Friday, March 14, 2008

Bear Stearns kaput

It is not surprising this morning to see the news that Bear Stearns is in the middle of a liquidity crisis after denying all the reports for over a week. The federal government and JPMorgan Chase have teamed up in an attempt to provide enough liquidity to enable Bear Stearns (BSC) to survive for another 28 days.

A Bear Stearns statement read it "is working with JPMorgan Chase to find permanent strategic alternatives to alleviate the liquidity problems, but could not guarantee they would be successful.” This type of language is not indicative of the probability of a positive outcome. The best case picture has Bear Stearns being merged into another major bank, while the majority of employees pack their possessions into card board boxes.

Considering the previous news out of Bear Stearns (see Is Your Investment Bank Executive a Doper); it is not surprising to see this turn of events. It is obvious to most outsiders that the majority of the executive team was not focused on properly driving the business and attending to risk control.

Most concerning are the broader implications for the banking sector. Citi and others have turned to sovereign wealth funds to capitalize their institutions and remain afloat. This spigot is about to be cut off. The failure of Bear Stearns is probably just the leading edge of a series of dominoes that are doomed to fall over the upcoming months.