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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: MulhollandDrive who wrote (109158)	3/11/2008 8:10:59 PM
From: MulhollandDrive	Read Replies (1) \| Respond to of 306849

marketwatch.com Fed action may have targeted Bear Stearns: analyst Higher borrowing costs may dent prime brokerage, advisory businesses By Alistair Barr, MarketWatch Last update: 6:51 p.m. EDT March 11, 2008 PrintPrint EmailE-mail Subscribe to RSSRSS DisableDisable Live Quotes SAN FRANCISCO (MarketWatch) -- The Federal Reserve's promise to inject $200 billion into the banking system on Tuesday may have partly targeted Bear Stearns Cos., a brokerage firm that's struggling with higher borrowing costs and mortgage-related losses, according to one industry analyst. The Fed joined with other leading central banks to extend its temporary lending program, increasing the funds available and broadening the collateral it will accept. 'The Federal Reserve's actions today may have been strongly influenced by Bear Stearns' problem.' — Analyst Dick Bove of Punk Ziegel Under the coordinated action, the Fed will lend up to $200 billion in Treasury securities for 28 days to primary dealers in the bond market. The new term securities lending facility will accept as collateral many kinds of mortgage-backed securities, including federal agency debt, Fannie Mae (FNM: BSC 62.97, +0.67, +1.1%) is one of the primary dealers that can trade directly with the Fed. The central bank's latest move will allow primary dealers to swap mortgage securities they hold for Treasury bonds. Treasurys are much easier to borrow against because they're backed by the U.S. government, so this should help Bear and other primary dealers including Countrywide Financial (CFC: Countrywide Financial Corp , borrow money more easily. "This morning's announcement by the Fed helps the brokers and their fixed-income hedge fund clients who were struggling with funding," Brad Hintz, an analyst at Bernstein Research, wrote in a note to investors. The Fed's move may help Bear in particular, according to Dick Bove, an analyst at Punk Ziegel & Co. Bear's stock dropped 11% on Monday on concern that its borrowing costs are rising. For a brokerage firm, which relies on steady access to financing, such disruptions can restrain its businesses and leave it at a disadvantage to financially stronger rivals. "The Federal Reserve's actions today may have been strongly influenced by Bear Stearns' problem," Bove wrote in a note to clients. Following the central bank's efforts, Bear shares climbed 1.1% to $62.97 on Tuesday, lagging gains by several other financial-services stocks. "The term securities lending facility is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally," a spokesman for the Federal Reserve Bank of New York said on Tuesday. He declined to comment further. Bear Stearns representatives didn't immediately return a phone message and email seeking comment on Tuesday afternoon. Higher borrowing costs Bear built a business focused on originating mortgages and re-packaging them into mortgage-backed securities and collateralized debt obligations, reaping profits from the whole real-estate financing process, Bove explained. But when the subprime-fueled mortgage crisis hit last year, "Bear did not get out of the way fast enough," the analyst wrote. "Consequently, its balance sheet, its business operations, and its reputation were all hurt badly. One key result of this is that the firm's borrowing costs rose sharply according to reports." A gauge of a company's borrowing costs can be gleaned from the market in credit-default swaps. These derivatives pay their holders in the event of default, and so they appreciate in value when the perceived creditworthiness of a borrower declines. Swaps on Bear Stearns traded at 610 basis points over Treasurys on Monday. That's up from 400 basis points on Friday, according to GFI Group, a leading over-the-counter derivatives broker. A basis point is one hundredth of a percentage point. Still, a Bear Stearns executive told CNBC on Monday that the firm wasn't experiencing liquidity problems