What are some predicted consequences if Bear Stearns failed? They do not have depositors like a bank. They invested for people, but for whom? Why would the credit market take the hit so severly if J P Morgan can get it for a penny on the dollar? Surely there are some good assets.
Reuters reported this from CNBC.
NEW YORK (Reuters) – Bear Stearns Cos (BSC.N: Quote, Profile, Research) Chief Executive Alan Schwartz on Wednesday dismissed recurring speculation that the investment bank faces a cash crunch, saying it has hefty cash reserves that have remained little changed this year.
Schwartz, in a televised interview on CNBC, also said he is comfortable with the range of analysts’ earnings estimates for the fiscal first quarter ended Feb. 29. Results for the quarter are due next week.
“We don’t see any pressure on our liquidity, let alone a liquidity crisis,” he said.
Bear finished fiscal 2007 with $17 billion of cash sitting at the parent company level as a “liquidity cushion,” he said.
“That cushion has been virtually unchanged. We have $17 billion or so excess cash on the balance sheet,” he said.
Schwartz denied speculation that other brokers were turning down Bear’s credit on trades for fear of counter-party risk.
“There’s been a lot of volatility in the market, a lot of disruption. That’s causing some administrative pressure, getting trades settled. We’re in constant dialogue with all the major dealers, and I have not been made aware of anybody not taking our credit,” he said.
Now that the stock is below $35, will they claim simple Herstatt risk for the transaction?
This news might be significant or not, and the action is timed around an oil deal with China in the area, but provides a glimpse perhaps of how Sadr forces have used the time of reduced violence. The militias in Anbar have done the same.
Violence erupted once again in central and southern Iraq as heavily armed Shiite militia groups battle with police and army over control of residential quarters.
The most ferocious clashes are reported to be taking place in the Province of Wasit of which the city of Kut is the capital.
Police sources in Kut say the Mahdi Army, the military army of the Shiite cleric Moqtada al-Sadr, has driven police forces from city.
The clashes follow orders from Sadr to permit his militias to carry arms and defend themselves. This is the first breach of the six-month truce he and U.S. commanders had agreed upon.
So far the fighting has involved his militias and Iraqi forces. But the latest clashes in Kut prove that Iraqi troops are no match for Sadr’s heavily armed militia.
Police and security forces have fled the city and are reported to be regrouping for a counter attack.
Iraqi troops have asked for reinforcements but it is not clear whether U.S. occupation troops will interfere.
Update: Today’s news
Brad Stetser at rge monitor has a great write up on the question of central bank interventions that MG suggested was relevent in comments.
The explanation is a narrative and has many links. However, it needs to be read over there, as I do not know how to break it into parts. The size and scope of new world banks interventions in the US dilemma is well developed for a short article. It is also his area of particular knowledge.
For the 2008 Bonus Plan the Committee selected the following performance measures and relative weights:
· The Company’s 2008 net operating profit, weighted at 30%, calculated as operating profit before income taxes and excluding the effects of (i) loan loss provisions other than related to our credit card business and (ii) expenses related to foreclosed real estate assets;
· The Company’s 2008 noninterest expense, weighted at 25%, calculated to exclude expenses related to (i) business resizing or restructuring and (ii) foreclosed real estate assets;
· The Company’s 2008 depositor and other retail banking fees, weighted at 25%; and
· The Company’s 2008 customer loyalty performance, weighted at 20%, based upon a proprietary rating system designed by the Company and an outside vendor.
In evaluating Company financial performance, the Committee may adjust results to eliminate the effects of charges for restructurings, discontinued operations, extraordinary items and items of gain, loss or expense determined to be extraordinary or unusual in nature or infrequent in occurrence or related to the disposal of a segment or a business or related to a change in accounting principle.
Wamu bond rating hits BBB, and bonuses EXCLUDE expenses from performance disaster. I wish I could do that!!! Sammy, help!
Salon notes the WSJ article on smart customer planning for borrowing.
Wall Street Journal’s Robin Sidel explains that home equity credit lenders are stuck in a tough place when homeowners start defaulting.
While banks can foreclose on a first-lien mortgage, lenders often have little recourse when trying to collect a delinquent home-equity loan, especially if another bank holds the primary mortgage. Banks holding home-equity loans generally can only seize the collateral — a house — after the mortgage is paid off.
When another bank holds the mortgage and the mortgage payments are current, the home-equity lender is effectively powerless to collect the debt.
