A falling stock market today is being blamed on Bear Stearns, which said that its cash position had “significantly deteriorated” in the past 24 hours and that the New York Federal Reserve and JPMorgan Chase & Co. are extending it a lifeline, according to numerous press reports including Bloomberg.
First let’s recall that Bear was a big player in subprime, including in Orange County. In December it said it stopped making subprime loans in Irvine but kept servicing loans there. That followed news that two of its hedge funds collapsed after borrowing money to invest in subprime-related bonds.
Here’s more from Bloomberg:
The New York Fed agreed to provide financing through JPMorgan for up to 28 days, the bank said in a statement today.
The regulator stepped in to prevent the collapse of the second-biggest underwriter of U.S. mortgage bonds and forestall a potential market panic as losses by banks and brokers reached $195 billion and stocks plunged for a third day this week. JPMorgan, which has suffered fewer losses than rivals during the credit crisis, may end up owning all or part of Bear Stearns, analysts speculated.
“I don’t think they can afford to let Bear go,” said Charles Geisst, the author of “100 Years on Wall Street,” referring to the New York Fed bailout. “At this particular moment in time, it would be a devastating blow to the markets.”
Bear’s stock is down 36% as I write this to about $36.50, but trading is highly volatile. The Dow is down 172 points, or 1.42%.
To read the full story CLICK HERE.
It was a margin call by a large European Bank is what was briefly reported. The same thing happened to Thornburg in New York. No one though seems willing to name the bank or banks that are making these calls or why.
Wow, rates have gone up on the loan I want to use this summer a full half percent in the past month or so. I wonder how many people will have to downsize a bit when they purchase because of the higher rates? I guess it will all depend on if they’re pushing their debt ratio to the max. I’ll be buying a place that’s only about 65% of what I can afford, so luckily it won’t affect me.
Bear will probably survive because they have utilized a mixed bag of tricks, the subprime mess is like a stone around their neck but they still have arms and legs to keep their head above water; while the stone dissolves
There’s more to this story than is being reported. Why would JP want to take that bad debt onto their “clean” books? Either JP has a sweet backroom deal with the Fed, or they’re getting Bear’s assets at firesale prices.
This is why I don’t invest in overleveraged companies. Look at the Carlysle Fund… they were leveraged 32 to 1 on subprime. This is taking a very bad investment and multiplying the effects by 32. It’s sickening that the government continues to bail out these suicidal hedge funds.
Bear Stearns and JP Morgan, now we are getting to the
real pimps in the Subprime Loan problem .
Without these guys the Mortgage Bankers could not sell those loans. So don’t feel sorry for them as they made a TON of money . NO quality control whatsoever .
House of cards as only the investors lose !
Don’t forget the recent newsflash about how the nation’s debt on its home stock has exceeded its equity for the first time since statistics were started in 1945. The entire nation is now under water (as a whole) so this margin call onslaught/real estate deflation will only gain momentum. Yet you have posters on Lansner’s blog plotting their future real estate fortunes. Smalltimers that live in 2 bedroom condos (!) crowing about their real estate “investments.” How embarrassing to be so lowbrow, wake up and smell the coffee.
As an american I feel the bailing out of Bear sterns by the feds is dicrimanation of the worst kind.Lets see CEO Alan Schwartz gets about 35 mill with stock options .So the feds bail him out.Americans with the cost of gas food taxes and every thing under the roof going up do not get bailed out . all we get is a slap a little tax credit that wont do any good . as the presiden yes Mr bush is so blind and says the price of gas 4 dollars a gallon who said that will happen . he should be jailed for crimes commetted on Americans. BAIL BIG BUISNESS OUT , BUT NOT THE AVERAGE JOE.
Depression, yep
Oil
Dollar
Lending
Outsourcing
income
Social services
Fraud
debt
lack of savings
I’m sure I’m forgetting at least 10 other items
Oh, yeah, forgot the bigy war
Subprime is so 2007….Alt-A is the newest, baby…and of course the A Paper Neg-Ams are just coming on the scene too.
