Yves Smith on Bear Stearns

Yves Smith has a post about JPM’s buyout of Bear Stearns, that, coincidentally, says something that I was thinking when I woke up this morning. If I hadn’t read his post, I might have written something like this myself after letting it simmer for a bit:

A hedge fund correspondent pointed us to an article at Institutional Risk Analytics on the Bear-JP Morgan deal. While we don’t subscribe to its view that Bear was “raped” (please, the firm was going to file for bankruptcy a week ago Monday), it contains an intriguing analysis of JP Morgan.

Differing with popular opinion, IRA argues that JPM is far from a financially strong institution. It has the highest gearing of any of the three large US banks (and remember, that includes the CDO-laden, walking wounded Citigroup) and by their measures, also has the highest level of economic risk per their metrics. JPM’s chickens have not yet come home to roost because its book is heavily weighed toward consumer business, and those problems are coming to the fore later. (The cognoscenti may take issue with their use of RAROC as another measure, but I’m not troubled when making cross company comparisons if you have access only to published financials).

Although IRA does not say so explicitly, the reasoning appears to be that the Fed pushed Bear into JPM’s arms as a way to shore up JPM. If asking a firm to take on a $13 trillion derivatives book, of which only $2 trillion is exchange traded, is a favor, I’d hate to see what punishment looks like.

The Fed is guaranteeing JPM it will cover any losses if JPM buys BS. That started out as a $2 a share gift to BS shareholders (since the value of BS’ assets without any assurances from the Fed are exceeded by its obligations) and now that gift seems about to get sweetened.

But… I was wondering, why not give the gift directly? Why do it in this convoluted way? My first thought was – well, if you go through JPM, its somewhat more opaque (and hence less likely to raise the taxpayer’s ire). But the Fed could be opaque in more direct ways too… which leaves one thing… for whatever reason, the Fed wants to provide a gift to JPM too.

And BTW, Ken Houghton has another collection of follow-ups to this mess.