I am looking at the balance sheets of GS and MS and I noticed that MS has about $80B and GS has about $100B in cash So why was MS running to merge with Wachovia? They had enough cash to write down $75B worth of bad bets. Or am I missing something here? PS: Bear had over $30B in cash when it went under. Can someone explain as to how this can happen? I just can’t see it
Why are they looking to raise CASH when they have billions of it on their balance sheet?
“So why was MS running to merge with Wachovia? They had enough cash to write down $75B worth of bad bets.” -Bad Debts is a non-cash expense.
Bear’s Assets / Equity ratio was around 3% when it went under. So I think even though they had billions, they were so highly leveraged that it did not help. Not sure about how much they owed / needed to write down though.
You are looking at just one side of the BS. That cash is supplied by short and long term loans on the other side of the BS. In uncertain times, short term lenders can pull credit lines, forcing the company to repay outstanding balances. If there is no liquidity available, assets will have to be liquidated at firesale prices. When this happens and you are leveraged 30-1, it doesn’t take too much to wipe out equity holders.
So did equity holders pull out their money and people started to short sell because it looked like bear could not pay its short term loan obligations?
salvaNJ Wrote: ------------------------------------------------------- > You are looking at just one side of the BS. That > cash is supplied by short and long term loans on > the other side of the BS. In uncertain times, > short term lenders can pull credit lines, forcing > the company to repay outstanding balances. If > there is no liquidity available, assets will have > to be liquidated at firesale prices. When this > happens and you are leveraged 30-1, it doesn’t > take too much to wipe out equity holders. yea but i m talking about cash if the lenders pull the credit lines then why not just pay using the $75B cash? I am talking about cash and not short term investments (which are illiquid)
http://www.usatoday.com/money/industries/banking/2008-03-17-bear-stearns-bailout_N.htm “Bear Stearns failed because its investors no longer believed it could repay its loans — even its short-term, overnight loans. Even worse, investors concluded the bank no longer could stand behind the complex agreements it had with other financial institutions. And Bear Stearns had a web of intertwined agreements with other banks, investment houses and corporations.” "Once the housing market started to fall, though, borrowers started to default on mortgages. As defaults piled up, the complex securities Wall Street had created from those mortgages began to crumble. More and more lenders grew wary of making loans, especially if the collateral was mortgage-backed securities. " http://ukhousebubble.blogspot.com/2008/03/bear-stearns-balance-sheet-tells-story.html Take a look at Bear Stearns most recent balance sheet. The bank was running out of capital. Take a look at the “leverage ratio”, which is simply total assets divided by shareholders equity. Between 2005 and 2007, this ratio increases from 27.1 to 33.5. This ratio tells us how much assets one dollar of capital generates. The sudden increase in assets and liabilities between 2006 and 2007 must be due to the Bear Stearn’s decision to take onto its books the two hedge funds that collapsed last summer. So it was the off balance sheet sub prime activities that brought the bank down. There is a hard lesson there for all investment banks as well as financial regulators - off balance sheet activities matter. - - - looks like although the company may have had cash as you said, it was running out and did not paint a pretty future for investors / creditors . . . leading to its demise
They can’t pay using that cash. If you are looking at GS’ 2Q08 balance sheet, you will see that they had cash of $13.781B. The other cash amount listed is $84.880B, and it belongs to GS’ customers, which is why it is listed as “segregated”. So basically, GS’ had $13.781B of cash available to pay off credit lines. Compare that to the $71.176B of unsecured short-term borrowings, and you’ll see that a crisis of confidence could cause them severe liquidity problems.
http://www.wealthdaily.com/articles/bear-stearns-collapse/1213 similar commentary about LEH in this one Bear article- - crazy … published 3/18/08 In this market, anything is possible. With Bear Stearns gone, could Lehman be next? It’s plausible. According to a SeekingAlpha article: “Like Bear Stearns, Lehman is relatively small and undiversified. Like Bear Stearns, Lehman just reiterated that its “liquidity position is strong.” Like Bear Stearns, at least one of Lehman’s trading partners is cutting it off: The WSJ reports that Southeast Asia’s biggest bank, DBS Holdings, has asked traders not to enter new transactions with Lehman Brothers. “DBS has sent an internal e-mail saying it would not deal with Lehman Brothers from now on.” Like Bear Stearns, Lehman is levered about 30-to-1. Like Bear Stearns, Lehman chose not to raise additional capital last fall. Like Bear Stearns, no one has any idea what’s really on Lehman’s balance sheet (including, probably, Lehman) Unlike Bear Stearns, says an analyst at ING, Lehman is NOT too big to fail, which means that the Fed might not be in such a panic to bail it out.” Any way you look at it, it’s an insane situation… one that sounds all too familiar.
