Liquidity Always Equals Solvency

So, the Bear Stearns name passes into history, joining the likes of Drexel Burnham Lambert and EF Hutton, two firms that passed out of existence in similar stressed circumstances. It can't be said often enough that in the financial world, without liquidity, without entities willing to lend you money, you are out of buisness. This is a de facto bankruptcy; the $2/share offer by JPM is a placeholder, a way for JPM to get control of this company without a long and drawn out Chapter XI proceeding, something the market doesn't need right now. This price is very much like the price ING paid for Barings in 1999 (1 pound), although Barings swift end came about as a result of fraud (BSC looks to be a case of poor management/risk management).

Here's my take on the going forward. With respect ot the Fed, this Fed has done more than any other Fed in the 95 years of its existence. They have been creative, active, and will to do what is necessary to try to help. The naysayers and critics should get a grip (you know who you are). The people out there that were clamoring and ranting for faster Fed Funds rate cuts, do you really think it would have made a difference? The best case scenario there would have been to postpone for a little while the inevitable that has occurred. Funds are 225 bps lower than seven months ago (and maybe as much as 325 bp tomorrow) and there hasn't been much help. The problem was never the cost of capital, but rather the amount of leverage employed and the transparency related to that borrowing. If there is a criticism of the Fed, it was they left rates too low too long, which allowed for the housing market and lending market to get way ahead of itself and that they didn't raise the flag early enough in either market (not that anyone would have listened).

With respect to govenrnment regulation, the repeal of Glass-Steagal a few years ago allowed banks to operate like investment banks. This pushed investment bank to operate more like hedge fund, levering up to the hilt. This has come home to roost. Going forward, the has to be more transparency and better capital regulation, which will require new legislation.

With respect to the markets going forward, Bear Stearns was clearly (all along) the weakest player in all this. They had the most exposure to the weakest part of the market and employed the greatest amount of leverage in that area. Bankruptcy is part of the capitalist system, and if there was more confidence in the economy and markets right now, that is where BSC would be. There may be more consolidation moves out there, and that would be good as it places stronger players in the market.

As a final note, the big winner here is Jaime Dimon. Forced out of Wall Street almost ten years ago, he has returned to become the savior of the day and now the go-to-guy for the Fed. Well done!