[jtfanclub]

hrothgar, on Mar 17 2008, 02:28 PM, said:

I'm not precisely sure why Bear Stearns was so exposed.

I think it was because as a percentage of their total business they had very few liquid assets. In contrast, Countrywide (to name one) had just enough assets that the Saudis and others were able to keep it going with a more normal bailout.

[barmar]

Since I posted yesterday I've listened to some discussion of this on NPR. From what I gather, BS's problem is that when it became apparent last year that the housing market was declining, and subprimes would be especially hard hit, they didn't go looking for protection (i.e. loans from Saudis) like most other banks did. They assumed that they had enough assets to carry them through the crisis. But they were wrong.

But it also seems like they're not totally alone. I've been hearing Lehman Brothers is another bank that's in trouble. If the Fed and JPMC hadn't bailed out BS, they'd probably be next to tumble.

Some of the commentators have indeed suggested that this is not unlike the lead-up to 1929, and the Fed is worried that if they don't step in it could get almost as severe.

[Winstonm]

Quote

Some of the commentators have indeed suggested that this is not unlike the lead-up to 1929,

Actually, the amount of debt makes it much larger than what faced 1929.

[Aberlour10]

German public opinion is shocked since one of the state-owned banks Landesbank Sachsen stumbled totally by gambling with these high risk US-Investments. They lost about 3,5 billions of Euro, another state-owned bank had to save this institute before collapsing with anymore public money. More of these Landesbanken are involed, € -billions of tax money are burned on the run for these "easy and fast profits"

Robert

[helene_t]

I think it's ok that state-owned banks do high-risk investments. After all, the state is not particularly risk-averse - it has a large buffer. I would be more concerned about commercial equity funds or pension funds taking high risks.

Of course the expected gain should be larger than what could have been obtained by low-risk investments. Maybe that wasn't so in this case.

I've heard about equity funds that had a bonus structure that gave managers options, which means that they become risk-seekers since the bonus can never be negative, so any loss is no worse than a break-even. Of course such a scheme is very very bad.

[Winstonm]

The most interesting (or troubling, perhaps) part of the Fed solution has been to open its discount window to the Primary Dealers - this means that non-banks, non-depository institutions now have access to the lender of last resort, and the Fed has agreed to take all sorts of collateral for loans, including mortgage backed securities.

Trouble is these non-banks are non-regulated, so the Fed has no idea if they are lending to a solvent or insolvent institution.

For example, Bear Stearns was a primary dealer.

[Al_U_Card]

Back in the days of:

you deposit some money for which you are paid interest on your principle;

you borrow some money on which you repay the principle with some interest;

the bank makes money on the difference.


btw, when were those days anyway?

[Al_U_Card]

Big finance

Big pharma

Big manufacturing

Big military


Bigger is not necessarily better.

[Winstonm]

Over the next 6-12 months, the Fed will have a strange-looking balance sheet. Instead of treaury assets, they will hold MBS.

What happens when there is a bank run on the Fed?

[Al_U_Card]

The "people" will pay for it.....as always.