Oil, Euros, Bear Stearns, and the Sinking Dollar – What does it all mean? 

By Nathaniel Ford, BythePeople Business Contributor

The extraordinary action taken by the Federal Reserve Bank’s (“Fed”) Chairman, Ben Bernanke, on Friday, March 14, 2008 to bail out Bear Sterns, the fifth largest investment bank in the United States, was designed to avoid Bear Stearns’ collapse and prevent further deepening of the “credit-crunch crisis”.  The terms of the bail out provided Bear Stearns with a 28-day line of credit.  The line of credit was to be administered by JP Morgan Chase, and allowed JP Morgan Chase to borrow from the central bank’s discount window and put up collateral from Bear Stearns to back up the loans.   In this capacity, JP Morgan was to act as an intermediary to Bear Stearns, and Investment firm, who cannot borrow directly from the Fed.  On Sunday morning following the bail out announcement, Bear Stearns was acquired by JP Morgan for the measly amount of $ 236 M or $2.00 a share.  Subsequently, and in order to pacify Bear Stearns investors, JP Morgan Chase increased the buy out offer to $ 10 a share or $ 1.18B, still a significant lower price than the value of Bear Stearns the previous Friday when the stock was trading at $ 30 a share. The extraordinary nature of this bail out was not the size of the credit line nor JP Morgan’s involvement, but rather the fact that the Fed was taking as collateral mortgage-backed securities from Bear Stearns, which in today’s environment are considered risky.

The Bear Stearns near collapse capped a week in the world finance markets that saw oil and gold prices reach new highs, $111 dollars a barrel and $1,000 per ounce respectively, and a new low for the battered dollar. The dollar dropped to a 12-year low against the yen or ¥100.20 to the dollar, after briefly trading under at ¥100, a psicological barrier, and $1.56 against the Euro on Thursday, May 13th.  The backdrop to the economic bad news during one of Wall Street’s most interesting weeks in years, was the almost certain recession that has hit the US, and which is expected to be followed by a slow down in economic growth world-wide.  Read More...