Tomorrow may be historic

[barking_iguana]

But we'd damn well better hope it isn't.

My financial situation is awful (but ultimately salvageable), in any case. I'm glad most of my friends with significantly positive net worth own houses. Later this year, those houses may be worth many fewer dollars than they are now, but they will still be worth a house, no matter what happens to the dollar or the rest of the economy.

Saturday morning, I observed to my father that there was a small but non-negligible chance of a financial meltdown on Monday. That's because people would have all weekend to stew about Bear Stearns, without seeing any reassurance of seeing the markets function normally.

Bear Stearns, for those who don't know, is was a major nexus in the overly leveraged economy of the past 20 years. Friday, it almost went under and had to be indirectly bailed out by the Fed. The Fed had to stretch its mission and rules, as well as expend resources to accomplish the task. I don't think it has the ability to do this over and over.

Now it turns out the bailout wasn't enough. Bear Stearns, which was trading at $150 per share months ago and closed at $30 per share on Friday, was just bought $2 per share (translation: a drunk pitching coach and a rosin bag) by the Fed's companion of late, JP Morgan.

If Bear Stearns had actually declared bankruptcy, rather than merely gone bankrupt, all of its 'unsalable' assets would have been sold, putting rather unpleasant, but actual, market-driven numbers next to everybody else's (like JP Morgan's) similar assets. That would, I believe, almost immediately trigger many other Wall Street bankruptcies.

It remains to be seen how much confidence (that's a euphemism for lack of complete, rational and irrational panic) JP Morgan's playing White Knight will instill. Asian markets are down only 2% and the dollar hasn't collapsed, and if things have held so far, it's reasonable to bet that they will hold for the immediate future.

But it's also reasonable to hedge your bets. How much cash would you need for a week or two, if none of your cards worked. The cost of losing the return on having that much money invested is probably small right now, compared to the security of knowing you have it at hand.

Comments

[cinema-babe.livejournal.com]

It's funny, I was just thinking this morning that I'm so glad I'm not in financial services anymore.

[chemoelectric.livejournal.com]

I heard that Bear Stearns got in trouble with bad lending to a part of the Carlyle Group. If so, at least we’ll have some Schadenfreude.

Thom Hartmann had on Ravi Batra recently. It turns out that we should have been buying gold. But, anyway, Thom Hartmann starts talking about bank failures like in the Great Depression, but Ravi Batra says, no, now we have the FDIC; and Thom goes, Yes but; but Ravi Batra goes, no there really is an FDIC, quit worrying about it. So it does help at least that one of the leading forecasters of doom thinks that your savings accounts are safely insured, if not safe themselves; just spread it around some to different banks, which we’ve been doing for years. (There actually is more than one bank, still!)

But we were supposed to be buying gold to sell later. I’d rather have a few tons of zinc, but mainly I'd rather Kristy handle the investments.

[chemoelectric.livejournal.com]

Actually I should get off this subject, because money talk makes my symptoms worse. Not just eyes glazed over, but inability to think.

Besides, your noting tomorrow as possibly historic guarantees that tomorrow will not be historic. (Tuesday will be historic, instead.)

Fear not.

[stormlorde.livejournal.com]

You are not looking at a pending banking collapse, different banks have different portfolio makeups, Bank of America for instance had a relatively small presence in subprime instruments, and is leveraging that posistion to buy countrywide in a profittable fire sale. Wachovia is taking large write downs, but has a relatively balanced portfolio, and a model that posts a couple of billion a quarter in profits. (They have the space for write downs). Bear Sterns was always cutting edge in investment packages, and there is risk in being out front. Carlyle was seperately incorporated as an LLC from its parent company for a reason. This too will pass, with the american banking system in tact. Of course the FED should still act aggresively to limit the damage, but they are handicapped by being led by a mentally handicapped bush apointee.

Be well.

Re: Fear not.

[tayefeth.livejournal.com]

The American banking system, and a fair number of large fortunes, made it intact through the Great Depression, too.

I don't think we're going to have the agricultural collapse that would really kill the economy, alongside a collapse in the gambling financial markets. But if the drought in the Southeast intensifies and the upper Midwest floods out again and we get another couple of big hurricanes on the Gulf Coast, the upward pressure on food prices will be intense. And that's not even taking the effect of high gas prices into account.

[tayefeth.livejournal.com]

They keep talking about lowering the Fed rate. Hasn't the Fed rate dropped from over 5% to under 3% within the past couple of years? How much lower can the Fed rate go before I'm not the only one who starts wondering what happens when the Fed rate is 0% and the economy still isn't growing?

[barking-iguana.livejournal.com]

In 2003, it was 1% and people were (with obviously even more reason) wondering the same thing.