Sky News business correspondent Joel Hills
On Monday Alan Schwartz, President and CEO of Bear Stearns, insisted that the bank’s “balance sheet, liquidity and capital remain strong”.
He was reacting to market rumours that the bank was on the verge of running out of cash.
Four days later and guess what? Bear Stearns has run out of cash. Like Northern Rock, the credit crunch means that Bear Stearns has been unable to borrow the money it needs to finance its day-to-day operations.
Unlike Northern Rock it has managed to negotiate emergency funding before the news went public.
One of the biggest names in US investment banking is now being propped up by a financial package put together by JP Morgan and The Federal Reserve of New York.
The package means Bear Stearns will be able to carry on through the next 28 days but what happens after April 11th?
The answer is that unless alternative funding is found Bear Stearns goes under. Thanks to the ongoing credit crunch it’s widely expected that more than one bank will go bust before the end of the year. Will Bear Stearns be the first?
So was Alan Schwartz lying when he said everything was fine or has a line of credit unexpectedly collapsed?
Schwartz says the credit problems appeared in the last 24 hours and says “market chatter” is to blame.
He also insists the bank can “continue normal operations”. We’ll see. Northern Rock was/is a mortgage lender with a small number of savers.
Bear Stearns is an Investment Bank. What’s the difference? Well, Bear Stearns makes most of its money buying and selling shares, trading bonds, financing mergers and acquisitions.
It does have retail customers of sorts but they tend to be the mega-rich. Not the type to queue outside a bank Northern Rock-style but it doesn’t mean there won’t be an invisible run. They may still decide to take their money elsewhere.
Robert Peston the BBC Business Editor has now appear twice on the BBC News, in the past few days, to report on the demise of Bear Stearns.
Until recently he has been keeping a low profile, since I accused and blamed him for what happened to Northern Rock in September 2007.
It was his bad handling and reporting, that caused what happened to Northern Rock.
He must now feel relieved to be able to report a similar problem with Bear Stearns, which he could not be accused of causing.
But everyone is missing the big picture.
Business is War.
Bear Stearns like every major bank in America and Europe, are now finding it very difficult to raise finances on the open markets.
JP Morgan and the American Federal Reserve had two choices in the case of Bear Stearns.
They could have simply helped Bear Stearns by giving them a short term loan.
Or
They could refuse to lend them any money, knowing it destroy the company.
All they have to do then, is buy the company for peanuts and then offer them a short term loan.
JP Morgan has bought Bear Stearns, originally estimated to be worth 18 Billion Dollars, for approximately 250 Million Dollars, plus the original guaranteed loan.
What ever happens to Bear Stearns, JP Morgan will make tens of billions of dollars in a few years. - not bad for a few days work, simply by refusing to help in the first place, adding more fuel to the fire in the case of the credit fraud crisis.
Business is War.
Make some noise.
Regards
Terry Giblin
Posted by: Terry Giblin Jarrow 19 Mar 2008 19:22:42
The Bear saga highlights yet again the eerie foresight of the financial thriller "One step to Danger" by John Gubert. Luckily the US had deeper pockets than Liechtenstein would have had!
"By the end of the week the rumours had gained such momentum that United were forced to act. The announcement was sombre. United would make losses of one point four billion dollars for the year. They had lost eight hundred million in Asia as a result of the market volatility and six hundred million on unauthorised lending against securities.
Their share price slumped. The press queried if they could survive. The Liechtenstein authorities, for that was the head office of the holding company, issued a nervous statement. In the countries where United operated, everyone protested that they were not the regulator. It was Liechtenstein. And they did not know what was hitting them.
Ryder said laconically. "Now let's put the buggers into play."
Posted by: john Gubert UK 17 Mar 2008 12:58:31
Rik,
Thank for you post.
Certainly Mr Applegarth & Co had a risky strategy of very fast growth in lending, financed by 80% of the funding for such lend coming from wholesale money markets....
They should have cut back on lending when warnings of the Credit Crunch emerged, true.
Perhaps the BoE and the FSA watchdogs should have stepped in earlier and ensured that they did just that.
They could have merely slowed down (or even temporarily stopped)their 'new' aggressive lending and relied only on the substantial but only 20% funding they received from depositors like you and me eager to profit via their advantageous rates of interest.
Perhaps, like other banks, they should have found a way to borrow 'on the quiet' from Europe, instead of the noisy BoE.
The cash flow problem loomed and they asked for just £3b from BoE just as a 'reserve' - we were told - whilst they, no doubt, were making some big, but late, changes, to their strategy; changes away from the Scoop writers' eyes, and which would have certainly ridden the crisis easily and, if so, there would be few issues today.
