2008 crisis resembles 1970 more than 1907 17 Mar 2008 Bear Stearns is 10 times larger than the brokers that failed in 1970. But the crises have something in common. In both cases, dense networks of obligations between the brokers made them too complex to fail. Derivatives today play the role incomplete computer systems did then.
JPMorgan soars while other banks slump 17 Mar 2008 So far, the market loves its takeover of Bear Stearns. Not only has it paid peanuts, it has got $30bn of Fed funding on what seem great terms. It also gets some attractive businesses and can probably cut half Bear's workforce. That's what happens when you are the only buyer.
Market’s CME/Nymex doubts may be overblown 17 Mar 2008 The stocks of both exchanges weakened after the deal terms were agreed, as shareholders fled all financial sector shares. But the Nymex fell more than the CME, showing the market s doubts about their merger. The hurdles are significant. But Nymex shareholders look too worried.
Bear rescue leaves markets on knife’s edge 17 Mar 2008 Investors can take comfort from the Fed s willingness to use its authority and a $30bn guarantee to resolve the broker s plight. But the deal leaves three frightening questions: who is next, will everyone s flight to safety wreak havoc, and where will the rescue money come from?
What happens in Tibet may not stay in Tibet 17 Mar 2008 For the first time ever, the monks of Lhasa have political leverage from China s hosting of the Olympics. A successful revolt might embolden others particularly those hardhit by China s worryingly rampant inflation to rise up, too. There s a risk of general civil unrest.
Booming Gulf and bust US strains currency pegs 17 Mar 2008 Gulf states are under US pressure to keep their dollar peg. But the US medicine of low interest rates and a weak currency is no prescription for the Gulf. And as the Gulf moves towards currency union it needs a more independent policy anyway.
US should be congratulated on swift Bear bailout 17 Mar 2008 The contrast with the UK's months of dithering over Northern Rock is extreme. The Fed has had to oil a privatesector solution with $30bn of public money. But it has avoided nationalisation. What's more, the virtual wipeout of Bear's shareholders limits moral hazard.
British Energy sale could spark utility feeding frenzy 17 Mar 2008 The UK nuclear power company is in talks over a possible sale. British Energy may have a patchy operational record, but it holds the key to £20bn to £30bn worth of new plants in the UK. The economics look juicy, if risky.
The Orient offers best hope for M&A bankers 16 Mar 2008 With the disappearance of the LBO, merger activity is plummeting in the US and iffy in Europe. Not in Asia. Crossborder, even hostile, deals like Ping An's Fortis deal and Sinosteel s Aussie bid are on the rise. It s time for bankers to ask for a relocation package.
Was Bear too big to be allowed to fail? 14 Mar 2008 Not on paper. The broker is a fraction the size of its rivals. But unlike when, say, Drexel or First Boston were on the brink, the fates of today s financial firms are tightly bound by webs of counterparty exposure. If one failed, the fallout would be keenly felt by all.
Could the Fed run out of money? 14 Mar 2008 Its bailout of Bear Stearns is the third time it has relaxed the rules for pumping liquidity into the market in a week. If any more institutions need cash, the Fed's $700bn of conventional firepower might be depleted. It might then have to find yet more unconventional tools.
Bear’s attempt to blame rumour doesn’t wash 14 Mar 2008 True, the broker toppled when counterparties lost faith. But in the nine months since Bear kicked off the credit crunch, it did little to bolster its financial defences and regulators didn t force it to. Banks, especially weak ones, need to be rumourproof.
Boutique bandwagon will get more crowded 14 Mar 2008 Frank Quattrone, the onetime Silicon Valley darling, is aboard and Michael Zaoui, the Morgan Stanley rainmaker, may hop on soon. Small advisory shops tend to proliferate during big bank upheaval. Although a few thrive, most peter out before a full business cycle completes.
Is this Uncle Sam’s last laugh? 14 Mar 2008 The US has been able to get away with an almighty binge because it borrowed in dollars. Now its multiple bailouts are causing the greenback to tank. The US will get away with destroying foreign investors capital this time but maybe never again.
Lehman has better stuffed cushion than Bear 14 Mar 2008 In the wake of JPMorgan s Fedengineered Bearhug, Lehman s stock fell about 20% on Monday. Concerns about its liquidity echo the fears that have humbled smaller Bear. But Lehman has relatively larger cash reservoirs and immediate access to Fed lending a big advantage.
