Bear Stearns Bankruptcy Looms

[Joanne98]

If weekend suitors do not rescue Bear Stearns, we are likely witnessing a turn out the lights party for the Bear. CNBC is reporting Bear Stearns Weekend Talks Reveal 2 Key Contenders.

Department heads at Bear Stearns met with officials at J.C. Flowers and JPMorgan Chase Saturday afternoon to give an overview of their business divisions, including headcount and profit and loss positions, CNBC has learned.

The discussions indicate that potential bidders for Bear have been narrowed to those two CNBC.com firms, although other last minute contenders could still weigh in, according to one source aware of the talks.
S&P Downgrades Bear Stearns Credit to BBB

In a "timely" move, the always on top of things S&P, lowered its long-term counterparty credit rating on Bear to "BBB" from "A," and it placed long and short term ratings on credit watch with negative implications.

Because of that S&P downgrade, bankers have now come to the conclusion that a deal must be done by Monday morning because no one on the street will trade or lend to Bear Stearns, which is rated a notch above junk bond levels.

China Backs Out Of Existing Bear Stearns Deal

Don't look for Chinese sovereign wealth funds for a bailout: China's Citic won't guarantee completing Bear Stearns investment.

China's Citic Securities Ltd. said Saturday that it can't guarantee it would complete a deal to invest about $1 billion in Bear Stearns Cos. due to the U.S. investment bank's financial crisis, Reuters reported Saturday.

"Our company has noticed the recent financing arrangement with the U.S. Federal Reserve and JPMorgan Chase and other financial institutions, and we have also considered factors including the sharp fall in Bear Stearns' share price.

We cannot guarantee reaching a final agreement in the future," Citic Securities was quoted as saying.
Massive Derivatives Mess At Bear Stearns

With a tip of the hat to Prudent Bear let's take a look at the Bear Stearns' 2007 SEC 10k filing page 80.

As of November 30, 2007 and 2006, the Company had notional/contract amounts of approximately $13.40 trillion and $8.74 trillion, respectively, of derivative financial instruments, of which $1.85 trillion and $1.25 trillion, respectively, were listed futures and option contracts.

The aggregate notional/contract value of derivative contracts is a reflection of the level of activity and does not represent the amounts that are recorded in the Consolidated Statements of Financial Condition. The Company's derivative financial instruments outstanding, which either are used to offset trading positions, modify the interest rate characteristics of its long- and short-term debt, or are part of its derivative dealer activities, are marked to fair value.

The Company's derivatives had a notional weighted average maturity of approximately 4.2 years at November 30, 2007 and 4.1 years at November 30, 2006. The maturities of notional/contract amounts outstanding for derivative financial instruments as of November 30, 2007 were as follows:

I followed leads on the above to Bear Stearns: The Smoking Gun(s) and from the same blog 2007-2009 Bear Market Update. A snip from the former also made reference to the above chart with the following additional commentary.

This market has become a leveraged nightmare, being so large that the failure of any single significant company such as Bear Stearns could precipitate a chain reaction of defaults. As you may recall we pointed out some time ago that after subprime the next area to watch closely as a potential tipping point would be the CDS market.

Notice that Bear Stearns is not EVEN LISTED as holding derivatives in any of the tables we looked at in the OCC Report. Is this because of their 'non-bank' status? We wonder how many other US corporations are quietly loaded up with derivatives risks as well, either as a large counterparty, or the target of a pyramid of wagers on failure risk many hundreds of times their actual net worth. What a monster Wall Street has created for the world.

Let's Not Pretend

I am not going to pretend that I know how much of that is real vs. imaginary risk. But as long as we are not pretending, let's not pretend about this:

Whatever the risk is, it is enormous.
That risk is 100% guaranteed to not be marked to market.
There is no freaking way, no matter how many people are thrown at the task, to figure out the above mess with any degree of certainty by anytime next week, let alone Monday.
Fannie Mae's hedge book could not be figured for over two years. Can Bear Stearns' hedge book be figured out in two days?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

[TomClash]

1. Good

My solution is simple - have the Fed force and run a private auction for Bear Stearns among the other banks and investment houses. Bear shareholders get their 50 cents on the dollar (much better than they would do in bankruptcy) and a "good bank" gets the BS assets cheap - that's their reward for taking lower returns and being responsible. If the shareholders don't like it, let it fail - divid the assets quickly - and simultaneously keep the market liquid.