It should be great fun; be sure to dress accordingly for when t.s.h.t.f. or as they say on tickerforum b.o.h.i.c.a.
Ciao bella
It’s never just one thing is it?
But sub-prime is definitly a big thing.
The ignorance on this board never ceases to amaze me….soooo many “know-nothings” blowing hot air and ACTING like they know anything that is going on….no credibility whatsoever….First of all “just the facts”, Bear Stearns is NOT a “bank”…they are an INvestment bank but not a depository bank….this means they cannot borrow from the Fed except as they did through JP Chase…and while Bear bought Encore Credit through it’s EMC Mortgage division a couple years ago in 2006, that was AFTER the big “Sub-prime blowout” of 2004-2006 that put this credit crunch in play…though they had “Bear Residential lending” they were primarily an Alt-A lender though a very small player….what happened to them in the last week was what is happening in the housing market…PANIC! Bear securitized a LOT of Subprime and ALT-A mortgage securities but was not the LENDER on hardly any of them…that is why they are getting called by panicky investors…Bear had some margin calls as “Arthur Jensen” said in the first post and since they are not a Fed chartered bank, could not get a loan from the Fed to cover them and now likely face being bought out by Chase or some other bank similar to what happened to Countrywide with BofA…this is what happens in “Credit Crunches”: Firms get “Crunched”. Since this is the “Mother of All Credit Crunches” the fact that it is Bear is not all that surprising….You may hear “Lehman Brothers” and “Merrill Lynch’s” name in the same boat before too long…also, Bear’s EMC division is protected because they are a “servicer” not the primary LENDER of the loans they have primarily…get it?
And because most of you are ignorants blowing hot air like “Kirsten”, I will repeat what I have posted so many times but you all either didn’t read it or were too simple too understand it: ALL ARM loan rates are going DOWN….RAPIDLY! Neg am option ARM’s rates WILL ALL be in the 4’s within 4-7 months and for some the 3’s and possibly high 2’s shortly after that (some rates will be so low that homeowners won’t be able to even MAKE a neg-am payment if they wanted to as it will be LOWER that the interest only payment!)…ALL non-subprime ARM rates in adjustment WILL BE in the 3’s to 4’s not too long after that….this is a FACT! People walking away from homes now…unless they lost their jobs or are amatuer hour “flippers” in full scale PANIC, they CAN afford the payments…that is the problem now…because short term rates are so low and going lower ANY ARM reset taking place now through likely 2010 will be into LOWER rates than what the “teaser” rate was for any ARM loan. I have asked Matthew Padilla to write about this FACT but it seems that it’s better for the media to ignore this trend or propogate the LIE that rising ARM rates are the problem….rates are not RISING! Only PANIC is rising…A-paper and Alt-A ARM’s in adjustment are the BEST loan RATES in the world right now….homeowners lacking in ethics and character are the rising problem in the housing market today! Soon however, as the recession/depression continued on by these self-interested parasites walking away from homes they can afford builds to a crescendo and people REALLY begin to lose their jobs (including many regulars here cheerleading the job losses in the mortgage/real estate world…that will be a highly ironic!) THEN it will be for reasons beyond simple greed and lack of character, as was the case in EVERY previous “housing recession” prior to this one…but for now it has NOTHING to do with rising rates or “Neg AM” loans. Doubtful you simpletons will ever understand that but maybe some of you will have more time to read and learn about such things when you are unemployed soon!
hey Larry P. did you run out of breath or venom? Amazingly enough other people do read about economics and the US financial system (or ponzi scheme).
At this very minute Bear Stearns is getting “bailed out” or “bought out”. If this doen’t happen their stock will be worth 0 Monday.
Neg-Am loans will blow the economy up along with Prime loans that will be defaulting this year.
There are so many links out there to read, I’m not even going to start. You appear to have gathered information on this yourself.
