Tuesday, March 18, 2008

Bears Stearns as a Symbol

The loss of Bear Stearns was disappointing, but necessary. In every market cycle, there are one or two players that take on too much risk, or make poor decisions, and pay the price. We had to have a symbol for this cycle, and Bear Stearns will symbolically represent the mortgage and credit problems of 2007-08. Will there be more? Maybe, but unlikely. The Fed was smart in how they handled things this weekend. Bear lost all investor confidence, and there was basically a run on investors' assets. This will cripple a bank. But if the Fed just let it go, the market would have really tanked. Instead they orchestrated a buyout, in which JP Morgan was basically given Bear Stearns.

I heard some commentary from Larry Kudlow last evening about the Fed only allowing commercial banks to borrow from its discount window rather than investment banks. It is an old rule that was written in a different time. The Fed could have easily allowed this, and maybe could have saved Bear. Who knows. Its sad that a lot of people will lose their jobs, but Bear Stearns put themselves into the position they were in. Plenty of other investment banks are surviving.

Some say an event like this could mark a significant bottom in stock prices. I don't like to try and call bottoms or tops. Its impossible. The key is continuing to stick to the same fundamentals, and use these periods of uncertainty to purchase quality stocks at significant discounts.

Have a great Fed day!

2 comments:

Eamon said...

The bank was sold for 1% of its last market value.

Over here in the UK there is very little the government here can do regarding economic decline(lots of borrowed debt to pay off, already).

On the other hand, the US government has far more options, is in a much stronger position to try and reverse economic decline.

Eamon

Michael said...

I see the government stepping in to help Fannie Mae more so than the big commercial banks, which have been able to get capital from outside sources (foreign wealth funds). Although that money may dry up if their investments don't start performing better.