Major financial news and emergency Fed meetings on a Sunday? If you had any doubts about how serious the Panic of 2008 is going to be, this should start hinting at how deep we've gotten. Watch Lehman Brothers this week - the brokers are selling it before the market even opens.
Early on Sunday (3-16-08) the details of the JP Morgan acquisition of
Bear Stearns were released: $220 million, $2 per share. This is
pennies on the dollar - or at least the dollars that Bear was claiming
to have just a few days ago. Many were absolutely shocked at this
final price, and the Fed rushed in immediately to cut discounts rates
by 25 points - many expect an additional emergency meeting early today
(Monday 3/17/08) with a target cut of about 100 basis points.
International markets wasted no time in profitting off American
weakness, and the dollar crashed to yet another record low. Gold
spiked $20-$30, and is now entrenched well over the psychological $1000
/ ounce threshold.
Panic of 2008: AAA and Mortgage Miscalculations
What exactly took down Bear Stearns? Well, the subprime credit crisis
is part of the story, but we're at the point now where panic itself is
driving collapses left and right in the financial sector. In the
history books, they'll simply call it a "bank panic."
Obviously, it all began following 9-11 as the Fed cut interest rates to
very low levels, fueling an increased boom in home buying and mortgage
activity. New demand for real estate drove up prices, and the banks
holding mortgage-backed securities were using them as collateral for
their own investments or as the reserve for their loans to hedge funds.
This is where Carlyle comes in (you may recognize this name for its
association to the Bush family). One week ago, they managed $80
billion in assets - today there is nothing left. They had leveraged
some assets 23 times into triple AAA bonds, and the bonds went bust.
Within a day, the chain reaction brought them to default on their debts
and triggered a "run on the bank" that effectively eliminated the
company.
You know the economy is bad when the sitting president can't keep his dad's company from going bankrupt.
Enter Bear Stearns: They were the unfortunate holders of 15% of
Carlyle's stock. Again, within the day, margin loans were being called
in and Bear Stearns was in a position to liquidate its assets and shut
down shop.
As if this wasn't bad enough, the Fed managed to engineer a "rescue"
for the economy as a whole that consists of JP Morgan acquiring the
Bear Stearns assets for 1 / 100th of their previously reported values.
Stop for a second and think about that. To save the economy, we have
to revalue financial assets at 1 / 100th of their previous value.
There is a big problem with that, beyond even the inflationary pressure
of all this Federal Reserve activity and asset guarantees. What
happens in today's stock market when all the investors and depositors
at the banks that had invested in the now worthless Bear Stearns stock?
That's right - margin calls, mass withdrawls - another bank run,
another daily panic in the Great Panic of 2008. Dow Futures are
indicating an open at the 2008 low - about 11,750 and still a way to go
before seeing the important 11,500 level I predicted we would be
testing. If another major bank suspends investor access to liquid
assets or announces another "bailout" (or fire-sale), then I don't even
know how low things would go.
The talk, the rumor, and the panic is pointing at Lehman Brothers as the
next victim of the post-bubble crisis. In the Monday morning trading hours,
Lehman Brothers Stock is down almost 15% - and that is before any
actual bad news. This is the phase we are in: Almost no bank or
financial institution could actually cover all of its liabilities in
the face of a panic-driven run. At the same moment, almost anything
can create the fear and panic necessary to create such a reaction. If
the Fed doesn't act, banks will collapse left and right. When the Fed
acts, banks still fail.
Lunchtime Update: JP Morgan is the big winner so far on a week trading day. Sadly, the market finds no good news outside of government intervention. Shares are up about 7-8% but some Bear Stearns stockholders and employees are questioning if they have any way to block this deal or file lawsuits to recover losses.
Lehman Brothers continues to get battered for no particular reason but the fact that the rumor has been circulating and multiple sources vaguely indicate that it may be the next weakest link. It is possible that a major Southest Asian bank is advising its clients to stay away from Lehman - and investors are surely remembering Lehman's recent 5% across-the-board job cuts. Lehman stock is currently trading down 30% from the previous close.
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