When Neg-Ams recast at 110%-125%; payments will increase from $2,000 a month to $5,000 mo. because it will be based on the “new” loan amt. (Neg-Am) And yes people will return the homes to the lender as contracts state (as they are doing all over Orange County…short sales).
It’s all business not ehtics. That’s life. Yes we’re heading towards whatever you want to call it.
Recesion is what it’s called on Bloomberg and CNBC. On other websites they are stating Depression.
You might want to get your head on straight because all the hate you’re spitting out is going to put in the wrong place at the wrong time…..
Bear Stearns “bought” (bailed out) by J.P. Morgan as per WSJ online:
J.P. Morgan agreed to buy Bear Stearns for $2 a share in a stock-swap transaction. The deal values Bear Stearns at just $236 million. At the end of Friday, Bear’s stock-market value was about $3.54 billion.
• Bear Stearns’s Plunge Takes Along Billionaire
• Firms Rethink Reliance on ‘Repo’ Financing
My neighbor worked as an AE for Encore, then Bear Stearns. Before Xmas he was let go as ENC (Bear Stearns) folded Irvine operations. Encore only sold SubPrime, so by default Bear did too. The bigger they are the harder they fall. Who’s next….Lehman?
Jake,
You must be new around here. I know other people understand economics and the US financial system here…they are not for whom I intended that post!
First of all, my “venom” is for those on this board who deserve it after more than a month of THEIR venom towards anyone associated with the mortgage industry including those of us who always fought for them and their home….IF they were ever homeowners that is! Lots of virulent “perma-renters” around here too!
Second, tell me “Jake”, what is the monthly payment on a 30-year fixed at 6.5% interest on a $400,000 loan? Don’t know? It’s $2,528.27/month. Now, what is the RECAST payment on an MTA loan at 5.20% (1 month MTA of 2.55%…and DROPPING + margin of 2.65%…the AVERAGE margin on such a loan) with say 27 years remaining on it for $440,000 ($400,000 loan with 10% neg-am added due to borrower stupidly deferring interest every month like it was a credit card) remaining on it? Give up? It’s $2,527.94! How’s THAT for being a BAD loan??? Bigger loan, smaller amortization schedule, and STILL has a nearly the same payment. A few more months and it will have a LOWER payment than the 30 year fixed…MUCH lower! That will mean then that the Option ARM’ers are paying MORE of their equity down each month than the 30-year loan guy even with the higher loan amount AND since the index is based on a 12 month average, will stay lower well into 2009 even if the Fed started to raise rates today! Pretty startling isn’t it? Also, the payment ONLY increases for those who paid the min. payment every month! They are called “Option ARM’s” after all meaning they gave you OPTIONS to pay. Those that built their personal budgets around the minimum payments will get slaughtered if they didn’t SAVE (novel concept) any of the “equity” they pulled out when they made the neg-am payment but anyone who used such a loan WISELY as they were intended will not suffer at all…for them, it is a bonus that rates are plummeting as they are MONTHLY!
Third, you are right about this though….the prime loan holders are next! Job loss due to those “business decisions” you claim the “Just walk away” crowd are making will put even more people in the poor house than the subprime fiasco ever did! It is the “Just walk away” group who will ultimately determine the fate of the economy. After all, even if you have a “Great rate” of 5.25% 30 year fixed…it’s awful hard to keep paying on it if you don’t have any income…or the hopes to get one back any time soon!
Should the foreclosures “to completion” not just to the filings stage continue to rise, then we are ALL in for it! Better get on good terms with your kids or parents…lots of people are going to have to move in together to save money pretty soon if MORE people make such WISE “business decisions”!
As for Bear Stearns…see my post…they won’t be the last of the Wall Street firms to go the way of the Dodo…they are just the first domino to fall!
LarryP, that’s the first I’ve heard about that possibility. I hope you’re correct. Frankly, the concept is a bit over my head, ( I’m pretty much a fixed rate loan kind of guy.) but I appreciate your thorough explanation. It DOES sound plausible. Thanks for your perspective.
