Alex...:

Seriously, what was the thought process in your mind, to invest in this stock at the start of a financial crisis?  Did you know something about the company that no one else knew?  Was there some point of analysis that you had made, which was clearly superior and different than that made by practically anyone else?  Or did your ego just tell you that this could not fail? 

Sure we all make mistakes in the game of investing.  But unfortunately, from what I have read in this string so far, I cannot agree with a designation of "mistake" in going long on Bear.  It does not deserve that much honor as a poor decision.  It was a blind gamble that did not pay off.

When I invest, I act on situations where I can see a bit more than conventional wisdom, where I can see absolute or (at least) relative value.  If I am just buying something because I am just oh-so-certain of my infallibility, it is just a gamble. 

In my opinion, the key distinction between investing and gambling is that the former is an exercise of reason over ego, and the latter is visa versa.
 

 

Good advice. Worth repeating, so I did. 

lol!  If the Fed (or the administrator) gets more than face for this $30 billion in crap, then I will eat my hat. 

Here is the general structure as I understand it:

(Bloomberg)  The assets will be placed in a Delaware corporation set up by the New York Fed. BlackRock Inc. will attempt to sell the assets to pay back the Fed and JPMorgan. The first $1 billion of losses, if any, will be charged to JPMorgan, and the remainder go to the Fed.

From other sources, it appears that the Fed can in theory make money from this from accrued interest, and any possible gains on sale.  The former is clear-cut, and the latter will effectively be deemed "interest" to skirt any ownership issues.  As I see this, it is basically a "non-recourse" loan to JPM, with recourse being to the pool of securities...not JPM after the first $1.0 billion.  I have one unconfirmed source saying these are "10 year loans".  I have no idea what that means yet. 

Blackrock is not going to sell it now, that would be insane.  My understanding is that this is MBS and "related items" (shudder), so when will there be a favorable market?  2011-2012?  Ever?  In the meantime is any / all of this performing as agreed?  If not, it needs to be discounted down from face amount, which likely means a baked-in loss.  What would you pay for a nonperforming loan?  Ya think Bear wrote down the assets before this deal was made?  I bet not!  We know the Fed has no real idea what they bought, as they got an asset manager after this deal was cemented  We do know that JPM passed on holding these...right?  Do you think JPM just randomly picked assets for this pool?  Oh no!  They probably picked the BEST ones for the Fed, because they are on the hook for a whole $1 billion!  lolol...

The Fed is as silly as anyone that bought Bear a few months ago, if they think gain on sale is going to happen.  Yes, let's think about the potential gain!  Let's not remember that we 1) have no idea what we have in this pool, 2) have no idea when the market will be favorable to sell what we have effectively "bought", and 3) the current owner of the company has given us a nominal "first loss" participation after passing on effective direct ownership themselves.  lol...

Put lipstick on that wart-hog and take it out on a date if you want.  But to me it is still 30 billion of crap (rounded up), and the Fed owns it.   

As for the rounding error, the first billion is a nod in the direction of risk sharing, and that is about it. 

I have a deal for you.  I will buy LA for practically nothing.  As for the toxic waste dumps, sewage and pending lawsuits equal to 30 billion, you take that.  Just to be nice, I will take the first billion loss if that becomes a problem for you.  As for the rest of the city, its mine.  

What a deal!  Think of the gains!   

lololol....

Well...  My cynicism of the $30 billion in assets appears to have been excessive.  Sorry, should have kept my own counsel until I knew the specific terms of the deal.  We will see about a gain.  Interest income is reasonable.  The probability of a gain will be determined by future conditions of the mortgage and housing market.  At this stage, who knows?  But it does not look like a terrible deal for the Fed. 

Here is the Fed New York description of the deal. 

What reassures me most of all is that the Fed picked the $30 billion in assets, using fairly reasonable parameters.  That is, investment grade securities, performing loans, etc.  Also, the value of the $30 billion pool was supposed to be determined by market value.  So if that is not "mark to model" then I think its safe to say that the initial collateral value is fairly conservative. According to the comments, the Fed will be required to adjust these annually.  So I guess we will see how things go a year from now. 

It is a bit of a strange deal to me, in that I don't understand why it was $30 billion that JPM wanted in this pool, but I guess it makes sense to someone. 
 

