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More than $10bn of Bear's liquidity evaporated in one day, Congress hears

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    More than $10bn of Bear's liquidity evaporated in one day, Congress hears

    More than $10bn of Bear's liquidity evaporated in one day, Congress hears

    The head of the crisis-hit investment bank Bear Stearns has blamed short sellers and market manipulators for spreading negative financial rumours to induce a collapse of the 85-year-old Wall Street institution.

    Bear's chief executive, Alan Schwartz, told the Senate finance committee in Washington that his firm had been as well capitalised as its rivals – yet it suffered an evaporation of confidence last month fuelled by falsehoods.

    "As an observer of the markets, it looked like more than just fear," said Schwartz. "It looked like people wanted to induce a panic."

    Schwartz told senators that he never dreamt a run on the bank could happen so quickly. Bear lost $10bn of liquidity in a single day, with its financial resources plummeting from $12.4bn to $2bn on March 13 as customers, trading partners and investors fled.

    "The minute we got a fact out, a different set of rumours would start," said Schwartz, who testified that the "nature and pattern" of the damaging whispers made him suspicious they were being circulated deliberately.

    Schwartz urged regulators to investigate the debacle: "There are laws against market manipulation and there used to be laws against spreading rumours about banks." (AtW's comment: see, he also uses words "market manipulators", he must be against free market, a commie even eh?)

    Bear, which employs 14,000 people, was rescued from bankruptcy through a hastily arranged takeover by rival bank JP Morgan, which only agreed to do the deal if the Federal Reserve stood behind the troubled bank's riskiest assets with $30bn of public money.

    During a five-hour hearing on Capitol Hill, the Securities and Exchange Commission's chairman, Christopher Cox, assured lawmakers that any allegations of market manipulation would be taken seriously.

    "The SEC very aggressively pursues insider trading, market manipulation and the kinds of illegal naked short selling that have been very publicly alleged in this case," said Cox. (AtW's comment: no you don't Noddy, if you did those guys would have been in prison long time ago and nobody would dare to do this crap - they are doing it precisely because you did not pull the finger out whilst sleeping on the job.)

    Several senators expressed unease about the use of taxpayers' funds to support Bear Stearns. Critics have suggested that Wall Street banks bear a share of the blame for the credit crunch because they took undue risks in packaging subprime mortgages.

    Jim Bunning, a Republican from Kentucky, accused Federal Reserve chiefs of ignoring repeated red flags in the run-up to Bear's failure.

    "How did we get to a point where the failure of one firm can bring us to the edge of collapse for the whole of our financial markets?" Bunning asked. "How did you let the entire financial system become so fragile that it could not tolerate one failure?"

    The New York Fed's president, Timothy Geithner, answered that the crisis had taken years to develop: "What produced this is a very complicated mixture of factors. I don't think anyone fully understands it yet." (AtW's comment: load of bulltulip, under oath too - should be prison sentence straight away: this tulip started when Greenspan dropped rates to build a new bigger bubble in order to overcome .CON bubble, if the Feb banker does not know that then he is either an idiot or complicit in this action, probably both)

    Fed officials told the committee that a substantial increase in risk-taking, the invention of elaborate derivatives and a deterioration in underwriting standards contributed to the financial system's brittle condition.

    Geithner said regulators tried to crack down on the problem but added: "I'm not claiming people were wise and all-knowing or that we did everything that could have been done."

    The Fed has argued that allowing Bear to go out of business would have caused a disastrous knock-on impact by sapping confidence in the banking system throughout the economy.

    JP Morgan's chairman, Jamie Dimon, said it would have been too risky for his firm to buy Bear without the Fed's backing: "This wasn't a negotiating position. It was the plain truth."

    Dimon told the senators that a bankruptcy of Bear could have sparked a chain reaction of defaults by its trading partners, ultimately impacting the public. (AtW's comment: they should have modelled this situation earlier and create safeguards that would prevent such chains from being created in the first place - gamblers in the biggest ever casino called "financial markets" are trading tulip from one to another "spreading risk", using huge leverages, so obviously when one segment falls then the whole thing is like domino.)

    "It could have made it harder for homebuyers to get mortgages, harder for municipalities to get the funds they need to build schools and hospitals and harder for students who need loans to pay tuition," said Dimon.

    During round-the-clock negotiations to secure the buyout of Bear, the US Treasury intervened to impress upon JP Morgan the importance of keeping down the takeover price to avoid the "moral hazard" of rewarding investors in a failed enterprise.

    "There was a view that the price should not be very high, that it should be towards the low end," said Robert Steel, the treasury under-secretary for domestic finance.

    This strategy backfired because JP Morgan's initial deal to buy Bear at $2 per share aroused such outrage among shareholders that it was raised to $10 a week later. (AtW's comment: shareholders should have been outraged years ago when their company was engaged into speculation on property market, rather than financies companies like Intel or Google (or SKA Inc))

    Employees at Bear are still waiting to hear whether or not they have a future at the firm. Analysts have suggested that as many as 8,000 may lose their jobs and JP Morgan has been battling to prevent rival firms from poaching Bear's top talent.

    Bear's chief executive told the committee that he was unable to pinpoint anything that the bank's management could have done differently given the unforseen "forces" which destroyed the firm. Nevertheless, he accepted a share of the blame. (AtW's comment: )

    "I don't think a management team can ever say they have no responsibility for anything that happens," said Schwartz. "The buck stops here. We and our stockholders have paid the price."

    ---

    Questions? I thought so

    #2
    What's the big deal? Why twice?
    Me, me, me...

    Comment


      #3
      there used to be laws against spreading rumours about banks
      That is quite operative. So the law makers got rid of those laws, and then the law makers are going to find out who it is who's responsible?

      Not going to happen is it? My prediction is: they'll find a couple or so English bank execs, extradite them to Guantanomo as terrorists, and the panem et circenses US sub-prime population will thank their government for doing such a fine job.

      Flipping septics.
      Insanity: repeating the same actions, but expecting different results.
      threadeds website, and here's my blog.

      Comment


        #4


        I read the thread title and it frightened the life out of me!!!!

        Had to go and check my bank balance - but everything's fine

        Phew!
        Si posse, recte, si non, quocumque modo rem

        Comment

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