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I usually find Ambrose Evans-Pritchard of the Telegraph a bit excitable but this piece (via Yves Smith) on the aversion of foreign investors to buying US Treasuries struck a chord.

The other day, I listened to a New York financier bemoaning the furor in the US about investments by sovereign wealth funds in US financial institutions. His argument was that SWFs have a choice about where to invest and the US is in no position to be fussy. It needs the capital.

He went on to point out that SWFs are sister organisations to central banks and are often headed by members of the same families in Gulf and Asian countries. If the US annoyed SWFs too much, he suggested, some of the central banks that buy Treasury bonds would stop doing so, with nasty consequences for the dollar and the US economy.

I am reminded of that point by Mr Evans-Pritchard’s piece. On the face of it, it would be stupid for any investor to act on emotion rather than according to financial principles. There is no logical reason why a fuss in Congress over SWFs’ equity investments in the US should lead to foreign investors boycotting Treasuries.

But the financial world does not always work on strict logic, as behavioural economists tell us. I wonder whether my New York financier was speaking with some inside knowledge of the mood abroad?

There is one thing about being a central banker in the UK or the US. Most of the time, it sounds like a pretty dull business of looking at economic statistics and deciding whether to move interest rates a quarter of a point in either direction. Every so often, however, there is an adrenalin-filled weekend in which you get to decide whether a financial institution survives or goes under.

Last night, I reckoned the Fed had done a good job of balancing moral hazard with financial uncertainty by manoeuvring Bear into the hands of JP Morgan for a knock-down (actually negative) price and only having to stand behind $30bn of assets. That looked like a better outcome than the Bank of England had managed with Northern Rock.

In the cold light on morning, with the US markets open and Armageddon apparently postponed, I think that observation stands. But, of course, the difference between Northern Rock and Bear Stearns is that the latter is not a deposit-taking institution and the only run on the bank was from hedge fund customers withdrawing from its prime broking business. Rescuing hedge funds and other counter-parties is not the ordinary business of the Fed.

So how did the Fed do in terms of avoiding moral hazard? Let us take the parties in turn.

Continue reading "The benefits of wiping out Bear’s shareholders"

Does Bear Stearns own 383 Madison Avenue, the Manhattan building from which it operates? This question is, as John Carney and Choire Sicha point out, oddly difficult to answer.

But the answer determines whether Bear was sold for a song or actually paid JP Morgan Chase to take it over.

Bear’s building is worth at least $1.2bn and probably quite a bit more. So, if Bear owns it, then the bank it effect gave JP Morgan a net $1bn to take on its balance sheet (or some of it, since the Federal Reserve lent a helping hand).

On the other hand, if Bear does not own it, then it received $230m, valuing itself at a princely 2.5 per cent of book value. That is not a lot, but it is at least something.

JP Morgan insisted during its Sunday night conference call that Bear owns the building, but there is some confusing talk about a synthetic lease and the building being an off balance sheet asset. Still, the consensus seems to be that, if anyone owns 383 Madison, Bear does.

So what looks like a derisory price for Bear’s business is actually a negative one.

Update: Justin Fox concludes from this that the Fed handed Bear to JP Morgan on a plate.

Go back a few weeks and the idea that JP Morgan Chase would have been able to snap up Bear Stearns for $230m - a big discount to the value of its Manhattan headquarters, never mind the remainder of its business, would have been laughable. But that is what has just happened.

The reason that JP Morgan could get such a bargain deal is, of course, that Bear would have collapsed last week without the intervention of the US Federal Reserve, which gave Bear an emergency funding guarantee.

The Fed followed up on Sunday by guaranteeing funding for about $30bn of Bear’s less liquid balance sheet assets, which gave JP Morgan comfort that it can de-leverage Bear’s balance sheet without too much pain. More pain, that is, than it is pricing in with its low-ball offer.

Any time that a central bank steps in to rescue a financial institution, it had better have a good defence to those who argue that it is interfering wrongly in markets and promoting moral hazard.

Continue reading "How the Fed avoided the Northern Rock trap"

Alan Greenspan, writing in Monday’s Financial Times, says that:

The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war.

With the fire-sale of Bear Stearns adding to turmoil in many credit markets, that judgement seems fair enough. It seems a long time ago - but was only about 18 months - that Wall Street executives would muse that business could not carry on being so good indefinitely. Indeed it could not.

Readers of the Eliot Spitzer coverage on this blog may be interested to know that Ava Xi’an, one of my most prolific commenters, was interviewed by the New York Times this weekend about her life as an escort. It is illuminating.

John Quelch, the Harvard Business School marketing professor, has an interesting post on his blog about companies that defy conventional wisdom by dominating the mid-market, instead of focusing solely on the high or low ends.

Professor Quelch cites the examples of Tesco, Toyota and Charles Schwab as companies that have adopted this strategy. As he notes, Tesco and Toyota have gone into premium segments after securing the mid-market first.

Many companies now avoid the mid-market:

In business, it’s not fashionable to concentrate on midfield. Focus, we are told, is essential. You either have to be a specialist niche provider of premium-priced products tailored to a particular customer segment, or you have to shoot for scale, using low prices and volume purchasing to attract a mass market and drive down your cost structure.

Yet these companies have thrived by providing goods and services that are perceived as solid value, without having to venture into discounting. The whole post, which is worth reading, can be found here.

Here is a column I wrote for today’s Financial Times on the Bear Stearns rescue, examining why the event is so unusual and what it means for global financial markets. You can comment below.

On the Bear Stearns conference call this afternoon about its rescue by JP Morgan Chase and the Federal Reserve, Alan Schwartz, chief executive of the troubled investment bank, argued that its funding problems were due to outsiders not having distinguished between “fact and fiction”.

He seemed to mean that, if investors and lenders had paid attention to Bear’s assurance earlier this week that it did not have liquidity problems, then it would not have had liquidity problems.

Continue reading "Bear Stearns is, in fact, in trouble"

Jim Press, the former Toyota executive who is now a vice-chairman of Chrysler, made an intriguing comment in the New York Times this morning about relations between the car company and its dealers in the US.

When I first came to the company, the orientation was about wholesaling cars to the dealers as opposed to retailing cars. That change has occurred, and now we can be responsive to what out customers want.

That strikes me as one of the biggest challenges facing the incumbent Detroit companies at the moment. Not only do they make too many vehicles - and the wrong kind - for the demand, but their dealer networks are bloated and badly-structured.

Continue reading "Chrysler and the conundrum of dealers"