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America's Northern Rock

Robert Peston | 14:42 UK time, Friday, 14 March 2008

demonstrates that the worst of the global credit crunch is not yet behind us.

As an incident, it is America's Northern Rock.

Bear Stearns officesBut the run on Bear Stearns hasn't been a run of small savers, as happened at the Rock.

There has been a wholesale run on this leading investment bank, a withdrawal of capital by leading financial institutions.

Bear Stearn's creditors have become progressively concerned about Bear's exposure to mortgages - not subprime mortgages but AAA good-quality home-loans.

Why? Because on a daily basis there's been more and more disturbing news about the deterioration in the US housing market and the difficulties faced by borrowers in repaying their debts.

This is what did for Carlyle Capital Corporation earlier this week. And it meant that in just the last 24 hours Bear Stearns came close to running out of the cash or liquidity it needs to meet its daily requirements.

So enter the New York Federal Reserve. It is promising to supply whatever liquidity is required by , the leading bank, to help Morgan provide whatever funds are required by Bear Stearns.

Since JP Morgan is saying there is no risk to its shareholders, this represents a central bank bailout of Bear Stearns

So, as I say, this is America's Northern Rock.

UPDATE 16:40: A bit of context on Bear Stearns.

First, please don’t overstate the analogy with Northern Rock. Bear Stearns is an investment bank at the heart of Wall Street. It is not a retail bank like the Rock.

Second, it is – like the Rock – what regulators classify as a high impact firm. Or to put it another way, it is too big to fail.

Why? Because its businesses had consolidated assets $395bn at the end of November 2007 – which would make it roughly twice the size of Northern Rock.

If it had gone down, and there had been a fire sale of assets, there would have been a double whammy for the financial system.

First, there would have been losses for those institutions and individuals that have provided $383bn of credit to the various bits of Bear Stearns (there was also $12bn of equity supporting all that debt).

Second, the market price of all sorts of financial assets would have collapsed. And that could have caused solvency and liquidity problems at other banks and financial institutions.

So the New York Fed had no choice but to rescue Bear Stearns.

What’s unclear is whether the main problem at Bear Stearns is – like it was at the Rock – mainly one of technical insolvency caused by an inability to raise finance.

Or whether there is already a deficit between the value of Bear Stearns’ assets and its liabilities.

The trigger for the rescue of Bear Stearns was that the liability side of its balance sheet has gone wrong; it is in danger of running out of cash to fund itself.

But are its assets of reasonable quality?

As of November 30, it had $46bn of exposure to mortgages. And it is a fall in the market-value of mortgage-backed securities that has spooked Bear Stearns’s creditors.

The big question is whether creditors’ anxiety is hysterical or rational.

°ä´Ç³¾³¾±ð²Ô³Ù²õÌýÌý Post your comment

  • 1.
  • At 03:40 PM on 14 Mar 2008,
  • GS wrote:

Despite the hysteria and anti-american invective that this posting will engender amongst loyal followers of this blog I suspect we are getting close to the end game of this crisis...

  • 2.
  • At 03:41 PM on 14 Mar 2008,
  • adam wrote:

This is just the beginning....hold onto your seats and buy those puts.

  • 3.
  • At 03:56 PM on 14 Mar 2008,
  • Dave wrote:

In many ways this is worse than Northern Rock. Northern Rock was a retail bank. Had they collapsed the pain would have been felt by a few individuals. Bear Stearns is an institutional bank, with much much larger exposures than Northern Rock. The genuine failure of a big institutional bank could very easily push ripples through the whole banking sector that cause pain to many orders of magnitude more people than Northern Rock. This is clearly why the Fed have intervened so quickly. If one of the top 5 or top 10 banks in the world fails expect the ramifications to be severe. This could make 1929 look like a walk in the park.

  • 4.
  • At 03:57 PM on 14 Mar 2008,
  • Justin Scholtens wrote:

This is frightening. I can't see how Bear Stearns is going to rebuild people's confidence in the bank and therefore I can only see it going South. I'm curious to see how this plays out. I see no reason why Gold shouldn't reach $1,300 and I daren't say how low the dollar might go.

