Investors run for cover as Dow plunges 416 points, worst day since Sept. 2001

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Stearns chairman makin' out like a bandit...

Bear Stearns' Cayne sells over $60M in stock
March 27, 2008: Chairman dumps 5.6 million shares - his entire stake in the investment bank - a day after JPMorgan quintuples its bid.

Just a day after JPMorgan Chase quintupled its bid for Bear Stearns, James Cayne, the chairman of the troubled investment bank, dumped his entire stake in the firm, selling more than $60 million worth of company stock he owned. Cayne sold over 5.61 million shares of company stock Tuesday at $10.82 a share, according to a company filing with the Securities and Exchange Commission on Thursday. The filing also revealed that his spouse sold an additional 45,669 shares, worth close to $500,000. Calls seeking comment from Bear Stearns were not immediately returned. An attempt to reach Cayne's residence was not successful.

Bear Stearns shares closed at $11.23 apiece Thursday on the New York Stock Exchange, but tumbled over 5 percent in after-hours trading on the news. Nearly two weeks ago, JPMorgan Chase announced it would scoop up Bear Stearns for a mere fraction of what it was once worth - $2 a share - after it suffered a classic run on the bank. Amid rumors questioning Bear Stearns' financial health, Bear Stearns turned to the Fed, which asked JPMorgan to funnel funds to the embattled investment bank that the government would provide. Two days later, with the government fearing that Bear Stearns' unraveling would send widespread panic through the financial markets, JPMorgan agreed to purchase Bear Stearns.

Bear Stearns employees, which own about a third of the company, and other shareholders, expressed outrage at the terms, prompting JPMorgan to raise its bid for the investment bank to $10 a share earlier this week. Cayne, the company's second largest shareholder behind billionaire and vocal opponent to the deal Joseph Lewis, lost an estimated $477.8 million on JPMorgan's initial offer, based on his holdings at the start of 2008. At the time, Bear Stearns stock was trading at $88.35. Cayne stepped down in January as chief executive amid questions about his ability to lead the firm. He was reportedly out of the office when two of the company's hedge funds that were heavily invested in mortgage-backed securities collapsed, in what would herald the beginning of the ongoing credit crisis.

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Senators Seek Details About Bear Stearns Deal
March 27, 2008 WASHINGTON — Senior senators signaled their unease on Wednesday with the Federal Reserve’s shotgun marriage of JPMorgan Chase and Bear Stearns, demanding detailed information by next week about how the $30 billion deal was reached.

The challenge from Capitol Hill is the most striking shot in a rising political battle about whether the Fed’s decision to provide emergency loans to major Wall Street investment banks should be accompanied by stricter regulation over their activities — as is already the case for commercial banks. Treasury Secretary Henry M. Paulson Jr. defended the Fed’s rescue of Bear Stearns in a speech on Wednesday and resisted calls by some Democrats for greater regulation of Wall Street.

“Recent market conditions are an exception from the norm,” Mr. Paulson said in a speech at the Chamber of Commerce of the United States. “The Federal Reserve’s recent action should be viewed as a precedent only for unusual periods of turmoil.” Though Mr. Paulson said that Wall Street firms should provide more information about their financial condition if they borrow money from the Fed, he said that investment banks were still fundamentally different from commercial banks and did not endorse any proposals for tighter regulation.

But in the Senate, the two leading members of the Finance Committee raised questions about policies being pursued by the Fed and the Bush administration in dealing with the credit crisis. “Americans are being asked to back a brand-new kind of transaction, to the tune of tens of billions of dollars,” wrote Senator Max Baucus, Democrat of Montana and chairman of the Senate Finance Committee, and Senator Charles E. Grassley of Iowa, the senior Republican on the committee. “Congress has a responsibility to look at whether the taxpayers will lose money here.”

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What, Me worry?...

$19 bln write-down? No problem, stock investors say
Tue Apr 1, 2008 - Investors have grown so inured to calamitous reports about global credit markets that they have taken to spinning fresh bouts of bad news into fits of irrational exuberance.

