sorry for the uncharacteristic rant yesterday; back to business. here's a picture of a smart pig. imagine he's the one writing this; it'll be much more fun.
besides the aforementioned conclusion to this story, there were a couple other options being talked about that weekend of March 14th.
filing bankruptcy
as the stock was plummeting, bear stearns asset base was declining (stock value is a reflection of the company’s value), and it became clear that they were moving toward becoming insolvent. Insolvency is the business term for when what you own is worth less than what you owe (assets less than liabilities, for the savvy of you) and most often precipitates filing for bankruptcy. if bear stearns had filed for bankruptcy, it would have had to liquidate all its assets, which means publicly exposing all the counterparties who were also exposed to the same sort of sub-prime risk. Letting the general public know how badly the investment industry had managed its own investments would have certainly created a run on the entire market, and as many other commentators have said, would have made the bear stearns decline look like just the tip of the iceberg. No one on wall street wanted bear stearns to file bankruptcy for this reason, but it is scary to think about how much consumer perceptions matter, and about what we will never know about other big firms.
raising capital
when you have debts, and you don’t have any money to pay them, you probably should consider making more money before you consider anything else. These are some options other banks have utilized when taking big write-downs. (I know I was wondering why the other banks who took big write-downs didn't share the same fate as Bear Sterns.)
splitting up and selling
Yesterday, UBS, another large banking institution, announced it was talking a $19 billion dollar write-down for its exposure in the sub-prime market. Strategically, they announced at the same time they had been able to secure $15 billion dollars of new capital, meaning they were able to borrow some money to cover their debts. This is important for two reasons: first being the obvious one that they will not have to worry about insolvency, and the second having to do with my point that financial markets are all about perception: if someone is willing to lend to them, how bad off can they be? Despite this, there was rumbling amongst the shareholders to sell certain arms of the company to raise even more capital. I don’t think this will happen, but I wouldn’t be surprised if it did happen to some bank before this is all said and done.
sovereign funds
How did UBS raise the $15 billion in additional capital? We don’t know exactly, and they don’t really have to tell us. The point is that someone was willing to take a risk because they believed the exposure was not crippling, and because they knew the return on their investment would be lucrative. Who are these mysterious investors? Almost always it is foreign companies or governments, with the occasional very very rich foreign individual thrown in. Those sovereign funds we’ve been hearing about that bailed out Citigroup and Merrill Lynch for over $19 billion dollars? Those are basically just excess cash from a cash-rich government, which right now is primarily east asia and the middle east (think the UAE, China and Singapore). In an ironic twist, our lack of restraint and subsequent failure to reach the American dream of homeownership will help fund their own burgeoning economies and the dreams of their citizens- whether they be in american interest or not. (There is a lot of politics surrounding these funds, which I don't really want to get into.)
So why didn’t Bear Stearns do any of this? No one was willing to lend them the money. (FYI word to the wise, this is what happens to if you have a bad credit score). And if no one is willing to lend to you, you are basically dead to the financial world. Your only option is to hope to be bought out.
ps. sorry for the weird capitalization issues in this post. MS Word is annoying about capitals.
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