Bear in mind

Attached is a link to the best article I have yet read on the twists and turns of the Bear Stearns saga. In my opinion, it is really worth a read. The article highlights that when confidence (which is essentially the life-blood for highly levered financial institutions) disappears, liquidity soon follows. The fall from grace can take place in a matter of days, if not hours.

The article emphasises the role that the rumour-mill played in Bear’s downfall. This is made all the more relevant at the moment given the Fed’s decision this week to cease all uncovered short-selling of brokers and the governmentally sponsored entities Fannie Mae and Freddie Mac. In passing, we were discussing the potential ramifications of this Fed decision around the desk this morning, and the following is worth noting: what will happen to all those players that have had short views on the US economy and on the financial markets in the US – players who have no doubt been shorting the highly levered financial institutions included in the Fed’s ‘out of reach’ list? If they are no longer able to hold these profitable shorts, then where will they look to next to express this same view?

Watch out all those financial institutions who thus far have been off the shorters’ radars, and in particular the currently troubled US regional banks, because this capital may soon be seeking new homes. I don’t think we have heard the last of these stories. Not by a long shot.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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Discuss Article

  1. Ed Painter says:

    Agreed, an excellently written article. It does of course lead one to question exactly what can be done concerning naked short selling and rumour-mongering by the less respectable members of the finance community. The answer, unfortunately, seems to be very little (however hard the SEC and FSA will try).

     

    Posted on: 21/07/08 | 12:00 am

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