Good thing that the Fed offered liquidity because there is no way that JPM would have been stupid enough to bail out an investment bank that's been on it's knees for months now, for fear of further losses.

  • 5.
  • At 04:12 PM on 14 Mar 2008,
  • Nicholas A wrote:

The obvious question is why did the Fed route its support through JPM rather than just lend directly to Bears?

  • 6.
  • At 04:13 PM on 14 Mar 2008,
  • mat wrote:

its not the last one.

  • 7.
  • At 04:21 PM on 14 Mar 2008,
  • Pete wrote:

Bear Sterns are certainly into sub prime mortgages in the UK through Rooftop. Are you saying they don't do subprime in the US or that they have a low exposure?

  • 8.
  • At 04:24 PM on 14 Mar 2008,
  • Mike Walker wrote:

Presumably this marks the end of any kind of independent existence for BS and is just the ultimate solution being applied by the central bank.

The analogy with Northern Rock seems a good one. The perception of BS for me was long identified as being at the sharp end - of the build-up of the toxic tangle in its case, and in NR's of a risky funding model.

Therefore one had also long thought if its ultimate demise as a necessary defining point in the post-bubble mop up operation. Thus it's almost... good news, or at least a key precondition for the necessary clearing and basing of the market.

  • 9.
  • At 04:25 PM on 14 Mar 2008,
  • Nicholas A wrote:

The obvious question is why did the Fed route its support through JPM rather than just lend directly to Bears?

  • 10.
  • At 04:31 PM on 14 Mar 2008,
  • Hassan Suffyan wrote:

First CCC and now Bear Stearns and all in one week! Finally the capitalist system based on interest and debt is being hung out to dry. I relish every single bit of news that shows another big bank taking a hit. The non-interest based banking system is the way forward, under which there would be no ridiculous housing inflation, no sub-prime lending, and no credit crunch!

  • 11.
  • At 04:31 PM on 14 Mar 2008,
  • Tony wrote:

Ouch!
Or are we into 'Yikes!' territory yet?

  • 12.
  • At 04:32 PM on 14 Mar 2008,
  • Jim Urbonas wrote:

It is only a facility for 28 days, it is not a solution to the problems. To imagine a solution can be found by then is optimistic.

Once again, policy makers are providing liquidity to what appear to be insolvent institutions.

Indeed, this bad news is bound to make many even more nervous. Bear Stearns is not alone on Wall Street as a bank involved in fixed income and US mortgages. So it is possible that a few other dominoes will be wobbling.

  • 13.
  • At 04:34 PM on 14 Mar 2008,
  • martin wrote:

peston has another thing to write about

"... buy those puts"

what's a put?

  • 15.
  • At 04:38 PM on 14 Mar 2008,
  • ivan wrote:

Does the American Government have the money to lend its financial institutions or is it just printing more money like Mugabe ?

  • 16.
  • At 04:38 PM on 14 Mar 2008,
  • Eugene Walker wrote:

Where does all this money come from we ask ?

Watching this video is well worth 47 minutes of anyone's time.

  • 17.
  • At 04:39 PM on 14 Mar 2008,
  • Daniel Law wrote:

If we would read history books as one should, we would find that a certain Mr Morgan in 1910 bullied the banks to provide money/liquide funds to the brokager houses to support these from crashing...
He, Mr JP Morgan, was man of vision and knew what he was doing... 100 years later same story same banks except that they have merged been made into "super" banks and brokers...and the big issue is there are no more men of vision....

The issue is not that the banks are the only ones in a cash shortage, but the whole market which in end will result into a dramatic downturn for all

  • 18.
  • At 04:42 PM on 14 Mar 2008,
  • Nicholas A wrote:

The obvious question is why did the Fed route its support through JPM rather than just lend directly to Bears?

  • 19.
  • At 04:57 PM on 14 Mar 2008,
  • J Mac wrote:

There's nothing anti-American about this post at all. We, in the UK, are in as deep trouble as the US and possibly deeper. This is becoming very very serious now. I don't think we are anywhere near the end game.

