Round and Round

When I was in the green room earlier today at NBC's studio in DC, I was watching CNBC curious to see how the variance finance talking heads would be covering the unfolding drama. The party line was pretty uniform, and a bit bizarre -- basically, the Fed was obviously right to act to prevent Bear Stearns from falling into bankruptcy because the entire global economy is teetering on the brink of collapse and utter doom would strike if they'd done otherwise. But all's well now, thanks! No need to worry, nothing to see here, worst is behind us, etc.

I mean, I suppose that could be right, but common sense indicates that if over the weekend drastic measures were needed to stop everything from unraveling that this week we continue to be in a pretty precarious situation. At a minimum, it seems like the best hope for a turnaround in the "real" economy is for the dollar to fall even farther, providing jobs in exporting and tourism, and as far as best-case scenarios go that doesn't seem like a particularly awesome one.

Comments

variance --> various

Posted by El Cid | March 17, 2008 3:56 PM

If we pretend everything is OK then it will be. And hey, look at that shiny object over there!

Posted by Steve LaBonne | March 17, 2008 3:59 PM

At a minimum, it seems like the best hope for a turnaround in the "real" economy is for the dollar to fall even farther, providing jobs in exporting and tourism

Sure, but the situation in the financial world is MUCH, much worse, than the issues in the "real" economy.

While the coverage you describe by CNBC is obviously only one of an infinite number of possible truths, it makes sense that this is the line they are pursuing because it has two main virtues: 1) It's simple and easy for viewers to understand, and 2) If everyone is reassured, there's a smaller risk of panic triggering systemic breakdown.

Of course in reality the issues are much more complex, but ill-suited to cable news.

Posted by right | March 17, 2008 4:02 PM

You must not have seen Meredith Whitney on CNBC. She thought the bearishness about Lehman was overrated but she also said some of the other investment and commercial banks are still overvalued -- some by as much as 50%. The Dow closed up slightly today -- JP Morgan, a Dow component, was up as investors realized that it probably got a steal with the BSC deal.

"At a minimum, it seems like the best hope for a turnaround in the "real" economy is for the dollar to fall even farther, providing jobs in exporting and tourism, and as far as best-case scenarios go that doesn't seem like a particularly awesome one."

You're not excited by the prospect of D.C. becoming the next Buenos Aires? The NY Times yesterday reported how the weak (but stable) peso has turned BA into a "hothouse of cool" with European and American artists and entrepreneurs colonizing the city.

Posted by Fred | March 17, 2008 4:03 PM

Good thing we've been doing everything we can to improve America's brand with potential tourists. Thank goodness it's easy for people to get in legally, and that our airlines are running with few delays. And I'm especially glad we have such a good track record with friendly and efficient customs officials.

... yeah, we're screwed.

Posted by Tel | March 17, 2008 4:04 PM

U.S. --> screwed

I just wish Ron Paul was President. Then we'd be rid of the Federal Reserve Bank and on back on the gold standard.

Then it would get really interesting.

Posted by Peter K. | March 17, 2008 4:04 PM

i found the market's action today amazing (not about jp morgan in particular, but in general). i suggested to a friend last night, for example, that the market would be taking a look at companies sitting on large stashes of cash (a favorable look, that is), but the two stocks i own with large stashes of cash, microsoft and berkshire hathaway, went in opposite directions (msft up, berkshire down).

more generally, of course this isn't close to the end of the problem: how could it? the problem is that the amount of capital available to markets is declining, risk premia are increasing, and therefore anyone with a leveraged bet is on shaky ground.

bear stearns is not the only financial entity, for instance, with leveraged bets.

in fact, there are 4 problems, all intertwined: 1.) the collapse of the housing bubble and the conequent impacts in terms of foreclosures, decline of asset values, and a major reduction in mortgage equity withdrawal; 2.) housing having been the driving force in the economy, we are seeing a slowing in many sectors, combined with a gradual edging up of inflation (along with a close to explicit admission by the Fed that inflation is tomorrow's problem, liquidity today's); 3.) key banks and bank-like entities are teetering somewhere between a liquidity problem and a solvency problem, in different ratios at different individual entities; 4.) george bush will still be president until january, 2009.

frankly, of the 4, i think number 4 is the most dangerous, since as i have long noted, if you put every presidential decision to a coin flip, you'd at least be right 50% of the time, whereas if george bush makes the call, you're going to be right close to 0% of the time.

Posted by howard | March 17, 2008 4:18 PM

Re "She thought the bearishness about Lehman was overrated "
-------------
Anyone remember my comment on Friday that the London financiers were saying another US bank (besides Bear) was in trouble?

Lehman was down by almost 38 percent today, but closed ONLY down 20 percent.

Lehman reports earnings tomorrow. heh heh heh

Posted by Don Williams | March 17, 2008 4:22 PM

providing jobs in exporting and tourism

It seems to me the foreign country-to-US tourism industry will generally boom regardless of the strength of the dollar, with one caveat: DHS and the TSA may be scaring would-be tourists away.

