Bear Stearns, the prominent investment bank and brokerage house based in New York, is being bought out by JP Morgan for about $2 a share, and with the assistance of the US Federal Reserve which is supplying $30 billion to “Bear Stearns’ less liquid assets” the first time since the 1920’s that the Federal Government has stepped in to bailout a brokerage firm. Last year Bear Stearns’ shares were worth as much as $170 a share for a total value of roughly $20 billion. The price is 93% of the value of those shares as of the market’s close on Friday when the share price was still $30 a share. In short, Bear Stearns is being auctioned off at fire sale prices.
This news led European stocks to lose as much as 3.2% of their value overnight, Japanese stocks to drop by 3.5%, the dollar to hit new lows, gold to hit new highs ($1030 an ounce) and crude oil to rise to $112 a barrel. God only knows what the US markets will do this morning. There is a word for situations like this, which brings me to my quote of the day from Michael Klawitter, “FX strategist at Dresdner Kleinwort” a German investment bank:
“The markets are in a complete state of panic and in such situations there is no such thing as valuation or value in any asset.”
The key word there is panic. That’s the word used to describe past market collapses. Panic is the opposite of rationality. Then again, the fact that many observers have been warning about the problems with all the funky assets financial institutions have acquired for several years now with little or no effect on the world’s stock markets (which continued to rise despite this knowledge) doesn’t exactly make past decisions by investors appear all that reasonable. They gambled that the big boys on Wall Street and at the Federal Reserve knew what they were doing. They gambled that deregulation of financial institutions, and accounting rules that let those institutions place unrealistic values on all the questionable assets they acquired during the US real estate bubble, wouldn’t hurt them.
Well guess what? The bubble has burst, the big boys on the Street and at the Fed weren’t all that smart and the gamble didn’t pay off, at least for anyone who hadn’t already sold out their positions. The cost of their mistakes and their unmitigated, unregulated greed, however, will have far reaching consequences far beyond the pain investors and investment bankers may be feeling today, and all the emergency quarter point cuts in the federal funds rate and relaxing the rules on who can pony up to the Fed’s window to buy all that cheap money won’t make a damn bit of difference. The levees have already been breached.
On the other hand, it’s likely to be a great day if you own oil stocks. Energy company stocks were big winners in Europe, and I suspect they will be big winners today in the American markets. Funny how that works out when you have a President and a Vice President tied so closely to the oil industry, isn’t it?
Update [2008-3-17 8:55:39 by Steven D]: Please also read Zandar’s recommended diary on the Bear Stearn’s debacle and his prediction for who is the next domino to fall.
Second Update [2008-3-17 9:38:3 by Steven D]: US Markets currently falling as of 9:38 am.
Third Update [2008-3-17 11:2:58 by Steven D]: Dow rallied but is still down from it’s close on Friday. NASDAQ has lost over 1% of its value, slightly better than it was earlier this morning. Federal Reserve is expected to lower rates again today.
