America's Bankrupt Banks

This is the first part of a six of an hour long show about the meltdown. If you liked this part you can find the rest the clips here. Hat tip to a Chicago for pointing these out.

Saturday Rock Blog: Sure Shot or Can't/Won't/Don't Stop the Bailouts

Bear Stearns bailed out by JPM bailed out by feds
FNM and FRE bailed out by feds
GS bailed out by BRKA
MS bailed out by MUFG
AIG $130B in bridge loan bailouts
Emergency Economic Stabilization Act of 2008
Citigroup gets $45B then splits up
GM $13B warm-up bailout
Crystler gets $5.5B in warm-up bailouts
CFC & MER bailed out by BAC bailed out by feds

What am I forgetting?

Update:
Throw BofA and Citi out of the Dow!

Lehman Brothers (RIP)

Source for the image

Feds' Lehman Plan Doesn't Sit Well With Wall Street Execs
Sale of Lehman Remains Dependent on Taxpayer Support
Barclays Abandons Talks to Buy Lehman
Bank of America Said to Walk Away From Lehman Talks
Wall Street Prepares for Lehman Bankruptcy
Lehman Files for Chapter 11 Protection
Greenspan: Crisis May Be Once in Century Event, More Firms to Fail

The rise and fall of LEH:


It looks like Lehman is going to be the test case where we see what happens when one of these gigantic financial institutions really goes bankrupt. Is Lehman "too big to fail," well I guess we'll find out. Up until now the mammoth firms that went under were bailed out by the gov (FNM, FRE), a bigger fish (BAC/CFC) or both (JPM/BSC). I'm excluding IMB in this because they were small compared to these others ($40B in assets).

I heard a trader use an interesting metaphor for the situation last week. When a pack of lions has a herd of buffalo surrounded, the one with the fewest connections at the edge of the herd is the one the lions will eat. Right now the buffalo at the edge of the pack are WM, LEH and MER while the lions are GS, JPM, BAC and WFC.

Bailout Blues

Source

The Dow Jones (which now includes BSC)

As you can see above, the dow jones industrial average has been in a huge 1000 point range since the start of this year. The range goes from 11,750 to about 12,750 which happens to be where the dow "bottomed" in August and November 2007. I don't see many reasons why the bulls won't rally this market up to at least the upper end of that range with the aid of the media. If you watched the headlines last week or cnbc, you would get the feeling that the financial crisis is over after the fed sacrificed Bear Stearns to save the rest of us. There is a fair amount of idiotic bullish momo going around and if they want to give us better prices to short from then why not let them. Some indicators are looking bullish now too, like the CCI and stochastics which gave buy signals last week. Furthermore, volume on up days has been increasing and is well above average.

Another point worth noting is that for the last six months or so the declining 50 day moving average has acted like resistance. In fact, shorting at the 50 dma has been ideal and the dow just rallied back up to it last week but I wouldn't short it here. The dow broke the 50 dma on the fed cut rally Tuesday, pulled back on lower volume Wednesday and broke it again on Friday with huge volume. This is not the type of behavior I'd like to see when the dow reaches resistance. In addition, the 50 dma is beginning to slope upwards. Long story short (no pun intended), I bet the dow rallies up to 12,750 ish, stalls then has a "super bullish" breakout to suck all the idiot money in. I can see it now, we breakout of this range, and the media screams bull market touting net gains for the year. We get back up to that 13,000 area and we tank big time on the accelerating contraction of the US economy and soaring commodity prices. If the dow reaches the declining 200 dma thats where you really want to short like crazy, but that would be asking too much I think. My guess.

You are probably wondering why I seem so bullish all of a sudden. I think it has something to do with the government intervening in /manipulating the market on scales I would have never dreamed possible. They are hell bent on saving wallstreet, and while I know this will end badly, theres a good chance it works in the short term. I was thinking about the BSC fraud last week and I realized a possible hidden agenda for the move. I originally thought the fed insisted on the $2 price so they could say "we aren't bailing out risk takers, look at the poor BSC shareholders." I'm sure theres some truth to that, and Hank Paulson said the line a few times last week. But what about this, JP Morgan is one of the 30 stocks in the dow, Bear was not. Bear Stearns was a huge company, a blue chip with a book value of something like $84 per share ($11B) but it was not in the dow average. The fed essentially took all that value, divided it by 40 and injected it into the dow jones. In a sense, the fed organized a $10B capital infusion into the most watched market index on the planet. Recall that many stocks just track the performance of the dow jones. Call me crazy, but it seems like that was a huge prop job and frankly it worked, just take a look at JP Morgan last week:

Call me a conspiracy theorist if you want but it seems pretty clear to me that the government will stop at nothing to prop this market up and boost the pocket books Paulson's buddies on the street. These relentless rate cuts and fed interventions are going to have the intended effect in the short term and I'm not going to fight it. Instead I think I'll just sit back and watch the monkey's do their dance until its obvious they are up the creek without a paddle.

Did Hank Paulson get punked by JP Morgan or does he belong in Folsom Prison?

Some related articles:

America gets conned - who will pay?
Bear Stearn's former CEO walked away with $232M
Whistle blower exposes insider trading program at JP Morgan

The Rise and Fall of Bear Stearns

It took 20 yrs for BSC's share value to grow to $170 but only a little more than a year to become worthless. If Bear Stearns is worth $2 now, then what about the other investment banks? How about the dow jones? Are we going to see a full scale collapse of the US financial system tomorrow? Dow -4k? Meanwhile the US central bank is freaking out.

I think this Barron's article just about sums it up.

Saturday Rock Blogging: Ring of Fire

According to wikipedia, "In 2005–2007, Bear Stearns was recognized as the "Most Admired" securities firm in Fortune’s "America's Most Admired Companies" survey, and second overall in the security firm section. The annual survey is a prestigious ranking of employee talent, quality of management and business innovation. This marks the second time in the past three years that Bear Stearns has achieved this top distinction. However, by March, 2008, Bear Stearn's share price reached a ten year low (losing 80% of its stock value) resulting from troubles related to the U.S. subprime mortgage market crisis."

I guess you could say that the range (2005-2007) won't be expanded to include 2008 after the federal reserve had to bail them out yesterday. After loosing 50% over the past year the stock then lost another 50% Friday on the news that their "cash position had unraveled in the last 24 hours, prompting it to secure emergency financing." Fortunately for them, the New York Times is reporting that plenty of people want to buy the company.

Disclosure: I own BSC and hedged.