From The Sunday Times
May 11, 2008
Hillary Clinton’s suicidal gamble with race poison
Andrew Sullivan

From the very beginning, the premise and the promise of Barack Obama’s campaign was that it would transcend race. And last autumn the Obama team also knew this was the only way it could win.

The Clinton brand among black voters was so strong, so unbreakable, so resilient a force that even the first credible black candidate for the presidency remained stuck 20-30% behind Hillary Clinton among African-American voters. She was, after all, the wife of the “first black president”, as the author Toni Morrison called Bill.

She had almost all the black political establishment behind her. Her husband, from his days in Arkansas during the civil rights movement, had forged a deep, durable bond with black America. And Obama’s only hope as a young insurgent was in winning a surprise victory in Iowa or New Hampshire, where black votes were close to nonexistent.

A biracial man reared by one white mother and two white grandparents knew that his ability to touch and inspire white voters was his greatest strength. Especially among younger voters, it was critical. And this appeal wasn’t geared only to white audiences. I will not forget a rally over a year ago, filled with predominantly black donors and activists, when Obama recounted how a supporter greeted him at the anniversary of Martin Luther King’s march on Selma.

“That was a great celebration of African-American history,” the supporter said, to which Obama immediately responded: “No, no, no, no, no. That was not a great celebration of African-American history. That was a celebration of American history.” The postracial appeal wasn’t just about necessity. It was also Obama’s core conviction about his own political message.

And after the primaries in Iowa and New Hampshire, where Obama scored extensive white support, the Clintons realised this as well. Flummoxed by this young, charismatic pretender to their dynastic throne, they made a fateful decision: not to compete aggressively for black votes, but to push Obama into the “black candidate” box and leverage white ethnic and Hispanic support instead. And as the Clintons’ losses mounted, the hints became harder and harder to miss.

Before Super Tuesday, Clinton campaign operatives aired rumours that Obama had been a drug dealer – hint, hint – in his younger days. When Obama scored a landslide in South Carolina, Bill Clinton reminded the media that Jesse Jackson had won the state as well. He called Obama a “kid”, perilously close to calling him a “boy”, prompting the former Clinton operative Donna Brazile to say: “I tell you, as an African-American, I find his words and his tone to be very depressing.” The black civil rights icon John Lewis switched from Clinton to Obama. When Clinton told white rural voters that Obama didn’t care about “people like you”, it stung.

In the last months, the Clintons pushed the story about Jeremiah Wright (Obama’s fiery pastor) hard, but the media did all the heavy lifting. The Clintons shrewdly focused their efforts on older, white Democrats in Ohio, Pennsylvania and Indiana (the kind who had once voted for Ronald Reagan) and refused to shoot down categorically rumours that Obama was a closet Muslim, and stopped even addressing predominantly black audiences in North Carolina.

Last Thursday, Senator Clinton – dazed from a brutal setback in last Tuesday’s primaries – went even further. She told USA Today to consult an Associated Press story “that found how Senator Obama’s support among working, hard-working Americans, white Americans, is weakening again, and how whites in both states who had not completed college were supporting me”.

Yes: a candidate was explicitly arguing that she was the candidate of white Americans. No Republican would be so crude, certainly not John McCain. And that became her primary rationale for carrying on. After North Carolina, the short-term electoral costs have evaporated: West Virginia has a black population of just 3.3%, Kentucky has 7.5%, Oregon has 1.9%, Montana and South Dakota both have less than 1%. There are no black superdelegates willing to switch from Obama to Clinton at this point.

And so a strategy that was essentially telling superdelegates that a black man could not win the general election became Hillary’s last resort. In this, the Clintons were egged on by the less principled members of the Republican right.

Obama, mercifully, did not take the bait. Despite the Wright fiasco, he tried mightily not to be racially pigeonholed, as he has his entire life. His victory speech last Tuesday night was full of references to his predominantly white family from Kansas and his love of America.

It was a shrewdly adjusted message. And more interestingly, it seemed to be working – slowly. In Ohio, he won 34% of the white vote; in Pennsylvania, he won 37%; in Indiana, he won 40%. The more the Clintons attempted to polarise the voting racially, the more successful Obama was in deflecting it. His rebuke of Wright probably helped. But also the profound media attention.

The more working-class white voters actually saw and heard of him, the more their fears of the unknown seemed to subside. He won only 27% of white voters without college degrees in Ohio; he won 29% in Pennsylvania and 34% of them in Indiana. And when you look at age, the effect is even more striking. In North Carolina, a southern state, Obama won 57% of white voters under 30 and 45% of white voters under 40.

In the Clintons’ morphing into a crude version of racially angry Reagan Democrats, you can see an almost Shakespearian tragedy. Bill Clinton has a long and admirable record in civil rights; and was on the right side of the struggle in the South in his youth. He has an effortless rapport with black Americans, and they were his core final constituency of support in the darkest days of impeachment.

But like any southerner, Clinton also knew how to navigate racial resentment. In 1992, he interrupted the primary campaign to return to Arkansas to sign the death warrant of a mentally retarded black man. He made a point of attacking the radical black hip hop artist Sister Souljah in his first campaign. He signed off on welfare reform. His genius was in holding together a coalition that included enough Reagan Democrats to win, while never losing wide and deep black support.

But he never ran against a black candidate and neither did his wife. They are used to loving and supporting minorities – as long as the minorities know their place and see the Clintons as the instrument of their salvation. Obama broke that dependency and that relationship. And that was why the Clintons had to do all they could to destroy and belittle and besmirch him.

But in that venture the Clintons are destroying themselves and their legacy and their capacity to bridge the very gaps they now must widen to stay in the race. It is a Clinton tragedy – and one that most Americans seem slowly, cautiously but palpably determined not to make their own.

