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| Boy Meets Kina GrannisThe Digg Girl was previously mentioned here and here.
Well, she was in New York this weekend so I finally got to meet her in person:
Wow I look fat. It's okay, it only makes Kina look prettier. =)
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| Bear on the WallI had predicted that JP Morgan may buy out Bear Stearns, but who would have thought it would be at $2/share, down from $160/share they were worth last year, $80/share they were worth last week, and $30/share they were worth at Friday's market closing before the buyout announcement on Sunday?!
This announcement came unusually early, before the stock market opened Monday. It turned out the Feds had their hands on this deal, offering to cough up $300 billion to help JP Morgan buy out Bear Stearns. Bear Stearns, it turns out, was in that bad of a shape, and the Feds, having noticed the horrible opening in the Asian market, moved in quickly to salvage the economy by having the only Investment Bank that had the power to buy out Bear Stearns buy it out before the European market opened. Since the Monday Asian market opens Sunday afternoon our time, the Feds had to make all this happen on a Sunday - an unprecedented move involving several high ranking officials in the government as well as at JP Morgan working endlessly on a holiday.
The fact is, JP Morgan was deemed the only firm capable of taking over Bear Stearns without taking a detrimental hit by Bear's debts. Bear Stearns is deemed to be the 5th largest Investment Firm yet there was only one firm in the whole country (possibly the world) that could rescue it, albeit at $2/share!
 Some argue that this is a ripoff for Bear Stearns. Their headquarter building in Midtown Manhattan New York (shown to the right) alone is worth more than $2/share, they argue. Add to it all their other assets, it is a pure theft to buy Bear Stearns at $2/share, especially when the government is providing a financial aid. But this is not necessarily so, most analysts agree, because of all the debts incurred by Bear Stearns that JP Morgan will have to back up with their own assets. Bear Stearns can still reject the offer, but this is unlikely - the only other alternative, no one disputes, is to declare bankruptcy.
Although this news broke out Sunday night, Bear Stearns' stocks were trading well above $2/share Monday morning during the pretrading hours. Officially, the stock market opens at 9:30am, but some early birds will start trading earlier; the earliest usually being 8am. The opening trading price for Bear Stearns was $3.80, almost double $2/share offered by JP Morgan. This is both a good and bad sign for Bear Stearns - First, this is a bad sign for Bear Stearns because it means that people really believe Bear Stearns cannot make it through without getting bought out by JP Morgan. But it is also a good sign for Bear Stearns because people believe Bear Stearns is worth more than $2/share, and JP Morgan may increase its offer before the buyout. JP Morgan's stock was also up, so many traders must have believed JP Morgan was making a good deal with the buyout. It'll be interesting to see how this plays out... Sadly, it feels a lot like watching someone suffocating to death - the death of Bear Stearns.
It reminds me of a quote by Paul Harvey:
If you found yourself in a situation where you could either save a drowning man, or you could take a Pulitzer prize winning photograph of him drowning, what shutter speed and apature would you use? ... and we're all taking our cameras out to watch Bear Stearns drown.
The market panicked otherwise on Monday, especially for other investment firms like Lehman Brothers and Morgan Stanley. If either or both of these firms tanked, there would not be another JP Morgan to buy out another firm, let alone a bigger firm - that would be the death of Wall Street! Perhaps the market knew this or perhaps they had some confidence remaining on these remaining firms, but Monday wasn't as bad as it could have been for either firms. Both made immediate statements Tuesday, ensuring the public that their Q1 loses do not look as grim as they had initially forecasted, allowing their stocks to regain the Monday losses.
The market fluctuated throughout the remainder of the week, both domestically as well as internationally. There are some words that the futures market is doing badly. The only good news is that the oil prices are down.
It'll be interesting to see how this coming week plays out.
Here is more information on how the market played out this past week.
PS: Did anyone notice I misspelled "Bear Stearns" in my Sunday post? I'm a ditz... I should know how to spell "Stearns" by now.
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| This is the New Math taught in schools today. I almost cried at the end of this video...
I still remember the day in 1997 my calculus professor came into the class and announced that the California education board made the decision to no longer require long division in the California elementary curriculum. What idiots...
BTW, Korean kids master multiplication, division, and fractions by the end of the third grade.
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| A binary calculator made of wood pieces:
This sort of illustrates how computers think. You know what they say: "computers are all one's and zero's". This contraption sort of shows how computers calculate, except computers use electrons instead of marbles, and tiny tiny wires instead of wood pieces. Voltages are used instead of gravity to move the electronics (marbles) in computers, and those "levers" in computers are called "transistors". It's just an illustration, albeit a very nice one; you won't see tiny wires that looks like this wooden calculator inside a computer.
Transistors are tiny, which is what allows computers to be small. Before transistors, vacuum tubes were used instead, which were pretty big (a little larger than your thumb.) It's the invention of the transistors that allowed computers to become small.
