Bear Stearns Watch

Bear-Stearns, teetering on the brink of collapse from a lack of cash, got emergency funding from the Federal Reserve and JPMorgan Chase & Co. in the largest government bailout.
The central bank agreed to provide financing through JPMorgan for up to 28 days, the bank said in a statement today.

1 or 2 large and systematic brokers will go belly up
And Bear is only the first broker dealer to go belly up. Rumors had been circulating in the market for days that the exposure of Lehman to toxic ABS/MBS securities is as bad as that of Bear.
Bear Stearns had the highest toxic waste ("residual balance") exposure as percent of adjusted equity on balance sheet; the exposure of Bear was 54.5% while that of Lehman was only marginally smaller at 53.3%; that of Goldman Sachs was only 21%.
And guess what? Today LehmenBrothers received $2 billion unsecured credit line from 40 lenders. Here is another massively leveraged broker dealer that mismanaged its liquidity risk, had massive amount of toxic waste on its books and is now in trouble. Again here we have not only a situation of illiquidity but serious credit problems and losses given the reckless exposure of this second broker dealer to toxic investments.

What brought down Bear Stearns ?
Banking sources speculated that Bear Stearns could have been hit by last night’s collapse in value of so called alt-A, or low-end prime mortgage securities.
"The Alt-A market fell out of bed last night and Bear would have been completely caned by this. They hold a bunch of these securities," one investment banking source told Times Online.
"Against what you might normally expect, the sub-prime market rallied, but alt-A sold off."
Excuse me for laughing but just two days ago I cautioned everyone to Expect Everything To Be Worse Than Expected.
I do not understand how anyone could expect anything other than a complete disaster in Alt-A.

I have two systemic problems with the bailout of the Broken Bear as to why anyone, especially tax payers should want to save a failed investment strategy.
First, Broken Bear holds only investment (speculation) money so there is no genuine societal reason for their bailout.
Second, bailing out investment banks like the Broken Bear, Mother Merrill, and Golden Fleece constitutes a moral hazard that encourages continued speculation and ultimately a collapse of the dollar when the Fed comes to their rescue.

Rescuing the Bear Why and why is it this way
While the Fed, like any public institution, should support institutions and arrangements with public goods properties, like markets, it should not as a rule support private businesses. In the financial field these externalities often are through contagion effects, as in the case of the classical bank run by depositors…Deposit-taking institutions are deemed to fall into this category because they are an important part of the retail payment mechanism. Other institutions are deemed too systemically important to fail because they play a key role in the wholesale payments, clearing and settlement system.Finally, some institutions are provided with liquidity on non-market terms or bailed out when they are insolvent because it is feared that their failure would trigger a chain-reaction of contagion effects. Fear and panic would spread through the markets and first illiquidity and then insolvency would threaten institutions that would have remained both solvent and liquid but for the failure of this ‘focal institution’.
How does Bear Stearns line up according to these three criteria for special Fed attention? Bear is not a deposit-taking institution. It plays no role in the retail payment mechanism and is of no significance to the proper functioning of the wholesale payments, clearing and settlement system…
The firm could have been left to go into receivership.If the Fed fears the risk of contagion effects and financial panic, it could have requested the nationalisation of the investment bank.

The funny one from S&P:
Standard & Poor’s cut some of its credit ratings on investment bank Bear Stearns on Friday following news of the bank’s cash crisis and emergency bailout.
S&P cut its long-term counterparty rating on Bear Stearns to "BBB" from "A" and its short-term rating to "A-3" from "A-1."
S&P said Bear Stearns’ need for temporary financing to continue operating normally led to the downgrade.
The agency also placed the bank’s long- and short-term ratings on negative watch, meaning they could be downgraded in the next three months.