Friday, March 14, 2008

Financial System Red Alert

Thanks to loyal reader Kevin for the tips on growing potatoes. I remember when I was in high school an uncle of mine would grow potatoes and such in his garden. Those potatoes tasted excellent! Maybe it is because they are fresh or maybe it has something to do with growing your own, but they were great. I am going to give it a whirl this season and see how green my thumb is! Warning, the spellcheck is not working again!

Bear Stearns - This is What Happens When We Get Information
Unless you slept all day today, it was impossible to miss the news that Bear Stearns went belly up today. One of Wall Streets oldest financial firms (rip off artists) finally had to face the music that began playing last August. From Yahoo Finance for posterity:
Fed and Rival Bail Out Bear Stearns
Friday March 14, 6:09 pm ET By Stephen Bernard and Joe Bel Bruno, AP Business Writers
On the Brink of Collapse, Bear Stearns Gets a Lifeline From a Rival and the Feds
NEW YORK (AP) -- On the verge of a collapse that could have shaken the very foundations of the U.S. financial system, investment bank Bear Stearns Cos. was bailed out Friday by a rival and the federal government. The near-miss raised new alarm about the credit crisis -- and whether other big firms might be in jeopardy.
The rescue came from JPMorgan Chase & Co. and, in an extraordinary step, the Federal Reserve, both rushing to pump new money into the venerable Wall Street firm after its financial state deteriorated so much in a 24-hour period that it threatened to fail.
Bear Stearns stock lost nearly half its market value, about $5.7 billion, in a matter of minutes, and pulled the broader market down with it. The Dow Jones industrial average fell nearly 200 points.
If Bear Stearns were to go under, "it has the potential of bringing down the whole market," said Richard Bove, an analyst at Punk, Ziegel & Co. "This is the crescendo of the crisis."

JPMorgan and the central bank agreed to extend loans for 28 days to Bear Stearns, the nation's fifth-largest investment bank and the one hit hardest by the subprime mortgage mess.
Two hedge funds managed by Bear Stearns failed last summer, setting off a credit crisis that has swept up banks and brokerages around the globe.
In backing up JPMorgan, the Fed dusted off a rarely used, Depression-era provision to provide loans. It also said it was ready to step in to fight an erosion of confidence in the nation's largest financial institutions.
Officials from the Fed and the Securities and Exchange Commission held conference calls throughout the day Thursday to assess the potential impact on the broader economy, according to a Treasury official, who spoke on condition of anonymity because of the sensitive nature of the discussions.

Stunning and expected at the same time.

I have some bad news for Richard Bove quoted in the above piece with saying "This is the crescendo of the crisis", if by using the word crescendo he is thinking of the literal meaning he is off the mark. From the Wikitionary:
Crescendo: A gradual increase of anything, especially to a dramatic climax
Now maybe Mr. Bove went to school at the S&P University for the Hopelessly Optimistic (affectionately called U-HO), but the BSC news is not the final climax to the mortgage mess.

Bear got mauled because it had to come clean and actually price it's assets to what it could get for them. In effect this was the first instance where we had SOME idea what the situation was. Coupled with massive leverage, BSC was exposed as insolvent in a way that could not be papered over any longer. BSC hung around from August to now hoping and praying something would change their fortunes. Didn't happen. Let me ask you out there in Internet land, do you think BSC is the only one? Is it even possible given how entwined and duplicated these positions were that BSC is the only bank screwed?

Financial System Red Alert
The BSC news has become the perfect example of so many things that are seriously wrong with our financial system. In no particular order, here are the major issues of the day;

Willfull and Deliberate Lying - Quite a few, one as recently as Wednesday, BSC top dogs were out in force assuring the markets that they were ok. Not just ok, but that they had no liquidity issues whatever! The CEO and CFO both made stops at CNBC and reiterated that BSC was in good shape. Now, in a 24 hour span, they need FED rescue? Either the BSC top brass are immensely retarded (a distinct possibility I fully acknowledge) or they are obscene liars. Faced with a possible run on their business, the only thing they could have done was not say a word. Instead they ran out and deliberately LIED to try and save the ship. Should be illegal to mislead investors, but I do not expect anything to happen. Don't forget the golden parachutes for the top dogs, they deserve them!

