What Brought Down Bear?
Overexposure, bad investments and Alt-A mortgages may hinder bailout.
Earlier today I wrote Beleaguered Bear Stearns Bailed Out. And as with every bailout to date involving housing, hedge funds, SIVs, asset backed commercial paper, etc, this one too was doomed to fail.
What's interesting this time are actual statements from the company in question speculating on whether or not said bailouts will work. Of note, these statements are on the very same day the bailout was announced. This is a first. Consider this Times Online Report.
Bear Stearns (BSC) today warned Wall Street that it was not certain it would survive after admitting that both JP Morgan (JPM) and the Federal Reserve Bank of New York provided the investment bank with emergency short term funding.
The bank said today it will bring forward its first quarter earnings announcement to Monday, March 17 as Alan Schwartz, Bear Stearns' chief executive admitted it was forced to seek funding following a sudden spike in demand from investors wanting to withdraw their cash.
Mr Schwartz said today: "The company can make no assurance that any strategic alternatives" to fund itself in the long term "will be successfully completed".
Singing A Different Tune
That's a far different tune Schwartz is singing today than on Monday when he stated "Bear Stearns' balance sheet, liquidity and capital remain strong."
And one has to question why the Fed should be providing any loans, especially non-recourse loans for this bailout.
JP Morgan said the NY Fed will provide "non-recourse, back-to-back financing" for the deal so it doesn't believe the transaction represents any material risk for its shareholders.
Absurd Expectations About Alt-A
The Times Online article continues...
Banking sources speculated that Bear Stearns could have been hit by last night's collapse in value of so called alt-A, or low-end prime mortgage securities.
"The Alt-A market fell out of bed last night and Bear would have been completely caned by this. They hold a bunch of these securities," one investment banking source told Times Online.
"Against what you might normally expect, the sub-prime market rallied, but alt-A sold off."
Excuse me for laughing but just two days ago I cautioned everyone to Expect Everything To Be Worse Than Expected.
For the life of me, I don't understand how after all this time anyone could expect anything other than a complete disaster in Alt-A. The reason is that is where all the liar loans were hidden.
Evidence Of Walking Away In Alt-A Pool
Let's review Evidence of "Walking Away" In WaMu Mortgage Pool.
A friend of mine who goes by name "CS" sent me this screen shot of a particular Washington Mutual (WM) Alt-A mortgage pool known as WMALT 2007-0C1. Let's take a look to see what we can see.
Click to enlarge
Let' Do the Math
- The total pool size is $513,969,100.
- $476,069,000 was rated AAA.
- 92.6% of this cesspool was rated AAA.
- Yet 15% of the whole pool is in foreclosure or REO after a mere 8 months!
Somehow this pool was 92.6% rated AAA in spite of the fact that full doc was provided on only 11% of the loans. This folks is another fine example of how out of whack the rating agencies are.
And if Bear Stearns was loaded up with this garbage, it deserves to go under.
Thoughts On The Broken Bear
Earlier Today I received an E-Mail from Minyan "DG" on Bear Stearns.
I have two systemic problems with the bailout of the Broken Bear as to why anyone, especially tax payers should want to save a failed investment strategy.
First, Broken Bear holds only investment (speculation) money so there is no genuine societal reason for their bailout.
Second, bailing out investment banks like the Broken Bear, Mother Merrill, and Golden Fleece constitutes a moral hazard that encourages continued speculation and ultimately a collapse of the dollar when the Fed comes to their rescue.
Indeed there is no reason for this bailout. In fact, every bailout only reinforces speculative behavior, ensuring the next bailout will be bigger. The process continues until we get to the point that it's simply too big to bail, which by the way is where I think we are today.
Bear Stearns will not survive in its present form, bailout or no bailout. Stay away from credit risk because more stories like these are coming.
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