Boris Johnson CON 1,168,738
Ken Livingstone LAB 1,028,966

Seriously! What were they thinking? Ken Livingstone was a bit arrogant at times, but he was a damn good Mayor these last 8 years and played a key role in helping London to become one of the "greatest cities of the 21st Century." He willed be missed.

Peter Brookes cartoon via The Times.

Banks must come clean, says EU commissioner
David Gow in Brussels guardian.co.uk
Wednesday April 16 2008

The only way to restore confidence in global financial markets is for banks to come completely clean about their exposures, Charlie McCreevy, EU internal market commissioner, said today.

McCreevy told guardian.co.uk: "There's no commercial paper market in Europe and it appears that last week's rate cut by the Bank of England made no difference at all because there's no confidence at all."

"What we need is a situation where every financial institution puts all its cards on the table so everybody can see clearly what they have and how they have valued things - and over a period of time that's the only way to put confidence back into the world."

The Irish commissioner also highlighted the time it would take for banks to regain consumer and regulatory confidence. "This excessiveness built up over a long, long number of years and didn't happen just in the last six months. It would be lovely to think that would be finished in a couple of months but it will only wash itself out over a period of time."

Kurer admitted to the Financial Times that it could take three years to restore UBS's battered reputation.

McCreevy, who oversees the European banking sector, has been reluctant to endorse tougher regulation in the wake of the sub-prime crisis but said changes would come in the medium to long term. "But no regulatory change will restore confidence overnight because if that were the case it would have been done."

But he also indicated he would bring forward proposals for stricter oversight of credit rating agencies later next month and planned to go ahead with his proposals for "colleges of supervisors" to watch over the EU's 46 cross-border banks, with one national regulator being assigned the role of lead supervisor. The idea is canvassed in proposals to beef up the EU's capital requirements directive published today and due to be finalised in October.

On rating agencies he said: "To be fair, some agencies have put forward their own proposals ... There will be changes, either voluntary or enforced, and I prefer voluntary but if it needs regulatory change I will not be afraid to do it."

As for the tax rebate mentioned in the article, well I recently got a letter from the IRS indicating that I'll find out in May if I'm entitled to the payment. I'm assuming every taxpayer from last year got this same letter. What a complete waste!

Recession unlikely if US economy gets through next two crucial months

From The Times

April 7, 2008

Anatole Kaletsky: Economic view


After last Friday's announcement of the third consecutive drop in US employment figures, following hot on the heels of Ben Bernanke's admission that the American economy is already in recession - or more precisely that “a recession is possible ... there's a chance that for the first half as a whole, there might be a slight contraction” - I am probably the only economist left in the world who still believes that a US recession is likely to be avoided.

Obviously, I drew some encouragement for this view from the surprisingly decent ISM index, which triggered the huge rally in global stock markets on Tuesday (with some help from UBS and Lehman and the news of further regulatory moves to ease the credit crunch).

But the monthly employment figures are widely regarded as the real litmus test for the recession/soft landing debate.

So does Friday's 80,000 employment decline mean that the US is in recession? And does it matter anyway whether the technical definition of a recession is or is not satisfied? The answer to the first question is No and the answer to the second is Yes.

More important, other short-term indicators, such as the purchasing managers' indices, the industrial production figures and the quarterly consumption statistics (up a very decent 2.8 per cent in the fourth quarter), would be confirming the signs of a generalised downturn.

Instead, all these figures are still consistent with a mid-cycle slowdown similar to the ones that the American economy experienced in 1995-96 and 1986-87.

But does the distinction between a recession and a mid-cycle slowdown really matter anyway, given that the US is obviously suffering from one of the worst housing and financial crises in living memory - a fact that nobody (including me) can any longer deny? Actually, this distinction does matter quite a lot.

The difference between a recession and a slowdown is not just a matter of semantics, because there is a world of difference between a dislocation confined to one or two parts of the economy - say, housing and mortgage lending - and a generalised economic decline in which the weakness of demand in a few sectors creates a self-sustaining downward spiral of falling employment and incomes, weakening consumption and investment and further declines in activity across the economy as a whole.

It is the self-reinforcing and contagious nature of recessions that makes them different - and much more dangerous - than the sector-specific slowdowns that occur in market economies all the time.

This is why the National Bureau of Economic Research defines recessions in a very specific way: “A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income and wholesale-retail trade.

A recession influences the economy broadly and is not confined to one sector. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.”

This definition of recession is not just a matter of semantics. The broad-based and lasting nature of the economic decline is absolutely essential because a sector-specific or transitory slowdown is not sufficient to counteract the natural expansionary momentum of a capitalist economy.

This, incidentally, is why comments frequently seen in the media about a “housing recession” or “manufacturing recession” or “retail recession” or “export recession” are always technically inaccurate.

Problems affecting only one or two parts of the economy are a continuous feature of any market economy with its constant variations in demand and supply for particular products and services.

Such fluctuations can be very painful and disruptive for the sectors involved, but at the macroeconomic level they rarely do much serious harm.

But surely the financial and housing crises in America are now so severe that there can be no hope of avoiding the sort of self-sustaining downward spiral described above?

Apart from the lack of statistical evidence (so far) of a recession already mentioned, there are three other reasons for continuing to resist the consensus view.

First, the occurrence of a severe financial crisis is not, in itself, a sufficient reason for expecting a recession.

In fact, there have been severe financial crises that did not lead to recessions in the middle of every previous economic cycle: for example, the Latin American defaults of 1984, the stock market crash of 1987 and the savings and loan and housing collapse of 1988-89 and the Mexican peso, Asian and Russian crises of 1995-98.