Tuesday's rally in U.S. and European stocks could serve as a veritable case study in this nascent reversal of investor psychology. After all, the day's two big catalysts for the 391-point gain in the Dow Jones industrial average .DJI -- a $4 billion stock offering from Lehman Brothers and a $19 billion bad debt write-down by UBS -- would have sparked panic almost any other day.

Instead investors chose to see it as one bedraggled U.S. investment bank get a much needed market endorsement and a Swiss bank scrubbing its balance sheet clean. "An important personality change has occurred in the stock market in that bad news is no longer killing the stock market," said Al Goldman, chief market strategist at Wachovia Securities, in St. Louis.

It was only two weeks ago that analysts and investors marked the beginning of the bottoming process with the stunning collapse of Bear Stearns. But to conclude that Tuesday's monstrous rally with the Dow's leap of 391 points is the resumption of a bull market is, well, a bit premature. Strains still exist in the U.S. credit and banking markets.

More $19 bln write-down? No problem, stock investors say | Special Coverage | Reuters

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How it came to an end...

The last days of Bear Stearns
March 31, 2008: It took only a few days, a rising sense of panic - and a critical e-mail - to spell the end of the 85-year-old investment bank.

You could detect a trace of fear in his voice. Mostly he seemed stunned. It was March 6, and one of Bear Stearns's top bond executives had dialed me up unprompted. The executive had dished about competitors in the past, but he had never initiated a discussion, much less one about his own firm. Now he explained that financial institutions that he dealt with - firms he had traded with for years - were suddenly asking him whether Bear had the cash to execute their trades.

Such news had yet to surface in the press, but the investment bank's shares had dropped nearly 20% in the previous ten days, and there were murmurs that short-sellers were circling. The executive asked whether I'd heard rumors of trouble, and he tried to preempt them. "We're making money," he said. "Our counterparties are getting paid, trades are clearing, business is picking up. It doesn't seem to be the likely scenario for an investment bank's collapse."

Ten days later Bear Stearns was swallowed by J.P. Morgan Chase. But all the brouhaha over the deal - were the shares worth $2 or $10? should the Federal Reserve have intervened? - has obscured how astonishing Bear's collapse is. It's a reminder that in a business based on confidence, when that confidence evaporates, so does the business. A reconstruction of the week before Bear Stearns agreed to be funded, and then acquired, by J.P. Morgan Chase, reveals the speed at which Bear's longtime customers and counterparties lost their faith in the investment bank and undermined its ability to continue.

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Break `em up an' sell off the pieces?...

Big banks face break-up calls in subprime wake
Fri Apr 4, 2008 - Battle lines are forming in banking that pit bigger-is-better against break-up advocates, and some of the largest conglomerates -- like subprime victims UBS and Citigroup -- could fall prey.

Such sprawling financial groups are facing pressure from regulators and shareholders to look back to the future and simplify, sell assets and focus on what they do well. Big banks have long held that they profit from broad strategies in two ways: one business unit often feeds another, and diversified activities lessen earnings volatility.

But new risks have come to the fore with the subprime crisis which saw, for example, a handful of traders and managers at UBS's investment bank rack up over $37 billion in losses and damage the reputation of its prestigious wealth-management division, the world's largest.

"The supposed synergies of having investment banking and private banking in one company have been grossly overstated by the previous UBS management," said analyst Peter Thorne at brokerage Helvea. "They have persistently ignored the large conglomerate discount that held back the UBS share price because of the presence of the risky investment bank," Thorne said.

UBS on Friday suddenly saw the emergence of a major shareholder who is leading a campaign to break up the bank into its parts and possibly sell them off, reducing the Swiss bank to its core wealth-management activities.

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Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen...

Derivatives the new 'ticking bomb'
March 10, 2008 -- "Charlie and I believe Berkshire should be a fortress of financial strength" wrote Warren Buffett. That was five years before the subprime-credit meltdown.

