Chicken

by on March 16, 2008 at 6:32 pm in Current Affairs | Permalink

Suppose that Monday morning, Ben Bernanke is presented with a deal,
under which a buyer gets Bear assets on the cheap, Bear stockholders
get paid out, and the Fed (implicitly or explicitly) bears residual
risk. If the Fed doesn’t approve, executives say, Bear will file for
bankruptcy. Dr. Bernanke will then have an unappetizing choice. He can
say yes, and hope that there aren’t any more rumors out there about any
other firms. Or he can say no, and make it very clear that if Bear
Stearns files for bankruptcy despite the Fed’s continuing provision of
liquidity, he will do everything in his power to hold Bear executives
personally responsible for the crisis that results.

Who do you think has more bargaining power in this game?  The firm with the reputation for obnoxiousness and recklessness, or a charming, intelligent and indeed gentlemanly central banker?  We may know soon enough.  Here is more, and here, and don’t forget this.  Here is a news report, if you are interested in the background.

Update: Seems to be a deal…at about $2 a share.  Book value of about $80 a share. 

enplaned March 16, 2008 at 7:12 pm

The Fed should just announce that in the event of Bear Stearn’s bankruptcy, they’ll stand behind all of Bear’s unmet obligations. That would (1) allow the Bear equity holders to lose everything and allow Bear to be wound down and (2) keep the financial system from flying apart.

Bernard Yomtov March 16, 2008 at 7:53 pm

enplaned,

Pretty close. The shareholders get $2/share.

Dennis Delay March 16, 2008 at 8:13 pm

Accept the Bear Sterns deal at $2 a share, and cut the discount rate one quarter of a point at the same time. As a friend at the FDIC told me last November, its game on!

DK March 16, 2008 at 9:06 pm

1. What ‘personal responsibility’ do the execs need, other than
the fall of the stock price from $150 a year ago to $2 today? Bear’s ex CEO Cayne was a billionare in January, and is worth less than 10 million today, before counting debts and the legal fees that he’ll surely be paying.

2. how much risk does the Fed actually bear? JPM has assumed Bear’s counterparty risk, which is the part that matters for the financial system. Does the Fed only bear the risk that JPM too fails? They (or more accurately taxpayers) already bore that risk, as a JPM failure would be well in the N-word range.

IMHO being bought out for $2 is a bankruptcy in all but name. The $2 is presumably a premium for not facing bondholder lawsuits and bankruptcy court costs as well as shareholder lawsuits. It’s hard for me to see it as a ‘victory’ in a game of chicken.

russ March 16, 2008 at 10:30 pm

Tyler,
The root of the problem is Bernankes weak $ policy.

You cash in your appreciating euros for a depreciating asset(dollars) to buy another depreciating asset(US stocks), Ben has managed to shut off almost all ROW(rest of the world)investment in the US equity market.

Nice move Ben, all to help out our export market.
Stupid is as Stupid does.

Matthew March 16, 2008 at 10:48 pm

Short LEH premarket tomorrow around 9:00 AM.

They are next.

Wheels coming off the cart of the global financial system. . .

Barkley Rosser March 16, 2008 at 11:42 pm

russ,

For better or worse I think that the low interest rate policy of the Fed and Bernanke
has not been directed at saving the US export market. Rather it has been directed at
lowering the costs for banks to borrow to help prop them up. It has been directed at
avoiding things like what just happened with BS. Of course it has not worked so far,
at least partly because the falling dollar is stimulating a rising price of oil, which
in turn is adding to the destabilization of the financial markets and the degradation
of assets, which has underpinned the everincreasing problems in the banking sector.

Ben A March 17, 2008 at 12:10 am

In terms of holding the executives at Bear accountable, a sale at $2 is a lot rougher than bankrupcy. Remember with bankrupcy the inmates still run the asylum, and hang on with “retention” bonuses etc.

russ March 17, 2008 at 12:22 am

Barkley,

Do you agree with this:
It can decide to withdraw cash from circulation, doing so by taking the $1000 bond from its portfolio of assets and selling it on “the open market.” The decision on whether or not to buy bonds to create cash or sell bonds to extinguish cash is made by the Fed’s Board of Governors and the presidents of the regional Federal Reserve banks.

http://www.wanniski.com/showarticle.asp?articleid=4897

ranger_granger March 17, 2008 at 12:54 am

“At what point do the economists admit, that while they may have convincing explanations for past events, they have no freakin’ clue on how economies and markets actually work in real time.”