A second reason why an American recession will probably be avoided - or, if it does occur, will be extremely brief - is that powerful expansionary forces are about to come into play in the US economy in the months ahead.

From the second week of May onwards, every American household will receive tax rebate cheques of between $600 (£300) and $2,000. As a result, personal disposable income will grow at an annualised rate of well over 10 per cent in the third quarter of this year.

Even if only half this money is spent, US consumption will therefore be guaranteed to grow by at least 3 per cent in the third and fourth quarters. And beyond that, the lagged effects of the Fed's recent monetary easing will kick in from the start of 2009.

This is why Mr Bernanke could afford to state so confidently on Wednesday that the US economy would return to trend or above-trend growth by early 2009.

Thirdly, there is the US housing market.

Financial markets imply a further decline of about 20 per cent in US house prices, but financial markets are sometimes wrong (as must surely be obvious by now).

US house prices have already fallen almost 15 per cent from their peak and as a result property in America is no longer expensive in relation to average incomes.

In fact, the ratio of average house prices to personal disposable incomes is now 5 per cent below its 40-year average and only 9 per cent above the record low it reached in 1990 and again in 1995.

Given that disposable incomes are rising at about 6 per cent annually, the housing valuations would fall to a new all-time low within 18 months or so, even if there were no further decline in house prices from now on.

And the last time American homes were as cheap as they are today in relation to disposable incomes, interest rates were much higher.

For example, in 1990 and 1995, when house price to income ratios were last at about present levels, standard 30-year US mortgage rates were 10 per cent and 8.5 per cent respectively.

Today, the corresponding rate is 6 per cent. As a result, affordability indices that take both interest rates and incomes into account show US property to be very good value already.

For example, the National Association of Realtors' composite affordability index stands at 135, compared with a record high of 140.8 reached in 1999, at the start of the recent housing boom.

After a few more months of falling house prices or rising disposable incomes, American housing will start to look irresistibly cheap.

In sum, if America can get through the next month or two without sinking into a serious recession, the danger should be past by the second half of this year.

anatole.kaletsky@thetimes.co.uk

Economic Scene
Can’t Grasp Credit Crisis? Join the Club
By DAVID LEONHARDT, The New York Times, Published: March 19, 2008

Raise your hand if you don’t quite understand this whole financial crisis.

It has been going on for seven months now, and many people probably feel as if they should understand it. But they don’t, not really. The part about the housing crash seems simple enough. With banks whispering sweet encouragement, people bought homes they couldn’t afford, and now they are falling behind on their mortgages.

But the overwhelming majority of homeowners are doing just fine. So how is it that a mess concentrated in one part of the mortgage business — subprime loans — has frozen the credit markets, sent stock markets gyrating, caused the collapse of Bear Stearns, left the economy on the brink of the worst recession in a generation and forced the Federal Reserve to take its boldest action since the Depression?

I’m here to urge you not to feel sheepish. This may not be entirely comforting, but your confusion is shared by many people who are in the middle of the crisis.

“We’re exposing parts of the capital markets that most of us had never heard of,” Ethan Harris, a top Lehman Brothers economist, said last week. Robert Rubin, the former Treasury secretary and current Citigroup executive, has said that he hadn’t heard of “liquidity puts,” an obscure kind of financial contract, until they started causing big problems for Citigroup.

I spent a good part of the last few days calling people on Wall Street and in the government to ask one question, “Can you try to explain this to me?” When they finished, I often had a highly sophisticated follow-up question: “Can you try again?”

I emerged thinking that all the uncertainty has created a panic that is partly unfounded. That said, the crisis isn’t close to ending, either. Ben Bernanke, the Federal Reserve chairman, won’t be able to wave a magic wand and make everything better, no matter how many more times he cuts rates. As Mr. Bernanke himself has suggested, the only thing that will end the crisis is the end of the housing bust.

It really started in 1998, when large numbers of people decided that real estate, which still hadn’t recovered from the early 1990s slump, had become a bargain. At the same time, Wall Street was making it easier for buyers to get loans. It was transforming the mortgage business from a local one, centered around banks, to a global one, in which investors from almost anywhere could pool money to lend.

The new competition brought down mortgage fees and spurred some useful innovation. Why, after all, should someone who knows that she’s going to move after just a few years have no choice but to take out a 30-year fixed-rate mortgage?

As is often the case with innovations, though, there was soon too much of a good thing. Those same global investors, flush with cash from Asia’s boom or rising oil prices, demanded good returns. Wall Street had an answer: subprime mortgages.

Because these loans go to people stretching to afford a house, they come with higher interest rates — even if they’re disguised by low initial rates — and thus higher returns. The mortgages were then sliced into pieces and bundled into investments, often known as collateralized debt obligations, or C.D.O.’s (a term that appeared in this newspaper only three times before 2005, but almost every week since last summer). Once bundled, different types of mortgages could be sold to different groups of investors.

Investors then goosed their returns through leverage, the oldest strategy around. They made $100 million bets with only $1 million of their own money and $99 million in debt. If the value of the investment rose to just $101 million, the investors would double their money. Home buyers did the same thing, by putting little money down on new houses, notes Mark Zandi of Moody’s Economy.com. The Fed under Alan Greenspan helped make it all possible, sharply reducing interest rates, to prevent a double-dip recession after the technology bust of 2000, and then keeping them low for several years.

All these investments, of course, were highly risky. Higher returns almost always come with greater risk. But people — by “people,” I’m referring here to Mr. Greenspan, Mr. Bernanke, the top executives of almost every Wall Street firm and a majority of American homeowners — decided that the usual rules didn’t apply because home prices nationwide had never fallen before. Based on that idea, prices rose ever higher — so high, says Robert Barbera of ITG, an investment firm, that they were destined to fall. It was a self-defeating prophecy.

