Bear Stearns...

[swears]

Not sure about this, I mean, if you look at the value of a particular security and think that the only thing that is propping it up is a few chancers after a bargain then why not sell it short rather than buy it and hope that it has a shortlived rally? What I'm saying is, if you can think that why can't everyone else?

OK, I meant the stock market as a whole, but yeah, I see see what you're saying there. That's what confused me about the "scramble" for cheap shares anyway, I had supposed the people selling them needed the cash in the short term, whereas the buyers were looking to make a return in the long run.

 

[vimothy]

BCS currently trading at near $7 a share, despite an agreement that JP Morgan will purchase at $2 a share. Felix Salmon explains why:

The big winners from the Bear Stearns acquisition are Bear's bondholders. They came close to an event of default this weekend; if all goes according to plan, they'll soon own nice safe debt from JP Morgan Chase. The only thing which can derail their glide path (if Krugman can mix his metaphors, so can I) would be if the deal doesn't go through at $2 as planned.

The main thing that needs to happen for the deal to go through is that shareholders vote in favor. And the only way that bondholders can ensure yes votes for the deal is to own those shares and vote them themselves. Says Neubert: "They will eat the difference between where they buy the equity and $2.00 in order to protect much higher numbers in debt."

There's another reason for bondholders to buy stock above $2. Explains Neubert:

Think of equity as an option on the assets of the company. Higher uncertainty means the equity has more value, just like an option...
Think of the equity as an out-of-the-money call. Implied volatility has more influence on the price of out of the money call options that the price of the asset.​

What he's saying here is that if the deal falls apart, the value of the company might go down, all the way to zero eventually. But on the way there, volatility will be huge - and if volatility is high then the value of the equity will go up. In this sense, the equity is a hedge against the deal falling apart. If JP Morgan doesn't buy Bear, bondholders' bonds will fall in value - but their stock will rise, helping to offset the loss.

Looking at the big picture, then, people aren't buying Bear stock at these levels because they think it's going to go up: rather, they're buying stock because they hope it's going to go down. Ain't finance wonderful?​

 

[IdleRich]

The main thing that needs to happen for the deal to go through is that shareholders vote in favor. And the only way that bondholders can ensure yes votes for the deal is to own those shares and vote them themselves. Says Neubert: "They will eat the difference between where they buy the equity and $2.00 in order to protect much higher numbers in debt."

They're buying stock at $7 so they can vote to sell it at $2 because the money they will make on their bonds will be more than they will lose on the stocks? Blimey!

...if the deal falls apart, the value of the company might go down, all the way to zero eventually. But on the way there, volatility will be huge - and if volatility is high then the value of the equity will go up

Not sure about that though - if the deal falls apart who is to say the price won't race to the bottom? Just because no-one knows which bad outcome will be the result doesn't mean that the price will react as though there is a possible good outcome.

 

[IdleRich]

Seems to me that the only answer that the Fed has to any financial problems is to cut interest rates. They did it after Soc Gen and the markets bounced back, for a bit, then they did it again after Bear Stearns and the markets seem to have bounced back again - but for how long? They cut 0.75% percent yesterday and now they're down to 2.25% - if they cut that much again three more times they're down to 0 - then what?
Will the UK cut their rates as well? We are quite a lot higher than the states now.

 

[hucks]

Does the fed have a wider remit thatn the BoE, tho? The BoE just has to look out for inflation, nothing else. Inflation is already at 2.5%, which is as high as it's allowed to go without the Chairman writing the Chancellor a letter (!) explaining what's going on.

 

[IdleRich]

"The BoE just has to look out for inflation, nothing else."

I'm not sure that that's quite right is it? At the moment inflation is above the target and so if that was all the BoE had to consider they would simply increase interest rates - however commentators seem to think that they may lower them.

Wikipedia says

"The Bank of England performs all the functions of a central bank. The most important of these is supposed to be maintaining price stability and supporting the economic policies of the British Government, thus promoting economic growth."

I guess that the problem is that at this juncture performing either of those functions will arguably involve moving the interest rate in a direction that will impair achievement of the other. In other words the fear at the moment is that although inflation is above target a rise in interest rates to counter that may be so detrimental to growth that it can't be implemented.

 

[vimothy]

US markets are up -- S&P 500 had its biggest one-day rally in five years -- and yet yesterday everyone seemed to be expecting a 100bps rate cut, when they only got a 75bps cut. They should, if anything, be slightly disapointed. What's going on? I guess Bernancke looks like less of a shmuck today...

 

[IdleRich]

"US markets are up"

The question is, how important is where the market is to the overall economy? To me it's far too simplistic to say "market rises, we're good" or "market falls, we're fucked". Obviously if stocks are crashing willy-nilly then people (and pensions etc) are losing money, companies are going bust etc so it can't be good but surely the Fed (or whoever) needs to consider more than that for their policies? I would have thought that stability in the markets might be a useful aim but just cutting interest rates every time that they fall seems like treating the symptoms rather than the deeper underlying cause.

"I guess Bernancke looks like less of a shmuck today..."

I'd hold fire on that judgment. I'm not criticising him either but he's used one of his three remaining bullets, the market has risen sure but there has only been one day since the action. Anyway, we keep reading about how much he has studied the Great Depression so hopefully he knows what he's doing.

