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Sunday, March 16, 2008


jpmorgan pays $2/share for bear; fed cuts rates again

if anyone doubted just how desperate things are in the united states financial system, consider this action from a sunday.

the fed and treasury must have pointed a gun across the table at bear stearns' execs, who accepted in principle an emergency sale at $2/share in jpm stock. the fed further agreed to fund bear's worst assets to the tune of $30bn. bear traded at $180 not so long ago, $70 a week ago and $30 even after the worst single day stock price collapse in living memory friday. bear has come full circle since the failure of two of its poorly conceived credit funds went belly up to kick off what many are calling the worst credit disaster since the great depression. more from yves smith.

what's more, to try to put a seal of confidence on the whole sordid affair and diminish the possibility of a massive selloff on monday, the fed put in place an intermeeting discount rate cut of 25 bps, and furthermore announced unprecedented six-month loans (or what will amount to that) to all primary dealers through the discount window -- previously reserved for commercial banks with depositors -- in return for a broad range of collateral. the program is called PDCF for primary dealer credit facility.

it amounts to a statement that the fed will take credit risk on from primary dealers because it won't allow primary dealers to fail -- or at least it hopes it can save them, so long as they keep coming just one at a time. for the record, lehman brothers would probably be next. again yves smith, but interfluidity makes the most important point about the new discounting policy -- had it been in place last week, bear would still be with us; therefore, the prospect of lehman or any other primary dealer now failing would seem remote indeed. as such, it should stay a great many concerns about a counterparty-risk-driven unwind.

at this writing, however, it's not working -- the s&p futures are off 32.70 to 1260.30, nasdaq 100 futures off 37.75 to 1686.75. a huge rumbling from beneath the market is growing louder as the japanese yen is soaring higher, a symptom of the long-dreaded carry trade unwind. the steps taken to relieve the investment bank disaster may seem to traders to be perpetrating a currency collapse of even greater ramifications.

what's more, as smith notes, while precious metals are up commodities in general are trading down -- could it be that traders are finally beginning to fear a deep demand-crushing recession of global reach? or deflation?

if this doesn't stop at this critical juncture, many will view it as final judgment that the american government no longer has any control over events, which are spiralling down with massive inertia.

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