First we had the giant Bank of America (BOA) take over the US’s biggest mortgage lender, Countrywide Financial (CWF), in a $4bn deal. Analysts said the deal was a lifeline for Countrywide, which was rumored to be close to bankruptcy. It was also rumored that BOA was willing to invest/squander its massive assets to stave off the possible collapse of the credit/banking system. After all, the losses of a collapse would be far greater than the mere $4bn invested in CWF.
Now we see JP Morgan (JPM) buy Bear Stearns (BS) for a fraction of its former (a mere 30 days ago) value; all with the help of Federal Reserve which is taking all the risk.
What is going on here? Hedge funds, which used to be considered high risk, somehow evolved into a viable investment vehicle for concerns that can’t afford to lose big. Is there too much money and not enough places to put it? Oil and gold futures can only satisfy for so long.
The US market is supported in a large degree by global investment of money pouring in, believing that it’s safe here. After all, the US is supposedly the home of capitalism, although London is clearly the place for global financial institutions. Gosh what happens when the Saudis and OPEC wake up and decide to peg the price of oil to the Euro? Snap, crackle, pop.
On a minor note, chatting with a friend the other day I mentioned that Reagan is known as quickening the fall of the Soviets by spending them into the ground (the fear of the ‘Star Wars’ SDI weapons system); Bush will be known for spending on a war that sends the US into an economic tail spin that makes the great depression look like a walk in the park. Or can just put it on our credit cards and worry about it later.
See BBC BOA/Country-Wide Deal
See BBC JPM/BS Deal
What is troubling the Global Markets?
1998 BBC article on Hedge Funds