And it largely explains why the mortgage mess has had such ripple effects. The American home seemed like such a sure bet that a huge portion of the global financial system ended up owning a piece of it. Last summer, many policy makers were hoping that the crisis wouldn’t spread to traditional banks, like Citibank, because they had sold off the underlying mortgages to investors. But it turned out that many banks had also sold complex insurance policies on the mortgage debt. That left them on the hook when homeowners who had taken out a wishful-thinking mortgage could no longer get out of it by flipping their house for a profit.

Many of these bets were not huge, but were so highly leveraged that any losses became magnified. If that $100 million investment I described above were to lose just $1 million of its value, the investor who put up only $1 million would lose everything. That’s why a hedge fund associated with the prestigious Carlyle Group collapsed last week.

This toxic combination — the ubiquity of bad investments and their potential to mushroom — has shocked Wall Street into a state of deep conservatism. The soundness of any investment firm depends largely on other firms having confidence that it has real assets standing behind its bets. So firms are now hoarding cash instead of lending it, until they understand how bad the housing crash will become and how exposed to it they are. Any institution that seems to have a high-risk portfolio, regardless of whether it has enough assets to support the portfolio, faces the double whammy of investors demanding their money back and lenders shutting the door in their face. Goodbye, Bear Stearns.

The conservatism has gone so far that it’s affecting many solid would-be borrowers, which, in turn, is hurting the broader economy and aggravating Wall Streets fears. A recession could cause credit card loans and other forms of debt, some of which were also based on overexuberance, to start going bad as well.

Many economists, on the right and the left, now argue that the only solution is for the federal government to step in and buy some of the unwanted debt, as the Fed began doing last weekend. This is called a bailout, and there is no doubt that giving a handout to Wall Street lenders or foolish home buyers — as opposed to, say, laid-off factory workers — is deeply distasteful. At this point, though, the alternative may be worse.

Bubbles lead to busts. Busts lead to panics. And panics can lead to long, deep economic downturns, which is why the Fed has been taking unprecedented actions to restore confidence.

“You say, my goodness, how could subprime mortgage loans take out the whole global financial system?” Mr. Zandi said. “That’s how.”

Thus, for those of you in London, a good book to read is, All you need to know about the city: Who does what and why in London's financial markets by Christopher Stoakes. I wouldn’t say that it is riveting, but it is written in plain conversational English and helps to demystify the city so that even novices like myself can start to understand what the heck is going on and just how everything connects.

HBOS: Malicious traders in the City try to topple the Halifax bank
Christine Seib, From The Times, March 20, 2008

Stock market manipulators yesterday tried to bring down one of Britain’s biggest banks by spreading false rumours through the City.

The Bank of England was forced to issue an unprecedented denial that HBOS was in trouble.

The Financial Services Authority (FSA) said that it would pursue traders guilty of “market abuse” by spreading untrue claims that banks were on the brink of collapse.

The authorities believe that the fear and uncertainty in financial markets are allowing unscrupulous traders to make multimillion-pound profits by whipping up hysteria about the stability of big banks.

It is feared that short-sellers — investors who use falling share prices to make money — were deliberately spooking the market in order to profit from plunging stocks in a practice called trash ’n’ cash.

Rumours that the American investment bank Bear Stearns was short of cash contributed to its near-collapse last week after its lenders were scared into demanding that it repay them immediately.

The warning to speculators came as it emerged that the American financial watchdog was investigating similar activity in the trading of shares of Bear Stearns and Lehman Brothers, another US investment bank heavily exposed to risky American mortgage business.

Andy Hornby, the HBOS chief executive, vehemently denied that the bank needed an emergency loan. He said: “It’s categorically untrue that we’ve approached any central bank for funding.”

Sally Dewar, the FSA’s managing director of wholesale markets, said that a series of “completely unfounded rumours about UK financial institutions in the London market” had been spread over the past few days, usually accompanied by short-selling of the banks’ stocks.

The FSA can listen to office telephone calls and investigate suspicious transactions but has never brought a trash ’n’ cash prosecution.HBOS shares closed 7 per cent down at 446.25p.

And having purchased a home just last September, I am concerned about getting into negative equity. However, I do take comfort in the fact that my deposit was 10% and prices for my area seem to be holding steady. Case in point, a similar house on my street went up for sale this week and the seller egged on by the estate agent is asking for approximately £60K more than I paid. Granted no two properties are the same, but I find it hard to believe that they’ll achieve that price point in this market. Of course only time will tell.

I also take comfort as had I waited to get on the property ladder, I probably would not have the same buying power, as while prices may have dipped, interest rates have gone up -- so monthly repayments would be higher. Also, banks have tightened their lending criteria and some are even asking for a 25% deposit to be eligible for the best mortgage deals. That’s just outrageous when you consider that the entry point for a two bedroom place at the lower end on the London property market is about £250K. At that price point, a buyer would have to come up with £62K for the deposit plus a further £5K-£7K to cover stamp duty, attorney fees and other cost associated with the purchase. At these levels, the barriers to entry are higher, especially for first time buyers who experts all agree are the lifeblood of the property market. Particularly as, if people can't sell on their starter homes, they can't move up the ladder which in turn means that everything grinds to a halt.

So I am going to try my best to ignore all this doom and gloom talk. Especially as even if I move on from the UK, the plan is to hold on to this property for many years to come. Plus once prices start to fall, unless you absolutely have to sell, the best strategy in these cases is to do nothing. Otherwise, selling will just crystallise any potential loss -- which would not be a good thing at ALL!

