What happened to US ' s one of the leading investment banks all of a sudden. Here are the facts of the sudden fall of Bear Sterns
- Sold to JD Morgan Chase at a price of 2 dollars per share .( 236 mn $). Imagine the price was 30 dollars a week before .Thats how ruthless markets are , if you lose your confidence , youi get hammered down
- During a crisis of confidence, earnings, book value and liquidity dont matter. Bears was sitting on a comfortable 80 $ book value of stock at the time of sale.
- The US FED bailed it out from an imminent insolvency . Perhaps US fed wanted to send some sort of positive signal that everything was all right in the US financial markets .It feared the collapse of Bears would have a "Domino" effect on the economy.Alas, bluffs canot be kept under the wraps for long !!!!
- Total reported losses of Bears FY08= 3 bn dollars due to sub prime mortgage loans.
- Has the FED set a wrong precedent by bailing out the firm from insolvency?Perhaps, no.
- What will hapen to the 14K people under Bears rolls is anybody's guess. Perhaps Morgan will absorb them for the time being .
- Did the FED introduce any new measures to prfevent a recurrence of such fiasco? Yes, the term auction facility ( TAF ) and the term securities lending facility ( TSLF).The TSL allows investment banks to enter into repo agreements for upto 28 days with firms . Previously they were overnight obligations.For the term of the repo, this arrangement allows banks and firms to swap their problem assets ( ex: subprime finacial instruments) for good money.
- Bears has still 60 bn$ of debt outsatnding in the repo market.The repo market firms extend and receive short term loans, typicaly made overnight which are backed by securities.
- The Bears takeover is a classic exampe of a "Bank Run" ( stretching poneself too far and thin).The firms short term creditors refused to roll over the loans and long term assets could not be liquidated quickly enough to close the gap.Any institutio that borrows short and lends long term must have sufficient requity cushion to liquidate and repay short term creditors.Unfortunately, this cushion was sadly missing in the case of Bears.
