I’m not getting the overall picture of what caused this to happen? BSC bought or invested in CDOs and those investments went sour because people weren’t paying their mortgages. That would mean that they would lose part of their investment? How does leverage play in this? Also, BSC had trouble borrowing money to stay afloat? Why does BSC need to borrow money or use leverage to stay afloat? It can’t use 1 on 1 money that they have? I can understand the part where customers took their money out of BSC and BSC is losing business left and right. Sorry for beating this subject to death. I’ve been trying to read articles on CNBC and marketwatch, but it didn’t help.
BSC is holding a very large quantity of illiquid securities. Their cash is gone and in order to free up more cash they would need to liquidate some of their holdings. This is easier said than done when what they are holding is deemed to be toxic waste by the rest of the market. If it was just a bond or two they could sell them, but when the assets are closer to $$ billion they need to find another party that will buy the securities at some reasonable price. None of the other major firms want the crap that BSC needs to get rid of so they are totally SOL. Some firm with better liquidity will probably buy BSC and their assets at pennies to the dollar, and then sell them to make a killing once liquidity returns to the market.
Those toxic securities that BSC hold may really only be worth pennies on the dollar depending on the assumptions you make about the % recovery from the massive defaults & fraud that has occured. The powers that be have got us convinced that this is a liquidity crisis but the market is there bidding… it’s just pricing it at 6 to 9 cents on the dollar… so another way of looking at it is the market is not seized, just priced to reflect perceived value. There is no lack of liquidity… there is cash available, but no one is using it for stupid investments (except our own FED!). When I go broke, lose my job, can’t sell my watch, can’t borrow money, etc… then I’m done. I’m bankrupt, etc. When BSC can’t sell their crap bonds the calvary comes in and calls it a friggin’ liquidity crisis. The fed needs to realize their REAL business model was to take stupid risks and get bailed out. Perverse incentives & moral hazards, blah blah blah…
Did Bsc borrow money to buy those mortgage backed toxic securities? They didn’t have cash on hand? From what I got on Marketwatch " But J.P. Morgan is also taking on some of Bear’s large mortgage exposures. The troubled broker had $33 billion of mortgage-related holdings at the end of February. Roughly $2 billion of that was tied to subprime home loans, while $15 billion is backed by prime and so-called Alt-A mortgages, according to a J.P. Morgan presentation on Sunday. The rest – $16 billion – are commercial mortgage-backed securities. About $20 billion of Bear’s mortgage exposure will now be covered by the financing provided by the Federal Reserve, leaving J.P. Morgan exposed to roughly $13 billion of mortgage securities, he noted. Bear also has about $9 billion of exposure to leveraged loans, which are used to finance leveraged buyouts, he added. J.P. Morgan plans to “de-lever” Bear’s balance sheet after the acquisition, executives at the bank said. That means assets that Bear bought, partly with borrowed money, will be sold and loans repaid with the proceeds. Selling illiquid mortgage securities during a credit crunch could generate huge losses. J.P. Morgan said on Sunday that the deal will likely cost roughly $6 billion before taxes. That includes the impact of selling some of Bear’s assets and de-leveraging the balance sheet, plus litigation and other costs