http://online.wsj.com/article/SB120569598608739825.html?mod=hpp_us_inside_today Meanwhile, worries are deepening that other securities firms and commercial banks might be on shaky ground. Lehman Brothers Holdings Inc. Chief Executive Richard Fuld, concerned about the markets and possible fallout from Bear Stearns's troubles, cut short a trip to India and returned home Sunday, ahead of schedule, according to people familiar with the matter. The decision came after a series of calls Saturday to both senior executives at the firm and Treasury Secretary Henry Paulson, these people say.
Bear Stearns is the big name in financial distress right now, but it could have company soon -- thanks in part to the aftershocks of its own problems.
Bear, under new owner J.P. Morgan Chase, will be under pressure to drastically shrink its balance sheet, which stood at $395 billion in November. Hasty asset sales at Bear could do further damage to prices in many different markets. There also could be knock-on effects in the already strained $50 trillion credit-default-swap market, where Bear is a big player. It could be harder than usual for firms that have engaged in trades with Bear to unwind them.
Then there are the less-direct effects. The prospect of a hanging concentrates the mind and, after Bear's near-failure, brokers and banks will be more intent on cutting borrowing levels even if they have to take losses. Despite the Federal Reserve's move to save Bear last week, the brokerage house's cash-flow crisis will intensify banks' current reluctance to lend to other financial institutions. The borrowing costs of some of Bear's rivals, as implied by CDS prices, increased sharply Friday, and some bank stocks took a hammering.
Meanwhile, Wall Street will take another $50 billion or so of write-downs in the first quarter, according to a Bear analyst. The troubled brokerage house was scheduled to kick off the Wall Street earnings season today, with others to follow this week. There could be more bad quarters to come, with U.S. house prices still falling and defaults on other types of consumer debt starting to rise.
The authorities will try to prevent a vicious cycle taking hold. On top of Fed measures to pump cash into the system, traders expect a full percentage point cut in the fed-funds overnight interest rate this week.
But low rates won't help firms on the financial brink much in the short term. The Fed's willingness to engineer the rescue of Bear makes a broader, taxpayer-funded financial bailout seem more likely. Combined with superlow rates, that perception will add to pressure on the already beleaguered dollar. Bear Stearns is the biggest financial firm to hit the wall this time around. But the biggest name in financial distress could eventually be the U.S.
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0336 GMT [Dow Jones] JP Morgan buyout of Bear Stearns, Fed liquidity actions are "bad news for risky assets and the U.S. dollar," says Barclays Capital. "The Fed likely got its first look at Bear Stearns' balance sheet over the weekend and today's action at the discount window demonstrates their concern. The Fed's action (though) has failed to ease credit concerns...iTRAXX spreads in Japan and Australia have started to rise as the counterparty risk on banks has been increased." Also, has been substantial destruction of wealth; Bear Stearns' shares were trading at $30 on Friday and $100 in December 2007. That is all bad for USD: Financial sector problems in U.S. continue to get grow and force market to price in greater chances of Fed cuts; in meantime, is little sign from economic data in rest of world that U.S.' problems are dragging on global growth, though this should change in coming months. "We expect this week to be a tough one for the equity markets and risky assets and for the swiss franc and yen to continue to outperform amongst the G10 currencies and" AUD, NZD to underperform.(RXM)
http://www.businessspectator.com.au/bs.nsf/Article/Dogged-by-a-shadow-CT5BM?OpenDocument The key to the rescue appears to be not the $US2 a share that JP Morgan will pay for the investment bank, whose shares were trading at $US30 last week, but the willingness of the Federal Reserve Board to fund $US30 billion of Bear Stearns "less liquid" assets – inevitably its sub-prime exposures, which enabled JP Morgan to guarantee its former rival's counterparty risks.
