Monday, April 07, 2008
The Last Worthwhile Part of the Old Firm is to be Destroyed
by Ken Houghton
These are the workers one would see every day, working hard and getting their jobs done. Many of them long predate my first time there, in the early 1990s.
And none of them ever made thousands or millions or even billions of dollars of shareholder value go away.
Stick a fork in it; one way or another, Bear Stearns is gone.
Even Jimmy Cayne didn't screw this one up, but Jamie Dimon plans to ruin the one Unarguably Good Thing they did:
JPMorgan Chase...wants to dismantle the firm's jobs program for people with disabilities, according to sources familiar with the matter.
That means about 40 Bear workers with disabilities who were given jobs at the firm over the years will likely be laid off.
These are the workers one would see every day, working hard and getting their jobs done. Many of them long predate my first time there, in the early 1990s.
And none of them ever made thousands or millions or even billions of dollars of shareholder value go away.
Stick a fork in it; one way or another, Bear Stearns is gone.
Labels: The New Gilded Age, The Old Firm
Thursday, April 03, 2008
In the Meantime, We are Reminded what the phrase "Representative Government" Means
by Ken Houghton
And I start fearing for the democratic process, because seeing Christopher Cox explaining financial markets as if he knows anything about them other than how to provide patronage is scary.
So it is reassuring to see this piece on Political Radar, as a reminder of that vox populi does, occasionally, work:
In the world of economists, this will probably be seen as an inefficient solution, encouraging the (mythical) Moral Hazard.
But in the real world, Congress has ready access to Wall Street bailout advocates. It's only on vacation that they speak with the people who elect them.
It appears that Gore Vidal is correct that the Congressional offices and buildings should never have been fitted with air conditioning: not because of the mischief-making, but rather because it reduces the chance of their getting actual voter input.
I'm watching (mercifully, with the sound off) Christopher Cox (R-CA; patronage job as SEC Chairman), if CNBC is correct, blatantly lie to Congress (CNBC Chyron: "What happened to Bear Stearns was unprecedented" Let's see: a major financial player with large bets in a specific market sector gets caught ignoring the rule "The market can stay irrational longer than you can stay liquid." Where have we heard that before?) and figuring that Yves or Steve Randy Waldman will take care of it so I don't have to.
And I start fearing for the democratic process, because seeing Christopher Cox explaining financial markets as if he knows anything about them other than how to provide patronage is scary.
So it is reassuring to see this piece on Political Radar, as a reminder of that vox populi does, occasionally, work:
In the Senate this week, a bipartisan bill to help stem the tide of foreclosures nationwide is sliding through the senate like water on Teflon.
A similar bill fell prey to partisan bickering at the end of February when Republicans blocked it after Democrats refused to allow unrelated amendments.
What happened between then and now to end the partisanship? Vacation. That's what. Because while most people take vacation to forget about their jobs, in Congress they take vacation to go talk to their bosses, the people.
"I suspect the other major event was the fact we went home for a couple of weeks. Nothing like going home, Mr.. president, to get a message," said Sen. Chris Dodd, the chairman of the Senate Banking Committee, who engineered the bipartisan bill in a marathon 20 hour bipartisan brainstorming session with Sen. Richard Shelby, R-Ala....
"But they asked the legitimate question, if it was good enough for people to get together to solve a problem on Wall Street, what about the problem on my street? What are you doing here to see to it I can stay in my home? That our neighborhood will not collapse? That our taxes and properties and neighborhoods will not further deteriorate? I suspect more than anything else, going homemade a big difference and -- going home made a big difference."
In the world of economists, this will probably be seen as an inefficient solution, encouraging the (mythical) Moral Hazard.
But in the real world, Congress has ready access to Wall Street bailout advocates. It's only on vacation that they speak with the people who elect them.
It appears that Gore Vidal is correct that the Congressional offices and buildings should never have been fitted with air conditioning: not because of the mischief-making, but rather because it reduces the chance of their getting actual voter input.
Labels: Democracy, High Finance, Moral Hazard, Regulation, The Old Firm
Wednesday, April 02, 2008
Even I'm Not that Gullible
by Ken Houghton
It wasn't until I read the link at this post from Steve Gould of EoB that I realized that yesterday was more than the traditional birthday of our cat.*
So I'm gullible. But even I'm not as gullible enough to believe the claim of Lehmann's CEO today that he has evidence that hedge funds "conspired" to destroy Bear Stearns by short-selling.
It's not that I don't believe multiple hedge funds shorted the firm, or even that some of them spoke with each other. But the conversation was more likely,"Are you short BSC?" "Better believe it. You too?" "Of course." than some clandestine activity.
Let's be clear: when your firm is leveraged over 30x itself, when most of your revenues come from an area that hasn't generated enough volume to support your structure in over a year (even after two major rounds of layoffs), and when your swap spreads blow out by a factor of 15 or 20 in the course of a few weeks, short sellers (who have to risk a lot more capital than derivatives traders) are the least of your concerns. Or just the icing on the cake.
