Can someone explain in simple terms what has happened in banking tonight?

[Disneycrazymom]

I have read some here and am watching City of Money on CNBC. I don't understand how the 1 company can affect the whole system? I thought there would be systems in place to keep the financial's separate enough that 1 failure would not cause them all to fall. Thanks in advance!

 

[Youarehere]

 

[Fizzgig]

Here's a comprehensive article to try and give you the whole picture: http://www.msnbc.msn.com/id/3683270/

When the 5th largest investment bank goes under (the choice was between declaring bankruptcy or getting bought out at $2/share--a pittance, and Bear Stearns may still be overpriced), that causes massive ripples.

The reason Bear Stearns went under is being bandied about as mortgages were no longer getting paid by high credit risk homeowners. As in, when the loans were made, the people buying the houses should have been denied due to their credit history, income, etc.; not that they had one major medical claim and went under, and prior to the loan they were fine.

Last week, Bear Stearns was worth Billions. This week, they are worth $236 million.

Hope that helps!

 

[PatsMom]

One of the things that has happened is that JP Morgan probably bought the bargain of the century.

 

[shelly3girls]

One of the things that has happened is that JP Morgan probably bought the bargain of the century.

Along with the lawsuit they are going to have to fight...

 

[breezy1077]

I keep saying call your congressmen and put a stop to the mortgage witchhunt! This isn't the first investor to drop (but it is the biggest) and it won't be the last. There's been such a hit to the mortgage industry that everyone now needs to sit back and let the dust settle. Instead they keep kicking the industry when it's down and the ripple effect is going to hurt everone. Everyone! The housing market affects so many other financial sectors. So, again...

Call your congressmen!!!!!!!!!!!!

 

[Toby'sFriend]

I'm not quite clear on what further actions you expect our Government to take.


They've already meddled quite a bit.

 

[mikehn]

On Thursday, Bear Stearns got a margin call, basically, creditors came calling for their money. Most of Bear's liquid assets are mortgage backed securities, which are currently worth little to nothing. Since Bear was not able to sell their mortgage backed securities to raise cash, they could not satisfy their margin call. Thus on Friday, their stock tanked. Unable to raise any cash, it was apparent by Friday evening, they were on the verge of collapse. A collapse would cause catastrophic ripples through the world financial markets as every creditor, in fear, would be issuing margin calls to their banks. Individuals would rush out to their banks and pull their money out, which is essentially a margin call. And you can imagine the domino effect.

 

[PatsMom]

Along with the lawsuit they are going to have to fight...

Lawsuit from who? Bear Stearns investors? They have no right to sue because the company they invested in was sold at a fire sale price. They'll get some JP Morgan stock. Bond holders also can't sue unless there was fraud involved and I haven't seen any allegations of that. Bad investment decisions perhaps but not fraud. Investors withdrew $17 billion in two days. The more money withdrawn, the greater the panic among investors. Bear Stearns did not have the liquidity to pay out so they sold out. The Fed is guaranteeing their most questionable investements so JP Morgan's risk is minimal. What they are paying for Bear is less than the value of Bear Stearns real estate. Bear Stearns is the larges underwriter of mortgage backed bonds in the industry - it was just too big for the government to let fail. The crisis of confidence in banks and investment houses would have crippled the economy. And Bear Stearns was in a position where they really had to agree to the buyout to restore investor confidence.

 

[breezy1077]

I'm not quite clear on what further actions you expect our Government to take.


They've already meddled quite a bit.

That's my point exactly! I'm telling everyone to tell congress to back off. Right now they are only legislating more of a problem. Every week we hear of more and more proposed legislation....enough already. It's like beating a dead horse. I've said this from the beginning of the mortgage meltdown last year - Brace yourselves! The housing market affects everything. Hate to be doom and gloom, but...anyone else thinking depression?

 

[punkin]

Lawsuit from who? Bear Stearns investors? They have no right to sue because the company they invested in was sold at a fire sale price.yes they do have a right to sue. their claims will be twofold: 1st that Bear Stearns' board undervalued the company and 2nd that officers and directors of Bear Stearns violated securities laws by misstating the financial health of the company. I am sure there are more but those are the main 2. They'll get some JP Morgan stock. Bond holders also can't sue unless there was fraud involved and I haven't seen any allegations of that. Bad investment decisions perhaps but not fraud. Investors withdrew $17 billion in two days. The more money withdrawn, the greater the panic among investors. Bear Stearns did not have the liquidity to pay out so they sold out. The Fed is guaranteeing their most questionable investements so JP Morgan's risk is minimal. What they are paying for Bear is less than the value of Bear Stearns real estate. Bear Stearns is the larges underwriter of mortgage backed bonds in the industry No, I don't think so, but they were a heavy player in the repo market, which is what threatened to crash- it was just too big for the government to let fail. The crisis of confidence in banks and investment houses would have crippled the economy. And Bear Stearns was in a position where they really had to agree to the buyout to restore investor confidence.

There are always lawsuits in this type of situation.

 

[paulh]

JP Morgan's risk is minimal. .

in fact it`s zero as everthing is covered by the fed
Paulh

 

[MsStinkerBelle]

One of the things that has happened is that JP Morgan probably bought the bargain of the century.

Some co-workers and I were saying this exact same thing.