tobias Wrote: ------------------------------------------------------- > They can’t pay using that cash. If you are looking > at GS’ 2Q08 balance sheet, you will see that they > had cash of $13.781B. The other cash amount listed > is $84.880B, and it belongs to GS’ customers, > which is why it is listed as “segregated”. So > basically, GS’ had $13.781B of cash available to > pay off credit lines. Compare that to the $71.176B > of unsecured short-term borrowings, and you’ll see > that a crisis of confidence could cause them > severe liquidity problems. Can you provide a link to where it says the other $84B is customer’s money and not GS I am looking at the 10-K and it says: "Cash and securities segregated for regulatory and other purposes " - does that mean its the customer’s money?
The cash as listed under the assets is funded by ST loans (or “deposits” which are exactly offset with a liability), which can be pulled and that liquidity can evaporate quickly.
Gecco Wrote: ------------------------------------------------------- > The cash as listed under the assets is funded by > ST loans (or “deposits” which are exactly offset > with a liability), which can be pulled and that > liquidity can evaporate quickly. Deposits constitute only $15B for Goldman compared to $120B of Cash and securities segregated for regulatory and other purposes
good thread, thanks guys. so bottom line is that the cash, in an uncertain time, is a major phantom since the Liab side may pull down that cash in an immediate worse caser scenario???
I think calculating current ratio helps a lot in this case…
madanalyst Wrote: ------------------------------------------------------- > I think calculating current ratio helps a lot in > this case… Its not about ratios All I am saying is if Morgan Stanley has $75B worth of bad mortgage bets on its balance sheet, wouldn’t it simply offset with the $75B in cash? If it does, then why is MS so worried about its survival? It hasn’t even written $5B of the possible $75B it has room to write off without any problems. But I think I am not properly understanding the meaning of Cash on Morgan’s balance sheet. Is that cash Morgan’s money or money of its clients? But why would it’s clients money be on the balance sheet when MS is not a retail bank?
balance sheet ASSETS | LIABILITIES ------------------------------------------------------- $75B (bad investmnts) | ALL LIABILITIES other invstmnts | | $75B (cash) | EQUITY -------------------------------------------------------- The only way you can write off $75B in bad assets is by reducing equity. cash and bad assets r on same side of the balance sheet, they don’t balance each other.
KoolBen Wrote: ------------------------------------------------------- > balance sheet > > ASSETS | > LIABILITIES > -------------------------------------------------- > ----- > $75B (bad investmnts) | ALL LIABILITIES > other invstmnts | > | > $75B (cash) | EQUITY > -------------------------------------------------- > ------ > > The only way you can write off $75B in bad assets > is by reducing equity. > > cash and bad assets r on same side of the balance > sheet, they don’t balance each other. That makes sense. But now does this mean that the $75B in cash is just useless? If real estate values continue to tumble MS or GS can’t do anything with their cash to survive?
Writing assets down increases leverage thus triggers margin calls, increased cost for short term financing, and loss of business due to credit worthiness. From the view of the counter party, if write downs continue to spiral, the billions of dollars will be used to post existing margins. I guess I’m trying to say is that cash is not really their cash if they continue to write down stuff
Hope this can clear this once and for all. About cash: let’s just look at MS quick. $77 billion in cash, of which 35 is customer deposits (see the liability side of BS), so this is not MS money. Out of the 42 left, 24 is unrestricted, the rest is posted as margins at various exchanges and clearing houses. These are essentially working capital for financial services companies, so unless you cease your operation, this cash can not be drawn to pay down your debt. So the life line is really the $24b unrestricted cash. On the liability side, besides $24b of short-term borrowings, notice more than 200 billion in collaterized financings, which I believe are repo agreements with relatively short maturities. Repo financing are taken for granted during good times, but can dry up quickly during downturns, especially when the collateral is of questionable quality. So imagine if MS’s short-term lenders and repo counter-parties refuse to rollover these giant liability piles, you can start to understand why the banks are walking on a thin line. This is not to mention other use of cash, such as the $300b payables.