That said, I can't believe that Bear Stearns was sold to JP Morgan Chase for $240million. Even when you factor in the two failed hedge funds, the company had significant assets which apparently could be sold off for least $7.7 billion. However, I suppose timing is everything and Bear Stearns simply didn't have that on their side --not when other financial institutions refused to do business with them. So bad for Bear Stearns, but really good for Jamie Dimon and JP Morgan Chase -- especially, since the amount pledge by the Federal Bank of New York to back the Bear Stearns assets is $30 billion+.

All of this just makes you wonder, could a bailout by the US government of sub prime homeowners who kicked off this whole crisis be far behind? It seems only fair.

JPMorgan Surges After Striking Deal for Bear Stearns (Update1)

By Yalman Onaran

March 17 (Bloomberg) -- JPMorgan Chase & Co. surged in New York trading after striking a deal backed by the Federal Reserve to buy Bear Stearns Cos. for $2 a share, 90 percent less than the 85-year old firm's market value last week.

JPMorgan, the third-biggest U.S. bank by assets, rose $3.86, or 11 percent, to $40.44 at 4 p.m. in New York Stock Exchange composite trading while the Amex Securities Broker/Dealer Index fell 10 percent. The bank said yesterday it will pay about $240 million for the fifth-largest securities firm in a transaction in which the Fed will guarantee as much as $30 billion of Bear Stearns's ``less-liquid'' assets.

JPMorgan Chief Executive Officer Jamie Dimon bought Bear Stearns, once the biggest underwriter of U.S. mortgage bonds, for less than the value of its real estate after clients, alarmed by speculation about a cash shortage, withdrew $17 billion in two days. Faced with the prospect of bankruptcy, Bear Stearns CEO Alan Schwartz was forced to accept the deal less than five days after he assured investors that the company's ``liquidity cushion'' was sufficient to weather credit-market losses.

``Dimon got the best side of the deal,'' said Peter Sorrentino, a portfolio manager at Huntington Asset Advisors in Cincinnati, which oversees $15 billion including JPMorgan shares. ``He got a motivated seller and a lot of people willing to facilitate the deal for him. It's not like he had to put a lot of JPMorgan's capital at risk.''

Shareholders of Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the New York-based companies said in a statement late yesterday.

The Fed announced minutes later that it had cut the rate on direct loans to banks, moving to stave off a broader market panic with the first emergency weekend action in almost three decades.

Sanford C. Bernstein analyst Brad Hintz estimated that the breakup value of Bear Stearns was at least $7.7 billion. Even taking into account JPMorgan's estimated $6 billion of merger costs, the price paid for Bear Stearns is a ``tremendous bargain for JPMorgan shareholders,'' Hintz said in a report today.

``Bear Stearns shareholders are at the short end of the stick,'' said David Hendler, an analyst at New York-based CreditSights Inc. ``This was done in the market's best interests. They had to get this done or they would risk runs on other companies.''

Stock Swap

JPMorgan will give investors 0.05473 shares of its common stock for every share of Bear Stearns they own. Including shares in an employee-incentive plan, the purchase price may reach $270 million. JPMorgan, whose shares closed at $36.54 in New York trading on March 14, will get funding for the transaction from the Fed.

Bear Stearns, which closed at $30 a share on March 14, traded at $4.88 at 3:57 p.m. in New York trading. The company last night cancelled its first-quarter earnings release, which had been scheduled for today.

``Jamie Dimon's done a great deal because the Federal Reserve is paying for it,'' said investor Jim Rogers, who co- founded the Quantum Hedge Fund with George Soros in the 1970s, during an interview with Bloomberg Television.

JPMorgan ``stands behind Bear Stearns,'' Dimon, 52, said in yesterday's statement. ``Bear Stearns's clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns's counterparty risk,'' he said.

`Serious Crisis'

Without a resolution this weekend, Bear Stearns's situation would have continued to deteriorate when markets resumed trading today, according to analysts and investors. Yet the value placed on the company, whose shares closed as high as $158.39 last April, raised questions about share prices for the rest of Wall Street.

``This is a serious crisis,'' said David Goldman, portfolio strategist at Asteri Capital in New York and former head of debt research at Bank of America Corp., the biggest U.S. bank by market value.

``For Bear's stock price to go to effectively zero, contrary to market expectations, even at the close on Friday, tells us that something is systemically very wrong and we're at a very dangerous moment,'' Goldman said. If a sale hadn't been announced, Bear Stearns, which employs about 14,000 people, probably couldn't open its doors for trading, he said.

Founded in 1923, Bear Stearns survived the Great Depression and first sold shares to the public in 1985, under then-CEO Alan ``Ace'' Greenberg. Today's fire-sale to JPMorgan caps an eight- month slide in the company's fortunes that began last July with the collapse of two of its hedge funds, which invested in securities linked to subprime mortgages.

Reduced Fortunes

Those failures caused investors to doubt the value of any asset linked to the mortgage market, Bear Stearns's biggest business. The collapse of Bear Stearns ranks along with Drexel Burnham Lambert Inc. as the biggest in Wall Street history.

``The past week has been an incredibly difficult time,'' Schwartz, 58, said in yesterday's statement. ``This transaction represents the best outcome for all of our constituencies based upon the current circumstances.''

Schwartz, an executive with more than 30 years of experience at Bear Stearns, became CEO less than three months ago, as the hand-picked choice of his predecessor, James ``Jimmy'' Cayne, 74.

Cayne, who remains non-executive chairman, stepped down after reporting an $854 million fourth-quarter loss, the first in the company's history. He was at a bridge tournament in Detroit last week as speculation about the firm's cash position pummeled the stock.

