• 
• 

Published on March 19, 2008

DBS Group Research in its report yesterday said most analysts put the ultimate tally at about $400 billion.

"By last Friday, about $200 billion had been reported. The sale of Bear Stearns at $2 per share probably means that another $11 billion of losses has effectively been reported. That's a big chunk, but not that big," the DBS report said.

"And it means we are still only about halfway there in terms of uncovering all the losses hidden 'out there' (that companies remain loath to disclose). Until these losses are reported, and financial institutions - the ones which remain viable - are recapitalised, lending will remain weak and real economic growth will suffer. The quicker the remaining $200 billion of losses is reported, the better. This is why the Bear Stearns sale was good news."

JP Morgan really got a steal when it decided over the weekend to buy out Bear Stearns. According to Korn Chatikavanij, a Democrat MP and the former chairman of JP Morgan Thailand, the Federal Reserve asked JP Morgan on Friday to provide liquidity support to Bear Stearns, which had been facing a financial run. In return, the Fed would guarantee all of JP Morgan's short-term lending to Bear Stearns, whose value was $3 billion on Friday.

Over the weekend, JP Morgan decided to take over Bear Stearns instead, Korn said.

"In fact, about four to five years ago, JP Morgan had wanted to acquire Bear Stearns because it was interested in Bear Stearns's primary brokerage operation, which deals with hedge funds," he said.

JP Morgan finally got the chance to get Bear Stearns and at a good deal, with the Fed guaranteeing about $30 billion of Bear Stearns' illiquid assets. This has made JP Morgan's acquisition risk-free.

Bear Stearns' value dropped like a stone, from $3 billion last week to $236.2 million on Monday. JP Morgan's shares rose 10 per cent on Monday when the takeover deal was announced.

Bear Stearns only has itself to blame. It is a highly leveraged investment bank. On capital of $20 billion, it carried assets of almost $400 billion. Its hedge-fund clients are also all highly geared, meaning that they borrow heavily to invest against their small capital base.

When institutional investors or creditors lost confidence in Bear Stearns due to its heavy exposure to the sub-prime mortgage loan crisis, they began to withdraw their money, leading to a classic run on a financial institution. About half of Bear Stearns' portfolio has exposure to asset-backed securities amid a crash in the US housing market and an economic recession.

Bear Stearns' management had no choice but to succumb to the Fed's arrangement for it to be saved by JP Morgan because it was depending on the lifeline provided by the Fed.

The problem is that when another US investment banking firm or financial institution is about to go under, there won't be any big financial institution left to rescue them. Most of the big financial institutions are also struggling under the financial strain.

Thanong Khanthong

The Nation