The Story Should Be Retitle….Subprime Killed Bear Stearns….
Liar Loan,
Yes, I would have bet on Lehman failing before Bear due to their HEAVY involvement with subprime and Alt-A…they were a MUCH bigger LENDER of both than Bear ever was…they and Merrill Lynch are highly exposed directly to subprime debt….this ain’t over by a long shot yet!
As for the people you know with the Option ARM’s that can only afford the min. payment…I don’t know what to say about that! I hate to ehar stuff like that…I had a homeowner call in last week that basically was in the same situation…I told him he couldn’t refi into the same program again because A) his home’s value had gone down too much (he would have been at around 85% LTV and B) that program is dead and buried for all but the most financially stable with TONS of equity….I advised him to sell now while he still had something to walk away with…this was a loan program that when some banks started allowing 90% LTV with No Documents (No Doc is not “stated”) loans (Bear Stearns was one) it allowed some people to stay in home they had no business keeping! Luckily, from my recollection LTV’s that high for No Doc loans were only around 1 year, 2006…and ONLY for people with high FICO scores! These will wash through the system by 2011 or 2010 at the earliest…we’ll see where the rest of the market is by then…No Doc Alt-A loans not “Stated” Alt -A loans are the next shoe to drop imo…but not yet!
Larry P-
The people I know with Option ARMs qualified through Countrywide. I don’t know what the LTV qualifications were during 2005-2006 on these, but probably too high. Combine that with liberal appraisal standards, and they have a real mess on their hands.
Maybe you can answer a question for me. When the loan recasts, is it based on original appraisal, or do they get re-appraised periodically? If the answer is original appraisal, some of these loans may have 140-150% LTVs by the time they recast. Yikes…..
Kiar Loan,
When a loan recasts, all that means is that the borrower has “deferred” the max. allowable interest of the original LOAN amount( 2005 = 10%, 2006 = 15% for most lenders) and then it is amortized over the remaining term of the loan…usually what’s left from origination date from 30 years. This means that a $400,000 loan made in say…March 2005 with a 10% max. deferred interest ($40,000 is 10% of $400,000) on an MTA index loan with say, 2.65% margin might recast (go to fully amortized” by maybe….June 2008 IF the borrower ONLY paid the minimum or “Neg am” payment the entire length of the loan to that point. If the MTA (monthly Treausry average…a 12 month average of the 1 year CMT) index were at say 3.15% and the fixed margin were the 2.65%, the actual RATE on the loan would be at 5.80%. Amortized over the remaining 26.75 years or 321 months (time remaining after first 3.25 years of the loan), the FULLY amortized payment would be about $2,701.30…and as the rate droped or rose over that remaining term, the amortizatuion payment would change based on how many months you had left, the remaining balance, and the rate. The lower the rate, the lower the payment but also the more principal you pay down. That is how it works in “recast”.
The original appraisal has nothing to do with any loan after that loan has funded…there is never a re-appraisal….only the payment amount will change and the only thing that will affect that is the term, balance, time, and interest rate. So, if these folks got their loan at say 90% (horrible loan for that scenario) ltv, with an original loan of $400,000 and they deferred 10% but prop values have DROPPED 15% from the appraisal (15% of $445,000 = $66,750…so the new value would be $378,250…but the new balance would be $440,000) so they would be totally upside down. Bad loan at high ltv’s…good loan with lower LTV’s and financial plan calling for selling home OR shifting into a reverse mortgage…most people used this loan the wrong way…but even though they did, with rates as low as they are now and are headed, it will be a smaller payment per month that a conforming or FHA loan would be…in some cases hundred os dollars a month!
Hope that helps!
Larry P-
Thanks for explaining. I didn’t realize the deferral amount was based on a percentage of the loan rather than the property value.
I believe these are good loans for investors who need the minimum payment during vacancies and possibly for self-employed people who do seasonal work, such as contractors.