Yesterday I talked about how things were truly getting bad here in Ohio. In other parts of the country, in other tax brackets, things aren’t as critical, but they are still bad and getting worse for a lot of folks.
Take the employees of Bear Stearns. (Please, take them. JP Morgan’s getting rid of more than half of them.)
Employees at Bear Stearns were hardly celebrating the day after JPMorgan Chase raised its bid for Bear five-fold.
Instead, resignation, bitterness and anger gripped Bear staffers, who are also major shareholders, as they bustled into the fallen investment bank’s headquarters on a crisp, clear day in New York.
The new offer, while higher, was 88 percent below the stock’s value a month ago, wiping out what was for many the bulk of their personal wealth.
The mood is “very quiet, depressing. People are resigned to it,” one Bear employee, who has been at the company more than three years, said during a cigarette break outside the company’s headquarters in midtown Manhattan, which JPMorgan has secured the rights to buy at a discount even if the deal fails.
There are reports of stock offerings and bonuses being offered to those Bear employees that JP Morgan really wants to keep, but would you want to continue to work there after the company’s board decided to sacrifice you on the altar to keep their millions?
The fight continues over the buyout. JP Morgan has pulled off quite a coup here.
Aiming to seal the takeover, JPMorgan also struck a deal to buy 95 million new Bear shares — equivalent to a 39.5 percent stake — and Bear’s board members agreed to vote their 3.6 percent holdings in favor of the deal.
The revised offer values Bear, which recently ranked as the fifth-largest US investment bank, at about $2.1 billion, compared to $236 million under the original deal.
Bear employees, who owned more than 30 percent of the firm’s stock before JPMorgan’s share purchase deal, have collectively lost more than $3 billion over the last month.
They also now face massive layoffs, with media reports saying that JPMorgan will cut up to 50 percent of Bear’s 14,000 workers.
Folks are crying foul at that. My sympathy is limited, after all no company was deeper into the subprime mess and predatory lending than Bear Stearns. They got themselves into this mess and now the American taxpayer is being asked to get them out.
But the Battle for Bear isn’t over yet. That shareholder stock deal that JP Morgan pulled off is facing a serious legal challenge.
Two U.S. pension funds have asked a Delaware court for an emergency order to stall JPMorgan Chase from moving forward with its takeover of Bear Stearns, a plaintiff’s lawyer said on Tuesday.
JP Morgan has agreed to buy 95 million newly issued Bear shares, or a 39.5 percent stake. It is widely seen as giving JPMorgan a virtual lock on the proposed buyout, which requires majority shareholder approval. JPMorgan has said it hopes to acquire the newly issued shares by April 8.
The Detroit fund last week sued Bear Stearns in Delaware Chancery Court over the proposed JPMorgan buyout in a lawsuit seeking an injunction blocking the deal and damages for shareholders if it does close.
Since then, JPMorgan has raised its bid to $10 a share, up from $2 a share initially. But that’s still nowhere near Bear’s stock price of more than $170 a share last year.
“At this juncture, based on the public record and based on the company’s stock price, which continues to trade at a premium … the $10-a-share figure remains inadequate,” said Nespole, of law firm Wolf Haldenstein Adler Freeman & Herz LLP.
Nespole said the fund is coordinating efforts with another pension plan, the Wayne County Employees’ Retirement System, which filed a separate lawsuit on Monday over the merger.
A temporary restraining order, if granted, could block the issuance of the new Bear Stearns shares while the shareholders press their legal challenges to the deal.
But that challenge may never materialize.
But legal experts have said deal challengers likely would face a tough time persuading a Delaware judge to set aside the buyout. Investors, experts say, would have to argue that the Bear Stearns board failed in its fiduciary duties to all shareholders in agreeing to the takeover, a deal that was reached as the company faced imminent collapse and was brokered with the help of the U.S. government.
There’s little realistic chance of that. Too Big To Fail strikes again.
Meanwhile in Florida, another state hit hard by foreclosure and plummeting real estate prices, things are getting bad for the jumbo mortgage set.
Miami-area homeowner Richard Welch is spending $70 less on groceries a week after his house lost $145,000 in value. Rita Roland cut off 11 inches of hair to save on salon trips, and Victor Parris stopped drinking his favorite brands of dark ale.
“Absolutely, I feel less wealthy than I did in 2006,” said Welch, 48, a corporate tax auditor. He said he and his wife, Barbara, are slashing spending by 30 percent, including canceling their cable television.