Mark Gilbert mostly gets it right here:
And, to be clear, when you have done Jack about it in the month leading up to the day before Ben Bernanke decides he needs to help you because no one else will, two dollars a share is for the other shareholders; getting punched out in the gym (note the correction at 7:53a.m. on 3/28) is Getting Off Easy.
But the seeds of Alan Schwartz's destruction-by-inaction were, as Gilbert notes, planted in 1998:
Only the Stevens Levitt and Dubner might be surprised by that reaction. The rest of us noticed that, when rumors of an illiquid Lehmann started spreading, the first thing that happened was that Goldman Sachs trotted out a Senior Executive to confirm that they view Lehmann as (something like) "a strong, viable competitor."
When rumors started about Bear, there was about three days of silence, followed by the negotiations of March 14-16 to avoid Chapter 11 on the 17th.
That may be a case of revenge being a dish best served cold. Maybe the calls were made and no one was willing to do what Goldman did for Lehmann.
But all of the other evidence is that upper management just didn't realise that its job isn't to manage departments so much as to manage public perception by making certain that anything that might worry investors—say, the market for your CDS swap spreads going well past junk levels—is handled quickly and publicly.
That's why they pay the CEO—and the Board of Directors—the big bucks and bigger stock options. In early March, several "leaders" of BSC proved they were overpriced.
*No picture, in keeping with this plea.
Metro reported yesterday that CBS's Les Moonves was so impressed by Britney Spears's appearance on How I Met Your Mother that they decided to make her the centerpiece of a show—a remake of the Mary Tyler Moore Show.
It wasn't until I read the link at this post from Steve Gould of EoB that I realized that yesterday was more than the traditional birthday of our cat.*
So I'm gullible. But even I'm not as gullible enough to believe the claim of Lehmann's CEO today that he has evidence that hedge funds "conspired" to destroy Bear Stearns by short-selling.
It's not that I don't believe multiple hedge funds shorted the firm, or even that some of them spoke with each other. But the conversation was more likely,"Are you short BSC?" "Better believe it. You too?" "Of course." than some clandestine activity.
Let's be clear: when your firm is leveraged over 30x itself, when most of your revenues come from an area that hasn't generated enough volume to support your structure in over a year (even after two major rounds of layoffs), and when your swap spreads blow out by a factor of 15 or 20 in the course of a few weeks, short sellers (who have to risk a lot more capital than derivatives traders) are the least of your concerns. Or just the icing on the cake.
Mark Gilbert mostly gets it right here:
U.S. and U.K. regulators are wasting their time threatening traders who profit from speculation about the deteriorating health of the financial community. The gossips aren't to blame for the demise of Bear Stearns Cos., and they won't be at fault when the next firm goes bang, either.
Brokers, futures traders, collateral managers and compliance officers are ranking their counterparties from strongest to weakest, and choosing to stop doing business with whichever company comes bottom. If the same name gets crossed out on every list, it spells game over for the loser -- deserved or not.
And, to be clear, when you have done Jack about it in the month leading up to the day before Ben Bernanke decides he needs to help you because no one else will, two dollars a share is for the other shareholders; getting punched out in the gym (note the correction at 7:53a.m. on 3/28) is Getting Off Easy.
But the seeds of Alan Schwartz's destruction-by-inaction were, as Gilbert notes, planted in 1998:
In his 2001 book When Genius Failed, Roger Lowenstein details the Fed's crucial 1998 meeting to convince Wall Street that it should shoulder the financial burden of keeping Long-Term Capital Management LP afloat or risk financial meltdown.
James Cayne, the CEO of Bear Stearns, told his peers—including Philip Purcell of Morgan Stanley and Herbert Allison of Merrill Lynch—that his company wouldn't join the 14 securities firms paying for the rescue.
"In unison, the CEOs demanded an explanation," Lowenstein writes. "This only made Cayne more resolute. Bear had enough exposure as a clearing agent, Cayne said. He wouldn't say more. Suddenly these paragons of individual enterprise seethed with communitarian fervor. Purcell of Morgan Stanley turned beet red. He fumed, 'It's not acceptable that a major Wall Street firm isn't participating!' It was as if Bear were breaking a silent code; it would pay a price in the future, Allison vowed."
Only the Stevens Levitt and Dubner might be surprised by that reaction. The rest of us noticed that, when rumors of an illiquid Lehmann started spreading, the first thing that happened was that Goldman Sachs trotted out a Senior Executive to confirm that they view Lehmann as (something like) "a strong, viable competitor."
When rumors started about Bear, there was about three days of silence, followed by the negotiations of March 14-16 to avoid Chapter 11 on the 17th.
That may be a case of revenge being a dish best served cold. Maybe the calls were made and no one was willing to do what Goldman did for Lehmann.
But all of the other evidence is that upper management just didn't realise that its job isn't to manage departments so much as to manage public perception by making certain that anything that might worry investors—say, the market for your CDS swap spreads going well past junk levels—is handled quickly and publicly.