Citic Scraps Deal

Cayne ranked as Wall Street's richest CEO, with $1.3 billion of assets, according to Forbes magazine's 2007 billionaire survey. His stake in the firm approached $1 billion last year when the shares reached their peak price of $170. Under terms of the JPMorgan takeover, his holdings are now worth about $12 million.

Joseph Lewis, Bear Stearns's second-largest shareholder, has spent more than $1 billion on the firm's stock since September, paying as much as $150 a share. Lewis, a 71-year-old billionaire, wasn't planning to reduce his stake, a person close to him said March 11. He's now entitled to $22 million of JPMorgan shares.

Beijing-based Citic Securities Co. canceled a proposed $1 billion investment in Bear Stearns, said Kong Dan, chairman of Citic Group, the company's parent, in an interview today. Citic had agreed in October to buy a stake in Bear Stearns when the company's stock was trading at more than $117.

45-Story Building

``To see a situation involving a bailout lead to shareholders getting pretty much wiped out is a pretty significant event for the market,'' said Ben Wallace, who helps manage $800 million, including stock in JPMorgan, for Grimes & Co. in Westborough, Massachusetts. ``It's going to raise concerns'' about the value of financial stocks, he said.

The Fed's attempt to rescue Bear Stearns last week with a cash infusion failed to avert a crisis of confidence among the company's customers and shareholders, who drove the stock down a record 47 percent on March 14, when the emergency funding was announced.

Bear Stearns's profit exceeded $2 billion in 2006, yet the price JPMorgan is paying is about one quarter the value of the securities firm's headquarters building in midtown Manhattan. The 1.2 million-square-foot, 45-story structure built in 2001 is worth about $1.2 billion, based on the average $1,000 per- square-foot that comparable office space in the city is currently fetching.

Counterparty Risk

JPMorgan Chief Financial Officer Mike Cavanagh said on a conference call after the sale was announced that the bank was comfortable with the values Bear Stearns had assigned to the mortgage-related assets on its books. Asked to explain why JPMorgan was paying about $2 a share for a company with a book value -- assets minus liabilities -- of $84 a share, Cavanagh said the price reflected the risk the firm was taking.

It ``gives us the flexibility and margin of error that's appropriate given the speed at which the transaction came together,'' he said. JPMorgan said it was confident Bear Stearns shareholders would approve the sale.

``If you're buying equity for free and the liabilities are pretty well capped, it sounds like it's good for JPMorgan shareholders,'' Wallace said. ``The thing that everybody's been worried about has been the counterparty risk, and if this gives people more confidence, that will be good for the markets.''

`A Lot of Value'

Minutes after the deal was announced, the Fed cut the so- called discount rate by a quarter of a percentage point to 3.25 percent. The Fed also will lend to the 20 firms that buy Treasury securities directly from it.

Bear Stearns's prime brokerage unit, which provides loans and processes trades for hedge funds, generated $1.2 billion in revenue last year. That business is probably the only piece left of the company with value after the mortgage market collapsed last year, analysts said.

The prime brokerage was the third-largest behind Goldman Sachs Group Inc. and Morgan Stanley as of April 2007, according to Sanford C. Bernstein & Co. About a sixth of the firm's income came from packaging and trading mortgage bonds, a market that has been almost completely frozen since July during the biggest housing slump in a quarter century.

``As bad as things are at Bear Stearns, this is still a franchise with a lot of value, particularly the prime brokerage business, which is what JPMorgan is after,'' said William Fitzpatrick, who helps oversee $1.6 billion at Racine, Wisconsin-based Optique Capital Management, including JPMorgan shares. ``That's the crown jewel, and that would fit into JPMorgan's business extremely well.''

Paulson Involved

Dimon's New York-based company has suffered fewer losses than rivals during the credit-market contraction, which has prompted $195 billion of writedowns and losses by Wall Street's biggest banks and securities firms.

JPMorgan has posted $3.7 billion of writedowns, a fraction of the $22.4 billion reported by New York-based Citigroup Inc., the third-biggest U.S. bank by market value.

Treasury Secretary Henry Paulson defended the Fed's bailout yesterday, saying policy makers will do whatever is needed to prevent disruptions in financial markets from hurting the economy. Paulson said he was involved with the discussions on Bear Stearns's future this weekend, without elaborating.

``There's always a decision to be made to say what's best for the stability of the marketplace, the orderliness of the marketplace,'' Paulson said. ``I think we made the right decision.''

Amaranth Takeover

When Bear Stearns invited potential buyers for detailed presentations by department chiefs, only JPMorgan and private equity firm J.C. Flowers & Co. showed up, according to people familiar with the talks.

Other potential buyers, such as Royal Bank of Scotland Group Plc and HSBC Holdings Plc, which had expressed interest in the past, didn't send representatives.

Bear Stearns has offices in cities including London, Tokyo, Hong Kong, Beijing, Shanghai, Singapore, Milan and Sao Paulo, according to its Web site.

JPMorgan's participation in the bailout follows a long tradition at the bank of stepping in to rescue financial markets from crisis, according to Charles Geisst, the author of ``100 Years on Wall Street.''

The bank has also profited from its intervention. JPMorgan got at least $725 million of revenue for taking on half the energy trades from collapsed hedge fund Amaranth Advisors LLC in 2006.

UBS to Northern Rock

The first signs of the deterioration in the U.S. mortgage market emerged in February 2007 when HSBC Holdings Plc, Europe's biggest bank, boosted the amount of money it sets aside to cover loan losses as a mix of rising interest rates and falling house prices made it harder for Americans to repay their home loans.

