Bear Bought, Fed Cuts, Oil and Gold Surge, Greenspan Speaks, and More!

by Addison Wiggin & Ian Mathias

  • Bear Stearns acquired for pennies on the dollar… but who really bought the broker, and why
  • Greenspan says current financial crisis worst since WWII… how Mr. Bubble says it’ll end
  • Fed stages another emergency rate cut… details on its latest plan to save the U.S. economy
  • Dollar strikes fresh lows, commodities to new record highs
  • Plus, the “Ethiopian secret” to buying gold for a few bucks an ounce

 

 

“The current financial crisis in the U.S.,” our favorite former Fed Chairman Alan Greenspan wrote yesterday, “is likely to be judged in retrospect as the most wrenching since the end of the Second World War.

“It will end, eventually, when home prices stabilize and with them the value of equity in homes supporting troubled mortgage-backed securities.”

Thanks, Googly. You’ve been a world of help.


J.P. Morgan Chase bought Bear Stearns for 2 bucks a share yesterday. That’s a 93% discount to the $30 a share Bear was trading for on Friday. In dollar terms, the brokerage — with 14,000 employees, 19 offices in 11 countries — will sell for a mere $236 million.

Clever irony, eh? The company that started this whole mess last summer is the first to bite the dust. Thus, the 85-year existence of Bear Stearns comes to an end.

For what it’s worth, J.P. Morgan is buying Bear for less than a third of the cost of Bear’s IPO in 1985. Ouch. “The building [itself] is worth $8 a share,” a mid-level Bear Stearns executive told The Wall Street Journal, referring to the Bear’s Manhattan headquarters.

The Dow opened down over 300 points on the news.

On Friday, the Dow lost 1.6%. The S&P 500 and Nasdaq both lost more than 2%. None of the indexes were able to muster any more than a 0.4% net gain or loss for the week. This week, we suspect things will be moving… in the wrong direction.

Bear shareholders are, you might say… screwed. Insiders at Bear own about 38% of outstanding shares. This time last year, they’d be worth about $5.3 billion… J.P. Morgan told Bear employees yesterday they could cash out that same portion for $90 million. That’ll brighten up your Monday morning.

The most notable insider casualty is the bridge-playin’, pot-smokin’ former CEO of BSC, Jimmy Cayne. He will have lost as much as $883 million in the deal.

In reality, the Federal Reserve is buying Bear. All of the capital J.P. Morgan will use to buy the brokerage house is being borrowed. The Fed is putting up $30 billion in cold cash to help shore up Bear’s balance sheet.

“J.P. Morgan and the Fed are stepping in,” Dan Amoss explains, “because they realize the type of liquidity crisis that would unfold if they do not.“ J.P. Morgan is likely a monstrous counterparty to derivative trades with Bear Stearns, and could find itself in the s$!t, too, if Bear starts defaulting.”

But more than that, “the bailout is an effort to keep the financial system functioning,” Amoss says. The Fed needs to keep up appearances “until their TSLF
is implemented at the end of March. They intend to keep Bear Stearns on life support for the next two weeks, not bail out BSC shareholders.”

Carlyle Capital is calling it quits this morning, too. The Carlyle Group, the infamous private equity giant behind Carlyle Capital, announced this morning that it would liquidate the company, stating simply that “the company believes its liabilities exceed its assets.”

Like Bear Stearns, Carlyle Capital’s few remaining lenders had taken possession of just about everything they could get their hands on. For what it’s worth, Carlyle’s portfolio was composed of almost entirely Fannie Mae and Freddie Mac paper.

We’ll go out on a limb here… Carlyle Capital won’t be the last firm of its kind to close up shop.

“Nonborrowed bank reserves had dropped to roughly a negative $20 billion as of the last reporting,” notes our shadowstats.com ally John Williams.

“Clearly, the Fed is lending beyond needed reserve levels, taking in illiquid mortgage-backed securities and providing liquidity to the banking system for other purposes.

“Those other purposes are highlighted now by the Bear Stearns bailout.”

We’ve been wondering what would happen if the “derivatives time bomb” were to go off… we may just find out. Lehman Brothers and Morgan Stanley are sitting on a pile of the ticking mortgage-backed explosives, too. Don’t miss Dan’s play-by-play coverage in the Strategic Short Report.

The Fed announced a surprise, premeeting 25 bps rate cut on Sunday, too. Like their cut last August, this one will apply only to the “discount rate” — the rate at which banks can borrow cash from the Fed. The discount window now lends at 3.25%.

In an effort to instill confidence, Ben Bernanke announced the surprise last night. The Fed chairman held a conference call with the global media. For a six-month period, the Fed’s TAFs and TSLFs will now be open to “primary dealers” of U.S. securities — namely brokerages. And just like their big bank brothers, brokerage houses can use all kinds of collateral to gain a Fed loan, even mortgage-backed securities.

This was the first time the Fed has made a surprise announcement on a weekend since Paul Volker raised rates on a Saturday morning in 1979.

Despite their scheduled meeting tomorrow, the Fed expected the Bear news to cause a rash among Asian traders and tried to apply some ointment before any serious scratching started.

The Rx didn’t work.

Asian markets plummeted on the news. India’s Sensex took the prize, down a full 6%, to a six-month low. The 951-point loss was the second worst in Indian history. Hong Kong fared only marginally better… the Hang Seng plummeted 5.1%. And for once, major indexes in Japan and China worked in unison. This time, they both fell about 3.6%.

Investors in Europe got a taste of the panic themselves. In France, the CAC 40 is down 2.5% this morning. The German DAX is down 3%. And the ‘footsie’ in London is off 2%.

“The unfolding financial crisis,” writes the WSJ this morning with a chart that could easily have been ripped straight from our movie, “one that began with bad bets on securities backed by subprime mortgages, then sparked a tightening of credit between big banks, appears to be broadening further.