That's why they pay the CEO—and the Board of Directors—the big bucks and bigger stock options. In early March, several "leaders" of BSC proved they were overpriced.
*No picture, in keeping with this plea.
Labels: hedge funds, High Finance, leverage, liquidity, The Old Firm
Tuesday, March 25, 2008
The Price Increase: a BS violation, but maybe with a purpose
by Ken HoughtonBailout Stock Offer Increase. And I think I have a theory that makes as much sense as any other.
As Carney notes, many of us who said nothing at the $2 level are screaming Bailout at the four-fold increase.* (Tom and cactus, as I noted yesterday, were ahead of the curve—I still think they were wrong, but let's go with prescient.) And, to give him credit, he also notes that this (1) may have been necessary for the market and (2) the shareholders could still make a lot of trouble (if they're asstupidstubborn as Yves, for one, believes they are).
Let us think for a minute about Black-Scholes. One of the key elements of the model is that square root of time thing: the longer you have to expiry, the higher the time value of the option.**
JPMC just went from having a lock-in until March of 2009 to needing things to be done on 8 April 2008. And they're paying more.
But, to reference another former firm,*** there was a period of time—around mid-2000, iirc—where Carly Fiorina (whose leadership and management skills are legendary) got it into her head to buy the consulting arm of PwC for about $18 billion. And negotiations went on and on. Others from the HP side talked it down to about $11 billion, and then HP decided that the employee turnover rate (the best of the Big Five, but still twice what HP was used to seeing) was too high. So the deal was called off.
For the six or seven months of that roundelay, though, the senior partners of PwC did virtually no Business Development. (Exceptions noted, but they were exceptions.) They were, as it were, counting their money.
So by the time the deal fell apart, the pipeline was dry. And along came a recession, and then 11 Sep 2001, and finally the business was sold to IBM in mid-to-late 2002 for, iirc, $3 billion.**** (HP went out and found a company with a low turnover ratio—Compaq—and the synergies created there made it a powerhouse that has only added to Ms. Fiorina's reputation.*****)
Now, I'm not saying that the time spent on the failed HP merger drained between 75 and 83% of the value of the company—but there's a reasonable argument that the market did, and it is certainly true that distracted partners don't generate the revenue stream that dedicated ones do.******
Now think about that in the context of an investment bank, where the cash flows are larger, quicker, and more fleeting. A business idea that is six months old still has value. A trading algorithm that gets delayed six months is likely to lead to losses.
So I suspect believe that Jamie Dimon has just played the last trump: "You want another $1 billion for the equity holders? All right, but you've got to finalize the agreement on this deal in the next two weeks, or I'm taking your building. And, by the way, if the deal fails, the market has already smelled blood twice. So Bring It On, if you want. But be careful what you wish for; you may get it."
Whether he finished with "Do you feel lucky, punk?" is left as an exercise to the reader. But with the value of the assets declining daily, Dimon probably realised that Black-Scholes wasn't the model to use for valuation.
It's still a bailout, but it appear to have a working logic to it.
*Yes, I said four- not five-, fold. Round figures, the swap went from 0.05 JPMC shares per BSC share to 0.21 shares, which is just over a four-fold increase (ca. 320%). The rest of the appreciation came from the rise in JPMC's stock.
**It's also one of the reasons no one would ever use the standard model to price a long-dated option. But that's a sidebar, not relevant to the example at hand.
***I've got a million of them. Well, sometimes it feels that way.
****None of these numbers or dates is necessarily accurate, but I believe they're close. You can look them up.
*****This you can definitely look up.
******It was legend at Bear that one of the then-current Compensation Committee members had maneuvered his nearest rival out of the job when the latter was tending to his cancer-stricken wife. But again I digress.
I've been trying to figure out the
As Carney notes, many of us who said nothing at the $2 level are screaming Bailout at the four-fold increase.* (Tom and cactus, as I noted yesterday, were ahead of the curve—I still think they were wrong, but let's go with prescient.) And, to give him credit, he also notes that this (1) may have been necessary for the market and (2) the shareholders could still make a lot of trouble (if they're as
Let us think for a minute about Black-Scholes. One of the key elements of the model is that square root of time thing: the longer you have to expiry, the higher the time value of the option.**
JPMC just went from having a lock-in until March of 2009 to needing things to be done on 8 April 2008. And they're paying more.
But, to reference another former firm,*** there was a period of time—around mid-2000, iirc—where Carly Fiorina (whose leadership and management skills are legendary) got it into her head to buy the consulting arm of PwC for about $18 billion. And negotiations went on and on. Others from the HP side talked it down to about $11 billion, and then HP decided that the employee turnover rate (the best of the Big Five, but still twice what HP was used to seeing) was too high. So the deal was called off.
For the six or seven months of that roundelay, though, the senior partners of PwC did virtually no Business Development. (Exceptions noted, but they were exceptions.) They were, as it were, counting their money.
