No more BS?
Liquidity depends on confidence, and the Bear lost it. Rumours have been circulating all week - see here for a summary from Naked Capitalism - and finally the Bear had to be bailed out on Friday. The SEC comments:
There are several interesting questions about this. One is why the FED acted at all. Bear Stearns is not one of the largest firms - it does not feature on the Bank of England list of systemically important institutions for instance - but it is a key player in three areas of stress at the moment, prime brokerage, muni bonds and MBS trading. Certainly the failure of the Bear would have had an impact on confidence, and it might well have caused some knock on hedge fund failures. But if BSC is too big to fail then the CEOs of a range of institutions across the US must be sleeping easier at the moment.
The second is how the FED acted. Apparently it could have lent to BSC directly (at least after a board vote in favour) but instead it chose to lend to JPM with JPM on-lending to BSC. JPM has no risk here so one obvious reason for their involvement is that they want to buy some or all of the Bear. Certainly the Bear's HQ, the prime brokerage operation, perhaps parts of the mortgage business, and apparently asset management are interesting potential suitors. (Why anyone would want an asset management operation involved in a recent hedge fund collapse is another question.) Anyway, perhaps 'suitor' is the wrong word. Do we have a term in English for the man you are about to be forced into an arranged marriage with?
Now if I were you, I'd move straight on and check the successor language in your ISDA docs and/or prime brokerage agreement. Figuring out who your new counterparty is might take a little work as this story plays out.
The decision by the Federal Reserve Bank of New York to provide The Bear Stearns Companies temporary funding through J.P. Morgan Chase & Co. today followed a significant deterioration in Bear Stearns' liquidity on Thursday. The Division of Trading and Markets has monitored both the capital and the liquidity of the firm on a daily basis in recent weeks. [...]As so the FED stepped in and we have the current back-to-back rescue via JPM.
"As of its most recent capital calculation as of the end of February 2008, Bear Stearns' holding company capital exceeded relevant regulatory standards. According to the information supplied to the SEC by Bear Stearns as of Tuesday, March 11, the holding company had a substantial capital cushion. In addition, as of March 11, the firm had over $17 billion in cash and unencumbered liquid assets.
"Beginning on that day, however, and increasingly throughout the week, lenders and customers of Bear Stearns began to remove funds from the firm, despite its stable capital position. As a result, Bear Stearns' excess liquidity rapidly eroded.
There are several interesting questions about this. One is why the FED acted at all. Bear Stearns is not one of the largest firms - it does not feature on the Bank of England list of systemically important institutions for instance - but it is a key player in three areas of stress at the moment, prime brokerage, muni bonds and MBS trading. Certainly the failure of the Bear would have had an impact on confidence, and it might well have caused some knock on hedge fund failures. But if BSC is too big to fail then the CEOs of a range of institutions across the US must be sleeping easier at the moment.
The second is how the FED acted. Apparently it could have lent to BSC directly (at least after a board vote in favour) but instead it chose to lend to JPM with JPM on-lending to BSC. JPM has no risk here so one obvious reason for their involvement is that they want to buy some or all of the Bear. Certainly the Bear's HQ, the prime brokerage operation, perhaps parts of the mortgage business, and apparently asset management are interesting potential suitors. (Why anyone would want an asset management operation involved in a recent hedge fund collapse is another question.) Anyway, perhaps 'suitor' is the wrong word. Do we have a term in English for the man you are about to be forced into an arranged marriage with?
Now if I were you, I'd move straight on and check the successor language in your ISDA docs and/or prime brokerage agreement. Figuring out who your new counterparty is might take a little work as this story plays out.
Labels: Bear, Liquidity risk
posted by David Murphy at 07:14
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