Three months later, UBS AG closed John Costas's Dillon Read Capital Management unit after losses in the U.S. mortgage market. Bear Stearns followed in June, when it led a $3.2 billion bailout of one of its hedge funds after creditors started seizing assets and investors demanded their money back. BNP Paribas SA, France's biggest bank, halted withdrawals from three funds in August.

Northern Rock Plc sought emergency funding from the Bank of England in September in the biggest bailout of a British lender in 30 years. Federal Reserve Chairman Ben S. Bernanke stepped up efforts to keep the strains in financial markets from spiraling into a full-blown meltdown by cutting interest rates five times and pumping cash into the banking system.

Carlyle, Peloton

Still, banks' losses continued to mount. Citigroup Chief Executive Officer Charles Prince and Merrill Lynch & Co. CEO Stan O'Neal both quit after the two banks posted record writedowns. In Europe, Societe Generale SA of Paris and Zurich- based UBS wrote down $16 billion of assets between them. In all, 45 banks reported $195 billion of asset writedowns and losses linked to the mortgage meltdown.

Wall Street responded by raising borrowing rates and demanding extra collateral for loans of hedge fund clients, themselves already nursing losses on the same mortgage securities. Carlyle Group's mortgage bond fund collapsed this month after lenders boosted margin calls. London-based Peloton Partners LLP liquidated its ABS hedge fund after ``severe'' losses on mortgage-backed debt.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: March 17, 2008 16:02 EDT

Fed leads Bear Stearns rescue

By Francesco Guerrera and Ben White in New York, and Krishna Guha in Washington

Financial Times, Published: March 14 2008 14:05 | Last updated: March 14 2008 23:21

The credit crisis on Friday engulfed one of Wall Street’s most important investment banks as the Federal Reserve and JPMorgan Chase combined to provide emergency finance for 85-year-old Bear Stearns and prevent further upheaval in global markets.

The decision by the monetary authorities to throw a temporary lifeline to Bear followed a night of deliberations involving regulators, led by Timothy Geithner, president of the New York Fed, and came after Bear’s shares plunged and its access to overnight funding dramatically diminished. It is likely to pave the way for a sale or liquidation of the company in the coming weeks. However, people close to the situation said Bear was also talking to strategic investors about a capital injection.

The rescue marked the first time in four decades that the US central bank has agreed to provide emergency finance to any financial institution other than a traditional commercial bank.

Fed officials told the Financial Times that it acted because of the systemic risks involved in the potential sudden failure of the fifth-biggest US investment bank at a moment of extreme fragility in the markets.

Top 10 investors in Bear Stearns Rank Investor
1 Barron Hanley Mewhinny
2 Joseph Lewis
3 Morgan Stanley
4 James Cayne
5 Legg Mason Capital Management
6 Private Capital Management
7 Barclays Global Investors
8 State Street
9 Vanguard Group
10 Janus Capital Management

The crisis at Bear, which has brought forward the announcement of first-quarter results to Monday, left some of its largest shareholders with sizeable losses.

Joseph Lewis, a UK-born billionaire who had been building a large stake in Bear, is estimated to have lost about $1bn on his investment since the summer. Jimmy Cayne, Bear’s chairman and former chief executive, is believed to have shouldered paper losses of more than $800m.

Bear on Friday said its liquidity position had “significantly deteriorated” and that it would access the Fed’s emergency finance facility – known as the discount window – indirectly through an arrangement with JPMorgan. The Fed took on the credit risk involved in the loans, which are secured against collateral. As an investment bank, Bear does not have access to the window, which is only open to commercial banks, so JPMorgan will act as a go-between.

The move marks a dramatic extension of the Fed’s role of lender of last resort for the financial system but Fed officials stressed there was no policy to provide emergency liquidity to investment banks in general.

Alan Schwartz, Bear’s chief executive, said the investment bank had fallen victim of a crisis of confidence in which counterparties in its core fixed-income markets were no longer willing to provide financing given widespread rumours that Bear could fail. On Wednesday, Mr Schwartz had told CNBC that the bank’s balance sheet had “not weakened at all”. On Friday he said that demands for cash had accelerated on Thursday.

Mr Schwartz said Bear would continue to work with advisers at Lazard to pursue strategic transactions that would protect customers and counterparties and maximise shareholder value.

Alternatives include a sale of the bank as a whole or in parts. JPMorgan is viewed as a potential buyer of pieces of Bear including its prime brokerage and asset management businesses.

Additional reporting by Michael Mackenzie and Anuj Gangahar

Copyright The Financial Times Limited 2008

At the beginning of the month I handed in my resignation at work. This wasn’t the easiest thing in the world as I really like the people I work with but after 5 ½ years it was definitely time to move on. Mainly as there are things I wish to achieve personally and professionally and after serious reflection, came to the realisation that this required moving to pastures new.

I had hoped that I would be immediately sent on garden leave, however, as I wasn't going to work for a competitor, I was required to serve out the one month notice per the terms of my contact. I kid you not folks, a month! Thankfully, I had already booked vacation for what would have been my last week of work. Thus I only had to put in place a coping strategy for three weeks.

For the first two weeks, it was almost business as usual which was most annoying. Don’t get me wrong, I wanted to do all that I could to help the business before I left but once I’d given notice I was emotionally checked out. So I switched tactic on the third week and focused on putting together a 26 page transition document.

During the third week, there was a bit of drama that was just surreal. The CEO and Chairman of the Board for my then employer’s parent company were forced out. While I won’t go into great detail as the company is listed on the London Stock Exchange, lets just say that when they realised they could no longer hold on to power, the troops were gathered for a champagne celebration! This wasn’t given by the outside investors who had instigated this coup, but by the CEO and Chairman who jumped on the boardroom table and gave a rousing speech about their achievements over the last 8+ years.

