Here is a blow by blow account of what happened this weekend.   This is history in the making folks, read this article and remember it the rest of your life. A brokerage firm like Bear Stearns BSC or a bank is nothing but a pile of IOUs and promises. When the promise cannot be kept, there is no balance sheet. And that is the lesson for accountants.  Eventually this crisis will pass. And years from now in the next market run up, you will read about how smart and clever some ‘investment banker’  is, assuming that term survives. Remember this incident at that time.

What do I mean if the term investment banker survives. Perhaps by the time this is over, Wall Street will be so reviled that they need new names.  It has happened before. IN the 1920s the preferred investment vehicle was the Investment Company, indeed the Securities Acts of 1933 and 1934 are enttield The Investment Company Acts of 1933 and 1934. But by the mid 1930s those vehicles were held in such low regard they had to be renamed to market them to the public. And so they were renamed

Mutual Funds, true story…..

Clearly the employees of BSC , like those at Enron, lost everything in their savings of BSC stock. Note one fellow says the building ought to be worth $8 a share.  Maybe but as the article notes, it is not possible to cherry pick assets given the bankruptcy code, ignoring the bad to only pick the good.

In a crash, cash is king.

Good thoughts from Jim Grant on the world’s reserve currency. He notes that every country using the Dollar is now in trouble with raging inflation but we are setting policy only for ourselves. Good point, will the Intl Monetary Fund supercede the FED?

On March 6 in Intermed II I repeated a presentation I did for DeSoto Rotary.  I showed how the stock market rally since 9/11 was ilusory, in Euro terms it has been much less than the run up to March 2000.  And we presented the turn towards dark themes of pop culture as shown by the Academy Award picks.

By the time you read this March 17 article in the WSJ, the facts will have come and gone. But WSJ is correct, cutting interest rates has not worked, the crisis is the worst yet.  I frankly do not understand how the FED can keep rates this low in the face of such dollar weakness and have said so and written so.  As i write Bear Stearns went poof and Asian stocks are down 3-5% looking for a lower opening in New York.

When will  we start defending the dollar?

Let’s see that makes Thornburg TMA, Carlyle listed in Amsterdam, and now J P Morgan buys Bear Stearns.

For $2.  Mind you I noted in class that these companies are still trading for much higher multiples than they deserve. And BSC dropped $27 one day this past week.  This is of course not a buy out but a rescue to save face and claim that a major investment  house did not go under. It is always thus. Back in the 1970s there were many such mergers, arranged to keep clients from losing their accounts or not being able to trade.

A week ago this was a $77 stock, note how quickly the balance sheet simply vanished. The $2 figure is the equivalent of the proverbial lawyer $1 and other consideration. This will continue to be a challenge for accontants, what is the balance sheet worth?

The firm I worked with initially, duPont Glore Forgan aka duPont Walston run by Perot was sold off office by office.  Note they are trying to get this done before the Asian markets open. The reason of course is to squelch rumors that  a major investment bank is going to fail. Did it?  Is Brittany Spears out of rehab, is there a difference?

Read more breaking news here. Gee if the FED is going to guarantee there will not be any losses we coold have bought it in Intermed II,what a neat accounting experiment!

Well the markets are opening in Asia and Japan is down 3% on the news of the BSC take over.

I remarked in class that individual areas have already crashed, it could happen to an entire exchange just as it did in 1987! This is setting up to be an interesting week!

In JanuaryFortune interviewed Rogers in his Manhattan townhouse.

In February Fortune updated his thoughts on commodities.

Rogers has written four books, check it out on Amazon.com.

Investment biker, Adventure Capitalist, Hot Commodities, A Bull in China

He recorded his Adventure Capitalist travels at http://www.jimrogers.com.

Jim Rogers never pulls back and only works for himself.  He has sold his NYC townhouse and moved to Singapore to be closer to the developing economies of the world.  Click on the hyperlink and read his latest thoughts on the markets, it certainly follows what I have ponited out in class. Like Jim I am amazed that Bear Stearns is still $77. For more on Jim’s trip round the world go to www.jimrogers.com.

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FNM is a GSE.  And it has a lot of Alt A or Liar Loans. We discussed Fannie Mae in Intermed II Tuesday. The hyperlink takes you to an excellent analysis of the FNM balance sheet.  We are about to study the equity side of the balance sheet. Such ‘equity’ only has meaning if the ‘assets’ are correctly valued. And that is the problem. This is an excellent article and a great demonstration of why we study accounting.

As Brandon pointed out in class, if the FED starts guraanteeing bad mortgages, who is really paying for that?  By extension as the article suggests, if the government bails out FNM by guaranteeing its pledge to re pay mortgages, what will that do to the value of the US dollar?  Yes the Chinese will get paid but what wil be the value of that currency?

Oh great here’s another bold idea, the Term Securities Lending Facility TSLF from the FED.  Sounds like another band aid to me, how about a stronger dollar instead?

Do you read Barrons?  This is a good article on technical analysis, the use of chart patterns to divine market direction, and where we are now.  Barrons.com is another good page to add to your bookmarks for business reading.

Consumers are slacking off at Starbucks.  The WSJ reports that gasoline consumption is down for the first time in 16 years.  No wonder the price just went to an all time inflation adjusted high.  The market will take care of this inflation.  Which is to say that consumers are aware of the increased cost of everytning, see the previous post concerning the weak dollar. Retail sales are slowing, the Retail SPDR is actually up, why?>  Because WMT and other big box retailers are a huge weighted part of that SPDR. When folks go to Wal Mart instead of say Dillard’s WMT benefits.

Actually the trend to $3.00 coffee at Starbucks has been amazing, will it really abate?  I dunno, a Starbucks is about the same price as a gallon of gas, and a lot more fun.

Jack Kemp makes some observations about the US Dollar and our tax policy.  He comes down for big time tax changes and a stronger dollar.  Steve Forbes also has a column on the danger of a weak dollar. (see forbes.com under opinions) Steve points out that it may take another stock market crash to convince Washington of the foly of a weak dollar. Indeed one of the apparent causes of the 1987 stock crash was then Secy Treasury Baker’s staement that if Germany did not boost interest rates, he would just let the dollar fall. Indeed as Kemp and Forbes point out, one can have low interest rates but it takes a strong currency. That way investors are not uneasy about parking their money in a stable currency.

We re discussing the need for retrospective changes in depreciation in Intermed II today. Most of such changes result from trying to advantage the enormously comlex US Tax Code. What if the tax code disappeared? Think how many accounting problems would disappear. Oddly professional accountants do not take positions on the tax code or the dolar in Presidential elections. Come to think of it, so far the canddates have not had much to say about it either.  The election should be more than a Sat Night Live skit but a serious policy discussion. Oh well…..