So by the time the deal fell apart, the pipeline was dry. And along came a recession, and then 11 Sep 2001, and finally the business was sold to IBM in mid-to-late 2002 for, iirc, $3 billion.**** (HP went out and found a company with a low turnover ratio—Compaq—and the synergies created there made it a powerhouse that has only added to Ms. Fiorina's reputation.*****)
Now, I'm not saying that the time spent on the failed HP merger drained between 75 and 83% of the value of the company—but there's a reasonable argument that the market did, and it is certainly true that distracted partners don't generate the revenue stream that dedicated ones do.******
Now think about that in the context of an investment bank, where the cash flows are larger, quicker, and more fleeting. A business idea that is six months old still has value. A trading algorithm that gets delayed six months is likely to lead to losses.
So I suspect believe that Jamie Dimon has just played the last trump: "You want another $1 billion for the equity holders? All right, but you've got to finalize the agreement on this deal in the next two weeks, or I'm taking your building. And, by the way, if the deal fails, the market has already smelled blood twice. So Bring It On, if you want. But be careful what you wish for; you may get it."
Whether he finished with "Do you feel lucky, punk?" is left as an exercise to the reader. But with the value of the assets declining daily, Dimon probably realised that Black-Scholes wasn't the model to use for valuation.
It's still a bailout, but it appear to have a working logic to it.
*Yes, I said four- not five-, fold. Round figures, the swap went from 0.05 JPMC shares per BSC share to 0.21 shares, which is just over a four-fold increase (ca. 320%). The rest of the appreciation came from the rise in JPMC's stock.
**It's also one of the reasons no one would ever use the standard model to price a long-dated option. But that's a sidebar, not relevant to the example at hand.
***I've got a million of them. Well, sometimes it feels that way.
****None of these numbers or dates is necessarily accurate, but I believe they're close. You can look them up.
*****This you can definitely look up.
******It was legend at Bear that one of the then-current Compensation Committee members had maneuvered his nearest rival out of the job when the latter was tending to his cancer-stricken wife. But again I digress.
Labels: financetheory, High Finance, Moral Hazard, The Old Firm
The Moral Hazard Contagion Spreads
by Ken Houghton
Yes, the plural of anecdote is not data, but the timing here is not coincident.
More later.
UPDATE: I see cactus at AngryBear is thinking the same way, though rather more like an economist than a taxpayer.
Tanta notes that Wells Fargo is begging, which they weren't doing when the BSC price was $2/share.
Yes, the plural of anecdote is not data, but the timing here is not coincident.
More later.
UPDATE: I see cactus at AngryBear is thinking the same way, though rather more like an economist than a taxpayer.
Labels: bankruptcy, High Finance, Moral Hazard, The Old Firm
Monday, March 24, 2008
A Buyout is a Buyout, No Matter How Small
by Ken Houghton
UPDATE II (via Dr. Black): There is a reason to renegotiate the contract from the JPMC side, but it should hardly be worth 4x the price of the firm, unless the stuff really is pure shite. Which would make this a true textbook case of Moral Hazard. Anyone taking bets whether Mankiw or Varian or any of the other intro or intermediate texts ever cites it? UPDATE V: John Carney gives the lie to that claim.
UPDATE III: The pity party thrown last week by the WSJ for Bear's senior, er, management appears to have omitted some data:
UPDATE IV: And it becomes official:
The Old Firm is projected to open trading today between 9.87 and 9.88 per share. Since its current takeover offer is slightly over $2/share ($2.41 last I looked, based on the then-current JPMChase price), and it was around $6.39 Thursday night, there is clearly a different type of Resurrection on the market's mind.
If the market turns out to be correct, then[It was; see Updates above] I will change my mind and agree with Tom and Cactus that the actions last weekend were a bail-out, even if the Fed didn't intend them to be.
Until then, the severance offer* alone strongly suggests that most of the employees will vote their shares in favor of the takeover.
*Three weeks per year of service for the first five years, two weeks for each year after that, and last year's bonus paid for this year. This is only slightly worse** than what the people who were severed in November got.
**November was three weeks per year, regardless of service time.
UPDATE: Well, that was quick. A Bailout is a Bailout, No Matter How Small.
UPDATE II (via Dr. Black): There is a reason to renegotiate the contract from the JPMC side, but it should hardly be worth 4x the price of the firm, unless the stuff really is pure shite. Which would make this a true textbook case of Moral Hazard. Anyone taking bets whether Mankiw or Varian or any of the other intro or intermediate texts ever cites it? UPDATE V: John Carney gives the lie to that claim.
UPDATE III: The pity party thrown last week by the WSJ for Bear's senior, er, management appears to have omitted some data:
Insiders at Bear sold a total of 715,000 shares last year worth more than $75 million, up from 2006 but down considerably from 2004, when sales of more than 1.5 million shares worth $147.9 million took place, the data show.
Since 2000, Cayne has sold 2.37 million shares worth about $182.7 million, while Schwartz has sold more than one million shares for roughly $67.2 million.
UPDATE IV: And it becomes official:
JPMorgan Chase & Co. (NYSE: JPM) and The Bear Stearns Companies Inc. (NYSE: BSC) announced an amended merger agreement regarding JPMorgan Chase's acquisition of Bear Stearns.
