Sunday Rate Cut + Bear Stearns Bailout? Uhoh
What a Sunday shocker to see the Fed announce a 1/4 discount rate count on a Sunday afternoon after feverishly prodding JP Morgan Chase's acquisition of Bear Stearns for announcement by the time Asian markets open on their Monday mornings. To do this on a Sunday seems to imply the critical nature of Bear's fall and its effect on the surviving financial institutions.
To cut the rate a mere 1/4 point two days before the Fed's official March 18 rate cut announcement seems odd at first glance, but on second reading seems to portend an extra 3/4 point cut a full point cut in the Fed Funds rate on March 18 (or even 17th) to stabilize the markets. Today's 1/4 point cut becomes, in effect, the warning shot - a mechanism to signal to the market that the Fed is ready to go full bore into righting the markets. We'll see how the markets react Monday morning...
Here's one more shocker: one year ago, Bear Stearn's share price was $170... JP Morgan Chase's purchase price: $2/share... oh, and that $2/share represents a 93% discount from Bear's closing NYSE stock price on Friday...
Ones first reaction is to be pleased with the rate cuts but I am more concerned with the inflation problems we may be seeing in the not so distant future.
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Inflation problems are coming. Its irreversibly.
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This is just a sign of things to come. There will be more buy outs of this nature down the road. What is really crazy is that one British Investor that had a 9.7% stake in the company lost $800 million. $800 million!! OMG
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Pat:
Don't you think the brokered deal, to Dimon was just a bit hasty? It was almost gov't-assisted theft.
I'm hoping some bidders come to the table but without the Fed's generous financing package (to new bidders) how can the REAL value of Bear be determinned?
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I had been watching the Fed and Bear all last weekend, and the media noted real urgency towards completing a deal by the open of the Asian markets or face the spectre of a Black Monday. The thinking was one bank declaring bankruptcy would domino the next one Lehman Bros etc. etc and crash the markets. Hindsight does suggest that the deal was shotgun and a new round of negotiations between the Bear shareholders and JPMorgan Chase looks likely... BSC is close to $6.00, triple the offer price by JPMC. But JPMC made out big because I believe they were guaranteed the acquisition of the Bear Stearns HQ building, and the Fed backed up the bailout with $30bn credit line to JPMC.
So BSC's real value will remain undetermined... I believe the problem the whole industry has in quantitatively evaluating the subprime laden portfolios is no analyst can predict the portfolios' default rates accurately without a predictable handle on future economic factors - recession, interest rates, dollar strength, etc. Analysts are completely divided whether the US will weather the downturn easily or crash.
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