[MannyGoldstein]

2. The Problem Is That Nobody Has Any Idea Of What Bear Is Worth

Bear's worth could be highly negative, thanks to illiquid derivatives.

On the other hand, letting it fail may well cause everything to get much worse.

This is fugly.

[Joanne98]

5. They have 11 billion cash and their leveraged over 300 billion.

They're totally screwed.

[TreasonousBastard]

3. Relax, it might not be too bad after all. Too many of...

these whizz kids whining don't remember when Whitehall Brokerage went belly up and everyone thought the world was going to end. Same with the more recent S&L nonsense.

My biggest worry is not the banks or Wall Street, but the Federal debt sucking up liquidity just when we need it most.

[DemocratInSoCal]

4. Are You Serious??

Do you have any idea how Horribly BAD things are? How precarious a situation we're in?

Might not be too bad at all? Do you happen to work for CNBC, and are you going to say that you didn't see it coming?

[TreasonousBastard]

6. I am and I do. Do you have any special insights into...

the future? Is your crystal ball so much clearer than mine that you know absolutely that we will crash into oblivion?

One curious nugget from history is that when the news is all bad everyone has an interest in seeing the worst doesn't happen, and sometimes it manages to work out. It's when things look rosey that we get surprised and taken for a big fall.

Everyone on earth with more than two nickels to rub together is working out a way for the US to survive and not drag the rest of the planet down in a huge failure. It is entirely possible that they might just pull it off. Nor definite, but quite possible. Would you rather they not try at all? Or would you rather they fail?

There are two fundamental problems that I see...

The present liquidity crisis is made more difficult by the amount of US debt. Thank you, Reagan and Bush.

The US using over 25% of the planet's resources will have to stop in the not so distant future.

The second relates to the planet's ability to feed and house more billions of people but that's another question entirely.

Now, I haven't seen any of the peanut gallery pontifications about this on the web actually proposing solutions other than handwringing and prophesying great Jeremiads about how we're all going to die. Every so often someone remembers the bright idea that we have to import less oil, but then ignores how 96% of the population is going to get to work while figuring this out. And so it goes with all the bright ideas, as if we can build 100,000 solar power generators overnight and get all those jobs back by paying everyone 30 bucks an hour while the rest of the world is paying a lot less.

What is happening is that everyone solvent and every central bank is trying top put cash where it will increase liquidity through the bankruptcies happening right now and the sytem will be working in the future when things sort out. This is a matter for big money-- really, really, big money. Some are in denial, some will be foolish, but essentially everyone from Wal-Mart to Merrill wants to stay in business and are doing everything they can to do so. They are fighting for their lives, and rather than whining over what we cannot control, we should hope they win.

[Mojorabbit]

7. With the news that Goldman sachs

is going to have a huge writedown tomorrow and the lawsuit filed yesterday against the fed for bailing our Bear Sterns,
http://www.reuters.com/article/ousiv/idUSN1630454820080316
I am worried about a huge loss of confidence and a domino effect. If we get past the week then I will breathe again.

[TreasonousBastard]

8. We'll see more writedowns, but...

yeah, real question is how panicked the Street gets as equity goes *poof*

I don't see any merit in the suit against the Fed-- it looks like simply sour grapes that they're bailing out Bear instead of handing a free house to everyone with a stiff mortgage payment. I do question whether or not Bear should be bailed out, but it may be too risky to let them go belly up.
They let Drexel go down way back when, but this time things are so complicated that they may not want to make that bet.

I remember when the Fed pretty much saved the world by keeping the discount window open during the Penn Central bankruptcy. Don't remember if they were involved in the Whitehall mess, but that was another one that threatened the whole Street and the Republic managed to survive.

Anyway, this is still for the big guys to fight out, and unless anyone here is a billonaire fund manager we have no say in the matter.