I just wish Ron Paul was President. Then we'd be rid of the Federal Reserve Bank and on back on the gold standard.

It would be interesting to see an economist tackle the subject of how/if the mortgage thing and looming recession would play out in a Gold Standard system, if only because I have no idea what would happen myself.

Posted by Shinyk | March 17, 2008 4:23 PM

Don, i have no judgement on lehman one way or another, but calculated risk draws our attention to an analyst with a good track record on the current difficulties believing that lehman is not bear:

http://calculatedrisk.blogspot.com/2008/03/mayo-lehman-is-not-bear.html

Posted by howard | March 17, 2008 4:28 PM

Don, let's not forget that tomorrow is the scheduled date of the dollar's 100bp execution.

Does he get a blindfold and a cigarette, or are those out of his price range?

Posted by Greg | March 17, 2008 4:29 PM

Matthew doesn't realize that the advisor to listen to is CNBC's Jim Cramer:

From http://www.businessandmedia.org/articles/2008/20080317110946.aspx
---------

"Hopefully your financial portfolio didn’t include stock in Bear Stearns, but it might have if you had listened to CNBC’s Jim Cramer.

After it was announced March 16 that J.P. Morgan Chase & Co. (NYSE:JPM) was purchasing Bear Stearns Cos. (NYSE:BSC) for $2 a share, the stock plummeted over 80 percent at the open of trading on March 17.
But, on March 11, Cramer told an e-mailer not to sell the beleaguered investment bank’s stock on his show’s Web site:

“Dear Jim: Should I be worried about Bear Stearns in terms of liquidity and get my money out of there? --Peter

Cramer says: “No! No! No! Bear Stearns is not in trouble. If anything, they’re more likely to be taken over. Don’t move your money from Bear.”

On Jan. 17, 2007, Bear was trading at its high of $171.51 a share. Since then, it has been racked by the mortgage turmoil. On March 11, when Cramer posted the e-mail and his response, the stock closed at $62.97. As of 10:00 a.m. on March 17, the stock was trading at $3.72 a share. "
-------------
ha ha ha ha

Posted by Don Williams | March 17, 2008 4:31 PM

i notice that krugman is also concerned about the quality of leadership available:

http://krugman.blogs.nytimes.com/2008/03/17/who-ya-gonna-call/

Posted by howard | March 17, 2008 4:33 PM

It would be interesting to see an economist tackle the subject of how/if the mortgage thing and looming recession would play out in a Gold Standard system, if only because I have no idea what would happen myself.

I'm not an economist but as I understand it, the liquidity/credit crisis is analogous to an engine seizing up because of lack of oil, where the engine is the economy and credit is the lubricating oil. Being on the gold standard would be like taking the car which contains the locked engine and driving it off a cliff.

Posted by Peter K. | March 17, 2008 4:40 PM

Peter, at this point, it's looking increasingly like every time some cries out about liquidity, they're covering up the fact that they may, in fact, be insolvent.

I think that, from the perspective of the rest of the world, if not our delusional investment bankers, we're facing a *solvency* crisis now.

In other words, we're fucked.

Posted by Greg | March 17, 2008 4:47 PM

Re howard's comment "an analyst with a good track record on the current difficulties believing that lehman is not bear"

---------

1) An excerpt from the Mayo report posted at CalculatedRisk:
"Lehman is Not Bear. 1) It has more liquidity, 2) It has support among its major counterparties, evidenced by an extension on Friday of a $2B working capital line with 40 banks (one issue w/Bear Stearns [BSC] seems to be that counterparties pulled in lines). "

2) But a report from earlier in the day noted:

"SINGAPORE (AP) -- Shares of Lehman Brothers Holdings Inc. plunged in Monday after a news report that Southeast Asia's largest bank instructed traders in an e-mail not to do business with the bank.
DBS Group Holdings Ltd. took back those instructions, but after the fall of the once storied Wall Street bank Bear Stearns on Sunday, skittish investors sold off quickly and Lehman fell 23 percent, or $9.16, to $30.10.

DBS sent an e-mail to several traders instructing them not to conduct any new dealings with Lehman Brothers or Bear Stearns Cos., two people familiar with the situation said, according to Dow Jones.

"There was an email sent out after the first advising traders to review new transactions (with Lehman Brothers) case by case," Dow Jones Newswires reported.

DBS wouldn't immediately confirm the existence of the e-mails.

"There are still transactions with Lehman that went through today," a top DBS spokesman told The Associated Press. "Given the current market conditions, we are merely exercising more vigilance and reviewing all new transactions on a case-by-case basis."

---------
Ref: http://biz.yahoo.com/ap/080317/singapore_dbs_lehman.html?.v=5

Posted by Don Williams | March 17, 2008 4:50 PM

Wall Street just wanted access to the government's power to tax. Now they've got it, they want the government to go away.