"We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

That warning was in Buffett's 2002 letter to Berkshire shareholders. He saw a future that many others chose to ignore. The Iraq war build-up was at a fever-pitch. The imagery of WMDs and a mushroom cloud fresh in his mind.

Also fresh on Buffett's mind: His acquisition of General Re four years earlier, about the time the Long-Term Capital Management hedge fund almost killed the global monetary system. How? This is crucial: LTCM nearly killed the system with a relatively small $5 billion trading loss. Peanuts compared with the hundreds of billions of dollars of subprime-credit write-offs now making Wall Street's big shots look like amateurs.

Buffett tried to sell off Gen Re's derivatives group. No buyers. Unwinding it was costly, but led to his warning that derivatives are a "financial weapon of mass destruction." That was 2002.

Derivatives bubble explodes five times bigger in five years

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Merrill Lynch hurtin'...

More pain for Merrill Lynch
April 17, 2008: Wall Street firm's quarterly loss is even wider than expected after billion in writedowns, and it plans to cut another 3,000 jobs.

The pain isn't over for Merrill Lynch & Co. Still suffering from bad bets in the mortgage market, Merrill Lynch Thursday missed even the drastically lowered estimates for its first-quarter results, reporting a net loss of $1.96 billion, or $2.19 per diluted share. It also recorded about $6.6 billion in new writedowns. The company plans to cut 3,000 more jobs, or about 10% of its workforce, excluding financial advisers and investment associates. It will focus the reductions in its global markets and investment banking division. The investment bank has already eliminated 1,100 positions this year.

Merrill reported revenue of $2.9 billion, down 69% from the prior-year period, primarily due to net writedowns of $2.7 billion in mortgage-related securities and $3 billion in downward revisions of the value of its guarantees with faltering bond insurers. It is also writing down $925 million in the value of its leveraged loan portfolio. Analysts had projected a $1.99 per share loss on a net loss of $1.4 billion and revenue of $3.7 billion. Wall Street, however, seemed pleased with the results, sending the stock up nearly 3% in morning trading.

Calling it "as difficult a quarter as I've seen in my 30 years on Wall Street," Chief Executive Officer John Thain said the bank is preparing for slower and tougher times ahead. However, it remains well-capitalized. Despite recent upbeat remarks from Wall Street CEOs, Merrill Lynch's results show that the industry is still suffering from the mortgage meltdown that began when the subprime sector crumbled last year.

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Islamics infiltratin' our financial system...

Shari'a-Compliant Financing Described As New Islamist Threat
April 21, 2008 Washington - Radical Islamists not only want to destroy America with bombs and weapons of mass destruction, they also are infiltrating U.S. financial markets and influencing the flow of credit and capital, according to the Center for Security Policy (CSP), a conservative think-tank.

CSP President Frank Gaffney, a former Reagan administration assistant secretary of defense, has launched a national campaign to counter what he calls "an insidious threat" -- shari'a-compliant finance. He says U.S. financial institutions and businesses engaged in shari'a-compliant financing are exposing themselves to civil and criminal liability. That type of investment poses a serious risk not only for U.S. financial institutions but also for ordinary investors and the national security of the United States, he said.

The finance method involves investments or transactions that have been structured to conform with the 7th century code of Islamic law, which is known as shari'a. Prohibitions include financial transactions involving interest, excessive uncertainty, or assets such as alcohol, tobacco, pork or gambling. Gaffney said shari'a-compliant financing "legitimizes and institutionalizes" repressive Islamic law that conflicts with Western values.

"Shari'a-compliant finance, also known as 'Islamic finance' or 'Islamic banking,' is a vehicle for effecting in America and in other Western capital markets, what its proponents have called 'financial jihad' -- a kind of soft jihad, but one arguably going after the lifeblood of our capitalist system and economy," Gaffney told a briefing of Capitol Hill staffers Friday at the National Press Club in Washington, D.C.

