Bear Stearns

I wish building walls wouldn't conceal so much. I walked by 383 Madison Avenue on Friday, which happens to be the headquarters of Bear Stearns Cos. From that vantage point, no matter how hard I tried, I couldn't see the 45% drop in share price evaporating several billion dollars of equity value, or the Federal Government's first loan to anyone other than a bank in this fashion (through JP Morgan on a 28 day term), or any other particularly tangible spectacle surrounding essentially the collapse of the US's 5th biggest bank. Really what happens as word spreads is that people stop executing business and trades with them and pull their money out, as it'd be locked up for an unknown period and potentially gone in bankruptcy. Enough pull out, and they can't function.

A liquidity crisis and a bailout says a few things. They can't meet short term liquidity, which is never a desireable state. But what it also says is that the repurcussions of actually having them fail are too great to allow it to happen. Realistically, the effect of the repurcussions probably aren't known with much precision due to how intertwined the system is. Obviously to take an action of this nature, some intelligent and high level minds came to the conclusion that it'd be bad.

Good time to keep the balance sheet inline. Assets that rank higher on the risk spectrum get less expensive when liquidity dries up. And owning such assets, and taking such risks, can potentially deliver commeasurate reward. Keep eyes peeled for the right situations!