The week of March 10 through March 14, 2008 was nearly an "Up Week". Monday was down but on Tuesday's we saw the market re-bound 417 points. Wednesday closed up, and Thursday the Market was positive, coming from a 200 points deficit to close positive. Even Standard and Poor's, the auditors, made the statement that a floor in the subprime credit crunch could be in the works. Most important, the Market held above the 52 week bottom at 11870.
Friday, March 14, began well. The 8:30 CPI news report showed that inflation was flat from January. This gave confidence to the Market that the Feds could again reduce interest rates at next Tuesday's FOMC meeting, even by as much as 75 basis points. The Market went up 150 Dow Futures points. The CME S&P 500 E-mini futures went up 24 points. All looked so very promising.
But Bear Stearns struck on Friday morning at 10:00am. It was as if Pearl Harbor was bombed once again. Shouldn't the Market have learned a big lesson trading derivatives during the Enron fiasco, when investors lost hundreds of millions of dollars? Or was that just a warm-up for Bear Stearns. Why wasn't legislation passed to stop brokerages from creating "air" derivatives and rating them AAA?
Carlyle Capital leveraged its derivates to the max. December 2007, Carlyle Capitals' equity stake was $670 million. Creating repurchase agreements, or what they called short-term loans, they leveraged their derivative holdings to $22 billion, until their margins were called by Bear Stearns. Carlyle Capital closed at 29cents on Friday March 14. It is basically bankrupted, and took Bear Stearns with it. Bear Stearns was left holding the "margin bag".
Shares of Bear Stearns were plummeted, with the stock closing down 46% to $30. One year ago, this stock was trading at $160/share. The entire Stock Market dumped with Bear Stearns. The CEO of Bear Stearns held a midday news conference, attempting to reassure investors. While he spoke, the Dow went from 140 points down to 217. Bear Stearns' CEO was just not able to put Humpty Dumpty back together.
On Friday, there were a record number of shares and contracts traded. Bear Stearns traded 184 million shares. The