ALPINE, UT | 17 March 2008 | I remember as a kid being told about the “Great Depression” and how the banks had collapsed and the government had to come in and bail everyone out. I remember hearing about how FDR had saved America, etc. I had no idea then, how tainted my perspective was based upon the politicizing that had gone on for generations about what had actually happened. Similarly, I’m not sure how many Americans are paying attention today to what is actually happening right before their eyes. For certainly what is happening today will be the source of stories told to children for generations. 2008 is likely the year for the economic earthquake so oft predicted by economic thinkers for the last decade. I’m not kidding, exaggerating, nor do I think I’m a “doomsday-er.” But, one thing I also am not is a pretender, and people who are pretending that this is just a “tough spot” and that “America will work through this” are downplaying the realities of the present situation. The effect that this pretending is having on average citizens is that they stay asleep. It’s time my friends, to wake up and prepare. Actually, it’s past time for some of the most important preparation but it’s not too late for those who are anxious, willing, and committed to getting their house in order - quickly.In order to grasp what’s “really” going on, one needs to simply pay attention to the financial news. Take for example the news story about J.P. Morgan and Bear Stearns.

Overview:

Bear Stearns is one of the largest global investment banks and securities trading firms in the world. Its primary clients are corporations, institutions, governments and high net worth individuals. Between 2005 and 2007 the firm was widely recognized as one of the “Most Admired” firms in Fortune magazine’s “America’s Most Admired Companies” survey.

While anyone can read the headlines, most average folks just have no idea how this company might affect them personally. One of the major investments of Bear Stearns has been mortgage backed securities. Or in other words, when you get a mortgage from a normal bank - they probably sell that mortgage to someone with more money than they have. The “asset” that they are selling is your promise to pay. Your promise is collateralized by the value of your home. Bear Stearns was highly invested in this section of the market. This means that many governments and corporations had substantial portions of their portfolio depending upon the performance of Bear Stearn’s investment in this area. With the real estate crisis, the mortgage/credit crisis, and the collapse of the sub-prime mortgage industry Bear Stearns was unable to maintain a substantial degree of liquidity of its investments. To make it more simple, they would put money in, but could not get money out of their investments. This means that they can’t pay their bills, can’t pay investors, etc. It basically means they can’t operate. Now, I’m not exaggerating. On March 10, 2008 the company denied it had cash liquidity problems, but on March 14, 2008 the AP reported that JP Morgan Chase, in conjunction with the Federal Reserve Bank of New York, would provide temporary funding because “its liquidity significantly deteriorated over the past day.” So, in a nut shell, the company has no cash but has huge obligations to major corporations and governments across the globe. If the company were to just close its doors besides the catastrophic loss to its investors the affect would ripple across the industry causing other investors in similar companies to want to pull out (a.k.a. “run on the bank”) because of fears similar things may happen to them. So, the Federal Reserve steps in and provides the cash needed to run the business for 28 days. But, the situation is even worse. 28 days from now is about April 11th. Look for more shocking developments in the financial sector as this loan comes due.

Now, let’s look at a few main points in the article.

Key Points:

• In January 2007 shares in Bear Stearns traded as high as $170. Today the stock is trading at just over $4.
• Basically the entire portfolio value of this stock has been eliminated overnight. This is far worse than any real estate depreciation.
• JP Morgan has offered to buy the company for pennies on the dollar ($236 million) when the company was estimated to be worth $3.54 billion.
• Why would JP Morgan be buying? Are they dumb? What are you doing?

“Government regulators, including Federal Reserve and the Office of he Comptroller of the Currency, having given their blessing to the transaction.”

• Isn’t it interesting that the Federal Reserve employees are considered “government regulators?”
• Also, isn’t it interesting how quickly the government can give its approval in a situation like this.

“Still, unwinding Bear Stearns could be a nightmare because of the plethora of Wall Street firms with which it has dealings.”

• Self interest: who has self-interest in keeping this entity from collapsing entirely?

“Meanwhile, worries are deepening that other securities firms and commercial banks might be on shaky ground. Lehman Brothers Holdings Inc. Chief Executive Richard Fuld, concerned about the markets and possible fallout from Bear Stearn’s troubles, cut short a trip to India and returned home Sunday, ahead of schedule, according to people familiar with the matter. The decision came after a series of calls Saturday to both senior executives at the firm and Treasury Secretary Henry Paulson, these people say. Investors’ concerns that the flight of worried Bear Stearns customers last week might spread to other firms is likely to make for a tense opening today on Wall Street. Yesterday, Mr. Paulson said in a TV interview that the government “would do what it takes” to protect the integrity of the financial system. On several occasions over the weekend, Mr. Paulson spoke about the Bear Stearns negotiations with Federal Reserve Chairman Ben Bernanke and New York Federal Reserve Bank President Timothy Geithner, according to people familiar with the matter.”

• Is this a private company or a public company ? (remember “public” these days means “government”).
• Where is the government when small business America is having “liquidity problems.” Is it principle or expediency?
• How is JP Morgan benefited? Compare this to Iraq war rhetoric in February of 2003.
• Is the integrity of the “financial system” built upon one company?

“One of Bear’s biggest attractions for J.P. Morgan is its prime brokerage business which caters to hedge fund clients. J.P. Morgan doesn’t have such a business and executives there have long said that they would like to add those operations to the bank’s portfolio…Over time, Bear Stearns’s misfortune could bear fruit for J.P. Morgan. Bear Stearns’s investment-banking unit, which underwrites stocks and bonds and advises on mergers, and its fixed-income and capital-markets trading businesses have been badly bruised by the credit crunch but still have some value.”

• Do you think that the government is protecting you? Or perhaps someone else?
• When “Banks” collapse, it is a public sales job for government / corporate action that is essentially a corporate redistribution of wealth.
• Would “Banks” fail in the unregulated marketplace? What would that look like?

Action Steps:

1. Research your own portfolio. Do you have a 401(k) or other fund based investment? Find out which companies are central to your funds performance.
2. Are you buying high and selling low or are you buying low and selling high? Research investment options for “wholesale buying.” Use your own pretend dollars and practice trading in situations like this - there is much more to come.
3. Are you holding “cash” as investments where the “liquidity” of the cash is controlled by someone else? Consider what options you might have to convert your cash based investments to commodity based investments.
4. At times like this, the public is being sold fear and insecurity to justify government intervention, most want to withdrawl in scarcity from the market. Fight scarcity by creating a master-mind group with licensed financial advisers, experts, friends, family members etc., and brainstorm how you might “benefit” from the current situation.
5. Keep your brain on, and keep reading.
6. Commodities, gold, commodities, silver, commodities, commodities, commodities. Did I say commodities?

Reference(s):

Date: Monday March 17, 2008
Source: Wall Street Journal - “J.P. Morgan rescue Bear Stearns”
Author: Dennis K. Berman, Susanne Craig and Kate Kelly
MRFC Principles: (2, 4, 7, 9, 10)