JPMorgan to Buy Bear Stearns for $2 a Share

[Umfriend]

No, not at all the same people. That was done by the so-called Rating Agencies. Not real agencies, in the sense of government related, at all: private and independent companies.

I wonder, it is hard for me to get data on that now, but has any initially AAA-rated sub-prime mortgage backed security in fact defaulted? As far as I can see, the prime source of the issues is one of bad ALM: funding long term assets with short term liabilities.

[ND66]

You might be right, but it doesn’t make any of the investors feel more secure at all.

Like I said, IMO, it would be better to let the Stock Market take it course and sink Bear Sterns, it just leaves bad aftertaste in the mouth… .

.

[Umfriend]

Oh, but it does. At least now the investing community knows that their claims aganist BS will be honoured as, and this is important, will the claims of creditors of BS who might just be your debtor. Imagine you had lent large sums to a bank who might have lent large sums to BS, could it be you'd become nervous? Or a bank came to you for a loan and you suspected that bank extended credit to (or had some type of large exposure on) BS, could it be you'd be less inclined to advance the loan you'd normally would have?

This is what some call "system risk": the natural/easy flow of capital/liquidity is frustrated by perceived risk. It is the nightmare of any regulator of financial institutions.

[RedRed]

Listening to the radio this morning, it appears that many of the 'products' sold (these wrapped up sub-primes) were actually classed as AA or AAA. If there were to be any action taken, surely it should be against thoes who classed them as such? It appears that Bear Sterns were one of the investment houses that created the products in the late 90's...

Perhaps one of the main things to come out of the whole debacle is the realisation that there is a split in roles within banks now-a-days.

One group sells the product - the mortgage
One group raises funds for the mortgage
One group sells the risk.

Noone has to carry the risk anymore within the company... everyone gets a bonus...

In the 'old days' the bank kept its own risk - that meant that there was care taken with the client.

[Umfriend]

Listening to the radio this morning, it appears that many of the 'products' sold (these wrapped up sub-primes) were actually classed as AA or AAA.

Correct. The way it works is that you pool a number of claims (such as mortgage loans) together. You know not all will be repaid but that the probability that less than, say, 80% is repaid in full is extremely small. You then sell the claims to a (ussually new) company who would issue, e.g., three types of bonds/notes, Class A (80%), Class B (15%) and Class C (5%). The rules on these bonds will dictate that the Class A notes will be redeemed first. As the probability that less than 80% of the underlying mortgage loans will be repaid is very small, these notes will carry a AAA rating.

If there were to be any action taken, surely it should be against thoes who classed them as such? It appears that Bear Sterns were one of the investment houses that created the products in the late 90's...

I disagree. These ratings were assigend by so-called Rating Agencies. They all reflect a probability of default i.e. the probability that interest and/or principal on the notes will not be paid (timely/in full, all kinds of variations). The ratings explicitly do not reflect any judgement on the value of the notes. Moreover, at least the normal disclaimers on forecasting statements apply.
Let's not forget, most, really most, of these bonds are purchased by professional parties who should be regarded as capable of taking care of themselves (in fact, in most jurisdictions (all that I know of) it is illegal to sell these products to the public.

Perhaps one of the main things to come out of the whole debacle is the realisation that there is a split in roles within banks now-a-days.

One group sells the product - the mortgage
One group raises funds for the mortgage
One group sells the risk.

And thank god for that. Seperation of Duties is important in any organisation but certainly within financial institutions. Look at the many examples where the control-mechanisms within did not work (Leeson, SocGen, those copper-trading guys in a japanse bank etc).

Noone has to carry the risk anymore within the company... everyone gets a bonus...

In the 'old days' the bank kept its own risk - that meant that there was care taken with the client.

Yes and that made competition virtually non-existent. In the Netherlands for instance, you had to have a large balance sheet to be able to enter the mortgage market. Securitisation allows you to sell product with much less equity and so allows more parties to enter the market. Prior to, say 1998, margins on mortgages relative to inter-bank-deposits where around 130 basispoints. Up to the credit crunch they had dropped to around 50. That is 0.8% savings on, what, 300 bln? 2.4 bln of savings per annum is good for all.

Of course, things got messed up. But it is important to look at what imperfection caused/allowed the ****-up.

[RedRed]

Good points Umf - as allways

However, of the 2.4 billion pa- how much of that was passed to costomers - how much went on bonuses to the various parties?
What I am trying to get at is that while the percentage differance in a mortgage rate and the underlying base rate - how much has that narrowed since '98? I only joined the property market in 84 - and I cant rember it being that keenly priced.... I do remember that my bankmanager was god - indeed they refused to fund my first purchase - I was only looking 30K for a 5 bedroom house.... in that area now they sell for 275K!!!

[Umfriend]

Uhm, that 2.4bln p.a. was passed on to customers entirely: it is the annual savings on interest payments individuals need to pay. How much was gained by others is not known by me but that was generated out of efficiency savings on top of the 2.4bln passed on to customers.

History of margins in the UK is not known to me by numbers I'm afraid.

I can only assume the bankmanager at the time did not feel you made enough to warrant a 30K loan and he probably did not want to advance funds on the premise that real-estate only rises in value. Given the current crisis, would you really want to blame him for that?