Right judgement
Right judgement is critical to everything. In financial world, it will cost death and survival. Many times, individuals fully soaked in events can't make correct judgement because they're so embedded that keen judgement ability is lost. That is just our psychological fact. So the suggestion is that pull ourselves out of a situation and think outside the box.
Here is an example.
Right before Bear Sterns' fall, its credit deteriorated from $18B to $4B just in one day. Trading partners and lenders kept withdrawing from Bear Sterns. They couldn't open the door the next day because they didn't have operating capital anymore. So the executive team seek help from JPM and the Fed. Realized how much impact could be the financial system, the Fed and JPM decided to open a lending window to Bear Stern. In fact, it was the Fed who is lending, JPM is the agent because the Fed didn't want to involve in this deal directly. The announcement said Bear Stern could have up to 28-days of credit backdrop by JPM. Everyone in Bear's executive team was so enlightened that they claimed a victory. No one questioned the statement and situation because they're too tired to do so. Instead they just hoped this was over and used the 28-day window to solve the problem.
The traders in Bear Stern, however, right after they got the announcement, immediately said the firm was done, as opposed to what they're told by the executive. The market knew they're done too because if the Fed needed to be involved that meant the situation was really bad. Downgrades from all rating firms pushed down Bear's price by 50% the next day. When Bear's executives puzzled why the market reacted in this way, the Fed realized much of Bear's assets were toxic. So they won't allow Bear afloat in the system for 28 days but 2 days. They ordered Bear to find a buyer in 2 days. Bear's executives argued that they had 28 days. No, JPM said, "it is *up to* 28 days". No one paid attention to the deadly "up to". It is useless to discuss the book in such a short time.
The rest is well known: in 2 days, Bear sold itself for $2.
Bear had options to sell itself earlier with unknown price. But they didn't. They thought they might get $30 or $40. The ones who knew intuitively are the traders right out of their market senses.
Here is an example.
Right before Bear Sterns' fall, its credit deteriorated from $18B to $4B just in one day. Trading partners and lenders kept withdrawing from Bear Sterns. They couldn't open the door the next day because they didn't have operating capital anymore. So the executive team seek help from JPM and the Fed. Realized how much impact could be the financial system, the Fed and JPM decided to open a lending window to Bear Stern. In fact, it was the Fed who is lending, JPM is the agent because the Fed didn't want to involve in this deal directly. The announcement said Bear Stern could have up to 28-days of credit backdrop by JPM. Everyone in Bear's executive team was so enlightened that they claimed a victory. No one questioned the statement and situation because they're too tired to do so. Instead they just hoped this was over and used the 28-day window to solve the problem.
The traders in Bear Stern, however, right after they got the announcement, immediately said the firm was done, as opposed to what they're told by the executive. The market knew they're done too because if the Fed needed to be involved that meant the situation was really bad. Downgrades from all rating firms pushed down Bear's price by 50% the next day. When Bear's executives puzzled why the market reacted in this way, the Fed realized much of Bear's assets were toxic. So they won't allow Bear afloat in the system for 28 days but 2 days. They ordered Bear to find a buyer in 2 days. Bear's executives argued that they had 28 days. No, JPM said, "it is *up to* 28 days". No one paid attention to the deadly "up to". It is useless to discuss the book in such a short time.
The rest is well known: in 2 days, Bear sold itself for $2.
Bear had options to sell itself earlier with unknown price. But they didn't. They thought they might get $30 or $40. The ones who knew intuitively are the traders right out of their market senses.
posted by Intl.investment.services at
7:43 AM
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