  • 20.
  • At 04:58 PM on 14 Mar 2008,
  • LP wrote:

Because Bear is not a commercial bank. Through the discout window the Fed is giving Bear indirect access to its crisis liquidity provision facility. Bear Stearns cannot access it directly, as it is an investment bank and not a commercial bank. By asking JP Morgan to act as the middle man, however, Bear can access this facility.
JP Morgan is expected to lend to Bear, taking the collateral, and then refinancing the collateral with the Fed at the discount window
.

  • 21.
  • At 05:00 PM on 14 Mar 2008,
  • Jonathan wrote:

From what I understand the Federal Reserve is a abit more complicated than the BoE as it is partly private and linked to the main US banks. I don't know if this is why the lending is done through JP Morgan. Worth having a read of the wikipedia article on the Fed.

  • 22.
  • At 05:03 PM on 14 Mar 2008,
  • Alasdair wrote:

I suppose that we will find out if Bear Stearn is "America's Northern Rock" if you contrive to write about it everyday with increasing doomsayer pessimism, dear Robert!

The most likely explanation is that JPM acted as Bear's agent in Tuesday's emergency auction. Fed almost certainly knew last weekend, given the unprecedented size of the emergency auction...

  • 24.
  • At 05:19 PM on 14 Mar 2008,
  • J Mac wrote:

There's nothing anti-American about this post at all. We, in the UK, are in as deep trouble as the US and possibly deeper. This is becoming very very serious now. I don't think we are anywhere near the end game.

  • 25.
  • At 05:19 PM on 14 Mar 2008,
  • Iceberg wrote:

It's now a question of confidence. BS doesn't have to go the same way as NR unless the markets and other players lose confidence.

JP will be making a decent mark up and this borrowing, which makes it more bizarre.

  • 26.
  • At 05:20 PM on 14 Mar 2008,
  • Andrew wrote:

It was none other than Adam Smith who said that capitalism is a vibration between greed and fear. I am in favour of capitalism but I am not a capitalist fundamentalist.

How much ire would I provoke from capitalist zealots if I were to suggest that maybe the removal of credit controls in the early 1980's was a bad idea for us all in the long run? Am I allowed to say that now?

I think it is time to read Will Hutton's "The State We're In" again.

  • 27.
  • At 05:24 PM on 14 Mar 2008,
  • Emile Wakefield wrote:

Where does all this money come from we ask ?

There is a video on Google that I would recommend everyone watches – it’s worth 47 minutes of anyone's time – Search for ‘Money As Debt’ it explains a great deal…

God help us all.

  • 28.
  • At 05:33 PM on 14 Mar 2008,
  • paul wrote:

bemused ! no one appears to known the extent of the CoD , SIV toxic loans ? I serious think there will be many more "failures" followed by a bout of inflation as the FED monetises the debt...

brings to mind the old football chant, 'ere we go!, 'ere we go!, 'ere we go! :-)

  • 29.
  • At 05:40 PM on 14 Mar 2008,
  • Hugh wrote:

The Fed couldnt support BEST directly as broker delaers cannot access the discount window (they are not commercial banks). Thus they get access to the window (as have many commercial banks in the US since this episode began) via JPM on a back to back basis. I'm surprised the conspiracy theorists out there havent wondered whetehr BEST is getting its comeuppance after refusing to take part in the LTCM resuce in 98.

  • 30.
  • At 05:48 PM on 14 Mar 2008,
  • Cahagnes wrote:

@Nicholas A (comment no. 5): As an investment bank Bear doesn't have access to the Fed's Discount Window, through which the emergency funding is provided, but JPM has.

  • 31.
  • At 05:50 PM on 14 Mar 2008,
  • Nicholas A wrote:

The obvious question is why did the Fed route its support through JPM rather than just lend directly to Bears?

  • 32.
  • At 05:59 PM on 14 Mar 2008,
  • Ian wrote:

RE: "The Obvious question..."

