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Bear Stearns' Crack-Up Affects Gas Trading, Prices

In the wake of the last-minute rescue of the Bear Stearns financial house by JPMorgan Chase, the New York Mercantile Exchange (Nymex) and IntercontinentalExchange (ICE) spent last week reassuring traders that all their trading members, including Bear Energy and MF Global, were meeting their obligations.

The Commodity Futures Trading Commission (CFTC) also chimed in in support of MF Global, the world's leading broker for exchange-traded futures and options, saying "the CFTC's Division of Clearing and Intermediary Oversight can confirm that MF Global is currently in compliance with the agency's regulatory financial requirements. The CFTC continues to monitor the commodity futures and options markets very closely."

MF Global was just one of the major financial houses subject to swirling rumors early last week that sparked major drops in their stock prices following the federally backed bid by JP Morgan Chase of $2 a share for Bear Stearns, which had been quoted at about $65 a share three days prior. Meanwhile, traders linked the natural gas futures weakness on March 14 to possible efforts by Bear Stearns subsidiary Bear Energy to unload some physical assets. April natural gas recorded a high for its recent up move of $10.285 on March 14 before retreating to $9.868, down 36.2 cents from the March 13 close.

The weakness continued last Monday as April natural gas plummeted 76.8 cents to finish the day at $9.100. The contract finished the week Thursday at $9.065. According to a trader, the discussion of fundamentals is "off the table" because the "craziness on Wall Street" is now calling the shots.

Last weekend, the Financial Times reported one trader's comment that Bear sales had "been pressuring physical natural gas for over a week and has caused likely weakness in the futures as well."

"Rumors that the Bear Stearns difficulties could have resulted in futures weakness [March 14] could have some truth to them," a New York trader told NGI. "There could be something there, but then why were the declines spilling into all the markets if it was just Bear Energy that was active? They were always big in energy markets, but I really don't know how entrenched Bear Stearns is in other futures markets. Now with JPMorgan buying Bear Stearns, you would think that would stop the liquidations of their positions to acquire monies, so I don't think you can link [March 17] natural gas futures declines." Calls to Bear Stearns were referred to JPMorgan, which did not return calls by press time.

The trader added that other investment houses might also be stumbling, which could be tugging on futures values some more. "In addition to the Bear Stearns rumors, there was also talk amongst traders [last Monday] that Goldman Sachs was doing a lot of selling in a lot of the futures markets," he said. "For what reason, I have no idea. In past years I would have said, 'No way, not true, Goldman is an icon,' but in this current financial environment all bets are off."

Media reports of massive write-downs might have been to blame for the activity. While Goldman reported $2.5 billion in losses on loans and other assets last Tuesday, the new was not as bad as the market had been speculating.

One Washington, DC-based broker said market participants are running scared. "We are in pure fear mode right now," he said. "No one is paying any attention to anything other than how much money they have lost and how much they can get out of the market with."

With all of the concerns and rumors swirling around Wall Street with regards to Bear Stearns, MF Global, Lehman Brothers and Goldman Sachs, there is an awful lot of market uncertainty right now, he added. "There is a lot of concern about counterparty credibility, and with good reason. On [last] Monday afternoon MF Global stock was down 60%, Lehman was down 20% and FC Stone was down 43%. These are important players in the market. Whether they are being painted unfairly is unknown, but there is clearly widespread concern with what is going on in the system. 'Cash is king' is a truism for a reason. Some have it and some don't. If you don't have it, then it is the end of the game for you."

MF Global took flak last Monday due to rumors of its affiliation with British tycoon Joe Lewis, whose stake in Bear Stearns was reportedly near 10%. "The rumor out there is that Joe Lewis also had large positions on in the futures market with MF Global," the Washington, DC-based broker added. "With Bear Stearns collapsing, that clearly affects Lewis' liquid net worth and perhaps affected his ability to meet his margin call with others."

MF Global responded to the concerns, noting that the company's "counterparty relationships are sound" and that the firm "has no exposure to sub-prime mortgage-backed securities that have been the root cause of the current market environment." MF Global added that the company is "very well capitalized" with $1.4 billion in a committed undrawn credit facility, and that "Joe Lewis is not a client of MF Global."

A spokeswoman for Atlanta-based ICE said it had been on the phone practically all day last Monday with investors who called to find what kind of exposure ICE had to MF Global, whose stock plummeted 57.29% from a March 14 close of $17.35 to $7.41 on March 17. ICE confirmed that MF Global, the world's leading broker for exchange-traded futures and options, was continuing to meet all obligations at its U.S. and Canadian futures clearing houses. In light of the downward movement in the market price of MF Global's common stock, ICE said it conducted an analysis of MF Global's financial position as a clearing member of both ICE Clear U.S. and ICE Clear Canada, and has concluded that it continues to meet all obligations.

Nymex Holdings Inc., parent of Nymex, said all its clearing members, including Bear Stearns and MF Global, "continue to meet all of their obligations to Nymex and remain in good standing."

Bear Energy, a natural gas player predominantly on the physical side, has its roots in the bankruptcy of independent power producer Calpine. Bear Energy was launched by Bear Stearns, Calpine's former partner in the defunct CalBear energy trading venture (see NGI, April 17, 2006). At the time, a Bear Stearns spokesman told NGI that Bear Energy would be strictly a financial player. NGI's source said at the time it was quite likely that Bear Energy would enter physical energy markets in the future.

JPMorgan Chase & Co. said March 16 that it is acquiring The Bear Stearns Companies Inc. in a stock-for-stock exchange. JPMorgan Chase will exchange 0.05473 shares of JPMorgan Chase common stock per one share of Bear Stearns stock. Based on the closing price of March 14, the transaction would have a value of approximately $2/share.

JPMorgan Chase said that effective immediately is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations. Other than shareholder approval, the closing is not subject to any material conditions. The transaction is expected to have an expedited close by the end of the calendar second quarter 2008. The Federal Reserve, the Office of the Comptroller of the Currency and other federal agencies have given all necessary approvals.

In addition to the financing the Federal Reserve ordinarily provides through its Discount Window, the Fed will provide special financing in connection with this transaction. The Fed has agreed to fund up to $30 billion of Bear Stearns' less liquid assets.

"JPMorgan Chase stands behind Bear Stearns," said JPMorgan Chase CEO Jamie Dimon. "Bear Stearns' clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns' counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner."

"The past week has been an incredibly difficult time for Bear Stearns. This transaction represents the best outcome for all of our constituencies based upon the current circumstances," said Bear Stearns CEO Alan Schwartz.

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