Alex...:

And of course the debt-holders are in a preferred position!  KB, the fact this confuses you indicates you have no idea what you are doing, investing in any equity position.  Owners have last claim on all assets.  Period. End of story.  If the equity holders were made "whole" (and I have no idea how one could even determine this), but bond holders took a loss in collection, all hell would have broken loose. 

Can you read Alex? Where did I imply that debtholders have the same claims as shareholders?

My point is that, if the Federal Reserve was going to bail out Bear Stearns, it should NOT have bailed out bondholders any more than the shareholders. It sets a bad precedent when the goverment makes whole those who facilitated the risk-taking. The FedRes should not reward all the parties that took the risk in the first place (this basically means management, shareholders,and bondholders).

The FedRes made a mistake here in my eyes. Those who doubt it will come around to my view in a few years. Even now, many who were in favour are coming around to the view that the FedRes lost a lot of credibility after the takeover price was raised by JPM. If there is a run on Lehman Brothers, you will see why this was a huge mistake to begin with.

So to sum up, the FedRes should never reward the risktakers, which is basically mangement, shareholders, and bondholders. It also shouldn't favour one party (JPM in this case). I really don't see how anyone can justify the FedRes offering up to $29 billion in losses to JPM and not anyone else.

WilliamJ:

I respectfully disagree.  The Fed did exactly what it needed to do. 

 I don't really have a problem with the FedRes preventing the collapse. My problem is that they are clearly showing favouritism to one party (JPM) and bailing out the bondholders who enabled Bear Stearns to take the risk in the first place.

I would have less of an issue if the (potential) $29billion benefit was divided across a consortium of banks or something. That's what happened to LTCM back in 1998.

A key component of Bear Stearns' problem is their 30x leverage which only existed because bondholders were willing to enable such debt issuance. By the FedRes bailing out the bondholers, this seemingly excessive leverage is still going to happen again.

Although I don't think it will happen, if Lehman Brothers (the #2 player in the questionable mortgages) collapses then the FedRes is going to have all sorts of problems due to what they did with Bear Stearns. I don't think LEH will fail given that the Fed window is open to investment banks right now but you just never know...

Yes, I know how to read.  The mistake I made was giving you more credit than I should have.  I assumed you knew the difference between an owner and a creditor, and what that means in terms of assumption of risk.  However, you do not seem to understand this basic concept of finance.    

As anyone who has taken an elementary course in finance or accounting would know, the equity holders are the owners and decision-makers of the company.  The bond holders have only very specific claims on the company.  In return for no claim on upside potential in the company, the senior debtors generally require first claim earnings for debt service, and assets in the event of liquidation / reorganization.  So that is the deal; bond holders get made whole first for specific claims, equity holders get everything that is left.  Simple really.  Generally true under common law for hundreds of years. 

Explain how the bond-holders "facilitated" the risk-taking of Bear, to such an extent they should share in the losses?  Do the bond-holders share in the profits?  Uh...no.  Do the bond-holders get profit participation / equity kickers?  No.  Do they sit on the Board?  Uh...no.  Do they act as managers?  No...never.  So even though they get absolutely nothing on the upside, have no real say in the direction of the company, they should share the losses with the stockholders?   Such thinking is simply bizarre to me. 

By that logic, depositors of a failed bank facilitated excessive risk taking, and should take a loss.  We should get rid of deposit insurance immediately!  Yes, in theory you can say they are facilitators, but they are not decision-makers or participants in upside success.  So why should they share losses with the equity holders?  Should the landlord also share the losses with the equity holders?  How about payroll, benefits, pension claims?  Maybe all those "facilitators" should also share the losses?  Aside from this being nonsensical, highly illegal, and completely without precedent in the laws of practically any developed country, it makes good sense!  

Also, I would point out that in every bankruptcy (or non-bk) reorg I have ever heard of, the bond holders were made whole before the equity holders.  Period.  And it is no better if the company does not go into bankruptcy, as the bond-holders will force bankruptcy if they are not made whole.  

KB, I wonder if it is you that does not know how to read.  If you did, you could look up the things I have said, and then understand how these things work.  

I am not going to talk to you about this anymore.  It is frankly a bit depressing to me, to deal with such willfully ignorant behavior.