 

[paulh]

There are always lawsuits in this type of situation.

as in the case of northen rock (UK bank) shareholders are taking government to court over natonalisation. And rocks problems were a fraction of bear sterns
Paulh

 

[Lisa_M]

I keep saying call your congressmen and put a stop to the mortgage witchhunt! This isn't the first investor to drop (but it is the biggest) and it won't be the last. There's been such a hit to the mortgage industry that everyone now needs to sit back and let the dust settle. Instead they keep kicking the industry when it's down and the ripple effect is going to hurt everone. Everyone! The housing market affects so many other financial sectors. So, again...

Call your congressmen!!!!!!!!!!!!

What am I supposed to say when I call?

ETA: nm, I saw what you wrote. I don't think staying out of it will help the situation. I don't know much about finance, but it seems that the government doing what it can to save our economy is the best course of action. But then again, the only finance class I took was accounting in high school...

 

[PatsMom]

as in the case of northen rock (UK bank) shareholders are taking government to court over natonalisation. And rocks problems were a fraction of bear sterns
Paulh

In the US for a shareholder suit to succeed on the basis of fraudulent business practices (including violation of securities laws) the facts must be "cogent and compelling" in proving that the company had an intent to defraud investors. The is probably going to rule out any shareholder suits since I haven't read anything to indicate allegations that BSC was "cooking the books" like Enron and Worldcom were. Marking to market and valuing mortgage securities is a tough call these days. What is selling is going at fire sale prices because of the overall market jitters in that sector. And high quality securities are being trashed along with junk. Shareholders might try to block the sale to force a higher price but it is likely that it will go through anyhow. 30% of all shares are employee owned - they won't try to block the sale as their jobs would definitely be lost if the bank went under. The SEC has said nothing and if they had any intentions of looking into BSC's accounting practices, I think they would have spoken up by now.

JP Morgan got a bargain. One of the reasons for the bargain price though is that they did not have time to do a proper job of due diligence on the acquisition so they are offering a low price. A couple of analysts I've read have mentioned that although BSC was the largest underwriter in the mortgage bond business before their collapse, that segment is basically worthless now. What JPM is interested in is the prime brokerage business. Another interesting item I read is that when BSC put out feelers on the sale the only two who showed up were JPM and a private equity firm. Since the private equity firm would never have gotten government support, JPM won the bid by default. JPM does still have some risk but its pretty well hedged by the fed guaranteeing the potentially riskiest investments.

This thinking is borne out by the markets behavior today. As a group financial stocks are down significantly as there is some speculation over who will fail next. JP Morgan is up significantly. Still way off its 52-week high but up quite a bit from Friday.

Edited to add - I stand corrected on litigation - JP Morgan evidently does anticipate some litigation. I did find one article in a UK newspaper talking about it when I went looking

http://www.guardian.co.uk/feedarticle?id=7391831

Evidently shareholders are looking for lawyers willing to file lawsuits - the question then becomes will the suits go anywhere?

 

[DVC Sadie]

I wonder who will be next? BS will not be the only company to be worth pennies on ther dollar before all of this shakes out.

 

[PatsMom]

Morningstar did an interesting piece on which would be the next investment bank to fail. I think it is available to all at www.morningstar.com - I have a premium subscription because of my job. It was very well done.

 

[DVC Sadie]

Morningstar did an interesting piece on which would be the next investment bank to fail. I think it is available to all at www.morningstar.com - I have a premium subscription because of my job. It was very well done.

Thank you for the link, very interesting reading.

 

[paulh]

In the US for a shareholder suit to succeed on the basis of fraudulent business practices (including violation of securities laws) the facts must be "cogent and compelling" in proving that the company had an intent to defraud investors. The is probably going to rule out any shareholder suits since I haven't read anything to indicate allegations that BSC was "cooking the books" like Enron and Worldcom were. Marking to market and valuing mortgage securities is a tough call these days. What is selling is going at fire sale prices because of the overall market jitters in that sector. And high quality securities are being trashed along with junk. Shareholders might try to block the sale to force a higher price but it is likely that it will go through anyhow. 30% of all shares are employee owned - they won't try to block the sale as their jobs would definitely be lost if the bank went under. The SEC has said nothing and if they had any intentions of looking into BSC's accounting practices, I think they would have spoken up by now.

JP Morgan got a bargain. One of the reasons for the bargain price though is that they did not have time to do a proper job of due diligence on the acquisition so they are offering a low price. A couple of analysts I've read have mentioned that although BSC was the largest underwriter in the mortgage bond business before their collapse, that segment is basically worthless now. What JPM is interested in is the prime brokerage business. Another interesting item I read is that when BSC put out feelers on the sale the only two who showed up were JPM and a private equity firm. Since the private equity firm would never have gotten government support, JPM won the bid by default. JPM does still have some risk but its pretty well hedged by the fed guaranteeing the potentially riskiest investments.

This thinking is borne out by the markets behavior today. As a group financial stocks are down significantly as there is some speculation over who will fail next. JP Morgan is up significantly. Still way off its 52-week high but up quite a bit from Friday.

Edited to add - I stand corrected on litigation - JP Morgan evidently does anticipate some litigation. I did find one article in a UK newspaper talking about it when I went looking

http://www.guardian.co.uk/feedarticle?id=7391831

Evidently shareholders are looking for lawyers willing to file lawsuits - the question then becomes will the suits go anywhere?

The only diffrance betwen Rock and BSC,rock was a lending bank to the public,thus having a run on it where people waited in line for days to draw money out.In BSC case there run on its funds was instituanal as they had no public outlets.
If you had folks waiting in line for there money it would have felt much worse
Paulh