I think this is the result of the implied government guarantee that most investors believe is far stronger in Europe.
However, now that the global financial system is so strongly intertwined I don't think the world financial system could handle a default resulting in the liquidation of any bank on the list.
So does that mean all these banks' default insurance should be trading at government rates?
Fed Makes a Gift to JPMorgan Written By: David Neubert 2008-03-17 14:13:09 I bought Bear Stearns (BSC - $4.68 - down 85%) on Friday for $33.00. I thought there would be some kind of rescue package. I was wrong. Here, Portfolio.com blogger, Felix Salmon summarizes some of my comments and those by others. Instead, what I got was The Fed exacting their revenge on Bear at my expense. I also benefited by the gift that the Fed gave to JPMorgan (JPM - $40.01 up 10%). Basically, what has happened is that the market (and I) didn't expect the government to play favorites and give such a valuable asset away at the shareholders' expense.
Did Bear Stearns deserve to go away? I don't doubt it. It would seem they didn't understand their own risks and didn't treat others nicely. As someone who competed against and interviewed a couple times at Bear Stearns over my career, I think I have a fairly common opinion of the firm. They were not very good citizens in Wall Street. For example, as a free rider they did not pitch in on the 1998 rescue of LTCM, though they did benefit. They culture at Bear Stearns was one of extreme self interest, which promoted chaos.
I know several employees at Bear who are wiped out. Stock vesting at Bear Stearns was cliff vesting over three years. This means that had to stay with the firm for three years to get your stock. Compensation at Bear (and most of Wall Street) is between 25%-65% in stock. So we are looking at a least a year's worth of earnings for many Bear Stearns employees being transferred to JP Morgan shareholders. I feel bad for these guys. They weren't expecting this. I know many others may not feel bad for this unlucky group. They are very employable and it's hard to get anyone to feel bad (except for the Bush administration) for millionaires getting pay cuts.
Photo:Photobunny, Creative Commons, Flickr
"Sent you a message on your Facebook acct...you adding to Merrill Lynch (MER - $42.97)? Can't get a read on the big pullback..do the institutional traders know something we dont?"
I'm not adding to MER and I'm actually out of it for a while. My stop loss rule got me out just after I wrote about Thain. (Sadly, I did not apply that same stop loss rule to some other stocks recently).
The institutional traders are selling everything financial. There is nothing special happening with MER that isn't happening with Lehman (LEH - $42.03 ), Goldman (GS - $160.92), Citigroup (C - 20.16), Morgan Stanley (MS - $40.62) and the rest. And if there is I'm not sure what it is. Unless you have really done a lot of research and figured out something special about specific financial companies, I'd rather play the financials using the financials iShare (XLF -23.66) at this point. I'd rather not take the specific risk of any one company at this point. If you believe financials are cheap you might as well buy them all. The fund provides diversification and thus is much less risky. I don't know if any of these firms are going under but I'm sure they are all not. And when they bounce back up they will NEARLY all bounce together.
Three factors will keep the cash register ringing for investment banks: 1. Demographics of baby-boomers saving for retirement. 2. The cheaper dollar, meaning that foreign firms will be on a shopping spree for U.S. companies, which will help M&A advisory. 3. Mortgage portfolios that have been marked to market. When liquidity retuns to this market, portfolios of mortgages will start to show profits.
It would seem that Wall Street also hasn't forgotten that it is the second most regulated industry in the U.S. (after nucular energy) and that it needs to keep track of where its bread is buttered. Banks are betting that the butter will be spread by a Democrat in 2009.
On the next pullback, which I think is coming once all the shorts are done covering, I'll be looking to buy the investment banks cheap again. Look out for U.S. firms like Goldman Sachs (GS - $179.63), Lehman (LEH - $48.65), Morgan Stanley (MS - $49.67) and Merill Lynch (MER - $46.71) to continue to do well. I own the investment banks directly, but rather than pick individuals, the Exchange traded fund (IAI - $39.43) works well as a proxy.
Level 3 Assets at Big Brokers - Not as Scary as People Say Written By: David Neubert 2007-12-14 12:08:58 Felix Salmon at Portfolio.com dug up the ratios for level 3 assets at each major Wall Street broker. This ratio is seen by some to be "scary." I don't find it as scary as some. The assets in Level 3 are mark-to-model. Some of these could include complex derivatives for which there is no market that exactly hedges assets, hence the high risk in panic liquidation but not so much in cash flow. Their markets are worried about some of those with the highest ratios of Level 3 assets to capital. Personally, I trust the risk managers at firms like Goldman Sachs (GS - $212.89), Morgan Stanley (MS - $50.88) and Lehman Brother (LEH - $63.03) to be able to correctly value these situations. I do believe the market will continue to focus on this ratio, which will encourage firms to try to move more assets out of this category.
