Posted by March 27, 2008
Monday, March 24 marked the one-week anniversary of the JPMC’s takeover of Bear Stearns. JPMC choose this anniversary date to raise their offer to purchase Bear from $2.00 a share to $10.00 a share. That sounded pretty reasonable, especially since there is talk that Bear’s building is worth $8.00 a share by itself. As part of the higher payment offer, Bear will issue JPMC 40% of their outstanding stock in exchange for the higher payment and JPMC agreed to take a first loss position for $1.0 billion of the $30 billion loan that the Fed granted to support the initial transaction. This offer has a very pleasing symmetry to it. JPMC realizes their bid was too low so they effectively raise it by $16.00 a share – $8.00 to the shareholders (offer price goes from $2.00 to $10.00) and $8.00 a share to the Fed ( $1.0 billion / ~ 120 million shares outstanding) in the form of a loss prevention layer.
My take on this deal, and I don’t know, is that Bear Stearns was effectively “broke”, i.e. they did not have enough liquidity to repay their liabilities as agreed. This lack of liquidity was very much like an old fashioned “run on the bank”, investors who used to finance Bear’s positions in securities became no longer willing to do so. Since JPMC was Bear’s clearing bank, the “run” actually occurred at Bear’s account at JPMC. When Bear’s repo customers asked for their money back, funds in Bear’s account at JPMC were depleted. If the situation was to continue unabated, the repo customers would have not received their money back; instead they would have been instructed to keep the collateral that was pledged to them. This doesn’t sound so bad for the investor, at least they’ll have collateral to sell, but this event could trigger a potentially sharp downward spiral in the prices of the underlying assets as investors look to sell the collateral to get their cash back. That’s why the Fed was motivated to cut a deal with JPMC.
I “shadowed” the AM Briefing rotation this week for two days, Tuesday and Thursday. The good news, you do get car service from your home to the bank. The bad news the car has to pick you up in time to get to work at 4:30 am!! So I’m slogging away, hoping to demonstrate at least a minimum mastery of these gosh darn briefings, when all of a sudden, out of the blue… I receive some game changing career news! and no, it was not feedback from Thursday’s AM Briefing. I’m being offered what looks like a great career opportunity to join a new group of about 18 people that will monitor the financial condition of the non-bank broker dealers to control the Fed’s potential exposure to them if they borrow via the Fed’s Primary Dealer Credit Facility. I immediately said “yes” and right away I officially joined the new group. So… no more briefings ever, fingers crossed.
I will be joining an analysis team that will try and make sense of the financial condition of these large broker dealers. What’s implied in the mission is that there is a non-zero probability for some level of borrowing that may be requested by a broker / dealer that the Fed may not be willing to do. Maybe I can help with that decision? We also want to be in a position where maybe we can find some ways to reduce systemic risk and share this with the broker dealers. Job sounds super cool.
March 31, 2008
The first quarter-end date of 2008 passes uneventfully. I spent most of my day cleaning out my desk, meeting new people, etc. I listened in / participated in two conference calls held by colleagues who were “on – site” at dealers. I pretty much had no idea what they were talking about at the calls. Is that good thing? Doesn’t sound good, but who knows?
There’s a meeting tomorrow to discuss “dealer liquidity metrics”, which just sounds cool. Already FRBNY has two employees working on site at each of the remaining large non-bank dealers and I guess they’ve been there for about two weeks now. Long enough for them to get a first impression, but not long enough for me to learn how to speak a new language!
Speaking of learning a new language, I passed off my student loan contacts, such as they are, to one of my colleagues in the area I’m leaving, Domestic Capital Markets. I kind of felt bad doing so as it looks like the student loan market may implode soon. Just as students are deciding which colleges, if any, to attend, suddenly no one wants to originate new student loans anymore, despite the fact that about 7/8 of them are 97% guaranteed by the Department of Education which is part of the Treasury, i.e. they are guaranteed by the US government. Despite the fact that almost all of the exposure is guaranteed, suddenly the originators have become reluctant to issue because they still have some exposure, not an unreasonable position given how crazy the financing markets have been. This craziness translates to high costs for issuers who traditionally issued structured products, like student loans and credit cards. My colleague told me that he already spoke to two or three student loan market participants, and they all told him: “this thing is broken, you should fix it.” So I told my friend in Domestic Capital Markets, “Good luck with that!” About three weeks ago I was in an E.V.P.’s office talking to the Treasury Dept about whether or not the Fed accepted student loan debt as eligible collateral at the Discount Window, which the Fed does. After the call was over, someone mentioned that the Department of Education student loan market is entirely within Treasury’s domain, so maybe my colleague won’t have too much to do. Not coincidentally, the WSJ had about five articles today on the expanded role of the Fed. OMG!
April 1, 2008
I attended two more meetings today on monitoring Liquidity and Funding at dealers. I said a few things, made some comments, but not too many, though. This leisurely pace is in sharp contrast to what occurred at my “old” job today. In that job, someone decided it would be a good idea to give President Geithner an impromptu update on the current financial outlook for the US automotive industry, including why the credit derivative prices (CDS spreads) were so high for both Ford and GM. The CDS of the auto companies’ captive finance companies, Ford Motor Credit (FMC) and the General Motors Acceptance Corporation (GMAC), are trading even higher, and finally, what’s up with GM’s ex-subsidiary, Delphi, which is having a difficult time leaving bankruptcy protection? Oh, and by the way, those five companies, GM, GMAC, Ford, FMC and Delphi, probably employ about 400,000 workers in the United States.
April 2, 2008
FRBNY President Tim Geithner will testify before Congress tomorrow with Federal Reserve Chair Ben Bernanke testifying today and tomorrow as well. A Senator asked Ben about details on which entity is managing the collateral in the Bear Stearns deal and Ben said, “talk to Tim tomorrow.” Cool. I really want to watch that testimony on TV tomorrow, particularly since I just sent an email to Tim G to invite him to play on the Markets Group softball team. (Tim and I are very close, well, not really).
Around 9:15 this morning I played a voice mail that was left on my machine by Tony Ryan, the Assistant Secretary of the Treasury. Mr. Ryan wanted to know about problems in the student loan market and there are a lot of them. I never did get to speak with him, though, as I’m transitioning over to the new area. When I return from my upcoming vacation, though, my workflow should be quite different, reflecting my new role. I will no longer be in the Markets Group, per se, as I begin my new role to provide support to the Primary Dealer Liquidity Facility.
Thanks for your blog, nice to read. Do not stop.