March 2008 Archives

Even the smart people don't fully understand what the heck is going on with the market.

Economic Scene
Can’t Grasp Credit Crisis? Join the Club
By DAVID LEONHARDT, The New York Times, Published: March 19, 2008

Raise your hand if you don’t quite understand this whole financial crisis.

It has been going on for seven months now, and many people probably feel as if they should understand it. But they don’t, not really. The part about the housing crash seems simple enough. With banks whispering sweet encouragement, people bought homes they couldn’t afford, and now they are falling behind on their mortgages.

But the overwhelming majority of homeowners are doing just fine. So how is it that a mess concentrated in one part of the mortgage business — subprime loans — has frozen the credit markets, sent stock markets gyrating, caused the collapse of Bear Stearns, left the economy on the brink of the worst recession in a generation and forced the Federal Reserve to take its boldest action since the Depression?

I’m here to urge you not to feel sheepish. This may not be entirely comforting, but your confusion is shared by many people who are in the middle of the crisis.

“We’re exposing parts of the capital markets that most of us had never heard of,” Ethan Harris, a top Lehman Brothers economist, said last week. Robert Rubin, the former Treasury secretary and current Citigroup executive, has said that he hadn’t heard of “liquidity puts,” an obscure kind of financial contract, until they started causing big problems for Citigroup.

I spent a good part of the last few days calling people on Wall Street and in the government to ask one question, “Can you try to explain this to me?” When they finished, I often had a highly sophisticated follow-up question: “Can you try again?”

I emerged thinking that all the uncertainty has created a panic that is partly unfounded. That said, the crisis isn’t close to ending, either. Ben Bernanke, the Federal Reserve chairman, won’t be able to wave a magic wand and make everything better, no matter how many more times he cuts rates. As Mr. Bernanke himself has suggested, the only thing that will end the crisis is the end of the housing bust.

With the financial markets in turmoil, business news is on the front pages, not just in the business section of newspapers. Furthermore, financial terms are being bandied around and it can be a bit difficult at times to follow the story without fully understanding the products and services provided by all these market makers (ie. commercial banks, investment banks, hedge funds, etc.).

Thus, for those of you in London, a good book to read is, All you need to know about the city: Who does what and why in London's financial markets by Christopher Stoakes. I wouldn’t say that it is riveting, but it is written in plain conversational English and helps to demystify the city so that even novices like myself can start to understand what the heck is going on and just how everything connects.

When your strategy is to bet against the market -- as it the case for most hedge funds who short sell securities (stocks and bonds) -- there are bound be dirty tricks to uncover illicit information on companies or spread false rumors with the hope of manipulating a stock. Thus it will be interesting to see in the weeks and months to come, if the Financial Services Authority -- the banking regulatory agency for the UK -- can figure out who earlier this week tried to bring down HBOS, which owns Halifax, the UK’s biggest mortgage lender.

HBOS: Malicious traders in the City try to topple the Halifax bank
Christine Seib, From The Times, March 20, 2008

Stock market manipulators yesterday tried to bring down one of Britain’s biggest banks by spreading false rumours through the City.

The Bank of England was forced to issue an unprecedented denial that HBOS was in trouble.

The Financial Services Authority (FSA) said that it would pursue traders guilty of “market abuse” by spreading untrue claims that banks were on the brink of collapse.

The authorities believe that the fear and uncertainty in financial markets are allowing unscrupulous traders to make multimillion-pound profits by whipping up hysteria about the stability of big banks.

I try not to pay too much attention to the everyday gloomy reports on the housing market in the US and UK but its quite difficult. Especially, when there seems to be a growing number of economists and other so called experts who are predicting a further drop in housing prices.

And having purchased a home just last September, I am concerned about getting into negative equity. However, I do take comfort in the fact that my deposit was 10% and prices for my area seem to be holding steady. Case in point, a similar house on my street went up for sale this week and the seller egged on by the estate agent is asking for approximately £60K more than I paid. Granted no two properties are the same, but I find it hard to believe that they’ll achieve that price point in this market. Of course only time will tell.

