Beleaguered Bear Stearns Bailed Out

Just four days ago I wrote about Bankruptcy Fears In Bear Stearns Options.

We've got very active put buying all the way down to the March 30 puts, but the institutional paper is trading in the March 60, 55 and 50 puts.

Like the action in Washington Mutual (WM) we cited Friday, this is bankruptcy fear rearing its ugly head in Bear Stearns, folks.

On the session over 95,000 puts have changed hands in BSC, or nearly five times the open interest in the first 2 ½ hours of trade.

Beleaguered Bear Stearns Bailed Out

Today we see the PUT buyers were correct. Reuters is reporting JPMorgan, NY Fed to provide Bear Stearns financing.

JPMorgan Chase & Co and the Federal Reserve Bank of New York on Friday agreed to provide emergency financing to Bear Stearns, after the investment bank said its cash position had deteriorated sharply. Bear Stearns shares fell nearly 40 percent after the news of the financing, the latest in the Fed's efforts to soothe financial markets that are increasingly fearful.

"Our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations," said Bear Stearns Chief Executive Alan Schwartz.

"Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity. We have tried to confront and dispel these rumors and parse fact from fiction."

Bear Stearns Gets Emergency Financing

MarketWatch is reporting Bear Stearns Gets Emergency Financing from Fed. J.P. Morgan.

Bear Stearns Cos. said Friday that it got short-term financing from the Federal Reserve and J.P. Morgan Chase after the brokerage firm's liquidity "deteriorated significantly" during the past 24 hours.

"The (Fed) Board voted unanimously to approve the arrangement announced by J.P. Morgan Chase and Bear Stearns this morning," the Fed said in its statement. "The Federal Reserve is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system."

J.P. Morgan also said it's working with Bear to secure permanent financing or "other alternatives" for the brokerage firm.

"Bear needs to raise $3 to $5 billion of equity within the next couple of days to address concerns; it needs support or firms will withdraw from doing business with Bear, Egan Jones analysts wrote in a Friday research report. "Bear shares are down again today, this time because of concerns about viability (banks are insisting on higher margin levels)," they concluded.

Flashback March 10, 2008

Greenberg scoffs at Bear liquidity crunch rumors

Bear Stearns Cos (BSC) On CNBC today, Alan "Ace" Greenberg scoffed at the notion that Bear Stearns was on the brink of a liquidity crisis. But the protestation wasn't enough to stem the fall of the stock price to $62.21, its lowest level since March 2003, according to Bloomberg. Despite the denial, there were two negative developments: Bear's put options were unusually active on Monday, and the cost to insure Bear's debt against default climbed, according to Dealbook. "Totally ridiculous" is Greenberg's assessment of the rumors, but someone's betting that it's not.

PUT Sellers Scramble

PUT Buyers were big winners and PUT sellers had to scramble this morning to short shares to hedge against the options they sold. There was no time to get out.

Bear Stearns 10 Minute Chart As of 9:15 AM CST



click on chart for sharper image

Totally Ridiculous Statements

On Monday Greenberg called the idea of liquidity issues at Bear Stearns "Totally ridiculous".

What's totally ridiculous is Greenberg's statement Monday and this statement from today CEO Alan Schwartz:

"Our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations"

From Professor Sedacca on Minyanville

Rhetorical Questions

• If Bear Stearns (BSC) was in such great shape, as it said, why does it need a bailout?
• Why do you reward a company with a failed model and poor results?
• Why do you bail out an over leveraged enterprise that is technically insolvent?

Because you know you have to and you are desperate.
End of story.

Welcome to bizarro land!

Futures opened up green today. They should have been lock limit down on this news. A major broker dealer has to be bailed out by JP Morgan and the New York Fed and someone managed to think (fleetingly) that this was good news.

I see Professor Fil Zucchi was thinking like I was. Here were his comments:

"The notion that stocks pop because the Feds bail out a major investment bank - the first such action since the Great Depression - is the only reaction that defies credibility more so than the CPI numbers."

Comment Of The Day

The comment of the day has to go to Professor Jeffrey Cooper who quipped "You've gotta wonder about guys that play cards and can see a lotta the hands at the table and still manage to lose the house. "

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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