As the Bear approaches its end, will the bear end too?16 March, 2008, 17:09. Posted by Zarathustra
Tags: Bear Stearns, Economy, Investment Bank, Markets, US
When a Bear Stearns analyst moved to ask a question at a biotechnology investor meeting, Genentech Chief Executive Arthur Levinson quipped, "There’s still somebody here from Bear? Let’s give him a hand."
"I’m still here," said Bear Stearns analyst Mark Schoenebaum. But pointing to a JPMorgan analyst, he said, "I think I work for Geoff Meacham now."
After Bear Stearns (NYSE: BSC) received the bail-out from the joint effort of JPMorgan and the Federal Reserve, it is likely that it will end up be acquired by other firms (most likely by JPMorgan). Bear Stearns will then lose independence. With "bear" in its name, it seems to be a curse to the market. When the subprime issue first aroused attention, it was Bear Stearns. Now, as it is about to go, will the bearish markets end?
The answer is more likely to be a "No" than "Yes". Although I think the market over-reacts to bad news now, and the stock markets all over the world have plunged for quite a bit since the beginning of this year such that cheap stocks seem to be everywhere, the bearish market can hardly recover at this stage.
I guess the situation would very much depend on how the Fed or US government help the financial systems to stabilize. On Tuesday, the Fed will likely to cut the Fed Funds Rate again, where the market consensus is a 75 basis point cut, would that help at this moment? Probably no. Money is now cheap, borrowing cost is low, the problem is not whether the money is cheap enough, rather, banks lose faith and do not want to lend. The confidence is very weak, all market participants are very risk averse. Further rate cut would only lead to further weakening of the dollar and rising of commodities prices.
The new Term Auction Facility (TAF) of the Fed which allows banks to swap MBS with Treasuries seems to be a better measure at this moment. But it seems that the Fed has to be more aggressive here to stabilize the market. Of course, it is perfectly imaginable that the Fed does not want to do so, because they would then become the largest mortgage creditor. That’s odd enough, isn’t it?
This sort of bail-out where the financial institutions can put MBS to Fed would probably be the last resort. But under such situation, can there be any better solution? The Fed and the US government can’t effort to let the credit market turmoil to spread further to other segments, like credit card receivables. If the bail-out is not timely enough, it will end up with a vicious cycle. Home prices continue to fall. Corporations cannot obtain financing. Consumer confidence weakening and lead to further contraction of consumption, which is the largest part of US’ GDP. These will further weaken the economy, ultimately leading to more bad debts in more segments, etc.
This sounds terrible, but indeed, it looks like not impossible. So will the bear go away with Bear? It is yet to be seen.