By now all y’all must have heard and read the autopsy of the demise of Bear Stearns. I will not go into the details that have been put out by various news outlets in the past week or so but what I will do is bulletize them:
-JP Morgan’s buying price = $2 per share=0.0547 shares of JPMC for a share of BS
-Closing price of BS on Friday, March 14=$30 per share. Hence discount=28/30=93.3% (ouch)
-Fed loaned $30 billion in ‘liquidity’ to BS through JP Morgan Chase
-Glass-Steagall legislation was invoked to help out BS indirectly
-Two Bear Stearns managed Hedge Funds filed for bankruptcy in July 2007. Net worth lost=$1.6 billion
-Cash reserves of Bear Stearns on March 13, 2008 = $17 billion
-Cash reserves of Bear Stearns on March 15, 2008 = $0
-Fact= On Thu, March 13 (nite) Alan Schwartz approached the SEC and NY Fed and mentioned that Bear Stearns would have to file for bankruptcy on Friday morning.
I still have not got my hands and mind around analyzing this monumental failure of Bear Stearns but what I have tried to understand over the past week is how exactly would cash reserves dwindle so dramatically in such a short time and spark this demise. Here is an attempt from me to explain this:
Let me start by pointed to a passage in the Financial Times weekend edition, March 22-23, 2008. Link
“The motivation behind the Fed’s plan was for Bear to lend the Treasury debt in the repurchase (repo) market for cash and shore up its capital, which was straining under a massive withdrawal of funds by investors. Some $17bn (€11bn, £8.5bn) had been pulled in two days. Bear could not raise funds from any of its non-Treasury assets as its rivals had lost faith in its creditworthiness.”
The key words in the above passage are “…to lend the Treasury debt in the repurchase (repo) market for cash and shore up its capital…”. What exactly is a “repo” market and how is this key to cash reserves. See Part II.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment