"Ian, I'm holding a long position in Bear Stearns, and am a bit put off by your recommendation to avoid it along with other banking institutions. The CEO just said the company was okay, and Jim Cramer said, ‘Bear Stearns is not in trouble. If anything, they're more likely to be taken over. Don't move your money from Bear.' What do you have to say about that, tough guy?"

That was the e-mail I received a day after publishing American Express Stock: Only the Naive Are Investing Long on American Express.

My response, "If you're holding and thinking of buying more of Bear Stearns, please use caution and please stay safe."

What else could I say?

I just hope he didn't buy more. Since that American Express article, shares of Bear Stearns plummeted from $65 to $2 on a buyout offer ($236.2 million offer) from JP Morgan Chase.

That's a 97% loss in less than a week. Yep, 85 years after being founded, after surviving the Great Depression, World War I and II, and financial meltdowns, Bear Stearns took itself down and finally collapsed after making horrendous subprime bets.

While a sad day for 14,000 Bear Stearns employees (who own 30% of BSC stock) and stockholders (Joe Lewis lost $1 billion on his investment and owns another 9.4%), the credit collapse nor the housing debacle is over... not even close.

Could Bear Stearns be the first of many to fall?

In this market, anything is possible. With Bear Stearns gone, could Lehman be next?

It's plausible. According to a SeekingAlpha article:

• "Like Bear Stearns, Lehman is relatively small and undiversified.
• Like Bear Stearns, Lehman just reiterated that its "liquidity position is strong."
• Like Bear Stearns, at least one of Lehman's trading partners is cutting it off: The WSJ reports that Southeast Asia's biggest bank, DBS Holdings, has asked traders not to enter new transactions with Lehman Brothers. "DBS has sent an internal e-mail saying it would not deal with Lehman Brothers from now on."
• Like Bear Stearns, Lehman is levered about 30-to-1.
• Like Bear Stearns, Lehman chose not to raise additional capital last fall.
• Like Bear Stearns, no one has any idea what's really on Lehman's balance sheet (including, probably, Lehman)
• Unlike Bear Stearns, says an analyst at ING, Lehman is NOT too big to fail, which means that the Fed might not be in such a panic to bail it out."

Any way you look at it, it's an insane situation... one that sounds all too familiar.

Bear Stearns pulls a Countrywide

If the Bear Stearns situation sounds familiar, it's because a similar incident happened with Countrywide.

It was 2007 when Countrywide Financial (CFC) had us believing that it had ample capital and liquidity to stay in business. They disclosed $35.4 billion in reliable liquidity. And they disclosed "sufficient liquidity available to meet projected operating and growth needs and significant accumulated contingent liquidity in response to evolving market conditions."

But who were they fooling? They burned through the $2 billion Bank of America cash infusion, burned through the $11.5 billion credit line used to ease liquidity issues. They burned through Fed cash infusions. And they burned through that $50 billion cushion they said they had.

They said they had ample capital and liquidity in August 2007 when they stated, "Our mortgage company has significant short-term funding liquidity cushions and is supplemented by the ample liquidity sources of our bank. In fact, we have almost $50 billion of highly reliable short-term funding liquidity available as a cushion today. It is important to note that the company has experienced no disruption in financing its ongoing daily operations, including placement of commercial paper."

Seven days later, the company announced that it faced "unprecedented disruptions" in debt and mortgage markets.

Now, take a look at what Bear Stearns did.

On March 12, Bear Stearns' CEO appeared on CNBC and said (per Briefing.com) their "liquidity position has not changed and their balance sheet has not weakened at all. Says their liquidity cushion has not changed. Don't see any pressure on their liquidity, let alone a liquidity crisis. As they close the books, they are comfortable with the range estimates that are out there currently."

He even denied threats to liquidity and said the company had a $17 billion cushion. Investors actually cheered the news and sent BSC up.

Too bad the rumors were true, and people lost so much money.

Ian L. Cooper
http://www.wealthdaily.com

 

 

It seems that even the Fed does not
have full disclosure of American Banks positions. Paulson appears primarily as a policeman for Goldman, Bernanke made fall guy and bullied by "I want them to bleed Jamie Demon. Banks lie about their positions days before the "true situation comes out. Perhaps Bernanke is also only there to protect the Bankers and Corporations who are now more powerful than bought politicians.No imperfect but valued Democracy while our Lords of the Universe rule.

Whatever Ben Bernankes reasons for
taking that chalice, apart from the "glory and income, he must surely be wishing to escape the fall guys concrete suit and escape back to anonymous academia. Though he may also have come under pressure to protect financial interests. Perhaps this time the American public will turn on their three presidential candidates and question their
massively corporate backed and influenced campaigns or as usual go
unquestioningly for the party television presentation and best haircut along with most of the western world.

Do not know the complete history of Bear Stearns, but if the company has been around for 85 years that would mean it was founded in 1923, and World War I ended in 1918.