It's A Deal

March 14, 2008

Confidence Builder. Not.

Well, we got a first-hand glimpse Friday of why some of us have been so very worried about the stranglehold within the credit markets. It was never just about a run-of-the-mill slowdown in the economy, or a meaningless debate about whether we were or were not officially in a recession.

No, in becoming essentially the first I-bank to be bailed out by the Fed, Bear Stearns has shaken the financial market to its very core. And there's a good reason for that, again having to do with the insidious nature of this credit crisis: there's no confidence in what anyone says. Not because they're trying to pull one over on us (usually), but because the people running many of the world's leading financial-services firms simply don't know what they're talking about. They can't. Have you taken a look at the group's so-called Level III assets recently, the stuff they can't value with any degree of certainty?

When Bear CEO Alan Schwartz said just a few days ago that the liquidity picture at his firm was OK, there's little doubt he was telling the truth. Fast forward to today and there is some question about his company's very existence.

Sure, we'll no doubt hear talk of the beleaguered broker being "too big to fail," and a would-be buyer might take a chance on the company. But there again, how could such a buyer, even if scooping up Bear at a remarkable discount, possibly know the extent of the troubles facing the bank, or others, The intertwined nature of the credit contracts and collateral make that virtually impossible. It's why the Fed set this whole "bailout" up to begin with: If Bear goes down, so be it. But this wouldn't be Bear going down, it would be the global financial markets potentially crashing to a halt based on the sheer size of its to little old Bear.

As I've written before, there is a tendency when this kind of news comes down the pike to overreact, assume the worst. Maybe the Fed, JPMorgan, Lazard and whoever else can help smooth this over and make it disappear. I just don't see how it doesn't get worse before it gets better.