The Market, The Bear and Jim Cramer!

Said on MSNBC news, Stunning collapse of Bear Stearns hasn’t calmed fears of more bad news

• “What we're in here is the closest thing we've seen to a bank panic since the Depression,” said Senate Banking Committee Chairman Charles Schumer, D-N.Y

Market commentator from Finacialsense, Tony Allison, calls it clearly an Election Year Bailout, in his market wrap, The Year of Living Dangerously: Printing Our Economy Back to Prosperity?

• Election Year Bailouts
  
  As this is a presidential election year, the level of questionable decision-making is sure to escalate. The legislature is currently preparing numerous bills to “help out the little guy.” The reality will likely be a bailout of the financial system on the backs of the taxpayer. The problem is finding the hundreds of billions of dollars, if not trillions, necessary for these and other proposed programs. The taxpayer is pretty well tapped out. The US is already borrowing over two billion dollars every day from foreign creditors. The $400 billion federal deficit will likely expand rapidly. Foreign holdings of Federal debt reached 45% in 2007. Will foreigners continue to purchase a depreciating asset at these levels in future years?
  
  As the economy continues to slow, so will income tax receipts. This will only lead to more Fed money creation out of thin air, leading to a still weaker dollar and more commodity inflation.
  
  The theme here is that the more intervention by the Federal Reserve and the government, the worse the situation becomes. Without the checks and balances of a sound money system, the Fed has no limitations on its actions. Watch for the bailouts. They are on the way, and your wallet is the target. And following bailouts, looming on the horizon are new regulations, tax increases and capital controls.
  
  Bailouts in an election year are an entirely predictable response of political self-preservation. The aftermath in 2009 and beyond is not of current concern. Continued dollar destruction and growing inflation are problems for future years. Unfortunately, the Federal Reserve and Congress will make these problems much worse through their “heroic” rescue efforts.

John Mauldin's has a different take in his editorial, Let's Get Real About Bear.

Firstly, it's not a bailout, it's a wipeout!

• But that is not what has happened. This is not a bailout. The shareholders at Bear have been essentially wiped out. Note that a third of the shares of Bear were owned by Bear employees. Many of them have seen a lifetime of work and savings wiped out, and their jobs may be at risk, even if they had no connection with the actual events which caused the crisis at Bear. Don't tell them there was no moral hazard.
  
  For all intents and purposes, Bear would have been bankrupt this morning. The $2 a share offer is simply to keep Bear from having to declare bankruptcy which would mean a long, drawn out process and would have precipitated a crisis of unimaginable proportions. Cue the lawyers.

And John reckons that the markets would have crashed!

Well, a run on the fifth largest bank in the United States would have indeed dire consequences!

• If it was 2005, Bear would have been allowed to collapse, as the system back then could deal with it, as it did with REFCO. But it is not 2005. We are in a credit crisis, a perfect storm, which is of unprecedented proportions. If Bear had not been put into sounds hands and provided solvency and liquidity, the credit markets would simply have frozen this morning. As in ground to a halt. Hit the wall. The end of the world, impossible to fathom how to get out of it type of event.
  
  The stock market would have crashed by 20% or more, maybe a lot more. It would have made Black Monday in 1987 look like a picnic. We would have seen tens of trillions of dollars wiped out in equity holdings all over the world.

And because of the Fed actions, John is actually modestly optimistic!

• As I have been writing, the Fed gets it. Their action today is actually re-assuring. I have been writing for a long time that they would do whatever it takes to keep the system intact. As one of the notes below points out, this was the NY Fed stepping in, not the FOMC. The NY Fed is responsible for market integrity, not monetary policy, and they did their job. And you can count on other actions. They are going to change the rules on how assets can be kept on the books of banks. Mortgage bail-outs? Possibly. The list will grow.
  
  Yes, tax-payers may eventually have to cover a few billion here or there on the Bear action. But the time to worry about moral hazard was two years ago when the various authorities allowed institutions to make subprime loans to people with no jobs and no income and no means to repay and then sold them to institutions all over the world as AAA assets. And we can worry in the near future when we will need to do a complete re-write of the rules to prevent this from happening again.
  
  But for now, we need to bail the water out the boat and see if we can plug the leaks. Allowing the boat to sink is not an option. And get this. You are in the boat, whether you realize it or not. You and your friends and neighbors and families. Whether you are in Europe or in Asia, you would have been hurt by a failure to act by the Fed. Everything is connected in a globalized world. Without the actions taken by the Fed, the soft depression that many have thought would be the eventual outcome of the huge build-up of debt would in fact become a reality. And more quickly than you could imagine.
  
