Professor Elam

A stated purpose of this blog is to relate what we study in class to real world events. Well it gets no more real world than what is happening to Bear Stearns. We have chronicled and predicted the fallout in the mortgage market for some time here. Now after only two or three months of real fall out, there is already talk that this firm may be taken over by someone else. 

Read about Bad News Bear here.  Can you identify all the terms used in the article, that is also part of the reason for the blog.  For example, what is a bridge loan? 

A bridge loan is a form of intermediate financing until a more permanent long term loan can be secured. Here Bear Stearns made the loans themselves thinking they would earn the interest and then roll the loan to someone else. Wrong, now that the debt markets are essentially closed, which is to say lenders are wary of taking on any new debt, BS ( now is that a great abbreviation for these guys or what) is stuck with the loan. 

The article mentions that BS (gee I love that, this is fun) has $73 billion of debt and equity to hedge against losses. What does that mean?  It means that BS could write off loan losses or any other loss as long as it has capital to write them off against.  BS has $15 B in cash but how long will that last?  What does it mean when the article suggests that investors may want some of the 30% collapse in the stock price back?  It means that unless BS can show they are actually doing something to restore confidence, there is not likely to be any.

And among the possible suitors, I found myself wondering hey, these guys all have the same potential problems, who wants more of the same and tomorrow any of them, like Lehman, could be in the same shape, Egads!

You can read in BS own words about how they really are experts in this sort of thing  Odd their web site does not mention any of the things we have discussed here……

Meanwhile last Friday  Central Banks dumped money into the system.   Does this ease investor fears or sound the alarm that indeed something could be very very wrong in deed.  An old saying in financial circles is that when firms or governments are attempting things too little too late it is a bit like re arranging the deck chairs on the Titanic in the honest belief that will cause the ship to miss the iceberg. I am already spotting this reference in some of these articles.