Sunday, March 16, 2008

Bear Goes Bust

Fed cuts by 1/4 point, world markets crash anyway, whoop de do, peoples is so predictible.

Ben Bernanke, is the right man, in the right job, at the right time, and makes the right move.

It is maybe the only move that can set the ship straight. There are those who will say, the Fed should stay out of this, let Bear go under, it sets a bad precedent, whatever. What these columnists fail to see is that Bear Sterns is only symbolic. That what we have to fear is fear itself. To do nothing, at this stage of events, would likely result in a world wide financial collapse.

From what I have been able to read, Morgan Stanley will buy out Bear Sterns for 0.05473 JPM share per share of BSC, Yes, the shareholders of BSC are getting screwed to which they have my sympathy, but my hunch is that despite the rhetoric, there will not be much recourse This is less about Bear Sterns and more about a symbolic management of the capital outflows on all the other fronts. As I write this the Asian markets are down close to 5% and the DJIA futures contract is down about 500 points in overnight trading.

The hedge funds are in a full panic mode and the mystical PPT is going to work. This is a buying opportunity in the making, Monday may be a bit black and blue, but somewhere along the line here, the worst of the news will be factored into the market and prices will stabilize. Until then, be cautious.

Stuff the Fed said:

Press Release
Release Date: March 16, 2008

The Federal Reserve on Sunday announced two initiatives designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for the promotion of economic growth.

First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

Second, the Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately. This step lowers the spread of the primary credit rate over the Federal Open Market Committee’s target federal funds rate to 1/4 percentage point. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days.

The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc.

Press Release
Federal Reserve Announces Establishment of Primary Dealer Credit Facility
March 16, 2008

The Federal Reserve has announced that the Federal Reserve Bank of New York has been granted the authority to establish a Primary Dealer Credit Facility (PDCF). This facility is intended to improve the ability of primary dealers to provide financing to participants in securitization markets and promote the orderly functioning of financial markets more generally.

The PDCF will provide overnight funding to primary dealers in exchange for a specified range of collateral, including all collateral eligible for tri-party repurchase agreements arranged by the Federal Reserve Bank of New York, as well as all investment-grade corporate securities, municipal securities, mortgage-backed securities and asset-backed securities for which a price is available.

The PDCF will remain in operation for a minimum period of six months and may be extended as conditions warrant to foster the functioning of financial markets.

If we get out of this in one piece Ben is going to look like a hero.

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