Under the revised terms, each share of Bear Stearns common stock would be exchanged for 0.21753 shares of JPMorgan Chase common stock (up from 0.05473 shares), reflecting an implied value of approximately $10 per share of Bear Stearns common stock based on the closing price of JPMorgan Chase common stock on the New York Stock Exchange on March 20, 2008.
The Old Firm is projected to open trading today between 9.87 and 9.88 per share. Since its current takeover offer is slightly over $2/share ($2.41 last I looked, based on the then-current JPMChase price), and it was around $6.39 Thursday night, there is clearly a different type of Resurrection on the market's mind.
Until then, the severance offer* alone strongly suggests that most of the employees will vote their shares in favor of the takeover.
*Three weeks per year of service for the first five years, two weeks for each year after that, and last year's bonus paid for this year. This is only slightly worse** than what the people who were severed in November got.
**November was three weeks per year, regardless of service time.
Labels: Economics, FRBOperations, Moral Hazard, teaching, The Old Firm
Friday, March 21, 2008
A Fate Worse Than A Fate Worse Than Death
by Tom Bozzo
On a maybe related note, I was scratching my head over the NYT editorial board's observation that:
[*] See here for explanation. Also please keep in mind the cultural subtext of the "worst X ever" formulation.
Cheers to Angry Bear's Cactus for pushing back against the meme that the near-wipeout of Bear Stearns shareholders means that there wasn't a bailout on. (For an example, hear Laurence Meyer in this NPR segment, which for the record starts with possibly the worst explanation ever of the origins of the present crisis from reporter Adam Davidson. [*])
On a maybe related note, I was scratching my head over the NYT editorial board's observation that:
[I]f the objective is to encourage prudent banking and keep Wall Street’s wizards from periodically driving financial markets over the cliff, it is imperative to devise a remuneration system for bankers that puts more of their skin in the game.Oh really? Whether or not it was enough, Jimmy Cayne experienced a 9-figure paper loss last weekend. The LTCM partners' large share of the fund's equity didn't stop them from almost blowing up the markets.
[*] See here for explanation. Also please keep in mind the cultural subtext of the "worst X ever" formulation.
Labels: High Finance, The Old Firm
Thursday, March 20, 2008
When You're Being Sued by Detroit...
Wednesday, March 19, 2008
Bear Investors bet that Moral Hazard Doesn't Exist for Them
by Ken Houghton
There will be a lot of noise about this over the next few months, and someone (not me) will get a nice dissertation out of the results.
Most interesting, though, from an asymmetrical information point of view, is this one, which notes that the inept Christopher Cox-led (but I repeat myself) SEC:
The Bear speculators are treating the stock as if it were SCO, which for a few years was basically a gamble on a successful lawsuit. That effort has not been pretty.
Strangely, their greatest hope may also be their greatest weakness, renowned bridge player and former CEO Jimmy Cayne. As the New York Post notes:
The "I was for it before I was against it" strategy is not something I want to gamble $4/share on. Your taste for lawsuits may vary—just be certain they are suits in your favor, not against you.
The Wall Street Journal has several articles today on the death of The Old Firm. Most interesting is "Heard on the Street" (link requires sub), where investors appear to have decided to play a game of Chicken with both Jamie Dimon and the Federal Reserve.
There will be a lot of noise about this over the next few months, and someone (not me) will get a nice dissertation out of the results.
Most interesting, though, from an asymmetrical information point of view, is this one, which notes that the inept Christopher Cox-led (but I repeat myself) SEC:
issued a written statement suggesting it has expanded an inquiry into Bear Stearns Cos. to include what was or wasn't said in the two months leading up to the brokerage firm's unraveling.
The SEC, which is usually mum about investigations, said its enforcement division wrote a letter as J.P. Morgan Chase & Co. was negotiating to take over Bear. The letter addressed to J.P. Morgan concerned "investigations and potential future inquiries into conduct and statements by Bear Stearns before the public announcement of the transaction with J.P. Morgan."
The Bear speculators are treating the stock as if it were SCO, which for a few years was basically a gamble on a successful lawsuit. That effort has not been pretty.
Strangely, their greatest hope may also be their greatest weakness, renowned bridge player and former CEO Jimmy Cayne. As the New York Post notes:
Cayne, who is a member of Bear's board of directors and voted for the JPMorgan deal, could risk further embarrassment if he threatens to vote against the deal, sources said.
The "I was for it before I was against it" strategy is not something I want to gamble $4/share on. Your taste for lawsuits may vary—just be certain they are suits in your favor, not against you.
Labels: High Finance, Moral Hazard, The Old Firm
Monday, March 17, 2008
"15 years investment in a place lost in a blink of an eye"
by Ken Houghton
The assets are leaving the building, with bags, binders, and other manners of carrying personal memorabilia.
It's probably a good time to sell all my old Koalas and Dalmatians with "Bear Stearns" attire on eBay. But I rarely time the market perfectly, so let's just make this a Day of Mourning.
