The Bear Stearns Situation, play by play. May 29, 2008
Posted by baxtersbrother2 in Accounting, Economy, Social Discourse, Tax Policy., US Government, Uncategorized.Tags: Bear Stearns, Federal Reserve, Government Intervention, JPMorganChase, Sub-prime mortgages, Wall Street Journal
2 comments
There is a very indepth series of articles from The Wall Street Journal that goes into great detail about the failure and “bailout” of Bear Stearns. The articles paint a picture that is nothing short of breath-taking. The beginning of the article has a vision of a trader, confronting the CEO, Alan Schwartz, and asking “How could this happen to 14,000 employees?” “Look into my eyes, and tell me how how this happened!” This is the 64,000 question.
Many large financial institutions have failed. One, was Drexel Burnham, Lambert, for example. But what makes this interesting is that this is the first time that the Federal Reserve responded.
Bear Stearns had alot of mortgages on their books, mortgages that were defaulting. The risk that Bear Stearns was assuming was great along with the fact that they had a cashflow problem.
Wikipedia explains it well…. As of November 30, 2007 Bear Stearns had notional contract amounts of approximately $13.40 trillion in derivative financial instruments, of which $1.85 trillion were listed futures and option contracts. In addition Bear Stearns was carrying more than $28 billion in ‘level 3′ assets on its books at the end of fiscal 2007 versus a net equity position of only $11.7 billion. During 2007, Bear Stearns had several funds that invested heavily in Sub-prime mortgages, and as the market tanked, the value evaporated. This was noticed in releasing earnings, when it was shown that net profits dropped 61%. Then in November, Bear Stearns wrote down another $1.2 billion. This caused more skepticism of the group, as many other brokerages (faced with their own problems) wanted to not do business with Bear Anymore.
In March, clients were dropping like flies. Cash was disappearing. Bankruptcy was definitely on the table, even though it would decimate the business. Then someone called the Federal Reserve. Then in an act of governmental interaction, the Federal Reserve, in connection with JPMorganChase issued an emergency 28 day loan. 4 days later, Bear Stearns and JPMorganChase agreed to a merger at $2 per share ( which got raised to $10, because of threat of shareholder lawsuits.)
What this blog found interesting was that the Treasury Secretary Henry Paulson was leery. The Wall Street Journal reports that “given the unprecedented level of government intervention in rescuing the troubled firm,& appearing to bailout Wall Street Investors while many were facing foreclosure.
GOT ALL OF THIS…. It is the opinion of this blog that this was a bailout that is unprecedented. The Congress is having a dreadful time regarding the Mortgage crisis, but can scope out a deal over a weekend. It furthers the question of how much governmental intervention is appropriate. There are two schools of thought, one is that Ok, you invested, got over extended, and failed; the second is that this needed to be done, otherwise the economy would have been driven further into recession.
The Bear Stearns situation is a situation that is the sign of the times. The sub-prime and other mortgage crisis not only effected the borrowers whose homes are repossessed, but large institutions as well. However, what is different, is that the government was quick to come to Bear Stearns aid and has been not as quick in coming to those effected by the sub-prime crisis. What is good for one, should be good for the other. Many, Many people lost billions of dollars because of the situation and there is empathy. The true effects will be felt for many years to come.
Student Loans should not be a target for a government takeover! May 8, 2008
Posted by baxtersbrother2 in Accounting, Economy, Election 2008, Social Discourse, US Government.Tags: Government Regulation, NYTimes, Student Loans
2 comments
There is an editorial in The New York Times regarding the student loan issue. Student Loans are a huge issue, but a government takeover of the student loan industry is NOT the answer. The nation is investing in the future, not trying to get rich off of loans. There needs to be better education regarding what the borrower is agreeing to and money needs to be freely available to invest in the future. An educated workforce empowers the nation. The third party lender is one that handles the administrative functions of the loan. They loan the money, but it is guaranteed against default by the government! It would be in the lenders best interest to invest in the future because they will be hiring those individuals in the future as well as lending money to those individuals.
The Housing Crisis: An Accounting Approach April 13, 2008
Posted by baxtersbrother2 in Accounting.Tags: Accounting, Auditors, KPMG
add a comment
There is an interesting article regarding New Century Financial and their Auditors, KPMG. It is a real practical approach of what happened. The article is in Sunday’s New York Times. There is a professor from UCLA, specializing in Accounting, that believes that it was a streach to put ALL of the blame on the Accounting industry. That is agreeable. However, it is a sign of the times to find something to place all the blame, when the reality is that all were at fault. Enjoy.
Powered by FireStats