Black Monday and the Bear Stearns bailout; Update: Bush to address economy; Update: Who's next?; Update: And now…lawsuits!
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The dollar’s in a tailspin this morning–despite the Fed’s actions over the weekend to calm the roiling markets:
The dollar plumbed fresh depths across the board on Monday as liquidity-boosting measures launched by the Federal Reserve over the weekend failed to quell worry about the health of the U.S. economy and financial sector. Stricken Bear Stearns is being bought by rival JP Morgan Chase for just $2 a share — versus Friday’s closing price above $30 — in a sign that even heavyweights of the financial sector can be brought down by U.S. subprime mortgage debt and the resulting credit crunch which took hold last summer.
The Federal Reserve took more emergency measures to stem the fast-spreading financial crisis, cutting its discount rate by 25 basis points to 3.25 percent on Sunday and opening up discount window lending to major investment banks, a tool not used since the Great Depression.
But the moves did not stop the dollar from tumbling as much as 3 percent to below 96 yen, its lowest since 1995 and bringing year-to-date losses to more than 13 percent.
“The dollar is suffering from the dual shock of an economic slowdown and a financial crisis,” said Teis Knuthsen, head of FX research at Danske Markets in Copenhagen.
“Until we see signs of an improvement on one of these two fronts, ideally both, then the dollar will remain under more pressure,” he added.
Dow Jones down 150 points.
India’s already calling it Black Monday:
Sensex crashes on Black Monday
The Bombay Stock Exchange Sensex extended losses to more than 6 percent today, joining a global equities rout on growing fears of financial trouble after a fire sale of Bear Stearns and the US Fed cut its discount rate.
The 30-share BSE barometer settled the day below 15k level at 14,809.49 points, a loss of 951.03 points. It touched the day’s low of 14,838.27 and a high of 15,326.93 points. The key index is closing below the 15k level for the first time since June 29, 2007.
Re. the Bear Stearns buyout: If it looks like a bailout and quacks like a bailout, it is a bailout. Let’s not delude ourselves.
J.P. Morgan Chase & Co. is buying battered broker Bear Stearns Cos. for $236 million in a Federal Reserve-backed bailout unprecedented in scope and execution.
The Federal Reserve, which cut the discount rate in a coordinated move with its announced backing of the deal Sunday evening, is taking the extraordinary step of providing special financing in connection with this transaction.
The Fed has agreed to provide financing of up to $30 billion of less-liquid assets held by Bear Stearns. Roughly $20 billion of that funding will back mortgage securities.
Asking the right question:
…it looks to me like the Fed will eventually become the largest mortgage lender in the history of the world. Having taken the worst of Bear’s mortgage backed securities, won’t other investment banks follow suit, leaving the Fed as the holder of a vast, unsaleable portfolio of mortgages that will, eventually, pay off once the foreclosures and walkaways are done?
And look out:
Bear Stearns only made it into 2008 because of the Term Auction Facility. Thus the Fed has effectively subsidized, with the full faith and credit of the US government, $2 per share and Bear’s year-end bonuses. Watch your mail: the bill to taxpayers is on its way.
Worst financial advice of the week from Jim Cramer (via Ed at HA):
Update 10:31am Eastern.
Bush comments this morning…
Mr. Secretary, thank you very much for coming by today to talk about the economic situation. But we’ll be meeting later on this afternoon with the President’s Task Force on Financial Markets.
First of all, the secretary has given to me an update. One thing is for certain: We’re under — we’re in challenging times. But another thing is for certain: that we’ve taken strong and decisive action.
The Federal Reserve has moved quickly to bring order to the financial markets. Secretary Paulson has been — is supportive of that action, as am I.
And I want to thank you, Mr. Secretary, for working over the weekend. You’ve shown the country and the world that the United States is on top of the situation.
Secondly, you reaffirmed the fact that our financial institutions are strong and that our capital markets are functioning efficiently and effectively.
We obviously will continue to monitor the situation. And, when need be, we’ll act decisively, in a way that continues to bring order to the financial markets.
In the long run, our economy’s going to be fine. Right now we’re dealing with a difficult situation. And, Mr. Secretary, I want to thank you very much for your steady and strong and consistent leadership.
Thank you very much.
This person doesn’t seem to think I apply my Suck It Up philosophy to the banks.
Hello? You are damned right I do.
I warned from the start of stimulus-palooza that we were headed in this direction. Both political parties support these massive government interventions–from empowering judges to meddle with private contracts to backing billions in mortgage securities. This isn’t the last step. It’s the first. And you know who will end up getting screwed: The responsible and the frugal.
Here we go: “Who’s next?” Where will it end?
The financial industry wants to know exactly how badly Bear Stearns bet on mortgage-backed investments. Unwinding the nation’s fifth-biggest investment houses should provide some insight into what other financial institutions might have on their books.
And with Bear Stearns seemingly gone, investors pondered who might be next. Lehman Brothers Holding Inc. stock lost 21 percent Monday, following a 15 percent drop on Friday amid concerns it might be having similar liquidity issues. Lehman Chief Executive Richard Fuld denied Monday that the firm was having liquidity problems.
Bear Stearns shares fell $26.26, or 87.5 percent, to $3.74 — above the shockingly low price of $2 per share that JPMorgan Chase is paying — while JPMorgan rose $2.88, or 7.8 percent, to $39.39. UBS AG, hit hard by the same type of write-downs for mortgages that felled Bear Stearns, dropped more than 14 percent in Zurich…
…The Federal Reserve and the U.S. government swiftly approved the all-stock buyout to complete the deal before world markets opened. The Fed also essentially made the takeover risk-free by saying it would guarantee up to $30 billion of the troubled mortgage and other assets that got the nation’s fifth-largest investment bank into trouble.
Update 1:54pm Eastern. And now…the lawsuits! I wonder if they’ll sue Jim Cramer, too?
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Angry Bear Stearns Co Inc shareholders have wasted no time in calling their lawyers to pursue potential legal recourse over the company’s $2-a-share fire sale to JPMorgan Chase & Co.
“I can’t divulge privileged conversations, but shareholders don’t contact me when they are happy with the way things are going with their investments,” said Ira Press, a lawyer at class-action firm Kirby McInerney, which has spoken with dismayed Bear investors about the matter.
“This is a stock that has gone from 50 to 2 literally overnight, and I also know of people who had assumed that the worst had passed when it closed at 30,” he said.
Bear Stearns, one of the most venerable names on Wall Street, is being sold for just $236 million in an emergency deal backed by the U.S. Federal Reserve in a sign of the deepening credit crisis.
The deal’s value is more than 90 percent below the company’s Friday closing share price of $30.85. But JPMorgan said the total price tag would be $6 billion to account for litigation and severance costs.
Investors have barely had time to digest the news, but are already exploring possible legal avenues, say plaintiffs’ lawyers who specialize in suing large corporations.
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