Hedge Funds Demolish Bear Stearns - JP Morgan feasts

Despite my poor performance this week-end has been so remarkable that I couldn’t help giving my 2 cents. Financial publications, radio shows and the likes all had a field day. Bear Stearns crumbles in just a couple of days, from $6 billions to $230 million in the blink of an eye. The Fed hatches a plan to save the dying investment bank through a third party, JP Morgan; putting over 30 billion on the line to help JP Morgan in the acquisition.

I understand the “Too big to let it go bankrupt” concept very well. However, I do find questionable the Fed’s decision to give JP Morgan access to such a large amount of taxpayers’ money, which will end up being backed by Bear Stern’s assets - assets of questionable value.

What I’m seeing here is another remarkable demonstration of the financial system’s ability to privatize profits and nationalize losses. If these assets turn out to be worth less than $30bn, and I expect they will, well the loss will be taken by taxpayers, not by JP Morgan.

What makes me even more skeptical about the solidity and cogency of the financial market as a whole is the fact that this disaster was largely caused by panic, or “sentiment”, if you prefer.
Bear Stearns prime brokerage business, providing admin services to hedge funds with a fixed income bent, was the main source of liquidity for the now-moribund financial institution. Last week a rumor, which later led to rampant speculation, was put out about Bear Stearns fragility and its excessive exposure to US mortgages. Obviously all the hedge funds using Bear Stearns to deposit their assets panicked and were quick to terminate their relationship with the bank.
Without the funds’ liquid assets in its “vaults” Bear Stearns was not able to meet its running costs.

The worst part is that just a few days later, on March 27th, the bank would have been able to exchange its gigantic portfolio of mortgage backed securities for high quality, liquid US Treasuries.

I don’t know about you but that doesn’t look like a fundamentally sound and rational system to me. Kudos to JP Morgan for getting the bargain of the century.

Source: By The Big Deal