From the WSJ:

The Fed can only lend directly to banks in trouble if it has the approval of five governors; in this case, the New York Fed made an end run around that requirement by showing that it had made the best efforts to assemble that many governors — and then giving Bear the loan anyway.

  • 33.
  • At 05:59 PM on 14 Mar 2008,
  • Simon Stephenson wrote:

"Bear Stearn's creditors have become progressively concerned about Bear's exposure to mortgages - not subprime mortgages but AAA good-quality home-loans.

Why? Because on a daily basis there's been more and more disturbing news about the deterioration in the US housing market and the difficulties faced by borrowers in repaying their debts."

There are some with an alternative view that the deterioration in the housing market, in the UK and the US, occurred during the period when property prices diverged upwards from economic value, driven by the irrational groupthink that this divergence could only ever get larger. These same contrarians would say, no matter how detrimental it is to some people, that an adjustment of property value to an economic level is fundamental to a resumption of real social progress, and that therefore, rather than being a deterioration, this process will be an amelioration to the housing market.

Speculative thought-suspension is as damaging to social progress now as it was at the time of the South Sea Bubble. You'ld have thought we'd have learned this by now, wouldn't you?

  • 34.
  • At 06:24 PM on 14 Mar 2008,
  • SH wrote:

Nick A, Bear Stearns is a Broker Dealer not a Bank JMPC is a Bank, the Bank can access Fed Funds but the BD less so.

  • 35.
  • At 06:52 PM on 14 Mar 2008,
  • Andrew Knight wrote:

No ammount of discount lending is going to protect losses being made in the American mortgage and wider lending sector.
Banks need to come clean with what they expect to write down in the next 12 months rather than hold back on this information which is causing long term market instability.

  • 36.
  • At 06:56 PM on 14 Mar 2008,
  • Philip Calrissian wrote:

"Or to put it another way, it is too big to fail."

Huh ?

You're saying because of its size, its technically impossible for it to collapse?

That is simply crazy. Just because a corporation is huge does not mean it is somehow safe. Indeed, quite the contrary, the bigger they are, the more complex and messy they can end up.
--

As many realise, probably Sterns and also Citigroup will tumble within the next few months, and take with it, 50% or more of the USA banking system.

Within this year, Gold will hit $1500, along with oil at $140 or more. The dollar will in contrast collapse to zero, and then we're into the 'really interesting' territory.

It will make for some entertaining news reports.

  • 37.
  • At 07:08 PM on 14 Mar 2008,
  • Nick Gotts wrote:

Are these the opening stages of the final crisis of capitalism? I'd guess not, but probably of the biggest since the Great Depression that started in 1929.

  • 38.
  • At 07:09 PM on 14 Mar 2008,
  • Buzz wrote:

'When America sneeze, we catch a cold.' America seems to be more than sneezing. Lets see bank executives actually behaving sensibly and being transparent with one another with their accounts.

Wish I'd held of opening an equity ISA for another few weeks!

  • 39.
  • At 07:18 PM on 14 Mar 2008,
  • merce wrote:

Central banks are running out of fingers to plug this bursting dam.

Bailouts will continue but ultimately
fail, you can't turn bad bets into good ones just by providing liquidity.

  • 40.
  • At 07:20 PM on 14 Mar 2008,
  • Andrew C wrote:

At 18:26 today the USD hit parity with the Swiss Franc:
CHF/$0.999501

Inconceivable since the Swiss Franc was created in 1850 and traded at 4 to the dollar for many years.

Bear Stearns was the last straw on the camel's (dollar's) back in setting this historic low. And yet bad news continues in the liquidity/solvency crisis.

  • 41.
  • At 07:51 PM on 14 Mar 2008,
  • Mark wrote:

Guy Cross,

A put is a financial instrument giving the buyer the right (but not the obligation) to sell an agreed underlying at a fixed 'strike' price at either a fixed point in the future or at any point until the 'maturity' of put.
By being long a put you are essentially taking a 'punt' on the market going down. A put on bear Stearns bought a few weeks ago would now be worth quite a bit of money - methinks!!