Losses of 40% will make SWFs wary of bank rescues 14 Mar 2008 Sovereign funds have put $50bn of equity into struggling Western banks. The shares are down by over a third. High dividends will cut their losses, but the debacle should be enough to deter SWFs from being so helpful the next time the begging bowl goes round.
UBS should raise more capital 14 Mar 2008 After the crisis at Bear, the Swiss bank's reinflated equity cushion no longer looks so comfortable. The bank will be reluctant to put its hand out again as shareholders would be diluted. But it would be wise to gather in cash as a precautionary measure.
J. Pierpont Dimon steps into the breach 14 Mar 2008 Give him a walrus moustache and a cigar, and JPMorgan s current boss could resemble his bank s namesake. A century ago, J.P. Morgan orchestrated a bank bailout. Jamie Dimon might fancy following him into the history books, but the current JPMorgan isn t rich or powerful enough.
Toll shows CEO pay is tough to reform 14 Mar 2008 With share prices plunging, investors are paying careful attention to gaps between executive pay and performance. Efforts to give shareholders a sayonpay have been gaining momentum. But talk is cheap. As Toll Bros shows, changing pay practices can be much more difficult.
What happens to Bear Stearns now? 14 Mar 2008 The investment bank's woes make finding sanctuary within a larger, wellcapitalised bank a likely endgame. Adviser JPMorgan, conveniently located around the corner in Manhattan, could be top of the list of buyers. There aren t many other options.
Who’s who of sovereign wealth fund banking? 14 Mar 2008 Sovereign wealth funds are attracting a growing pool of investment banking talent. Una Galani takes a look at the existing stars in the first edition of the Breakingviews Who s who of Sovereign Wealth Fund Banking.
Bear crisis could provoke further twist in vicious cycle 14 Mar 2008 The broker's rescue won't prevent contagion. It could push other institutions to the wall as banks and investors try to protect themselves by tightening terms on which they lend against collateral and dumping dodgy assets.
Bear Stearns worries echo Carlyle fund woes 13 Mar 2008 The investment bank isn t in the same dire straits as the credit fund. Bear may be highly leveraged, but it s bigger, more diversified and more sophisticated. Still, it s one of Carlyle Capital s creditors, and it s suffering from a version of the same counterparty wariness.
Domestic sovereign wealth funds make no sense 13 Mar 2008 South Korea is considering merging stateowned companies into a holding company, modelled on Singapore's Temasek. However, sovereign wealth funds investing domestically cannot act on the arms length basis that is possible abroad. It is better to privatise where possible.
Financiers should be made to study history 13 Mar 2008 The current crisis might have been less severe if bankers, traders and fund managers knew more about previous bubbles. To qualify as financial professionals, they should have to pass exams quizzing them about the South Sea Bubble and the crash of 1929.
Paulson misses multiple tricks on financial reform 13 Mar 2008 The US Treasury Secretary's plans to avoid a repeat of the current crisis are only soso. They apparently don't fully grasp the nettle on monetary policy, incentive structures, risk management, financial complexity, bank capital or ratings agencies. Marks out of 10? About 4.
Did the Fed torpedo Carlyle Capital? 13 Mar 2008 Some on Wall Street argue the Fed s new $200bn Term Securities Lending Facility caused Carlyle s lenders to demand more collateral, so they could trade it for government bonds. That s farfetched. But a similar drama could unfold for other types of mortgage funds.
Telecom Italia’s former kingmaker makes sorry exit 13 Mar 2008 Hopa has been forced out of the telecoms group. Its bank, RBS, sold Hopa s last 3.7% stake to pay a margin call. That s a big comedown for a holding company, formerly controlled by Emilio Gnutti, a financier who engineered two TI coups. Not that other TI investors mind.
Buy credit, sell equities 13 Mar 2008 Even after Tuesday s big rally, credit spreads are priced for Armageddon. Stocks are well down from their 2007 highs, but don t discount anything worse than a mild slowdown. That looks optimistic. The technical problems in the credit market have a created a big opportunity.
Crowded banks could put floor under City rents 13 Mar 2008 In the last City office crash, in 2003, banks had just moved to bigger premises, flush with dotcom exuberance. When they didn t fill the extra space they dumped it, and rents plunged. This time, banks are using all their space. Only a jobs bloodbath could hit rents as badly.