Leaving all that drama behind on the 21st February, I spent the next week entertaining Racquetball Guy here in London. For those of you who have read my blog for sometime, I’m sure this will come as a surprise. Our relationship fizzled out when I left Chicago for London and I wrote some not so nice things about him. Mainly because I was angry as for a while he stopped talking to me. Since I couldn't get him out of my head, I never stopped trying and we started seriously talking again in January. Will things work out this second time? I don’t know. I want to be optimistic but we are oceans apart and without a clear roadmap it will be quite the challenge. Despite all that, the romantic in me is hoping for the happily ever after. However, if that doesn’t happen, maybe this time I’ll get proper closure.

In the meantime, I am looking forward to starting my new job on Monday. These last two weeks off have been great, but I’m ready to get back in the thick of things!

Video found via Crunk + Disorderly.

Yeah it sucks for the shareholders, but had the government not propped up the bank with £55B in loans and guarantees, the bank would have gone under months ago. Their business plan of relying on cheap loans from other financial institutions left then overly exposed when the global credit crunch hit! These loans simply became too expensive. Thus the shareholders have no one to blame but the reckless executives and the Financial Services Authority who failed to provide appropriate oversight.

So long term, while the bank needs to return to the private sector, nationalisation is currently the most appropriate action to protect the taxpayers investment.

Chancellor to nationalise Northern Rock

Dominic Walsh, From Times Online, February 17, 2008

The Chancellor Alistair Darling announced today that Northern Rock is to be nationalised after deciding it was the best way to safeguard the £55 billion of taxpayers' money pledged in loans and guarantees.

Mr Darling decided that neither of the two remaining private sector bids to buy the troubled bank delivered “sufficient value for money to the taxpayer”.

Shares of Northern Rock will be suspended on the London Stock Exchange tomorrow morning and legislation will be passed to allow the Govenment to take it into temporary public ownership.

Mr Darling said that the level of compensation to Northern Rock shareholders, which analysts expect to be minimal, would be determined by an “independent valuer” who had yet to be appointed.

The news was announced at a hastily convened press conference at the Treasury this afternoon.

He refused to be drawn on what 'temporary' meant, insisting only: "We will transfer it back into the public sector when it is right to do so."

He excused the Sunday afternoon announcement, saying: "It is necessary to make a formal announcement before the markets open tomorrow morning."

Ron Sandler, the City grandee who led the rescue of Lloyd's of London from the threat of collapse, will become chairman of Northern Rock. At the press conference, he said that he would travel to the bank's headquarters in Newcastle tomorrow afternoon to see how the fortunes of the bank could be turned round.

He added that he was looking forward to the “exciting new role”, but reiterated that he saw his job as a “transitional” one. He said he saw his main task as being to return the Rock to being a “profitable and vibrant” bank.

Branches of Northern Rock will be open for business as usual tomorrow, the Chancellor stressed, and borrowers and savers will not be affected by the move. He said he was confident that every penny of taxpayers' money sunk into the troubled bank would be recouped.

Today's decision has come as a disappointment to Sir Richard Branson’s Virgin Group and the Northern Rock management team, who had both been working on bids up until the Chancellor’s decision today.

Both remaining bidders had been warned by the Treasury last week that they needed to improve their offers, because neither offered taxpayers a good enough deal.

Mr Darling said he was “grateful to the bidders for their work over many months” in formulating offers, but, after consulting with the government's financial advisers, Goldman Sachs, he had concluded that neither was in the best interests of taxpayers.

“I’ve always said I wanted to protect taxpayers’ interest,” he said, adding that under nationalisation the subsidy provided by the Treasury would be repaid in full.

He said that Northern Rock's problems stemmed from "a board that had a particular financial model which, when the markets became difficult, could not carry on".

The decision to nationalise Britain’s fifth-largest mortgage lender, which conjures up the nationalisations of the 1970s, follows the near collapse of the bank in the wake of the credit crunch.

The company’s financial difficulties forced it go to the Bank of England to ask for emergency funding, triggering the first significant run on a British bank for more than a century.

British taxpayers have been forced to subsidise the Rock through loans and guarantees to other lenders worth about £55 billion.

The timing of this afternoon’s announcement has come as a surprise, with most experts expecting the decision to be made via a Stock Market or Common’s statement.

The move is likely to be seen by many as a failure on behalf of the Treasury. Mr Darling has repeatedly said that a private sector solution was the preferred option.

Gordon Brown, the Prime Minister, said recently: "My first concern has always been the stability of the economy. Why we acted to help Northern Rock in the first place was to prevent contagion to other banks and other building societies and the British economy.

"And because stability is the issue, we will look at every option, and that includes taking the company into public ownership and then moving it later back into the private sector.”

George Osborne, the Shadow Chancellor, condemned the move. "I think nationalisation does enormous reputational damage to the UK as a place for financial services," he said. "And it also means now that the government is responsible every time Northern Rock forecloses on someone's mortgage."

Shareholders had been hoping to have a say in the outcome of talks between the Treasury and the bidders. However, the bank's two largest investors failed to win support for a number of proposals that would have given investors the right to approve the sale of the bank's assets.

Until today, Virgin Group - who planned to rebrand the stricken bank as “Virgin Bank” - had been seen to be in pole position when it came to a likely suitor. Even so, as late as Friday reports suggested that the Government was pushing for a better deal for taxpayers than currently on the table.

Mr Darling said that he had spoken today by phone to Sir Richard, who was "disappointed" at the Treasury's decision. Sir Richard said that he felt that a commercial solution would have been the best way forward.

Some job losses are predicted at Northern Rock.