Financial Teasers 17 March 08

Top Stories

JPMorgan to acquire Bear Stearns for cut-rate price
JPMorgan Chase has agree to buy all of Bear Stearns shares for $2 each, for a total of about $270 million. A year ago, shares of Bear sold for $170. The unprecedented deal includes a commitment from JPMorgan and the Federal Reserve to guarantee the trading obligations of Bear. ClipSyndicate/Bloomberg (17 Mar.) , The New York Times (registration required) (17 Mar.) , Financial Times (16 Mar.)

Bear Stearns' downfall raises questions about other firms: The Bear Stearns buyout is triggering a crisis of confidence about other brokers, just as Goldman Sachs, Morgan Stanley and Lehman Brothers are about to report results. "If a firm as large and liquid as Bear can be taken down on what appears to us as exaggerated claims about liquidity and counterparty risk ... then what's to stop the same thing happening to other firms facing similar issues," wrote Michael Hecht, an analyst at Banc of America Securities. MarketWatch (14 Mar.)

Analysis: JPMorgan ends up with an apparent bargain: JPMorgan Chase Chairman and CEO Jamie Dimon -- after two days of tense discussions with Bear Stearns, the Federal Reserve and the Treasury -- appears to have bought a major investment bank at a bargain price. Now Dimon will have to decide what to do with his new assets, such as Bear's prime brokerage business, securities clearing unit and energy trading unit. Financial Times (17 Mar.)

Citic cancels proposed $1 billion tie-up with Bear
Citic Securities Co., one of China's biggest securities firms, has canceled an investment deal with
Bear Stearns Cos. that was announced in November. "The situation has changed," said Citic Group Chairman Dan Kong, after Bear's buy-out by JPMorgan Chase & Co. ClipSyndicate/Bloomberg (17 Mar.) , Bloomberg (17 Mar.)

Bond insurers slowly make way through tough times
Although the bond insurers' stocks and credit default swaps are still distressed, the monolines are slowly working through troubled times. "What we are doing is really help restore confidence," John Uhlein, executive vice president at Ambac Assurance, said at a conference organized by the American Securitization Forum last week in New York. "That probably will take about six months." FinancialWeek (14 Mar.)

Analysts: Chinese banks' subprime losses will be limited
Researchers say China's major banks -- including Industrial and Commercial Bank of China, China Construction Bank and Bank of China -- will suffer only limited subprime-related losses. The banks own just $10.237 billion of U.S. subprime assets, which amounts to less than 1% of the banks' total assets, the analysts found. China Daily (Beijing) (17 Mar.)

Oil soars to record $111 a barrel on Fed, Bear news
Oil increased to more than $111 a barrel on Monday on news of the Bear Stearns sale to JPMorgan Chase and the Federal Reserve's latest cut to the discount rate, which forced the dollar to record lows. "The dollar weakness is the factor at the moment," said Tony Nunan, a risk management executive at Mitsubishi. ClipSyndicate/Bloomberg (17 Mar.) , Reuters (17 Mar.)

Gold reaches new high of $1,030 per ounce
Gold prices hit an all-time high of $1,030.80 on Monday as more bad news about the U.S. financial markets surfaced. "Flight-to-quality buying is boosting gold as the market is losing faith in the dollar," said Tatsuo Kageyama, an analyst with Kanetsu Asset Management. CNBC/Reuters (16 Mar.)

News report says UBS considering slashing 8,000 jobs
UBS is looking into splitting its investment banking and wealth management businesses, along with cutting as many as 8,000 jobs, according to a Swiss newspaper report. Marcel Rohner, CEO of the Swiss banking giant, said UBS wants to keep the businesses together, but it must consider alternatives. The New York Times/Dow Jones Newswires (17 Mar.)

Market Activity

Asian markets plummet on global credit fears
JPMorgan Chase's acquisition of Bear Stearns, the Federal Reserve's bold moves, the declining dollar and concern about the global credit markets all contributed to the losses suffered by the Asian markets on Monday. The Nikkei 225 Average dropped 3.7%, The Hang Seng was down 4.1% and Australia's S&P/ASX 200 and New Zealand's NZX 50 index each fell 2%. MarketWatch (17 Mar.)

