What does Bear Stearns bail out means to Mumbaikar ?
The Bear Stearns Companies, Inc. (NYSE: BSC) is the parent company of Bear, Stearns & Co. Inc., one of the largest global investment banks and securities trading and brokerage firms in the world. The main business areas, based on 2006 net revenue distributions, are: capital markets (equities, fixed income, investment banking; just under 80%), wealth management (under 10%) and global clearing services (12%). Since Mid 2006, Bear Sterns has been in considerable financial crisis: primarlily the subprime mortgage crisis, but this article does not divulge into financial crisis of Bear Stearns.(Please read the wiki link for details)
On March 16, 2008, under the supervision of the Federal Reserve, the company signed a merger agreement with JP Morgan Chase ($2 Per share) under which JPMorgan Chase would assume the counter-party risk and exercise management control over Bear Stearns pending shareholder approval.The Federal Reserve issued a non-recourse loan of $30 billion which would cover any losses in Bear Stearns' investments in mortgage-backed securities and exotic investment paper, with collateral to be managed by BlackRock. And last week, JP Morgan Chase increased the value of its purchase stock swap from $2.00/share to $10.00/share and reduced the loan from the Fed by $1 billion. The effect of Fed's bail out is considered on two groups of people. First, we discuss the implication of the bail out on American tax payers. Second, we try to co-relate the effect of the bail out on Mumbaikars ( Indian retail investors/ Portfolios, less than Rs. 20 lakh.) Keep in mind the retail investors does not include any type of funds.
The Feds have essentially taken up the risks of Bear Stearns with the American tax payers money. The equation is pretty simple, if JP Morgan is able to recover all of Bear Stearns investments, which also includes the risky subprime mortgage securities. Then, Feds will recover their loan money from JP Morgan and the Tax payers will see a return on their investments. But the key question here is: what are the risks involved in loans made out to Bear Stearn( Eventually to JP Morgan once the deal is approve by Bears stake holders)? And the truth of the matter is: NO ONE REALLY KNOWS. Even the experts of risk management have failed to describe the risks of Bear's investments. The analysts at Stock PM will post another article in future explaining Bear's investment risk. For now only one thing is clear, every American tax pair's money will be invested in Bear Stearns investments after the JP Morgan deal goes through.
Now, the second question: what does it mean for an Indian retail investor? For a long term retail investor (lazy investor), it just means for now its a Bear (Bear and bull) market, there are some oversold stocks in the market and a few good opportunities to invest ( Keep an eye on our future posts). For a speculative( Day trader) retail investor, " I believe, there is a strong correlation between BSE index to FII ( Foregin institutional investors ) investments and the Wall Street come back!" states one of the analyst here. This means, if the investors keeps an eye on the wall street confidence level (Not the Dow Jone or S&P index), speculators can really be on the right side of market movements. This confidence in the last few days has seen a sea-saw ride.And now we suggest readers to pay strong attention to the Fed news and re-align their positions based on these news. As seen last week the markets went up on Feds bail out, but then wall street confidence went down after JP Morgan increased its bid.We will in future post articles drawing correlation to Feds news and the BSE movements. Please keep reading to StockPM and wall street news to stay updated.
For now, we need to be patient and wait for the Wall street Big Boys to come back and help the Bears return on the Bombay stock exchange.
On March 16, 2008, under the supervision of the Federal Reserve, the company signed a merger agreement with JP Morgan Chase ($2 Per share) under which JPMorgan Chase would assume the counter-party risk and exercise management control over Bear Stearns pending shareholder approval.The Federal Reserve issued a non-recourse loan of $30 billion which would cover any losses in Bear Stearns' investments in mortgage-backed securities and exotic investment paper, with collateral to be managed by BlackRock. And last week, JP Morgan Chase increased the value of its purchase stock swap from $2.00/share to $10.00/share and reduced the loan from the Fed by $1 billion. The effect of Fed's bail out is considered on two groups of people. First, we discuss the implication of the bail out on American tax payers. Second, we try to co-relate the effect of the bail out on Mumbaikars ( Indian retail investors/ Portfolios, less than Rs. 20 lakh.) Keep in mind the retail investors does not include any type of funds.
The Feds have essentially taken up the risks of Bear Stearns with the American tax payers money. The equation is pretty simple, if JP Morgan is able to recover all of Bear Stearns investments, which also includes the risky subprime mortgage securities. Then, Feds will recover their loan money from JP Morgan and the Tax payers will see a return on their investments. But the key question here is: what are the risks involved in loans made out to Bear Stearn( Eventually to JP Morgan once the deal is approve by Bears stake holders)? And the truth of the matter is: NO ONE REALLY KNOWS. Even the experts of risk management have failed to describe the risks of Bear's investments. The analysts at Stock PM will post another article in future explaining Bear's investment risk. For now only one thing is clear, every American tax pair's money will be invested in Bear Stearns investments after the JP Morgan deal goes through.
Now, the second question: what does it mean for an Indian retail investor? For a long term retail investor (lazy investor), it just means for now its a Bear (Bear and bull) market, there are some oversold stocks in the market and a few good opportunities to invest ( Keep an eye on our future posts). For a speculative( Day trader) retail investor, " I believe, there is a strong correlation between BSE index to FII ( Foregin institutional investors ) investments and the Wall Street come back!" states one of the analyst here. This means, if the investors keeps an eye on the wall street confidence level (Not the Dow Jone or S&P index), speculators can really be on the right side of market movements. This confidence in the last few days has seen a sea-saw ride.And now we suggest readers to pay strong attention to the Fed news and re-align their positions based on these news. As seen last week the markets went up on Feds bail out, but then wall street confidence went down after JP Morgan increased its bid.We will in future post articles drawing correlation to Feds news and the BSE movements. Please keep reading to StockPM and wall street news to stay updated.
For now, we need to be patient and wait for the Wall street Big Boys to come back and help the Bears return on the Bombay stock exchange.
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