Standard and Poor's Now Totally Irrelevant - I know that nobody here believes anything the ratings agencies put out anyway, but others still (amazingly!) do. S&P gets the gold medal for total bafoonery with a week unparalleled in history for getting things wrong. First the maintenance of AAA ratings for monoline insurers that are every bit as broke as BSC was bad. Then the hilarious report S&P put out estimating the mortgage writedowns were largely over (was that counting the BSC mess? Just checking!). Today S&P took the bold and courageous step of downgrading the BSC long term counterparty rating! Great job guys! Nothing like downgrading debt after the place closes the doors. And after ENRON we were all told that would not happen again. I am picking on S&P, but the other ratings fools are just the same. Games and smokescreens that no longer need to be paid any attention to.

Liberty Dies With Thunderous Applause - Now you would think that the 5th largest investment bank going flatline would be a bad thing. One may come to the conclusion that if the FED had to employ a bailout technique not used since THE GREAT DEPRESSION things may be going poorly indeed. Not Wall Street! After years of reaping gargantuan profits from mortgage paper and derivatives that were all an illusion, now the same good old boys get to get bailed out by Uncle Sam. You, the tax payer (and really your kids in the future) will get to pay for all the golden toilets and silk kleenex the big boys use. The government stepping in and basically taking control of the nations private finances? How many points to the upside is that worth for the DOW? Capitalist freedom took a shot to the heart today. Instead of correctly seeing the FED having direct control over private banks as a disturbing event, the market loves the idea. Liberty truly does die to thunderous applause.

The Thin Veneer of Confidence Must Now Be Gone - There can be no doubt that even perma bulls and people not really into financial things are going to start asking some introspective questions now. How is it that if 10% of mortgages default, the whole economic system will collapse? How much is the FED really involved in close quarters with private banks? Will the dollar survive the next major rate cut next week? If the dollar loses another 30% of its value, is a 10% increase in stocks really a relevant thing? the whole system only operate because everything is always in motion. Now that plenty of things are stopping dead, difficult questions will emerge. Dangerous times indeed.

Friday Rock Blogging
After a banner day that should have finally gotten the truth out there was delayed by the FED for another month, we all need to get ramped up for the weekend. Some musical selections to try and send you off happy.

Kansas with "Dust in the Wind". Fitting song for BSC going bye bye!


Rusted Root with "Ecstasy". Sorry for the cruddy video with the song, all I could find!


Every song on the Kill Bill soundtrack is outstanding, take a listen to "Bang Bang" it is top notch;


Totally cool scene from the film "From Dusk till Dawn" with really great music, and Salma Hayek does not hurt either! Warning a bit on the wild side!


Have a good night.

10 comments:

Anonymous said...

"How much is the FED really involved in close quarters with private banks?"

All the reserves in the banking system and more have been borrowed directly from the FED, in a fractional reserve banking system it is kind of hard to make loans without even the slightest hint of at least some capital backing part of the loans. There are more banks to fall.
http://research.stlouisfed.org/fred2/series/BOGNONBR?rid=19&soid=1

http://research.stlouisfed.org/fred2/series/BORROW?rid=19&soid=1

Good luck with the potatoes.
Kevin

Anonymous said...

Everything is in focus now.
It's all crystal clear.

On every corner there is a Starbucks.
On every corner there is a fast food chain.
On every corner there is a Gas Station.
On every corner there is a FAST CASH shop (Any form of fast cash, check cashing etc...)
and last but not least...
On every corner there is a BANK of some rather odd semi unheard of name. (Not one that I even remotely remember seeing in my 20 years growing up here)

All this pulled into focus today.

All of this seemed to happen within the last year. (Okay three years)

What does this mean?

1. There are too many banks lending out too much money to people that can't ever pay it back.
2. There is too much obesity from bad food being available every 100 feet.
3.Gas is needed for our oil addicted lifestyles and poorly performing autos.
4. We have a national zero savings scenario when paychecks or payments don't go back into the bank but rather into cash to be spent at....

you guessed it

5. Over priced coffee with a drive through option to fulfill number three. (see oil)


Gezus I am pissed this isn't looking up anymore. Anyone else seeing it all slide off the table each day? I want to say for the record there are some of us that are going to be seriously pissed off when TSHTF.

G

Anonymous said...

Sorry got one more for the people that can't get enough.