Chinese shares drop more than 3% in morning session
China's benchmark Shanghai Composite Index fell 3.17% in the morning session, while the Shenzhen Component Index and the Hushen 300 Index plummeted 3.48% and 3.5%, respectively. The losses were led by blue-chip stocks. People's Daily (China) (17 Mar.)

Bear Stearns woes sparks fear in credit-default swaps market
Bear Stearns was a major force in the growth of the credit-default swaps market, so the firm's troubles are triggering concern in the market where investors, including hedge funds and banks, have taken long and short positions worth hundreds of billions of dollars. Regulators are already pushing for a more transparent system for settling contracts after a firm defaults, but the new market conditions may force the issue.
Financial Times (16 Mar.)

Swiss money markets freeze before bank's repo auction
Dealers say the Swiss franc money markets seized up before a Swiss National Bank repurchase agreement auction on Monday. "The situation is very extreme. Beyond one month there is no money market. There is a loss of trust. What is needed is coordinated central bank action -- rate cuts and intervention," said Peter Thor, a money market trader at UBS. Reuters (17 Mar.)

Economics

Fed moves boldly to boost liquidity for banks
The Federal Reserve has taken bold steps to provide liquidity to investment banks in an effort to curb the damage from the credit crunch. First, the Fed reduced its emergency lending rate to banks from 3.50% to 3.25%. It also created a new lending facility to provide investment banks with cash for short-term loans. "These steps will provide financial institutions with greater assurance of access to funds," Fed Chairman Ben Bernanke said. The Washington Post/Associated Press (16 Mar.)

Dollar plunges on banking woes, Fed's discount rate cut
The dollar continued its freefall on Monday as JPMorgan Chase's acquisition of Bear Stearns fueled fears that other financial companies might fail. "The speed of the slide in the dollar/yen is so rapid that U.S. action alone can no longer stop the dollar's downward trend," said Koichi Ogawa of Daiwa SB Investment. "The time is ripe for coordinated intervention by U.S., European and Japanese authorities." ClipSyndicate/Bloomberg (17 Mar.) , Reuters (17 Mar.)

HSBC chief says U.S. recession would impact Asia
HSBC Chief Executive Sandy Flockhart said a full-blown U.S. recession would hurt Asia, even though there have been few distress signals so far. "If the U.S., which accounts for 30% of the world's consumption, has a long and extended period of slow growth, then it's going to affect Asia," Flockhart said. The Times (London) (17 Mar.)

Gulf central banks pressed to sever ties with dollar
Central banks in the Gulf are feeling increased pressure to cut ties between the free-falling U.S. dollar and their own currencies. Officials in the United Arab Emirates and Qatar have denied rumors of imminent decoupling, and analysts say a sudden move is unlikely. Investors, though, are scrambling to buy local currencies while banks call for revaluation. The Times (London) (17 Mar.)

Geopolitical/Regulatory

China's words, actions differ on monetary policy
China has repeatedly said it is tightening its monetary policy to curb inflation, but observers are questioning whether its actions are in sync with its rhetoric. The answer determines whether financial markets should factor in interest rate increases, a quicker appreciation of the yuan and a renewed crackdown on credit. Reuters (16 Mar.)

Zhou reappointed as China's central bank governor
The National People's Congress approved Zhou Xiaochuan's nomination to continue as the governor of China's central bank. The congress also confirmed numerous other positions, including that of Zhang Ping as head of the economic planning agency, the National Development and Reform Commission. Reuters (17 Mar.)

Q-and-A: Carly Fiorina discusses McCain, Iraq, free tradeCarly Fiorina, the former CEO of Hewlett-Packard, has been campaigning for Sen. John McCain and has been said to be interested in a political career. Here, Fiorina discusses her new position on McCain's staff, McCain's agenda for the economy, immigration, free trade and the war in Iraq. BusinessWeek (17 Mar.)

Other News

Japan's parties argue over central bank chief's replacement
Forbes/Associated Press (17 Mar.)