Another Round?

Bear Stearns collapsing following the US$200bn injection by the Fed scared many investors. Below was the conference call held by the company:

12:30 P.M. ET: While the bulk of the investment community is listening to classical music in anticipation of the call’s beginning, here’s an update of where the world stands. Bear Stearns shares are down 36.7% on more than 100 million shares traded, making it easily the most actively traded stock on the Big Board today. The options market shows a ballooning in interest in put options at the US$20 strike price – more than 29,000 contracts have traded, and headed into today there was no open interest at this strike.

12:37 p.m.: Finally, the call is beginning. Elizabeth Ventura of Bear’s corporate communications department is starting the call with the usual boilerplate about forward-looking statements.

12:38 p.m.: Sam Molinaro, CFO notes that the firm is moving up its earnings relase to Monday, and also to share some information on the shared loan facility.

12:39 p.m.: Mr. Molinaro turns it over to Alan Schwartz, CEO, who immediately sets about blaming rumors. “Bear Stearns has been subject to a significant amount of rumor and innuendo over the past week. We attempted to try to provide some facts to the situation but in the market environment we’re in, the rumors intensified and given the nervousness in the market a lot of people it seemed wanted to act to protect themselves from the possibility of rumors being true and didn’t want to wait to see the facts.” MarketBeat is having a hard time remembering what “facts” the firm put out other than to say the rumors weren’t true.

12:42 p.m.: Mr. Schwartz drops this fact — that the firm has been talking to Lazard about “alternatives.” He doesn’t elaborate on this, and quickly opens the floor for questions.

12:46 p.m.: Guy Moszkowski of Merrill Lynch wants to know where the liquidity problems came from — prime brokerage, repo markets, or what. Mr. Molinaro notes that both he and Mr. Schwartz said earlier in the week that liquidity issues were not a problem at the beginning of the week, but “I would would say on Thursday we experienced pretty broad cash outflows from a number of different sources,” including prime brokerage and repo, and also saw “mark-to-market calls on open derivatives contracts. It was from a lot of places and there was a lot of concern in the market, and we had a significant level of outflows.”

12:49 p.m.: Mr. Schwartz, in response to a question, notes that the reason the firm went to J.P. Morgan was because the firm “is the clearing agent for our collateral. It’s easy for them to see the kind and quality of the collateral we had available and therefore could move very very quickly.”

12:52 p.m: Mr. Molinaro is asked about the firm’s view on its liquidity ratios in terms of coverage of unsecured debt. He says this ratio has actually increased because the firm’s short-term unsecured debt has “rolled off,” or declined. But then he goes again after market rumors. “The difficulty we found ourselves in was, counterparties that were providing secured financing against assets that were well liquid and routinely financed, they were no longer willing to provide financing,” he says. This was a result of a market being “fanned by rumors that were not true,” he adds.

12:54 p.m.: Glenn Schorr, analyst at UBS, wants to know if the facility being provided through J.P. Morgan (the size is not known) is large enough to “fill the gaps of all the pulled lines” from those who pulled credit lines from the company. He also wants to know if the 28-day lending facility from J.P. Morgan was given that length because the Fed’s Term Lending Facility comes into play during that time period. Mr. Schwartz says Bear Stearns has “been able to convince customers and counterparites that we have the abillity to fund ourselves every day and do business as usual and there is overlap where liquidity does become available to us and other dealers on some other very high quality collateral.”

12:55 p.m.: Mr. Schwartz continues, calling the facility a “bridge to a more permanent solution.” He then goes back to talking about fact vs. fiction (although the firm’s statements earlier in the week, about not having any liquidity problems, are clearly no longer operative, and the firm did not provide any detail, either. He says the facility is a “bridge to look at strategic alternatives which could run the gamut, but put us in the position where… investors will be able to see the facts instead of the fiction.”

12:56 p.m.: The brief call ends. Shares are down 39%, having not received any kind of boost from the call. The company’s credit default swaps, which measure protection against default on debt, are in a range of 690 basis points to 720 basis points, which is slightly better than the 730 level quoted earlier in the day, but still worse than 685 yesterday, according to Phoenix Partners Group, a derivatives broker.

Comments:

a) This panic is largely unwarranted. You are not going to have US$250-350bn write downs with no companies collapsing. BS is the weakest of the lot. Citic from China showed that not all Asian sovereign wealth funds or linked companies investing in troubled international invest banks are that savvy, or are just picking on the cheap. Their investments can backfire just as well.

b) BS troubles was amplified because it came almost immediately after Fed's silly move. The markets interpreted that as extreme pessimism, and wondering aloud which banks were the Fed trying to save.

c) To lend weight to the above opinion, shares of Lehman Brothers lost 15% and even Citigroup dropped another 10% as shorts betted on the next to follow BS. To me, that showed extreme pessimism - which shows that the reversal is probably very near.

d) Still sticking to 11,500-11,750 as the level where smart investors such as Buffett and the like will start buying large stakes in depressed companies. This is still largely a banks issue. Yes, the employment data has softened and retail sales in the US have tapered off, but that is understandable in light of the sharply correcting property markets there. The bulk of the global economy is still fighting inflationary pressures ( from sustained growth) and not part of this liquidity problem (with the exception of parts of Europe: or more specifically the European investment banks).

e) The Carlye situation also exacerbated matter as troubled hedge funds may be forced to sell other "good stocks" in other markets to cover their asses. However, Carlye's problems was due to extreme leverage - they geared up 1,200% on their positions to lock in certain credit risk papers to magnify returns which did not pan out as they hoped. There is good leverage and silly leverage.

f) Hence this does not look like "another round" but rather darkest before dawn scenario.