Monday, March 17, 2008

Bear in the pet cemetery

Bear Stearns is no more. Last night, J.P. Morgan Chase bought out the investment bank for a pittance -- $2 dollars a share, way down from its close of $30 on Friday (a loss of 47% in one day) and way down from over $100 just a couple of months ago. As well, the US Fed extended another $30 billion in loan guarantees to finance the buyout. Clearly, the end came when depositors realized that deposit insurance only covers real banks -- not investment houses -- and pulled their money and / or moved it into guaranteed divisions.

What an awful end for a group that survived the Great Depression, several wars, the meltdown after 9/11. This morning, Asian markets have taken a huge drop on fears it could only get worse. The US dollar dropped to a measly 96 yen. At this rate, it will be at par by next year unless central banks pull off another huge intervention.

And again I ask the same question I did last week, albeit in a slightly different form -- say the investment arm of one of the Big Six in Canada, or of Desjardins, suddenly got into trouble. Would we as depositors be expected to allow our secured deposits to bail out the risky portion of those financial institutions? Or would we bail out and find a safer institution, deposit insurance notwithstanding?

The shoe is going to drop. In a few weeks, or a few months, but it will happen. Maybe not the banks themselves, but their investment houses -- and the losses will be catastrophic. And this is one thing Stephen Harper won't be able to blame the Liberals for.

UPDATE (1:11 pm EDT, 1711 GMT): Couple of notes -- first: the 47% drop I referred to above was the decrease in price from Thursday to Friday. Today, Bear is trading just above $3.50; a 97% decrease from Friday. Second: Some are speculating that Bear just might make a huge comeback. Not likely -- someone at CNBC reported that to secure the sale, Chase Manhattan took the Bear building as collateral (and the building is worth more than the company); meaning even if Bear found a new suitor it'd lose its physical plant. Adding insult to injury to be sure. All in all, most of the 14,000 people who are there will lose their jobs; and Manhattan can't afford to lose that many employees plus all the spinoff jobs that exist. Both Bush and Mrs. Clinton have some explaining to do.

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