 

[vimothy]

LIBOR are low -- everything looks pretty liquid.

The question is, how important is where the market is to the overall economy? To me it's far too simplistic to say "market rises, we're good" or "market falls, we're fucked".

Oh, absolutely. And I don't think that this rally is going to last, because the underlying problems with the US economy remain. But can the Fed affect the wider economy in a positive way? I'm not sure.

I would have thought that stability in the markets might be a useful aim but just cutting interest rates every time that they fall seems like treating the symptoms rather than the deeper underlying cause.

The original purpose in setting up the Fed was to help prevent liquidity crises and banking runs, so in that sense it is fullfilling its remit. I guess it depends on what you think the problem is. If you think its liquidity, then the Fed's doing what it should. If you think it's solvency, then there's not really any point in the Fed cutting rates. If you think that the problems are economy wide recession, caused by X, Y or Z, then the government should really be involved, with the Fed focusing on keeping money stable.

Anyway, we keep reading about how much he has studied the Great Depression so hopefully he knows what he's doing.

That might be part of the problem, though. In any case, I'm more worried about stagflation than depression.

 

[IdleRich]

"If you think its liquidity, then the Fed's doing what it should. If you think it's solvency, then there's not really any point in the Fed cutting rates"

Probably both I guess.
Even if it is liquidity, what happens if the Fed cuts to 0 and the problem remains?

 

[vimothy]

Probably both I guess.
Even if it is liquidity, what happens if the Fed cuts to 0 and the problem remains?

I guess what I'm saying is that if the problem is liquidity, then the Fed wouldn't need to cut rates so much. LIBOR are low, the Fed Funds Rate is low: anyone can, or should be able to, get money, so that's not the issue -- maybe it's solvency, maybe it's recession.

 

[crackerjack]

fuck

http://www.guardian.co.uk/business/2008/mar/19/marketturmoil.creditcrunch

 

[vimothy]

fuck

Yeah, I noticed that this morning. Have you still got these shares, then? Probably best to hold onto them for now...

 

[IdleRich]

"This is complete and utter nonsense," he said. "HBOS is one of the strongest financial institutions in the world. We are one of the most respected institutions in the capital and wholesale markets. We continue to access the wholesale markets whenever we think it is appropriate to do so."

The dreaded vote of confidence from the board.
Actually, come to think of it I think I might have some shares in HBOS dating from the demutualisation. Suddenly it's not so funny.

 

[crackerjack]

Probably best to hold onto them for now...

wise advice there Vim.

The Financial Services Authority (FSA), the City watchdog, has launched an investigation into potential market abuse after shares in HBOS plunged to a 10-year low on speculation the bank is facing liquidity problems.

It is understood that Bank of England has been in touch with the FSA about investigating the source of speculation that the Central Bank was set to hold an emergency meeting with a UK bank, rumoured to be HBOS.

There are concerns that speculation has been generated by "short-sellers" who make money by betting on shares that fall in value.

how to separate the info from the disinfo...

this, the macca-mucca case, whatever the fuck's happening with that family whose daughter went missing... is it just me or is this onw of the weirdest news weeks in ages?

 

[vimothy]

Did anyone else see this?

March 18 (Bloomberg) -- U.S. regulators are investigating whether traders illegally sought to force Bear Stearns Cos. shares into a tailspin last week by spreading false information about the firm's finances, two people familiar with the inquiry said.

The Securities and Exchange Commission probe is focusing on whether hedge funds or other investors bet on a drop in the company's shares while disseminating rumors that the New York- based firm was nearing collapse, said the people, who declined to be identified because the inquiry isn't public. The New York Stock Exchange's regulatory arm is also involved in the investigation, the people said.​

 

[IdleRich]

Crikey, two good stories there... interesting if either were true. Still, if so then it shows the environment we're in where by spreading rumours you can destroy the fifth biggest US investment bank.

 

[jenks]

I've been paying attention to your discussion for the last couple of days but feel woefully unskilled in discussing econmic matters.

Could you explain the solvency/liquidity thing for me as I was a little confused.

"If you think its liquidity, then the Fed's doing what it should. If you think it's solvency, then there's not really any point in the Fed cutting rates"

I watched this old bloke on Ch4 news on Monday who claimed that banks in the uk had spent on improving liquidity making themselves much stronger and a NR less likely to happen again over here. Whilsh he didn't actually say as so he was suggesting that the mortgage market would have to shrink but whether by offering fewer 'products' or by giving fewer mortgages, he wouldn't say.

 

[vimothy]

I'm still not totally certain about what the exact problem at Bear Stearns was. Does anyone know what caused the run in the first place (assuming it wasn't hedge fund dissemination) -- was it simply that they were downgraded, short term creditors called in their debts and then it all went to shit?

 

[crackerjack]

Crikey, two good stories there... interesting if either were true. Still, if so then it shows the environment we're in where by spreading rumours you can destroy the fifth biggest US investment bank.

Quite. The surprise isn't that this sort of disinfo is happening, just the scale of the impact. I hope the bastards behind it are nailed. At htis rate financial regulation is gonna be the growth industry of the century - can we buy shares in it?