Gaffney said the shari'a code is is best known for beheadings, floggings, and amputations for petty crimes. "Shari'a is a totalitarian program for bringing about a global caliphate (Islamic kingdom), for ruling the world, for governing religious conduct, personal practices and family relations," he said. Shari'a-compliant financing is becoming more popular as a way to tap into petrodollars. Even Dow Jones has created its own Islamic Index for shari'a-correct investments, Gaffney said.

How does it work?

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Looks like ol' Warren took a bath...

Berkshire earnings down on derivatives
May 2, 2008: Berkshire Hathaway's $1.6 billion loss on derivative contracts drags its quarterly profit down 64%.

Berkshire Hathaway Inc. says its first-quarter profit fell 64%, because it recorded an unrealized $1.6 billion loss on its derivative contracts, and its insurance businesses generated lower profits.

Berkshire (BRK.A) reported net income of $940 million, or $607 per share, in the quarter ended March 31. That's down significantly from the net income of $2.6 billion Berkshire generated a year ago.

Berkshire's chairman and CEO, Warren Buffett, warned shareholders in his annual letter that the derivatives could make the company's earnings volatile. But Buffett predicted the derivatives will ultimately be profitable.

The four analysts surveyed by Thomson Financial expected earnings per share of $1,476.99 on average.

Source

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Isn't throwin' ever'thing overboard what they do right before the ship sinks?...

Citigroup To Shed Nearly $500B in Assets
Friday, May. 09, 2008 — Citigroup Inc. said Friday it aims to shed about $500 billion in assets and grow revenue by 9 percent over the next few years, as it tries to rebound from massive losses tied to deterioration in the mortgage and credit markets.

The plans are the most concrete yet by Vikram Pandit, nearing his five-month anniversary as the bank's CEO, to prove himself a capable turnaround specialist at a company that many claim was struggling long before the housing market collapse. The bank's plans to wind down its $2.2 trillion in assets to approximately $1.7 trillion were part of an investor day presentation at one of Citigroup's Manhattan offices.

These so-called "legacy assets" included yet-to-be-named noncore businesses, as well as assets in Citigroup's securities and consumer banking segments, including mortgages and other real estate-related holdings. Already, the bank has written down assets tied to soured debt by some $38 billion since last summer. It has also announced plans to reduce its residential mortgage assets by $45 billion over the coming year, and has recently sold businesses including CitiCapital, CitiStreet and Diners Club.

The anticipated rise in revenue will derive largely from cutting costs — which Chief Financial Officer Gary Crittenden said will mean more job reductions. Citi has so far lowered its work force by 13,200 people since last summer. Citigroup has been under heavy investor scrutiny over the past year as the value of its stock tumbled. Many Citigroup holders have been angling for a large-scale overhaul of the company's structure.

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Investment banks still under the credit crunch...

Credit crisis still looms over Wall Street
Sat., June. 7, 2008 - Analysis: Comments from financial firm chiefs may be too optimistic

The chief executives at the world's biggest financial institutions might have been a bit too optimistic by declaring we may be nearing the end of the global credit crisis. Morgan Stanley's John Mack said in April it had reached its eighth inning or "maybe top of the ninth" of a baseball game. Goldman Sachs' Lloyd Blankfein compared it to football's "third or fourth quarter." Richard Fuld at Lehman Brothers and Merrill Lynch's John Thain were also more upbeat about the future.

Just as Wall Street started to look safer for investors, another wave of anxiety about the financial industry, inflation and the economy dragged down stocks this past week. Investors continue to worry that the pain might not be over for financial companies — and that the market as a whole will suffer until investment banks release quarterly results later this month.

"Financials have become the kid that brings home a bad report card," said Chris Johnson, president of Johnson Research Group in Cincinnati. "Once they bring home C's and D's, you watch that kid closely week to week. If they bring home A's, you only really care once a quarter."

Cash shortage fears