“For years, the U.S. economy has been borrowing from cash-rich lenders from Asia to the Middle East. American firms and households have enjoyed readily available credit at easy terms, even for risky bets.

“No longer.”

Naturally, the U.S. dollar got taken to the woodshed on this news, too. The dollar index fell as low as 70.6 last night. It has since recovered, but only by a small margin… it’s at 71.2 as we write.

The euro gapped up big in weekend trading, to the high side of $1.58. Another all-time high. The yen deepened its own 12-year high, this time strengthening to 96.

Again, on the weak dollar, oil gushed to another record high. In Asia, a barrel of light sweet crude would have set you back $112. But like gold, oil is trading down this morning, now going for the low, low price of $106.

For what it’s worth, for the very first time, every available oil futures contract — from April to December 2016 — has oil priced at $100 a barrel. If you dare, futures for December 2016 are pricing oil at $104.

Gold shot through the roof in overnight trading. The spot price soared as high as $1,030 in Asian markets this morning.

“Counterparty risk has moved to center stage,” comments Goldmoney.com’s James Turk. “Financial assets are being scrutinized. Promises are being called into question. People are waiting for the next shoe to drop.

“When you own physical gold or silver, you own a tangible asset. In contrast, when you own a financial asset, the value of that asset is ultimately tied to someone’s promise and their financial capacity to fulfill that promise.

“In other words, wealth takes two forms, and they are fundamentally different. Financial assets have counterparty risk, but tangible assets do not.”

In New York this morning, spot gold is back down around $1,000.

If you’re looking for a low-cost way to add gold to your portfolio, you can always coat blocks of steel, pass them off as bullion… and swap ’em in Ethiopia.

Officials at the central bank of Ethiopia discovered thousands of pounds of gold-plated steel bricks in their reserves late last week. Several arrests have been made, but we’ve yet to hear how much phony gold is in Ethiopian reserves, or how much they paid for it.

According to the BBC, the bank is now on lockdown, desperately trying to locate all the fake gold and estimate total losses. If you happen to have bought gold from Ethiopia recently, we recommend you do the same.

The Beijing Olympic games could bring the Chinese water crisis to the boiling point. (Sorry, couldn’t resist.)

Hebei, a northern Chinese province that surrounds Beijing, has been drought stricken for months. According to the Chinese government, at least 250,000 people there are currently without sufficient drinking water and some 3.3 million hectares of crops have been affected. This weekend, Olympic officials told the Hebei population to prepare to ship out an additional 79 billion gallons of water to Beijing for the August games. That’s about 10% of their entire current water supply.

Revolutions have begun over far less. We’ll keep an eye on this one for you.

“I owned a home in California for 25 years,” writes a reader, “and it went down in value — even below the mortgage — several times through various housing downturns. However, I didn’t care, because I liked the home, had no desire to move and could afford the mortgage. That’s how most people feel. Only those who are forced to sell because their job requires them to move, or those who can’t afford the mortgage, are liable to walk away and stick the lender with the property.

“The current ‘mortgage crisis’ is way, way overblown, because 99% of homes are owned by people who intend to stay there for the immediate future and can afford to keep paying their mortgages. There is no reason to ‘write down’ AAA mortgages, but the banks are panicking.”

The 5: You’re exactly right. Banks in panic mode are the problem. But that doesn’t make it any less dangerous, especially for a world of folks dependent on lending and credit for daily subsistence Just like euphoric buying on the way up… panic selling on the way down can ruin a market and hurt investors or homeowners who didn’t even participate in the mania.

“It’s going to be one of the worst recessions we’ve had in a while,” our friend Jim Rogers said a few weeks back on Bloomberg television, “because we had so many excesses going into it. It’s going to be bad for all of us as currencies come under more and more stress and we have more inflation in the world.”

Happy Saint Patrick’s Day,

Addison Wiggin
The 5 Min. Forecast

P.S. We’ve heard (and made) some bad calls in our time, but this is certainly one of the worst.
Jim Cramer on Mad Money last Wednesday: “Don’t move your money from Bear… that’s just being silly” Ouch.

rspertzel

Recent Alerts

First Is Not Always Best (Vaccines)

First isn’t always best? Our science-and-wealth maven Ray Blanco thinks so: “Other vaccines, earlier in development, could eventually win the race.” Read More

Central Bank Audit!

The U.S. government is demanding a forensic audit of Lebanon’s central bank or risk sanctions similar to those leveled at North Korea. And the irony isn’t lost on us… Read More

Low Blow for Work From Home

First, we had the geniuses at Deutsche Bank… Now the cranks at Comcast? Here comes the next front in the war on remote workers… Read More

Biden’s A-Team Spells Trouble

What to Expect From the Next Presidential Cabinet… Read More

Speech Regulation (Happening Now)

We return to our theme of social-media censorship… and a rather dystopian pre-election headline we missed. Read More

Cold Reality

With new mRNA vaccines in the pipeline, we can go on the offense. But “the issue,” Ray Blanco points out, “is… transporting the vaccine.” Read More

Mainlining Hopium

It turns out the post-election fundraising grift is common to both major parties: the “Biden-Harris Transition” panhandles from broker Americans. Read More

Rigged!

Here’s an indisputable proposition: If Donald Trump mounts a credible effort to serve a second term, markets won’t see it coming… Read More

Fed in the Crosshairs

A California congresswoman puts the screws to a Federal Reserve stuffed shirt, and a former Lehman Bros.’ insider makes a cynical case for gold. Read More

Media Blackout: Lockdown Demos

“A hell of a lot of Germans are fed up,” says a reader from Bavaria, reaffirming our Election Day forecast on the breakout of social disorder. Read More