  As I have repeatedly said, recessions are part of the business cycle. There is nothing we can do to prevent them. But depressions are caused by massive policy mistakes on the part of central banks and governments. And it would have been a massive failure indeed to let Bear collapse. I should note that this was not just a Fed action. Both President Bush and Secretary Paulson signed off on this.
  
  The Fed risking a few billion here and there to keep the boat afloat is the best trade possible today. Their action saved trillions in losses for investors all over the world. It is a relatively small price. If you want to be outraged, think about the multiple billions in subsidies for ethanol and the hundreds of billions of so-called earmarks over the past few years to build bridges to nowhere. And think of the billions in lost tax revenue that would result from the ensuing crisis. I repeat, this was a good trade from almost any perspective, unless you are from the hair-shirt, cut-your-nose-off-to-spite-your-face camp of economics.
  
  The Fed is to be applauded for taking the actions they did. And they may have to do it again, as there are rumors that another major investment bank is on the ropes. I hope that is not the case, and will not add to the rumors in print, but I am glad the Fed is there if we need them.
  
  It is precisely because the Fed is willing to take such actions that I am modestly optimistic that we will "only" go through a rather longish recession and slow recovery and not the soft depression that would happen otherwise.

So could what happen to Bear happen to say Citigroup? Here's an interesting editorial featured on FinancialSense. Will Citibank Survive?

• So is Citi solvent? We just don’t know. But there are reasons to be concerned. We are in one of those recurring periods when the solvency of banks is doubted, like the late 1980s when the S&L crisis was brewing. Or perhaps it is more like 1974 when the failure of Herstatt Bank in West Germany set off banking crises throughout the world, culminating with the collapse of Franklin National Bank in New York City. The problem is leverage. Too much debt has been extended on too little capital, so even a small decline in the value of a bank’s assets can significantly erode its capital and make it insolvent.
  
  In any case, it looks like the financial crisis already upon us will get worse before it gets better, and I am not alone in that thinking. David Rubenstein, co-founder of the Carlyle Group told The Wall Street Journal last week: “This is the tip of the iceberg. People are looking at our situation and saying, ‘There but for the grace of God go I.’ There are others out there hanging on by their fingernails.”
  
  He should know. His group managed Carlyle Capital, which recently defaulted on its loans to Citi and other banks, and whose stock price is shown in the above chart.

And the markets incredibley ended the trading day mixed! Stocks Widely Mixed on Bear Stearns News

• The Dow Jones industrials recovered from an initial drop of nearly 200 points to finish up about 21 points. The broader Standard & Poor's 500 and Nasdaq composite indexes ended lower as investors bailed out of investment banks and small-cap stocks and fled instead to large companies apt to be reliable during a weak economy.


• Bear Stearns shares fell 86 percent to $4.10 -- still above the buyout price, implying that some shareholders believe the deal terms might change.


• Some investors worry Lehman Brothers Holdings Inc. might be next to fall. Lehman -- the investment bank considered most similar to Bear Stearns -- and other major investment banks are slated this week to report quarterly results.


• DBS Group Holdings Ltd., Southeast Asia's largest bank, reportedly instructed traders in an e-mail early Monday not to do business with the bank. According to Dow Jones Newswires, DBS Group later told traders to disregard the earlier e-mail. Lehman denied there were any problems with DBS.
  
  Lehman fell $7.51, or 19 percent, to $31.75.

Bear Stearns closed at $4.10!

Now do you know that Jim Cramer actually talked about Bear Stearns last Tuesday, 11th March 2008?

"Bear Stearns is not in trouble!" "Don't move your money from Bear! That's just being silly." "Don't be silly" shouted Jim Cramer. Bear Stearns was trading around $60.00 then.

There are 3 clips you can watch.

The below video clip was posted on youtube from DonHarrold.net. (He feels strongly that Jim Cramer should be held responsible!)

Same video minus the commentaries.







And watch how Jim Cramer tries to back-pedals from his earlier comments on Bear!!!!!!!!!!!!







Seriously any fans of Jim Cramer out here?????!!!!

And what's even more incredible, Cramer is still out there!

I kid you NOT. This time, he's singing Bear Is Only the Beginning !

• The implosion of Bear Stearns over the past week wasn’t just a run on one bank, Cramer said during Monday’s Mad Money, it could be the beginning of a run on all the banks, including the brokerages.