Trivia: who or what company invented transistors? Click on the comments to see the answer. | | |
| Bear Sterns vs. the WorldWhat happened to Bear Sterns? Their stock prices dropped almost 50% last week, which prompted the Feds to bail them out of bankruptcy with the help of JP Morgan.
This is pretty unusual from several aspects. One is that the Fed has not had to bail out an investment firm since the Great Depression. The very act they used to bail out Bear Sterns, in fact, was instated during the Great Depression. Two is that it's unusual for such large firm with the history and the prestige to fall into such trouble in the first place! So what prompted the trouble for Bear Sterns?
Ironically, it's the same thing that happened during the Great Depression, with a little twist. Bear Sterns invested way too much using loans. The twist is that they thought they were secure in these loans because they had backed up these loans with subprime mortgage-backed securities. Little did they know that subprime mortgage market would crash!
Now, a little word about what "subprime mortgage backed securities" are. Mortgage-Backed Securities (MBS) are basically ownership of mortgages that investment firms and banks buy and sell like stocks to each other. So when you take out a mortgage from your bank, your bank sells off your mortgage to an investment firm like Bear Sterns. This is good for the bank because they get paid up-front, including some interest (but not all), and they won't have to keep hassling you to pay your mortgage every month. This is good for the investment firm, too, because the investment firm gets paid the full interest when it is paid in full. If they're not paid in full, they can take over your house and sell it off; sometimes this will make the investment firm more money than had you paid off all your mortgage if you were close to paying off your mortgage, because the investment firm can take possession of your house, sell it, and make up the difference if not make some extra profit on the side.
If the MBS is a subprime MBS, then it means that you, the house owner who took out of the mortgage from the bank, has a less than ideal credit (your credit is not "prime.") This is fine for the bank and the investment firm, however, if they think they'll still make money off of you. The subprime mortgage market crashed, however, because too many people stopped paying their mortgages way too earlier than predicted by the analysts (probably because the lenders kept on raising the interest rates on the variable interest rate mortgages), so even when they took over these houses and sold them they couldn't make up the difference. This is a bit ironic to me, but I bet there's a select few that made a lot of money by buying all these houses at below-market prices then turning around selling them at market prices - probably the same people that raised the interest rates. Anyway.
So when the subprime mortgage market started crashing, all of Bear Sterns' investors started calling in their debts. In order to stay afloat, Bear Sterns got more loans backed by more mortgage-backed securities because they didn't have anything else to back them by. Of course, these loans had smaller and smaller value as the subprime mortgage market crashed, but Bear Sterns had nothing else to back up their loans. So they kept on doing this until the subprime mortgage market finally crashed and the whole investment market found out Bear Sterns was in trouble. That's when their stocks started nose-diving late Thursday into Friday.
The Feds were already on top of their game, thankfully, and had analyzed the state of Bear Sterns as an investment firm earlier. Their analysis showed that the bankruptcy of Bear Sterns would be detrimental to the economy and decided to bail them out. However, the only law allowing them to bail out an investment firm was an act instituted back during the Great Depression, and it allowed the Feds to bail out only investment banks, not just any investment institution.
In steps JP Morgan. JP Morgan was in a unique situation to help out Bear Sterns. One is that JP Morgan is an investment firm but also a bank (JP Morgan and Chase Bank are the same company.) JP Morgan was also a firm that considered buying Bear Sterns last year, so they had done an intensive analysis of Bear Sterns and knew its workings inside-and-out. JP Morgan also does much of its trading with Bear Sterns, so having Bear Sterns stay afloat was in the interest of JP Morgan. The Feds realized this, and loaned money to JP Morgan to be lent to Bear Sterns. The Feds are also guaranteeing that Bear Sterns will be able to borrow money from the Feds, via JP Morgan, for the next 28 days, protecting them from getting hurt by any calls on loans.
It'll be interesting to see how this plays out for the next 28 days and beyond. It's quite possible that JP Morgan will buy Bear Sterns while its stock prices are low, since JP Morgan had already considered such idea in the past. But JP Morgan has its own investment blunders to worry about, so perhaps it won't be that easy. They'll certainly want to take some time to analyze Bear Sterns' debts. The market will prefer that JP Morgan buy out Bear Sterns than for Bear Sterns to crash. It's also possible that various divisions of Bear Sterns will be sold off separately to various firms.
I had heard one speculated that Citibank will sell off its investment division (Smith Barney) to recover from its own subprime mortgage blunders. But even before the street starts talking about that, this crazy Bear Sterns fiasco takes place! We're definitely in a recession... if you have any money saved up, get ready to start investing once the market hits the bottom. We're not there yet, but we will be soon, soon after a couple more big firms make big moves to recover from the recession, the Federal Reserve stops cutting interest rates, and the tax relief money runs dry - maybe by the end of this year or the beginning of next year or so, I'd imagine.
The following stocks supposedly do well during the recession: Tobacco-related businesses, alcohol-related businesses, gun-related businesses, and casinos. Basically any businesses related to people trying to throw their lives away after dealing with the market crashes do well. It's sad but it's true...
Some references related to the Bear Sterns bailout: [1] [2]
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