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market news by nicholas ford
The rumours reported in the previous article came to fruition over the weekend and yesterday JP Morgan bought Wall Street investment bank Bear Stearns for a fraction of the banks stock market value just 2 weeks ago. The sale, probably rapidly engineered by the regulatory bodies in the US, should help prevent Bear Stearns’ troubles spreading systemically through the banking system in the US, and comes with a sweetener of an emergency 0.25% cut in the US Federal Reserve rate. In contrast to the protracted failure of the UK’s Northern Rock retail bank, the matter has been dealt with rapidly by the US, no doubt due to the larger capital base and operations of Bear Stearns and the extended potentially for knock on effects within the US banking system.
Much of the UK press are reporting the event as a US Northern Rock, in our opinion it’s far more serious. Bear Stearns is an integral part of the US banking system, Northern Rock was a retail savings and mortgage bank. The tabloidesque headline of this article underlines the severity of the situation. Few have seen this sort of event in their lifetime and it should be taken as a marker of just how bad US troubles are. In Asia the markets sold off heavily and London joined in opening 100+ points (1.8%) lower this morning in reaction to the news.
The move underlines our current policy of staying out of equities and holding high quality government and corporate debt. It’s difficult to see how lower interest rates are going to help the US financial system in the short term.