The rollercoaster ride has a while to run yet!

  • 42.
  • At 08:23 PM on 14 Mar 2008,
  • Nadine wrote:

Still confused as to why the run on Bear Stearns. If exposure to mortgages is $46bn and their total assets under managment are circa $400bn, then that is just over 10%. So why all the fuss?

Plus, if most of that $46bn is, as you say (and contrary to the Online article), for AAA mortgages, then it seems there is even less of a reason for creditors to panic.

This then also begs the question: why only panic over Bear? There must be quite a few other top banks which have similar levels of exposure to good mortgages -why no run on them? Not to mention those with higher levels of exposure to bad sub-prime loans...

More explanation please!

  • 43.
  • At 08:29 PM on 14 Mar 2008,
  • stanilic wrote:

Why am I coming to the view that we should stop trying to help these failed institutions?

Let's kick them into touch, face up to the bad times which are coming and then get on with the recovery.

It is no use crying over spilt milk!

  • 44.
  • At 08:45 PM on 14 Mar 2008,
  • hex wrote:

surely if this was the same as Northern Rock we'd already be seeing SRM Global and RAB Capital buying up huge quantities of cheap shares then running crying to mummmy when their hope of a quick profit turns sour...

  • 45.
  • At 09:19 PM on 14 Mar 2008,
  • Andrew Yale wrote:

The problem for Bear Sterns is that the global market will start to sell and companies doing business will fear inslovency. The sad death of this once great Bank may make the USA authorities sit up and taken notice, the FBI and SEC have been totally asleep.

  • 46.
  • At 09:19 PM on 14 Mar 2008,
  • john thomas wrote:

to #33...

in translation... once the public convinced itself that 20% house price inlation was the norm... getting into this asset market was a no brainer must... however...

the first, inbetween and last caviat attached to ANY and EVERY piece of investment advice is... past performance is no guarantee of future performance.

i'm an estate agent in suffolk... i rent (at a rental that is less than half the monthly repayment rate where ltv = 95%) ...buy a house? ...not this side of August 2011.

  • 47.
  • At 09:23 PM on 14 Mar 2008,
  • Andrew Yale wrote:

The problem for Bear Sterns is that the global market will start to sell and companies doing business will fear inslovency. The sad death of this once great Bank may make the USA authorities sit up and take notice, the FBI and SEC have been totally asleep.

  • 48.
  • At 09:31 PM on 14 Mar 2008,
  • Gordon ISA Moron wrote:

Well said Hassan.

Ever wonder why the City-dependent media is so happy to tag along with the anti-Islamic chitchat? There's more to it than the so-called "war on terror". There's also a less public war on an alternative financial system that has a demonstrable history of long term success, a system which is less like an evening at the casino than the current Western system. Sadly in the City casino it's working folks' pensions, amongst other things, that the City people are throwing away. Not a laughing matter.

  • 49.
  • At 10:49 PM on 14 Mar 2008,
  • Robert Peston wrote:

Just caught me on TV.

Robert Peston you are a sensationalist scare monger !!!

You journalist types thrive on gloom and suffering - bet you can't wait for a full blown recession !!!

  • 50.
  • At 02:09 AM on 15 Mar 2008,
  • Emile Wakefield wrote:

#49 Engage your brain. Work it out.

$46 trillion odd of debt in the US, 200 million odd population = $225,000 debt for every man woman and child.

Where did all the debt come from ? Who owns everything ?

Who owns everything ?

Think it is different in the UK ? Do the research...

  • 51.
  • At 09:37 AM on 15 Mar 2008,
  • Grant wrote:

"At 04:12 PM on 14 Mar 2008, Nicholas A wrote:
The obvious question is why did the Fed route its support through JPM rather than just lend directly to Bears?"

In response to this question, I'll say this:

The Federal Reserve itself isn't a lending institution. The Federal Reserve is mainly in charge of the maintenance of the overall money supply in the United States. As such they preferred to supply money to a more stable and established (relative to Bear Stearns) intermediary, which JP Morgan is (they've been in the business since the time of their namesake, during the Second Industrial Revolution of the late nineteenth and early twentieth century). By doing this the Fed doesn't get involved directly but entrusts a portion of its money supply to a responsible, established financial firm which can then mete out the funds in terms both banks can understand and accept.

