Friday, March 14, 2008

Bear Stearns (BSC) Getting Secured Financing from JP Morgan and NY Fed

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We just talked about this yesterday - despite constant reassurances in the media the past week that "everything is fine", Bear Stearns is in stage 1 of its bailout. As we discussed yesterday ["Smart Money" is Buying, So Should You], we had an analyst saying the Fed would not allow Bear to fail (free market capitalism and all, where large companies are not allowed to fail)

He said that fear makes sense, but he does not think the Federal Reserve will allow that to happen. The Fed would bail Bear Stearns out before allowing the bank to dump upward of $275 billion of tainted investments on a market that currently has little appetite for risk, he said.

Well lo and behold...
  • Bear Stearns received a secured loan facility from JPMorgan Chase as part of steps it is taking to shore up the market's confidence in its operations. JPMorgan Chase will provide a secured loan facility for an initial period of up to 28 days allowing Bear Stearns to access capital as needed.
  • In a highly unusual step, the Fed, through its discount window, will provide non-recourse, back-to-back financing to JPMorgan Chase, the commercial bank said. JPMorgan said it does not believe this transaction exposes its shareholders to any material risk.
  • "Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity," said Alan Schwartz, president and chief executive in Bear Stearns, in a written statement. "We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations."
  • According to Cumberland Advisors Chief Investment Officer David Kotok, the problem is bigger than Bear Stearns. "This is about the system," he said. "It is about the unfrozen mortgage-back constructed paper and how you thaw it out and get a liquid market and get it trade...This is about getting liquidity to markets which are dysfunctional and seized up."
And so the nationalization of our financial system begins in earnest...

Now remember, when *you* make bad decisions you are left on your own, or must go bankrupt. When NYC bankers made bad decisions the entire Federal government rides to their rescue. Seems like an even playing field to me.

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