I also take comfort as had I waited to get on the property ladder, I probably would not have the same buying power, as while prices may have dipped, interest rates have gone up -- so monthly repayments would be higher. Also, banks have tightened their lending criteria and some are even asking for a 25% deposit to be eligible for the best mortgage deals. That’s just outrageous when you consider that the entry point for a two bedroom place at the lower end on the London property market is about £250K. At that price point, a buyer would have to come up with £62K for the deposit plus a further £5K-£7K to cover stamp duty, attorney fees and other cost associated with the purchase. At these levels, the barriers to entry are higher, especially for first time buyers who experts all agree are the lifeblood of the property market. Particularly as, if people can't sell on their starter homes, they can't move up the ladder which in turn means that everything grinds to a halt.

So I am going to try my best to ignore all this doom and gloom talk. Especially as even if I move on from the UK, the plan is to hold on to this property for many years to come. Plus once prices start to fall, unless you absolutely have to sell, the best strategy in these cases is to do nothing. Otherwise, selling will just crystallise any potential loss -- which would not be a good thing at ALL!

Further comments related to specific companies involved with the liquidity crisis, credit crunch and sub-prime market will go unpublished on this blog. Why? Well my new employer is a global professional services firm that has many clients and prospects impacted by the downturn in the global economy. Thus fear of being dooced will keep commentary on specific companies to a minimum.

That said, I can't believe that Bear Stearns was sold to JP Morgan Chase for $240million. Even when you factor in the two failed hedge funds, the company had significant assets which apparently could be sold off for least $7.7 billion. However, I suppose timing is everything and Bear Stearns simply didn't have that on their side --not when other financial institutions refused to do business with them. So bad for Bear Stearns, but really good for Jamie Dimon and JP Morgan Chase -- especially, since the amount pledge by the Federal Bank of New York to back the Bear Stearns assets is $30 billion+.

All of this just makes you wonder, could a bailout by the US government of sub prime homeowners who kicked off this whole crisis be far behind? It seems only fair.

JPMorgan Surges After Striking Deal for Bear Stearns (Update1)

By Yalman Onaran

March 17 (Bloomberg) -- JPMorgan Chase & Co. surged in New York trading after striking a deal backed by the Federal Reserve to buy Bear Stearns Cos. for $2 a share, 90 percent less than the 85-year old firm's market value last week.

JPMorgan, the third-biggest U.S. bank by assets, rose $3.86, or 11 percent, to $40.44 at 4 p.m. in New York Stock Exchange composite trading while the Amex Securities Broker/Dealer Index fell 10 percent. The bank said yesterday it will pay about $240 million for the fifth-largest securities firm in a transaction in which the Fed will guarantee as much as $30 billion of Bear Stearns's ``less-liquid'' assets.

JPMorgan Chief Executive Officer Jamie Dimon bought Bear Stearns, once the biggest underwriter of U.S. mortgage bonds, for less than the value of its real estate after clients, alarmed by speculation about a cash shortage, withdrew $17 billion in two days. Faced with the prospect of bankruptcy, Bear Stearns CEO Alan Schwartz was forced to accept the deal less than five days after he assured investors that the company's ``liquidity cushion'' was sufficient to weather credit-market losses.

``Dimon got the best side of the deal,'' said Peter Sorrentino, a portfolio manager at Huntington Asset Advisors in Cincinnati, which oversees $15 billion including JPMorgan shares. ``He got a motivated seller and a lot of people willing to facilitate the deal for him. It's not like he had to put a lot of JPMorgan's capital at risk.''

Shareholders of Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the New York-based companies said in a statement late yesterday.