HOME OWNERS BURN THEIR OWN HOMES!

http://tinyurl.com/yrmopk

G

getyourselfconnected said...

G, very animated tonight! My friend, should the worst case scenario occur, remember it is us that are in the know that will lead the charge! Sometimes you have to destroy a thing in order to remake it.

Kevin,
thanks again for your help.

Anonymous said...

G

If you came out where I live you would find one gas station, one drive-in restaurant, that is only open 5 months a year, one full time restaurant, at least a 6 churches, 2 bars, the closest major fast food is 50 miles away, the closest Wall Mart is 150 miles away, the town has 600 people and 5% of them are in the volunteer fire department. We do have 2 banks but one is mainly a farm bank which I never see anyone at. I checked the rating on the one I have my interest bearing checking account at and it is in the middle of the pack but I'm not to worried with high ag prices except for livestock I think they are well managed and not over extended. At least I hope they aren't. One never knows does one?

Kevin

Anonymous said...

GYSC

Here are some good links for gardening, come on Ya gotta try more then just potatoes.

http://www.farm-garden.com/growing-vegetables

http://ohioline.osu.edu/lines/vegie.html

http://www.gardenersnet.com/veggies.htm

http://www.vegedge.umn.edu/mnvegnew/vol2/0400t1.htm

http://www.yougrowgirl.com/grow/seedstartingchart_lazy.php

I have a more links but that's probably enough for now. Nothing like walking out in the garden picking a ripe tomato, wash it off with the hose, put some salt on it an chowing down. That is really and truly living for this hick.

Kevin

watchtower said...

I'm thinking of putting in a garden for the first time this spring. Most people around here tell me I'm wasting my time because of the unusually high deer population. I guess I'll see for myself.

Bear Stearns
I was just going on my merrily way when I picked up on the Bear Stearns fiasco last year. This was what opened my eyes to the oncoming crap headed our way. I've always been frugal to a point, so I'm in pretty fair shape compared to what I have read about other folks caught up in this mortgage disaster. I had been in the stock market (just a regular long term mutual fund investor, not a day trader, I'm not smart enough for that) for about 18 years before this, and got out at a good time last year. I try to get people to listen, and do their own "due diligence", but I've found out that most people are so far gone (debt) that they just accept it (I think they believe me to a certain extent, they just feel that they can't do anything about it). I don't belittle these people (I try not to call them sheep), I would probably be just like them if it wasn't for the experience that I went through during my youth (dad lost his job, and mom was a housewife, didn't take me long to figure out that I didn't want to live paycheck to paycheck when I grew up. Had my own little depression right then and there, and it sucked!)
I'm thankful that I live where I do, if the S ever H'sTF as they say, there is plenty of game, places to fish, and most importantly, good people here.
It sounds like Kevin may live in a similar place from reading his posts.

Thanks to all that post here, it makes it an interesting place to stop by.

P.S. @ Getyourselfconnected
As you can tell, I liked your Bear Stearns post.

Anonymous said...

Watchtower

We have deer coming out the wazoo here, for the most part they keep them out of it but they do occasionally come in to eat apples the have come off the apple trees. I did put up a 2' chicken wire fence around it to keep that rabbits out though Another thing you can do is if you access to some blood dear will run the other way and maybe plant some garlic as they don't like the smell.

Yop I live in a place just like that, When the crap hits the rotating blades snd it gets as ugly as I think it might I don't want to be anywhere near a large population center.

Kevin

watchtower said...

Kevin
I'll have to try the garlic idea, plus I enjoy garlic in a number of dishes, kind of a 2 for 1 bonus.


I ran across this post on Jim Sinclairs website tonight:
"Market Panic Forces Governments Into Action" by Monty Guild
It is about the Bear Stearns incident too.

http://www.jsmineset.com/

I guess I liked it because it falls into line with what I believe will be the end results of this little fiasco. Of course I kinda fall in line with the goldbugs, so take this for what it's worth.

getyourselfconnected said...

Great comments all. Glad the last post was a good read. I do try my best. If the SHTF sort of speak, I would have to make a mad dash to somewhere more reasonable as I am way too close to mega metro Boston! I am getting excited about the garden, and my wife loves the idea. She has read Kevin's links and now wants to grow all kinds of stuff. Thanks Kevin, you may have created a monster!