Continuing the Dialog: Facing Realities in the Credit Market
The prior post focused on putting the systemic risks in the Credit Markets as clearly and simply as
we could manage and we'd like to continue that discourse by looking at what other folks had to say. The graphic at right take you to a recent apperance on Charlie Rose by Andrew Ross Sorkin discussing the BSC deal. Bear in mind that was the Mon. during the height of the crisis but it's not bad "Inside Baseball" despite the lack of detail. And despite the fact that the discussion and subsequent NYT stories still don't quite have it right. Before diving in however let's borrow a point from one of our favorite scifi characters Lazarus Long.
"What are the facts? Again and again and again-what are the facts? Shun wishful thinking, ignore divine revelation, forget what “the stars foretell,” avoid opinion, care not what the neighbors think, never mind the unguessable “verdict of history”--what are the facts, and to how many decimal places? You pilot always into an unknown future; facts are your single clue. Get the facts!"
The link to Galileo is that he's credited with being the Father of modern science by placing an emphasis on what the actual data is really telling us. When you listen to the Sorkin interview here are some points we'd like to add:
- BSC was effectively bankrupt because of margin calls by its' trading partners.
- JPM's "price" for BSC wasn't $2 or $10 per share. It will be the estimate $6B of hard dollar costs, taking $30B of bad paper and 2-3 years of writedown exposure plus all the additional time, effort, money and other resource required to manage the acquisition.
- IOHO JPM is unlikely to be fully compensated for many years for these costs and risks and what they did is more in the nature of a public service; continuing the traditions set by the first J.P. Morgan himeself. Considering what they are risking I sincerely hope they make alot of money.
- Any acquirer of BSC had to have a high-quality and large enough balance sheet to absorb the bad paper. They also had to be a regulated entity to have access to the Fed financing that makes this workable and addresses the need to re-start the credit and capital markets. Requirements #2 eliminates most of the other large banks, several of whom should be looked at as effectively insolvent and most of whom are facing continued writeoffs, as we learned today. Requirements #1 and #3 eliminate the non-regulated financial firms, e.g. Goldman.
- This was a miracle.
The key to all this is the breakdown in the mechanisms of the credit markets which posed a systemic risk. A point both admitted and strongly reinforced by Paulson's speech today. We're going to have to completely re-think our regulatory regime and extend it to the shadow banking system. This is the beginnings of a major re-thinking and re-structuring of the Financial Industry - how it's regulated, how it operates, its' business models & strategies, its' compensation programs and how it makes its' money. Those are the criteria we'll need to be paying attention to for the next few years.
After the break we provide an excerpt on Paulson's speech plus two more really outstanding Rose programs with Larry Summers and Paul Volcker. Who if you listen carefully provide much hard-learned wisdom on what broke, why what the Fed did was vital and the extent of the systemic risks. Listen carefully because the language is so careful you miss the sound of the Angel of Death's wings brushing us.
Paulson Calls for Broad Look at Financial Regulations The crash of Wall Street's once mighty Bear Stearns underscores the need to bring investment houses under the kind of federal oversight that has long been given to commercial banks, Treasury Secretary Henry Paulson said Wednesday. In a speech to the U.S. Chamber of Commerce, Paulson said the Bush administration will soon release just such a blueprint in an effort to promote a smoother functioning of financial markets. For months the financial markets -- rocked by the double blows of a housing and credit crises -- have been suffering through extreme turmoil, threatening to plunge the U.S. economy into a deep recession. The modern U.S. financial system is a complex web of financial players -- institutions and individuals and practices that are subject to different rules and regulations. Commercial banks, long a financial bedrock, are subject to regulations and supervision. Paulson said he "fully supported that action" but said it also raises important policy considerations about the oversight of investment houses. The secretary said that commercial banks' access to the Fed's emergency lending "discount window" has traditionally been accompanied by regulatory oversight and supervision. "Certainly any regular access to the discount window should involve the same type of regulation and supervision," Paulson said, in an apparent reference to the Fed's temporary extension of this emergency lending to investment houses.
- A continued discussion about the purchase of Bear Stearns with former Secretary of the Treasury and current President of Harvard University, Lawrence Summers.
- A discussion about the economy with Paul Volcker, former Fed chairman and one of the most respected figures on the economy, in an exclusive interview.