Happy St. Patrick's Day: from all the snakes out of Ireland to all the Bear Faithful out of 383. Requiescat in pace.
There are bodies—generally decapitated, but occasionally CNBC is showing heads as well; familiar people from the company cafeteria or the elevators or the floors—walking out of 383 Madison.
The assets are leaving the building, with bags, binders, and other manners of carrying personal memorabilia.
It's probably a good time to sell all my old Koalas and Dalmatians with "Bear Stearns" attire on eBay. But I rarely time the market perfectly, so let's just make this a Day of Mourning.
Happy St. Patrick's Day: from all the snakes out of Ireland to all the Bear Faithful out of 383. Requiescat in pace.
Labels: The Old Firm
Sunday, March 16, 2008
Profit Sharing -- Not even at 1992 prices
by Ken Houghton
This time, for once, it appears the Fed did its job: tried to save the market, not the malfeasant firm.
But $2 a share is brutal. At that level, even Jamie Dimon and the crackManny Hanny Chemical Chase JPMChase JPMChaseBankOne takeover team might be able to make a profit on this.
It's always been especially true at BSC that the assets walk out the door at the end of the day. The question now is how many of them will bother to walk in the door on Monday.
The counterpoint, somewhat, is offered by Steven Randy Waldmann, citing the always worth reading jck of Alea, while Mish suggests that derivatives may be a major issue, which is possible but unlikely, save in the balance between long- and short-term assets.
But after Carlyle got squeezed, and now BSC has fallen, it seems fair to ask exactly what the purpose of the TSLF is.
Unless, of course, you assume that market participants are using the three weeks (now 11 days) before it starts to kill of some competition. And no one in the financial services industry would do that, would they?
Iirc, and I probably don't, the first time I got BSC stock options was during my first go-round there. They were around $50/share, which was a minor premium when issued and a discount by the next year.
This time, for once, it appears the Fed did its job: tried to save the market, not the malfeasant firm.
But $2 a share is brutal. At that level, even Jamie Dimon and the crack
It's always been especially true at BSC that the assets walk out the door at the end of the day. The question now is how many of them will bother to walk in the door on Monday.
The counterpoint, somewhat, is offered by Steven Randy Waldmann, citing the always worth reading jck of Alea, while Mish suggests that derivatives may be a major issue, which is possible but unlikely, save in the balance between long- and short-term assets.
But after Carlyle got squeezed, and now BSC has fallen, it seems fair to ask exactly what the purpose of the TSLF is.
Unless, of course, you assume that market participants are using the three weeks (now 11 days) before it starts to kill of some competition. And no one in the financial services industry would do that, would they?
Labels: FRBOperations, High Finance, Moral Hazard, nce, The Old Firm
Friday, March 14, 2008
It Really IS time to move my 401(k)
by Ken Houghton
And that's the good news.
Now, let us translate:
People have noticed that our CDS spreads are higher than Argentine debt ca. 2001.
To do this, we enlisted Margaret Seltzer, who came highly recommended by James Frey.
Nobody believed me on CNBC yesterday; my e-mail has been filled with "The truth will set you free."
We threw ourselves on the mercy of the Fed and JPMC, which may do for us what BofA's support has done for Countrywide.*
In the desperate hope that, since Jimmy's gone, the people who remember that we kept all the LTCM collateral for ourselves will be nicer to us than he was to them.
*Insert your own Eliot Spitzer/Jessica Cutler joke here
Via Felix, a short, sharp shock:
With the support of the Federal Reserve Bank of New York, JPMorgan said in a statement that it had “agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days.”
For the next month, JPMorgan will work with Bear Stearns to reach a solution for its financing crisis. Options could include organizing permanent financing or, according to people briefed on the discussions, buying the bank for a discounted price.
“JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company,” JPMorgan said in its statement.
And that's the good news.
Now, let us translate:
In a statement issued on Friday, [Bear’s chief executive, Alan Schwartz] said: “Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity.
People have noticed that our CDS spreads are higher than Argentine debt ca. 2001.
We have tried to confront and dispel these rumors and parse fact from fiction.
To do this, we enlisted Margaret Seltzer, who came highly recommended by James Frey.
Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated.
Nobody believed me on CNBC yesterday; my e-mail has been filled with "The truth will set you free."
We took this important step
We threw ourselves on the mercy of the Fed and JPMC, which may do for us what BofA's support has done for Countrywide.*
to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.”
In the desperate hope that, since Jimmy's gone, the people who remember that we kept all the LTCM collateral for ourselves will be nicer to us than he was to them.
*Insert your own Eliot Spitzer/Jessica Cutler joke here
Labels: credit, High Finance, liquidity, The Old Firm
Monday, February 11, 2008
Time to Go Long Subprime?
by Ken Houghton
So when we see at Housing Wire that Bear—the #2 originator of MBS—is short $1 billion worth of securities, after having been long $1 billion in August, is it possible that this is the light at the end of the tunnel?