However, the leakage of the 'loan' deal, and the BBC's (soon to followed by Sky and others) sensationalist reporting every 15 mins about 'Northern Crock' and 'Northern Wreck' 'Last Resort' and the like, soon influenced and panicked depositors, so leading to the infamous 'Bank Run', and, as a result, most of the 20% they were using for current commitments was gone in about 3 days flat.
One customer even went into a branch and demanded £1m, in cash, for heavens sake.
This company had huge lending, mostly on secure people in secure worth properties, and masses of repayments due back to it over many years to come.
It was not insolvent, or anywhere near it.
It was making a big profit, doing good work for Charities, and was an excellent Employer in a region which desperately needs such; have you seen the huge building expansions at both Gosforth and Sunderland which are now to be in vain?
Now it has been brought to its knees and the long term staff shareholders ripped off.
And serious unemployment is coming fast - probably for over 3,000 decent people, with little prospect of finding other work here.
150,000 ordinary pensioners will also suffer greatly because of this debacle.
Yes, blame Applegarth, as the staff do I can tell you, but, because they well know the quality of the Company, it's staff, and it's assets, they realise that the outcome here is a disaster not worthy of the issues, and that there is as much, if not more, responsibility for the sad state of events to be shouldered on the media and it's thirst for petty sensationalism, always, everywhere.
In Joel's previous Blog, 'The Boiler Room' - even after all the damage - he could not resist, it seems, having another go at the shareholders who lost out in NR...unfair, unjust and not necessary at this time.
Then, in this blog, he is straight in there, scoop of the year stuff again, and - you read his words carefully - he is not advocating a calm approach by investors, he is advocating panic and 'clear the shelves'.
Hence my post. A messenger merely passes a message; not so long ago that meant it was mentioned on the lunchtime and on the 9 o'clock news etc.
Nowadays, 'messages' come all day, every day, every 15 mins, with drmatic headlines and language, (and, in this case, graphic images of queues - the same queue each time in fact) and emotive sensationalist quips and mis-representation of the the full and true facts of any issue.
That is why I criticise the style and the need for such - and these matters will raise their head again in many areas to come. All I want is the truth, and all of it, to be reported.
Not headline grabbing, award- seeking clap trap.
But, I do accept, many would very much want to see the early demise of Mr Applegarth; we can only hope he does too.
Dennis from Cramlington.
Posted by: Dennis, Cramlington Northumberland 17 Mar 2008 09:44:26
Sir
[Bee Gees] what a [Tragedy]many a CEO brings to market at times that books of all expenditure are scrutinised. One thing apart from internal accountability that amazes is the fact that when thngs get tough,they blame the media? Why? Do CEOs think jo public are incompeten and stupid?
Posted by: Khalid 16 Mar 2008 19:47:11
Hey, Dennis, Framlington, why shoot the messenger? Rather than the idiots who caused the problems?
Posted by: Rik, Isle Of Wight 16 Mar 2008 17:52:06
It is getting very serious out there...but will get worse
the property bubble pops the same time as teh credit bubble oh dear...i think you will find things will slowly crumble.
have a look at this vid for more. http://www.youtube.com/watch?v=8Ze0qjjGA-8
Posted by: jim australia 15 Mar 2008 10:36:25
Having just criticised you (again) on your previous blog for Sky's part (and your delight at it would seem) in bringing Northern Rock down (by influencing the punters to go on a panic and bank run, and tried to appeal to your conscience re the misery amd damage you helped to cause via your frenzied lust for sensationalism, how do you react?
An hours or so later you post this sorry tale from America, and you raise the possibility (or is it another strong hint, nudge nudge?) or liklehood that the Customers take their business elsewhere...another bank run thank you Sky.
Are you really so keen on getting that Radio Television Society 'Sensational Scoop of the Decade' award, Joel?
How thick is your skin, exactly?
Posted by: Dennis, Cramlington Northumberland 14 Mar 2008 18:41:41
When you hear of a bank like Bear Stearns hitting the buffers and having to call on the Federal Reserve to bail it out, it is hard to suppress the rising panic. But then whilst lying down in a darkened room one recalls the comforting words of Alistair Darling in a recent Sky interview: "this Country is better placed than any other to ride out this turbulence in the World economy".
So, no need to worry unduly, these New Labour chappies know what they are talking about, there will be no recession in this well managed land. Pleasant dreams.
Posted by: Robert, Scotland 14 Mar 2008 18:29:20