They — or at least, the laissez-faire economists — definitely have no freakin’ clue on how to LEARN from past events: how many market failures have to occur before people finally get it through their heads that deregulation leads only to disaster?

Anonymous March 17, 2008 at 1:02 am

Matthew,

A Bloomberg article has a positive take on Lehman (LEH) for the long term. For tomorrow on the other hand, you are right that they will probably take a hit.

russ March 17, 2008 at 1:35 am

Barkley,

A little more reading.

In 1991, Minister Cavallo expressed a philosophy of social contracts in explaining his position: “Each peso is a contract between the government and the peso holder. That contract guarantees that each peso — as a unit of value that the holder has worked hard to get — will be worth as much tomorrow as it is today. If the government breaks that contract, it’s breaking the law. The only role of the government in the economy should be to guarantee the integrity of market transactions.”

http://www.polyconomics.com/searchbase/g2-10-95.htm

Ziggurat March 17, 2008 at 2:14 am

Maybe the fed drove a harder bargain then you expected. Bear management and shareholders wiped out.

BSC debt is rescued. That would have been a mess and maybe taken others down.

The shorts who bought CDS’s don’t have a credit event. The huge credit derivative market won’t have to pay out on BSC.

If JPM got a great deal, then fine. They need to come out of this strong. If there was any question of them getting dragged down, then things get much uglier.

JPM gets to ‘sterilize’ $30 B in BSC assets. This takes care of most of their MBS and $9B in leveraged loan paper and commitments.

JPM is booking $6B in transaction costs or $50 per BSC share.

The other IB’s will have access to the discount window. No reason for them to fail for liquidity reasons.

John Quiggin March 17, 2008 at 4:52 am

Russ, is that the same Cavallo whose monetary policies (more or less implied by your quote) drove the Argentine economy into the ground? Can you find a more convincing source for this argument?

karl March 17, 2008 at 8:32 am

Weak dollar was Paulson idea.
Bernake has just arrived, If the Fed is to blame it is Greenspan fault.

Floccina March 17, 2008 at 11:06 am

The corporate person makes holding the executives (or investors) of any corportation impossible.

Floccina March 17, 2008 at 11:08 am

BTW Is this the revenge of the Austrian economists or what?

jamesn March 17, 2008 at 11:46 am

i think it is more interesting to see who is NOT caught up in the whole mortgage backed securities debacle. who? Warren Buffet. that’s who. he would not touch them with YOUR money. let alone his. so when they say “b-b-b-b-but everybody else was doing it too” laugh at them. and offer them a nice quiet place to lie down. and some vodka. they need it.

Charles March 17, 2008 at 3:01 pm

Speaking of imports, exports, and the falling value of the dollar, I saw a 37″ flat screen on sale at Best Buy for $667. It’s like they’re begging us to trade our depreciating dollars for worthless assets.

todo March 17, 2008 at 7:12 pm

As feared, foreign bond holders have begun to exercise a collective vote of no confidence in the devaluation policies of the US government. The Federal Reserve faces a potential veto of its rescue measures.

Asian, Mid East and European investors stood aside at last week’s auction of 10-year US Treasury notes. “It was a disaster,” said Ray Attrill from 4castweb. “We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed.”

Russell Nelson March 18, 2008 at 12:10 am

j@ne, what would you suggest? MORE regulation? It’s the regulation that’s gotten us into trouble. Adam Smith knew that 200 years ago. More mercantilism is no solution to the ills of mercantilism.

goober March 19, 2008 at 2:11 am

Um, Russell Nelson: A country with a 30 year long run of trade deficits hardly seems to meet even the threshold for being considered a practitioner of mercantilism.

lucy May 14, 2009 at 2:56 am

an interesting story

macheal May 14, 2009 at 2:58 am

thanks for your story

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