Or just sleight of hand, as the Bloomberg article notes:
Nor should he. But the implication is that they are short the securities that have a chance of appreciating, and long securities that have nowhere to go but down.
So maybe it's not an indicator at all. 2010 is looking more and more as if it will be something other than The Year We Make Contact. (R.I.P. Roy Scheider)
Yes, this post is snarky, but BSC formed a "work-out" team back in January/February of 2007—and then appears to have downsized most of them just as the HOPE NOW program was initiated.
So when we see at Housing Wire that Bear—the #2 originator of MBS—is short $1 billion worth of securities, after having been long $1 billion in August, is it possible that this is the light at the end of the tunnel?
Or just sleight of hand, as the Bloomberg article notes:
In an interview after Molinaro's remarks, Bear Stearns spokesman Russell Sherman said the New York-based firm's subprime trades are a "hedge" against potential losses on investments in higher-rated mortgages, he said.
"We are using short positions to offset other long positions in our mortgage inventory," Sherman said. He didn't provide details on specific trades.
Nor should he. But the implication is that they are short the securities that have a chance of appreciating, and long securities that have nowhere to go but down.
So maybe it's not an indicator at all. 2010 is looking more and more as if it will be something other than The Year We Make Contact. (R.I.P. Roy Scheider)
Labels: mortgage, subprime, The Old Firm
Tuesday, January 22, 2008
When You Know Your World Is Too Small
by Ken Houghton
A Google search for "Warren Spector"—looking for the former Bear Stearns leader who was ousted by Jimmy Doobie-Doo—produced a full first page--of Caroline's (of EOB fame) husband.
Labels: Eat Our Brains, The Old Firm
Monday, January 14, 2008
It hurts!
by Ken Houghton
On CNBC right now: my old friend Larry Kudlow speaking with Ben Stein on how the Fed is "saving" the economy.
Labels: Economics, Journamalism, The Old Firm
You're Ugly, Your Mother Dresses You Funny, and You Waste Money
by Ken Houghton
Most people at Bear who don't move for three minutes find the lights going out, all right. Just never heard anyone treat it as a badge of honor before.
The Old Firm comes off poorly in a non-financial matter as well:
Even before the report gets much press, it's already having an impact. For example, Ceres gave the investment banker Bear Stearns a zero rating since the company did not respond to requests for information or have any material in its annual report.
"So far as we can tell, they have no policy, no board members responsible for climate change, and no metrics," says Lubber.
Yet the investment bank is proud of its new "Energy Star-labeled" building, says Monica Orbe, a spokeswoman for the bank. "I know it's very energy efficient," she says, "because when I don't move for three minutes, the lights go off."
Bear Stearns intends to participate in the survey in the future, Ms. Orbe says. [emphasis mine]
Most people at Bear who don't move for three minutes find the lights going out, all right. Just never heard anyone treat it as a badge of honor before.
Labels: environmentalism, The Old Firm
Thursday, November 01, 2007
Minyanville Raises a Cayne
by Ken Houghton
The winner hands down is Minyanville, which produces enhanced graphics as well:
While Felix and Yves are rising to something resembling a defense, the Sainted Bess at dealbreaker, FT alphaville, and minyanville treat the WSJ's rehash of James E. Cayne's sins today.
The winner hands down is Minyanville, which produces enhanced graphics as well:
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Labels: Naked Capitalism, PortfolioMarketMovers, The Old Firm, WSJ
Friday, October 05, 2007
DealBreaker Remains Optimistic...
by Ken Houghton
We would prefer actual regulation, thank you.* But since there's no inclination that way, I'll just quote that busiest of blog commenters, Anonymous, at 7:47 tonight:
It sounds worth investigating, so it's no surprise that DealBreaker would be worried. But they're still only looking at a few of the pieces, not the whole jigsaw puzzle.
The investigators may know better; time will tell.
*Rudy G.'s reputation—but not reality—was built, of course, on his alleged "regulating finance through criminal prosecutions." To point out that his actual record was abysmal—and that it probably got him where he is today—would be rude of me, and Rudy is a man with faith in work, God, and himself.
and off-course, with this piece about The Old Firm:
While the Bear funds certainly made colossal mistakes, nothing we’ve heard so far has indicated criminality....
Some will no doubt be happy that the guys who lost all that money may face criminal charges someday. But the less vengeful of us might want to think twice about enjoying the another instance of regulating finance through criminal prosecutions. How well has that been working out?
We would prefer actual regulation, thank you.* But since there's no inclination that way, I'll just quote that busiest of blog commenters, Anonymous, at 7:47 tonight:
One of the funds that blew up was marketed as a low risk investment that had positive returns every month since inception. Of course that turned out to be the result of marking prices to their own models, which they didn’t bother to mention in investor meetings. Misrepresentation of risks including telling investors about the use of hedges that did not actually exist was common practice at another fund. They also claimed that all the Bear hedge funds used their internal risk management software called “Bear Measurerisk” to stress test portfolios, among other things. However, this was complete BS as the program was considered internally as basically useless. [MeasureRisk won several industry awards last year - kh] They had people in the back office that did not know how to settle trades, so they didn’t. They misrepresented the amount of assets that PM’s had invested in their funds…..I could go on
It sounds worth investigating, so it's no surprise that DealBreaker would be worried. But they're still only looking at a few of the pieces, not the whole jigsaw puzzle.