To say we live in interesting times is an understatement. Yet another national bank -- this time the Federal Reserve Bank of New York -- comes to the rescue of the 5th largest investment bank in the United States, Bear Sterns. To be exact, funds are being loaned to JPMorgan Chase who will then lend this undisclosed sum of money to Bear Stearns to help the company stay in business. However, should the company default or worse yet go out of business, all the risk rest solely with the Fed. Basically, JPMorgan Chase is simply acting as a conduit for the transaction. Thus the American public should be pleased that their hard earned tax dollars is being used to bailout rich investment bankers. Not!

Fed leads Bear Stearns rescue

By Francesco Guerrera and Ben White in New York, and Krishna Guha in Washington

Financial Times, Published: March 14 2008 14:05 | Last updated: March 14 2008 23:21

The credit crisis on Friday engulfed one of Wall Street’s most important investment banks as the Federal Reserve and JPMorgan Chase combined to provide emergency finance for 85-year-old Bear Stearns and prevent further upheaval in global markets.

The decision by the monetary authorities to throw a temporary lifeline to Bear followed a night of deliberations involving regulators, led by Timothy Geithner, president of the New York Fed, and came after Bear’s shares plunged and its access to overnight funding dramatically diminished. It is likely to pave the way for a sale or liquidation of the company in the coming weeks. However, people close to the situation said Bear was also talking to strategic investors about a capital injection.

The rescue marked the first time in four decades that the US central bank has agreed to provide emergency finance to any financial institution other than a traditional commercial bank.

Fed officials told the Financial Times that it acted because of the systemic risks involved in the potential sudden failure of the fifth-biggest US investment bank at a moment of extreme fragility in the markets.

February flew by too quickly!

At the beginning of the month I handed in my resignation at work. This wasn’t the easiest thing in the world as I really like the people I work with but after 5 ½ years it was definitely time to move on. Mainly as there are things I wish to achieve personally and professionally and after serious reflection, came to the realisation that this required moving to pastures new.

I had hoped that I would be immediately sent on garden leave, however, as I wasn't going to work for a competitor, I was required to serve out the one month notice per the terms of my contact. I kid you not folks, a month! Thankfully, I had already booked vacation for what would have been my last week of work. Thus I only had to put in place a coping strategy for three weeks.

For the first two weeks, it was almost business as usual which was most annoying. Don’t get me wrong, I wanted to do all that I could to help the business before I left but once I’d given notice I was emotionally checked out. So I switched tactic on the third week and focused on putting together a 26 page transition document.

During the third week, there was a bit of drama that was just surreal. The CEO and Chairman of the Board for my then employer’s parent company were forced out. While I won’t go into great detail as the company is listed on the London Stock Exchange, lets just say that when they realised they could no longer hold on to power, the troops were gathered for a champagne celebration! This wasn’t given by the outside investors who had instigated this coup, but by the CEO and Chairman who jumped on the boardroom table and gave a rousing speech about their achievements over the last 8+ years.

Leaving all that drama behind on the 21st February, I spent the next week entertaining Racquetball Guy here in London. For those of you who have read my blog for sometime, I’m sure this will come as a surprise. Our relationship fizzled out when I left Chicago for London and I wrote some not so nice things about him. Mainly because I was angry as for a while he stopped talking to me. Since I couldn't get him out of my head, I never stopped trying and we started seriously talking again in January. Will things work out this second time? I don’t know. I want to be optimistic but we are oceans apart and without a clear roadmap it will be quite the challenge. Despite all that, the romantic in me is hoping for the happily ever after. However, if that doesn’t happen, maybe this time I’ll get proper closure.

In the meantime, I am looking forward to starting my new job on Monday. These last two weeks off have been great, but I’m ready to get back in the thick of things!

In light of Dallas Hispanic leader Adelfa Callejo’s comments earlier this week (black politicians have done little for Hispanics and that Barack Obama "simply has a problem that he happens to be black") it's good to see a few prominent Hispanics are supporting Obama!

Video found via Crunk + Disorderly.