JP Morgan & The Fed Try To Rescue Bear Stearns
Today major news hit the markets and we’re down more than 230 points on the Dow. This is getting scary folks and is no joke. In the last 24 hours, investment banking giant Bear Stearns (BSC) suffered a major liquidity crunch and is on the verge of collapsing. JP Morgan Chase (JPM) and the Federal Reserve had to step in and provide emergency funding. Essentially we are seeing a run on Bear Stearns.
Funny thing is, this has happened before . . .
John Pierpont Morgan was a great industrialist and founder of what is now JP Morgan and Morgan Stanley. He was one of the richest and most influential men in the world. In 1893, the US government desperately needed his help. The US Treasury was running low on gold after suffering massive withdrawals. This run on the Treasury threatened the stability of not only the economy, but our entire country.
Morgan and his associates stepped in and floated a major bond offering. The money raised went to restock the coffers of the US Treasury. JP Morgan managed to complete this funding in one of the most difficult of environments. The entire country was deep in a recession, and several of the major banks and railroads were failing. Many believe through this single act, JP Morgan saved the US Government from collapse.
Then, he did it again a few years later. . .
In 1907 panic hit Wall Street. Speculation in the markets was running rampant. Another recession gripped the nation, and the markets began to collapse. The market fell so fast that trading virtually stopped (and you think losing a couple hundred on the DOW each day is bad). Nobody knew who owned what or more importantly how much money they had lost.
Banks stopped lending money to each other . . . or anyone else for that matter (sound familiar?). Banks started calling loans and borrowers defaulted on repayment. This kicked off a run on several banks which fueled the fire and caused more problems. Panic had set in.
Morgan had to once again save the economy. He organized a syndicate of banks and borrowed money from abroad. They supported healthy companies and moved money between banks to meet their obligations. A short time later, business was back to normal; crisis averted.
JP Morgan passed away a few years later, but his legacy lives on. His old firm – now named J.P. Morgan Chase (JPM) – is stepping in again to save the markets.
Bear Stearns (BSC) is one of the largest investment banks in the United States. In just the last 24 hours they suffered a serious blow to their liquidity. Other investment banks, hedge funds, and market participants were questioning their solvency.
The company became a risk and several firms started refusing to trade with them. This is scary folks, as trading is how Bear Stearns makes money. When people won’t trade with you, they’re basically saying you won’t be around to settle the trade – less than 24 hours later.
The snowball effect.
This could be the beginning of a huge problem. Your ability to execute trades disappears. Your ability to make money disappears. Investors with accounts at your firm start to wonder if you’ll survive.
They start transferring money out of the firm. Now you need to start selling assets to meet these cash demands. Can you imagine what would happen if Bear Stearns had to dump $30 billion dollars of stocks and bonds on the market?
It would cause a market collapse!
This is why the intervention of JP Morgan and the Fed is so important (although normally I don’t like too much meddling from the Fed). This will hopefully slow, if not stop, the mass defections from the firm. This may avert a modern day ‘run on the bank’.
JP Morgan would be proud.
I know you are asking the same question I am. How do we make money from this news? Here’s my thinking. If the Fed thinks JP Morgan is strong enough to help bail out Bear, they must be in a very strong financial position.
JP Morgan looks like it’s in a position to not only survive this crisis but also gain market share from other, less astute companies (like Bear). When the smoke clears, JP Morgan will be one of the last ones standing.
If you are willing to take a risk keep an eye on JP Morgan Chase (JPM), they might be worth adding to your portfolio.
Category: Stocks