The investigators may know better; time will tell.
*Rudy G.'s reputation—but not reality—was built, of course, on his alleged "regulating finance through criminal prosecutions." To point out that his actual record was abysmal—and that it probably got him where he is today—would be rude of me, and Rudy is a man with faith in work, God, and himself.
Labels: Regulation, The Old Firm
Thursday, October 04, 2007
A Lesson to Be Learned
by Ken Houghton
Even with the family away for the week, I'm buried. But these two are too good not to highlight:
- Quote of the day, via Dr. Black: "In fact, the most homes in foreclosure [in the Orlando, FL, area] are in ZIP codes that didn't exist five years ago." If that is true, then (1) it is clearly the speculators who are suffering the most right now and (2) those are precisely the contracts (second homes, rental properties) that current bankruptcy law allows a judge to revise. No wonder:
Some mortgage companies and lenders don't want you to know how bankruptcy lawyers can help, telling you bankruptcy is for deadbeats.
In bankruptcy, retirement savings and 401(k)s are protected. You can be freed from second and third mortgage obligations. Some lawyers are even negotiating directly with lenders, which has never been done.
"It just absolutely breaks my heart when I have a couple who wiped out a humongous retirement account nest egg before they came to see me," bankruptcy lawyer Lori Patton said.
If you want a textbook definition of a principal-agent problem, look no further. - The Derivatives world has turned upside down in the past twenty years. Proof: this quote from Tanta at CR from about a week ago:
One of the ways LIBOR was "sold" to consumers who were used to old-fashioned indices like Constant Maturity Treasury (CMT)or Cost of Funds (COFI)...
I spent about an hour in early 1994, during my first round at The Old Firm, on a conference call with an economist and one of our salesmen, discussing with one of his clients why COFI was underperforming the market. And CMT Swaps were not anywhere near so prevalent as LIBOR-based ones.
Time marches on.
Labels: Calculated Risk, mortgage, principal/agent problems, The Old Firm
Thursday, August 16, 2007
We're Number One!
by Ken Houghton
It is notable that the Fixed Income side of the firm has been expanding significantly in London over the past eighteen months, including acquisition of a couple of mortgage-related firms.
The defence:
Of course, they said that about the recent acquistion of Encore Credit too. That's working out:
With more to come?
There will be some good people available if that's true. But demand for those specific skills will probably be down.
UPDATE: BSRM takes a hit as well:
elicits the "non-defence":
Encore was acquired late in 2006, with a significant number of their old staff electing severance instead of acquisition.
Can the EMC operations, centered in Dallas, be far behind?
Coutesy of my Loyal Reader, a piece from the Daily Mail on worker satisfaction in The City:
More than 80 per cent of Goldman employees were either happy or neutral about their jobs.
The firm that performed worst in the poll was troubled global investment bank Bear Stearns - more than 73 per cent of respondents who work at the firm said they were either dissatisfied or wished to leave.
It is notable that the Fixed Income side of the firm has been expanding significantly in London over the past eighteen months, including acquisition of a couple of mortgage-related firms.
The defence:
But Bear Stearns said: "We have a great record for employee retainment and feedback from our staff is generally very positive.
"We have a strong climate and are making a lot of top quality hires as we grow."
Of course, they said that about the recent acquistion of Encore Credit too. That's working out:
Bear Stearns gave 100 employees their walking papers yesterday, according to CNN Money. The cuts hit Bear’s subprime unit, Encore Credit. Headhunters say that more cuts are on the way thanks to the recent “meltdown” in financial markets....
With more to come?
Alan Johnson, managing director of Johnson Associates, a New York compensation consulting firm, expects layoffs in the mortgage and structured products divisions of the big banks before the end of the year.
There will be some good people available if that's true. But demand for those specific skills will probably be down.
UPDATE: BSRM takes a hit as well:
Encore Credit, based in Irvine, California, is eliminating 100 positions, and the Bear Stearns Residential Mortgage Corp. division in Scottsdale, Arizona, is reducing its workforce by 140, said the person, who declined to be identified because the number of jobs isn't being released publicly.
elicits the "non-defence":
"In the normal course of business Bear Stearns Residential Mortgage Corp. and Encore Credit evaluate market conditions and staffing levels in an effort to identify areas where we can eliminate redundancies and improve the efficiency of our operations," the New York-based firm said in an e-mailed statement today. "As a result we have made the decision to reduce our staffing levels and close two operation centers."
Encore was acquired late in 2006, with a significant number of their old staff electing severance instead of acquisition.
Can the EMC operations, centered in Dallas, be far behind?
Labels: High Finance, mortgage, subprime, The Old Firm
