We will get a window on how bad it could get in about 20 minutes when the stock market opens. Stocks will drop like a rock if the overnight trends are any indication:
European and Asian stocks fell Monday in response to renewed worries about the financial strength of the world’s banking system after the bargain-basement sale of Bear Stearns to JP Morgan Chase
Stock markets across Europe fell 2 to 3 percent soon after opening on Monday, following drops on major Asian stock markets of 3 to 5 percent. Tokyo’s benchmark index hit a three-year low before it rebounded slightly; Chinese and Indian stock markets tumbled even more sharply.
In the United States, stock futures plunged overnight, indicating that the markets would open to heavy losses. Futures in the Dow Jones industrial average were down more than 200 points.
The euro rose again against the dollar and investors rushed to the relative safety of United States Treasuries. The dollar fell to a 13-year low against the yen, and oil hit a new record, near $112 in Asia.
Investors across Europe and Asia tried to figure out who might invest more capital to shore up Western financial institutions caught with heavy losses on their holdings of mortgage-backed securities. Chinese state-run institutions, with some of the largest cash holdings, appeared to be on the sidelines, watching as the prices of financial shares plunged, while Citic announced that it would not proceed with a previously announced deal to acquire a $2 billion stake in Bear Stearns.
Let’s face it–Bear Stearns is bankrupt:
After a weekend of intense negotiations, the Federal Reserve approved a $30 billion credit line to help JPMorgan Chase acquire Bear Stearns, one of the biggest firms on Wall Street, which had been teetering near collapse because of its deepening losses in the mortgage market.
In a highly unusual maneuver, Fed officials said they would secure the loan by effectively taking over the huge Bear Stearns portfolio and exercising control over all major decisions in order to minimize the central bank’s own risk.
When you offer $2 a share for a company (a fraction of its value just a few days ago) that was once a titan, you are acknowledging it has virtually no value. And the Fed is obviously doing everything possible to avoid an entire meltdown. It shocked even veterans on Wall Street:
Wall Street was stunned by the news on Sunday night. “This is like waking up in summer with snow on the ground,” said Ron Geffner, a partner Sadis & Goldberg and a former enforcement lawyer for the Securities and Exchange Commission. “The price is indicative that there were bigger problems at Bear than clients and the public realized.”
The question no one knows out there is: who else is in such bad shape. And my guess is that at least one other big financial institution, if not more than one, is in deep trouble–the popular rumor focuses on Lehman Brothers.
Of course, here’s the real bad news–thousands of people are going to lose their jobs and be in really bad shape. Not the big-time players who will have socked away a pile of cash but the secretaries, mail-room folks and other unseen and miserably compensated people who make those companies run. And they won’t have any safety net to keep them from falling.
UPDATE AT 9:48 A.M.: Stocks are already down more than 170 points in just 45 minutes of trading. Egads…this could get even worse. Me, I’m going to play golf.
I happened to notice this quote:
“The problem is bigger than the Fed,” said Meredith A. Whitney, an Oppenheimer financial services analyst. “Trillions of dollars of securities were underwritten on the false assumption house prices could never go down on a national basis. That falsehood has put the entire financial system in a tailspin.”
Well, we some people knew that it was a false assumption.
