Do not be so quick to say 'illiquid' and 'crappy' are the same thing. Markets can act irrationally, both on the upside and the downside. Note that even when LTCM failed in 1998 (a MAJOR credit insolvency event - read 'When Genius Failed'), the Wall Street banks that bought out their balance sheet ended up either break even or yielding some profits once the markets went back to normal.
"Ironically, after the bail-out by the other investors, the panic abated, and the positions formerly held by LTCM were eventually liquidated at a small profit to the bailers."
http://en.wikipedia.org/wiki/Long_term_capital_management
Getting technical on my usage of the terms "illiquid" and "crappy"?
In this case "illiquid" and "crappy" securities are the same: securities that are worth much less today than they were yesterday and that are projected to be worth even less tomorrow and for which the bottom has not yet been predicted. Those are certainly "crappy" since no one holding them wants to be holding them. They are certainly "illiquid" since no one _else_ wants to hold them.
And your reference to the LTCM bailout are hardly reassuring.
This is a great deal _only_ for J.P. Morgan.
It's a very bad deal for U.S. citizens, most whom have no large holdings in J.P. Morgan. Essentially the taxpayer is taking on all of Bear Stearns' bad investments and J.P.Morgan is getting all the good parts of Bear Stearns at reduced price.
But that's only the beginning. The Fed guarantee to back up these 20 Wall Street firms for the next six months will be disastrous. That gives them 6 months to dump all their garbage onto the Fed. What a deal.
Hey, I've got a 1995 Buick that I can't sell and I'd like the Fed to buy it back for the $8000 I paid for it. I had no idea it wouldn't become a classic selling for twice what I paid for it. Justice! Give me justice!
Yes, I am. They are not synonymous in this context. Don't take it personally.
Projected to be less tomorrow? Says who? I would think that JP Morgan would not accept even a $2/share buy out if they thought it would be worth less tomorrow. They would only make such an offer if they thought it was a good deal to them with a potential upside. Thus they are willing to buy a "illiquid" asset and provide "liquidity" for "value" to themselves. It's how the world goes 'round. Illiquid and crappy may be the same thing now, yes, but investment is, by definition, making decisions for future profit. This is why, in terms of net present value, crappy and illiquid are not the same thing. JP Morgan is thinking "This is a great opportunity".
In terms to my reference to LTCM as being hardly reassuring: get over it. We are in a credit crunch. We were in '98, we are now. It's bad, yes. This is probably worse than LTCM. I never said this was good, I said that 'illiquid' and 'crappy' are not by definition the same thing. That's all I said.
Right now the major issue is that no one knows how to value themselves because no one else knows how to value themselves because no one can value their portfolios. And in that uncertainty no one can judge who is right and wrong, who is getting a good deal and getting a bad deal. This is exactly why this situation is so screwed up. And this is exactly why the Fed is offering to provide liquidity for the rest of the market: because no one else is liquid enough to. Yes, it is a moral hazard, it sucks, but it is how it is.
Look, this isn't a zero sum game. For all we know, inaction by the Fed could lead us down a more damaging path. There are smart people working there, with far more education and experience than both of us and then some. Let us not be so quick to judge.
The upside for JP is the office building. It's worth over a billion on it's own. Since there were no other bidders and the price was just 200m, it's really clear that the real value of all the securities that Bear held is negative. The only question is how much negative.
"I am right and you are wrong."
-book by Edward de Bono
[In deference to de Bono I must add that I am using the phrase with it's original meaning.]
Indeed I am right and you are wrong. The foreign markets are punishing the Fed's moves.
1. Yes, BS was "projected to be worth less tomorrow". Until the Fed stepped in, JPM wouldn't touch BS without the Fed first taking the bad parts.
2. J.P. Morgan is buying only the "liquid" assets of BS; the Fed is getting the illiquid assets. Of course that's a sweet deal for JPM. It's a very bad deal for the Fed and the U.S. taxpayer. And part of the deal is a 6-month guaranteed bailout for hedge funds for the rich that have been posting returns from 20%-80% annually. Moral hazard never reached such scales before.
3. Drop the straw-man "this isn't a zero-sum game" statement: everybody knows that. The Fed's move is a redistribution of wealth regardless: wealthy investors are now wealthier than before the Fed stepped in and the value of the dollar is plunging further.
4. "There are smart people working there." How smart? I don't see the smarts oozing out today as the foreign markets punish the choices the Fed makes. Wait until the stock-buying public gets into this brouhaha. I would be the last to oppose the existence of the Fed, but today there I see only people who have their own and their mostly wealthy friends' interests in mind.
5. Sometimes inaction is best. Inaction would resolve the quandary more quickly by allowing the liquidation of BS assets on the open market and punishing wealthy investors for taking high-risk investments in hedge funds. All worthy goals. And that would happen without adding inflationary fire to the economy.
6. I don't relish "punishing investors" for it's own sake. But protecting high-risk investors against risk is foolish and, in the end, inflationary. "Caveat emptor" should apply to any investment.
"Ironically, after the bail-out by the other investors, the panic abated, and the positions formerly held by LTCM were eventually liquidated at a small profit to the bailers." http://en.wikipedia.org/wiki/Long_term_capital_management