “Wow, this just seems so …WRONG!” One month ago I was concerned that the debt holders of Ambac were going to get screwed by the NY State Insurance Department.  Now, I’m concerned that the NY Fed is going to screw Bear Stearns’ stockholders.  Bear’s stock is still trading and it rallied to about $6.15 today – well above the $2.00 share price.  Not for nothing, but is it right for the “lender of last resort” to also make a profit from the company whose liquidation it is also overseeing? Of course, Fed profits are remitted to the Treasury / taxpayer.  Still …what have we gotten ourselves into? This is truly breaking new ground.

This was first my stint during a “desk rotation” that occurred during an FOMC meeting. There was lots of price action throughout the day, and the PM Briefing product ended up being two pages long as a result—about double its normal length.  First off, the market was expecting a 100 basis point (100 basis points (bp) = 1.00%) cut to the fed funds target rate, which I thought was crazy, 50 bps should be enough.  The FOMC decided to cut 75 bps in an 8 – 2 vote, with two voting members wanting to cut 50 bp (Go dissenters!).  People were concerned how the equity markets would react and indeed, following the announcement, equity indices dropped about ½ of a percent, but they were already up 2.0% on the day before the Fed’s actions were announced based on expectations of a rate cut.  Then, surprise! the equity rally continues with the S&P 500 up 4.0% on the day. Apparently the 75 bp cut wasn’t such a bad idea after all!

Two interesting things happened to me, on a personal note.  First of all, I had an interview with my boss (soon to be my bosses’ boss) for an open Staff Coordinator position in the foreign exchange department.  I thought the interview went well but I did have to admit during the interview that I don’t know too much about foreign exchange (is that a drawback?  who knew?).  After the interview was over, I give my boss credit for being upfront with me and telling me that I probably wasn’t going to get the spot.  Then he mentions that, maybe, he’s not promising me anything, I might possibly be tapped to lead a contingency preparedness effort. I’m thinking (and hopefully not saying this out loud) “Why don’t you just shoot me?”  Then he mentions the second interesting thing … he’s just put me in for a special merit increase of 6.0% of my salary, and it might even be effective as soon as my next paycheck. YES !!!!!

March 20, 2008

Couldn’t make an entry yesterday, I was just too exhausted – that darn PM Briefing. Anyway, as of tonight I’m basically done with this horrid Desk Rotation for a while, even though it’s still Thursday.  That’s because tomorrow is Good Friday and the stock and bond markets will be closed – there will literally be nothing to talk about.

I imagine that learning how to prepare the PM Briefing is an intellectually interesting and worthwhile experience for most Trader Analysts, even though it is grueling. For me, it’s close to TORTURE!!  You basically have to summarize major price action across all markets.  The trouble is, since August ’08, there tends to be price action in ALL markets.  A typical day is equities down, Treasury yields lower, Fed funds futures lower in yield, credit indices wider, energy higher, yadda, yadda, yadda.  I am hopeful that I will never have to write a PM Briefing ever again after tomorrow.  Sounds excellent.  Of course, the reason why I’ve stopped the PM Briefing rotation is to start training for the AM Briefing rotation, which involves coming to work at 4 am!:-0

Nothing new on the Bear Stearns front today, but as I mentioned, I’m worried that the shotgun marriage of Bear to JPMC may turn ugly.  We’ll see what happens soon enough, I suppose.  I briefly discussed the Term Secured Lending Facility in the previous entry but I can’t believe that I forgot to mention that the Fed announced a major new facility on Monday, the groundbreaking Primary Dealer Credit Facility, which effectively allows the dealer community to borrow directly from the Fed.  The loans have to be collateralized, of course, but the pool of eligible collateral was also expanded, the Fed will now basically accept pledges of any security with a price and an investment grade rating.  There is a good chance that Bear Stearns could have weathered its liquidity crisis had this facility been up and running just two weeks ago, since Bear could have financed their large MBS inventory with this facility when private market investors “ran” away from them. Oh well, hindsight is often 20/20.  There was saying within the Fed that primary dealers had to decide whether they wanted to be “inside the umbrella” or “outside the umbrella”.  Inside the umbrella meant that the dealer was regulated by the Fed (or other major bank regulator) and had access to the discount window.  Outside the umbrella meant that the dealer had no bank regulator oversight, which no doubt reduced compliance costs, but then the dealer did not have access to the discount window.  The introduction of the Primary Dealer Credit Facility means that this distinction is gone – now non-regulated dealers have direct access to borrow from the Fed, i.e. there no longer is an “umbrella”.

Aside from potentially profiting from the liquidation of Bear’s collateralized loan, I think the Fed has done just a great job in responding to the crisis.  There is no doubt that we need broad systemic regulatory reform.  If you ask me, all banks, brokers and insurance companies need to be supervised on a national level, probably by the same outfit – or at least force the different agencies to communicate regularly. While the Depression era Glass-Steagall laws have served the country long and well, suddenly these laws seem urgently anachronistic. Hopefully my near-term stress level at work is going to abate soon.  Meanwhile I’m looking forward to my Fantasy Baseball Draft tonight.

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