Credit crisis obliterates Bear Stearns

Through March 31st, S&P 500 declined 9.4% YTD and the NASDAQ declined 13.9%. Stocks looked into the abyss on March 17th.  As is well known, Bear Stearns was driven to the brink of insolvency and was taken over by JP Morgan bank with the help of some powerful guarantees from the Federal Reserve.  Bear Stearns, the 5th largest broker dealer, was the most aggressive prime-broker to hedge funds, not only selling all kinds of exotic securities but also arranging for financing.  As a number of credit hedge funds have had a particularly tough quarter, failing at the rate of nearly one/day, a lot of the collateral ended up back on Bear Stearns' balance sheet.  In a shockingly short period (less than a week,) Bear Stearns found itself unable to borrow funds to finance this inventory.  Counterparties began cutting credit lines and withdrawing assets, and that crisis of trust was the end of the 85 year old firm. 

As news of the takeover broke Sunday afternoon, March 16th, stocks plummeted 6% in Asian markets, 3% in European markets, and opened down 3% in the US on the 17th.  However, reassuring words from the Federal Reserve Bank cut that loss to 1% by day's end and set off a subsequent short-covering rally in financial services (Federal National Mortgage nearly doubled from a low of $18.25 on March 17th to $35.50 on March 20th, which is ridiculous for a mature company with a $30 billion market cap.)  The S&P 500 fell as low as 1257 on the 17th (down 19.7% from last October's record,) but rallied smartly over the last two weeks.  The S&P 500 finished the month down just 0.4%, and the NASDAQ gained 0.4%.  At present, the S&P 500 is off 13.1%, the NASDAQ off 17.4% from the mid-October 2007 highs.

Read the entire commentary here.