Counterparty Terror

The Bear Stearns bomb has left bank trading floors full of fear. Faced with perceived counterparty risk at every turn, financial trading and interbank lending nearly ground to a halt on Monday.
“There’s turmoil in all markets after Bear Stearns,” said BNP Paribas strategist Edmund Shing. “Everyone’s asking: Who’s next? Is there a Bear Stearns in Europe? Could investment banks start to fail?”

Reflecting the fear, London interbank offered rates rose 80 points, the biggest daily increase since the attacks of September 11, 2001.

As stock prices and the U.S. dollar plummet, banks’ access to unsecured borrowing from each other has all but dried up, and dealers say the over-the-counter market had become highly discriminatory, depending on the bank name.

Published dealing rates were unreliable and analysts said any bank that had not already secured funding further than a week or so would struggle to raise cash at all.

“Bear’s near-collapse and takeover accelerates the liquidity crunch and the money market crisis,” Dresdner Kleinwort analyst Willem Sels told clients in a note.

Bear Stearns and the $2 bill

Around 6.30 a.m. on Monday a group of young Bear Stearns employees gathered around a side entrance of their Manhattan headquarters, laughing. They were looking at a $2-dollar bill taped above the Bear Stearns logo — some gallows humor on the bargain-basement price per share that JPMorgan agreed to pay for the troubled investment bank.

“That’s the money shot,” joked one employee, as I took a photo worth way more than a thousand words.

As a bonus, as I was calling my office the cleaners arrived; they overheard my conversation, and offered me the bill as a keepsake.