Posted by Helter | March 17, 2008 5:37 PM

"Cramer says: “No! No! No! Bear Stearns is not in trouble. If anything, they’re more likely to be taken over. Don’t move your money from Bear.”"

Cramer's clarification of this today was that he was talking about the money in the e-mailer's account at Bear, not money invested in Bear's common stock. That seems to be the case from the transcript, though I'm sure Cramer now wishes he had made been more explicit about this distinction.

Posted by Fred | March 17, 2008 6:00 PM

Re Fred's comment "Cramer's clarification of this today was that he was talking about the money in the e-mailer's account at Bear, not money invested in Bear's common stock"
------------
Oh, come on.

Bear's an INVESTMENT BANK -- it largely deals with the Fed, other banks and corporations.

How many INDIVIDUALS have a high enough net worth to have an account at Bear -- and of those, how many would ask Jim Cramer for advice on how to manage their money?

Posted by Don Williams | March 17, 2008 6:22 PM

How many INDIVIDUALS have a high enough net worth to have an account at Bear

From what I can find, the minimum is $250k of investable assets. Not very high at all. Usually, that can be waived if you have another relationship that shows potential (i.e., you work for a particular firm and have high earning potential). So, that's actually a pretty big number who might, not that BSC's private client group was particularly robust.

and of those, how many would ask Jim Cramer for advice on how to manage their money?

Everyone's always looking to get a freebie from someone "in the know" (not that that necessarily describes Cramer) and an absurd number of people like to be mentioned in the Media. A better question is why does anyone ask Cramer a question other than "what is wrong with you?"

Posted by zaleriana | March 17, 2008 6:56 PM

What the Fed was really doing was preventing BSC's underlying assets from being "marked to market" because this would force write downs on the part of others holding similar assets, which are worth far less than what's booked on their balance sheets. It's just part of the Fed's attempt to hide the "Old Maid Cards" - all the crappy paper (or "innovative financial products" as Greenspan called them) - while they hope and pray that things turn around in the meantime.

BSC's stock price was over $159/share last year and the buyout price was $2/share. But let's see if Alan Schwartz gets a big shiny golden parachute on the way out.

Posted by kafka | March 17, 2008 10:39 PM

In many times I had notice variance speling and grammerical error on you're blogs. Do U text posts 2 atlanic.com?

...Seriously, dude, what is UP with your English usage?!

Posted by MR | March 17, 2008 11:30 PM

Kafka,

My understanding (someone correct me and provide a link if this is wrong) is that the "crappy paper" the Fed took as collateral from Bear was triple-A Fannie Mae securities. If that's true, it's more a case of the market for MBS being completely seized up. The solution would be for the Fed to buy up a massive amount of this paper at a significant discount to face, to put a floor under these securities and get them trading again. If the Fed bought up this paper at, say, a 50% discount, even if underlying mortgage defaults exploded from the current single-digit percentage to 20% or 30% (which is far higher than I've heard anyone predict), it would still stand to profit from the trade after the dust settles.

Posted by Fred | March 18, 2008 1:09 AM

Those seriously interested in what a gold standard could mean in this type of situation could do worse than to read Barry Eichengreen's book Golden Fetters.

Peter K's comment above:

"Being on the gold standard would be like taking the car which contains the locked engine and driving it off a cliff."

isn't a particularly precise analogy, but it conveys the right general impression.

Posted by STS | March 18, 2008 2:11 AM

Fred, no one knows what the "crappy" assets are - i'm not even sure the Fed does. you cannot do due diligence on a big investment bank in a weekend.

but since you asked for a link, from the wall street journal:

As part of Sunday's agreement by J.P. Morgan Chase & Co. to buy Bear, the Fed agreed to "fund up to $30 billion of Bear Stearns's less-liquid assets," J.P. Morgan said Sunday. The funding facilitated the takeover of Bear while eliminating the risk that a different buyer would quickly dump the assets, straining markets that are already in disarray.

Officials told reporters at a briefing Sunday that the Fed was assuming responsibility for the management of the assets. Several people familiar with the matter said the funding is structured so the Fed assumes both the risk of those assets declining in value and the profit if they rise in value.

The composition of those assets hasn't been disclosed, but they are likely to include some of the riskiest of the firm's holdings.

http://online.wsj.com/article/SB120580165705943813.html?mod=Leader-US

Posted by howard | March 18, 2008 2:44 AM

Don Williams,

Re "She thought the bearishness about Lehman was overrated "
-------------
Anyone remember my comment on Friday that the London financiers were saying another US bank (besides Bear) was in trouble?

Lehman was down by almost 38 percent today, but closed ONLY down 20 percent.

Lehman reports earnings tomorrow. heh heh heh

Lehman (LEH) is up 35% on 4.5x its average volume after announcing earnings.

Posted by Fred | March 18, 2008 1:15 PM