But here’s the best part:
Unfortunately for home-equity lenders, many borrowers understand that pecking order, concluding there are few repercussions if they stop making payments on their home-equity loan. “Lenders are seeing people go delinquent on home equity who by all rights wouldn’t be expected to go delinquent,” said Dan Balkin of Wholesale Access, a Maryland research and consulting firm that specializes in the mortgage industry.
Lesson to would-be homeowners. Keep your mortgage lenders and home equity lenders separate! Lesson to banking industry: maybe all this slicing and dicing of real estate finance into separate bits wasn’t so smart.
(Meta-econo-blogging note. Sometimes, after skimming the Wall Street Journal and The Financial Times, I turn to the econoblogosphere to see what I missed. Sometimes, as was the case this morning, I find that the econobloggers are all highlighting the same story that caught my eye. The Big Picture and Calculated Risk also chime in.)
Update: This is not advice of any kind.
William Polley wonders out loud as well:
The WSJ Real Time Economics Blog opens a post with this:
“Back in 2003, when the Federal Reserve cut interest rates to 1%, the world worried that the Fed was running out of ammunition and would soon have to turn to unconventional tools.
Now, in 2008, it’s worth asking if the Fed could run out of unconventional ammunition. Tuesday’s offer to lend $200 billion of its Treasury holdings to primary dealers in return for mortgage-backed securities both guaranteed by the government-sponsored enterprises (Fannie Mae and Freddie Mac) and not (private-label MBS) means it will have eventually sold or pledged half of its Treasurys, limiting how many more of these tricks it can pull off.”
My first thought when I heard about this innovative move the Fed was that it would take the pressure off for a few days–maybe a week or two. And what then?
And Reader fatbear (any relation, cousin?) sends this link to Bloomberg: Carlyle Capital Fails to Reach Accord; Lenders to Seize Assets.
We also will be seeing municipal problems in Cleveland and Detroit to name a few, although as save the rusbelt points out these cities have been ignored to some degree.
The Office of Currency Control has a website to explore.
National bank subsidiaries monitored by OCC tend to be mortgage companies. The link is to the long list of matching trade names to the correct national bank, and in which state the subsidiary operates.
The Securities Exchange Commission has a listing of proposed rule changes by the OCC in 2008 at the link.
A generic regulation search engine is at this link.
OCC Watch is not current, but other sites will be researched.
This site dedicated to OCC watching offers a little background for us in the changes being made with banking rules.
In January, 2004 the OCC issued two related and sweeping rules, one preempting nearly all state and local consumer laws (the “preemption rule”) [69 Fed. Reg. 1904 (2004)] and the other restricting nearly all enforcement powers of state regulators and attorneys general (the “visitorial powers rule.”) [69 Fed. Reg. 1895 (2004)] over national banks, and incredibly, their state-licensed operating subsidiaries, which are not banks.
The issuance of the OCC rules has sparked a bi-partisan storm of protest from state legislatures, state financial regulators and state attorneys general. The attorneys general particularly criticized the OCC’outrageous characterization that the “National Bank Act protect[s] national banks from potential state hostility…” Calling the states “hostile” does not advance any legitimate argument. See the OCC Watch Coalition Partner Links page for more information.
Even the normally complacent House Financial Services Committee has weighed in. In addition to holding OCC oversight hearings, it has passed a bi-partisan budget resolution on a vote of 34-28 stating that the OCC action “may represent an unprecedented expansion of Federal preemption authority” and “comes without congressional authorization, and without a corresponding increase in budget resources for the agency.” The committee also pointed out that without a budget increase, the OCC cannot really expect its modest staff of 40 consumer complaint specialists and approximately 100 examiners to both continue their own work and also take over much of the work of an estimated 700 state consumer enforcers and examiners. “In the area of abusive mortgage lending practices alone, State bank supervisory agencies initiated 20,332 investigations in 2003 in response to consumer complaints, which resulted in 4,035 enforcement actions”.
Two points to be made:
1. The size of the department makes regulation moot given the responsibilities.
2. The national bank is not subject to state regulations, but also the state subsidiaries of that bank.
Since the trend is not new but was accelerated since after 2000, would state regulation have been able to help with the bank situation? Is the lack of staff with huge increases in responsibility another way to lessen regulatory effectiveness? Was that the intent? And how does that square with the press release by the OCC here?
Step by step information to be had….there are two lists compare. Perhaps a call to each state AG could obtain more information. If you call in CA, make sure to mention cactus’s problem.
Please post all comments on the unfolding drama of Mr. Spitzer here.