Research Roundup: Banks and Brokers
It ain’t over til it’s over.
Jamie Dimon must be wondering when he’ll next get some time off. After spending the previous weekend negotiating JPMorgan Chase’s $2-a-share bid for Bear Stearns (NYSE:BSC), he spent Easter trying to figure out how to fend off dissident Bear shareholders. According to the New York Times, JPMorgan Chase (NYSE: JPM) has quintupled its offer for Bear to $10 a share.
However, the Fed was said to be balking at the new offer price as it had directed JPMorgan to pay no more than $2 a share for Bear to assure that it would not appear that the Bear shareholders were being rescued.
Whatever the resolution of the immediate crisis, increased regulatory and legislative intervention is now inevitable. It’s just a matter of how much and in what form. Both the New York Times and the Wall Street Journal feature front page stories on this topic. The Times on Sunday also provides a comprehensive primer on the credit default swaps market and its impact on banks and the financial system.
There is an emerging consensus that the ability of mortgage lenders to package their loans as securities that were then sold off to other parties played a key role in allowing borrowing standards to plummet.
In an accompanying column, Gretchen Morgenson writes that future rescues are likely to look very much like those of Bear and Countrywide.
Seeking to address concerns that European banks have been dragging their feet on disclosing their write-downs, the Financial Times reports that UK Prime Minister Gordon Brown and French President Nicolas Sarkozy later this week will press UK and French banks to improve their piecemeal disclosure systems voluntarily rather than through greater regulation. Brown also is expected to seek French support for his proposal that the International Monetary Fund’s watchdog function should be strengthened to provide an early warning system of financial crises.
Supporting the argument that European banks have another large shoe to drop, the FT also reports that the value of some structured finance vehicles have fallen by a third or more. The data comes from a court filing in Canada by JPMorgan Chase.
Meanwhile, some subprime mortgage-linked securities issued by groups such as UBS have lost almost 95 per cent of their value.
Expectations are rising that central banks will need to intervene further in coming months, including taking some mortgage-backed securities on their books. According to a former chief economist of the European Bank for Reconstruction and Development:
Central banks will be managers for years to come of rather interesting portfolios - Professor Willem Buiter of the London School of Economics.
“The Financial Times reported on Saturday that conversations had taken place concerning such plans, as part of a broader, early-stage exchange as to possible future steps in battling financial turmoil.”
Meanwhile, following Standard & Poor’s modest cut Friday in the outlook for Goldman Sachs and Lehman Bros, CreditSights wonders “how the rating agency could aggressively upgrade the brokers for the most part in the last year, and then not review more harshly their ratings given what we think to be a secular change in the environment.”
“We believe that secular changes include ineffective risk management, an ineffective regulatory regime, and difficulties in the broker funding wholesale dependent funding model. S&P noted our concerns and agreed that it would consider those too, but at this time it needed to see more information before calling this secular instead of cyclical behavior.”
So despite, the broker’s funding profiles being on life support with Fed hookups at the discount window and utilizing unprecedented collateral including almost anything that is investment grade, S&P still seems to be napping on the ratings adjustments.
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