Some might say that this is the Fed taking advantage of a legal loophole (not to mention taking something of a risk), but think what would happen if this transaction didn't go through. Yes, it was stupid for Bear Stearns to make bogus investments, but if Bear Stearns went under there would be no financial recompense for the people who invested with them in good faith.

  • 52.
  • At 12:13 PM on 15 Mar 2008,
  • Gordon wrote:

Google the video "Money as Debt" to see where this debt-based money system is dragging us. The third separate mention of this video I think.
We know that something is wrong and this spells it out.
Only when we start talking about reforming the money supply system will we be heading in the right direction towards a more just society and world.

  • 53.
  • At 03:36 PM on 15 Mar 2008,
  • john thomas wrote:

#49... wants to shoot the messenger... doh!

#48... and anti islamic to boot!

you two are shrimp.

  • 54.
  • At 08:15 PM on 15 Mar 2008,
  • john thomas wrote:

When the Banks don't trust the Bankers' bank ...PANIC!

  • 55.
  • At 08:27 AM on 16 Mar 2008,
  • peter. raku wrote:

This is NOT Northern Rock, and is an issue many are watching with interest, if the media is so concerned with creating news, by creating this mass-hsyteria and lack of confidence in the market, they will soon be happy to write about the numbers of suicides not unlike to the 22,000 from 1929! The best thing they can report is to NOT panic, the banks are in bed with each ohter and no one wants to see a solid bank go under, the people who lose and the people who probably cant afford to. DONT PANIC

  • 56.
  • At 12:17 PM on 16 Mar 2008,
  • Terry Johnson wrote:

There will be a lot of Bears Stearns and Lehman stationary for sale next weekend at great prices. Just call Enron Liquidators.

  • 57.
  • At 06:53 PM on 16 Mar 2008,
  • Ian in London wrote:

1 sentence for your comment.

No one bank or institution should be too big to fall if it has indulged in reckless practices.

  • 58.
  • At 06:55 PM on 16 Mar 2008,
  • Verity wrote:

Is it hysterical or rational? Well rationality in business terms is as difficult to quantify or predict as rationality in economics generally. Nothing, as yet, accounts for emotion, and I feel that fear is leading this crisis.
In response to comment 43. Though I'm sure the comment was at least somewhat tongue in cheek, to suggest that we should leave banks to sink under the weight of their problems is quite naive. Those of us with mortgages to pay or share holdings will be the losers if this panic spreads. Though retail banking in the UK is yet to feel the full force of the blow, the fist is clenched and ready to strike. As all first time buyers currently searching for a mortgage provider will know, retail banks suffering from the early stages of this misfortune are passing on the credit crunch already. A goodbye to the 100% mortgage is nearly 100% complete. We may know that the capitalist system is effectively reaping what it has sewn, but we still rely on that system and need to do what we can to support it.
What would be the alternative?

  • 59.
  • At 10:15 PM on 16 Mar 2008,
  • DC wrote:

Really don't think this scare mongering, sadly I think there will probably bigger companies than Bear Stearns that get into trouble...now that really would be scary.

  • 60.
  • At 08:30 PM on 17 Mar 2008,
  • matt presland wrote:


Seen all this before really, remember the endownment scam ? The only difference now is its not the public being taken for a ride but the banks.

One way or another some bright spark finds a way to do more deals in this case bad credit loans and cover the risk. Then we or our friends over the water have a party on the assumption that growth means you can borrow more.

our banks cant cover their debts and the housing market is in decline. same thing really, declining asset value against secured borrowings. Bumpy ride more like a roller coaster.

we are all in the same boat

I want to thank post no.16 by Eugene Walker. After watching that video, it gives you a completely different look on money and world finance as it stands... and the implications that Robert points out in his blogs comes into focus for people like me, the ordinary Joe.

Thanks again.

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