The residents of Melrose Cove, a Miramar, Florida, subdivision 23 miles (37 kilometers) north of Miami, are cutting back after regional house prices tied with Las Vegas in dropping more than any other U.S. metropolitan area in January. They’re giving up shopping trips, restaurant dinners, movies and vacations, demonstrating how the housing market is damaging consumer spending and sentiment.
The Melrose Cove homeowners’ association expects to bring in $20,000 less in dues this year as residents struggle to pay bills. The group plans to reduce spending on landscaping, painting and other improvements by $41,000, said Welch, the association’s president.
Tragic, I know. But those pet care products, golf outings and weekly spa pedicures add up…and if they aren’t being purchased, the folks providing these goods and services get hurt, get laid off, or go under. As I said yesterday, we’re a consumer economy. Buying stuff accounts for 70% of America’s GDP. Without folks spending money on their lawns, hair, nails, and golf game, things start going south.
The money folks have used to spend on these things came primarily from the wellspring of rising home prices and equity. In the Miami area, home prices have dropped nearly 20% from this time last year. That’s a huge hit, losing $100,000 off your $500,000 home, especially if you’ve taken out an equity loan like most people have. Not everyone has chosen to do that, but it’s still a rough thing to lose that much.
“I looked at my house as a bank account that was going to accrue interest on a daily, monthly, annual basis,” she said. “I’m looking at not gaining money on this stock that I call a house, and may actually lose money.”
To save more than $1,600 a year, Roland said she cut her 14-inch-long hair to three inches so she wouldn’t have to pay for Japanese-style thermal straightening. She’s given up $400 monthly shopping trips to the mall with her 6-year-old son, and hasn’t bought any new clothes or shoes since October.
Roland said she never tapped her home equity with a line of credit. “I didn’t want the headache,” she said.
Martha Rodriguez, a 34-year-old executive assistant, said her husband’s sister bought the house next door for $330,000 with no down payment in 2006. Her sister-in-law, a manicurist from New York, moved out of Melrose Cove in August after her monthly house payments jumped to $3,000 from $1,900 and the property fell into foreclosure, Rodriguez said.
Next door to Parris, a 53-year-old energy analyst for the U.S. Coast Guard, is a home that’s been in foreclosure since last year.
It’s not just the working class Rust Belt families that are losing their homes. The financial disaster created by decades of deregulation and greed is now threatening to take out huge numbers of Americans from all walks of life.
The net effect of all these small cuts in spending all over the country and bigger losses in equity is that banks are cutting lending…to the tune of $2 trillion.
Peloton Partners LLP liquidated a $1.8 billion London hedge fund, gadget-retailer Sharper Image Corp. filed for bankruptcy — and Monica Tomasso is paying 35 percent interest to expand her school-lunch business.
The global credit crisis is squeezing businesses from the biggest, like Peloton, whose fund collapsed this month after banks demanded repayment of loans used to bet on mortgage securities, to the smallest, such as Tomasso, 34, whose Health e-Lunch Kids Inc. sells 6,000 meals a month online to parents in Fairfax, Virginia.
Credit is drying up as lenders, staggered by losses, try to raise capital and clamp down on financing for a U.S. economy that likely is in recession, economists at Goldman Sachs Group Inc. said in a March 7 report. The supply of credit for businesses and consumers may decline $2 trillion, the report said, equivalent to 7 percent of household, corporate and government debt.
“Financial markets and banks in particular are reliant on trust and confidence,” said Charles Bobrinskoy, vice chairman of Chicago-based Ariel Capital Management LLC, which oversees $13 billion. “When people start to lose that trust and confidence, they stop providing liquidity to each other, and that has all kinds of negative ramifications.”
Losses on home mortgages may reach $500 billion and as much as $656 billion on commercial real estate, other business loans, credit cards and autos, the Goldman report said.
We’re beginning to see the next wave of the financial crisis: trickle down from mortgages to commercial real estate, car loans, credit cards and business loans. This is what’s really going to start hurting the country in 2008 and 2009, especially if home prices keep falling as many expect they will.
The financial community keeps talking about a recovery in late 2008. I don’t see it happening, frankly. There’s just too much shit rolling downhill, and it keeps triggering worse crises every time, eventually it’s all just going to crumble. Two trillion dollars in lending cuts, a three trillion dollar war without end, billions in Fed bailouts into Wall Street…it can’t just magically stay up anymore. We’re tapped out, the rest of the world is tapped out, something’s got to give.
When it gives, and frankly it’s beginning to give now, then you need to be ready for it.
Be prepared.