Who is to Blame for Bear Stearn's Demise?
From our Things that make you go Hmmmm department:
There is a meme going around about the death of Bear Stearns (BSC). According to some people (mostly current and ex-employees) the collapse of the fifth largest investment bank in the US is the fault of many people, none of whom happen to be the management of Bear Stearns itself.
Let's review some of the reasons why this was "not" Bear Stearn's fault:
1) Various clients -- like Renaissance Technologies Jim Simons, who pulled his prime brokerage account from Bear a few weeks earlier, as well as short sellers spreading rumors -- caused a run on the bank.
2) The Greenspan Fed, for not giving iBanks a seat at the discount window when Glass-Steagall Act was repealed (K & Co, March 16).
3) The Ben Bernanke Fed, for failing to raise rates more rapidly.
These excuses are a steaming pile of organic, enzyme-free donkey fazoo. One in particular stands out as more manure laden than the rest. I wish to draw your attention to the third excuse, as it was penned earlier this week by, of all people, three Bear Stearns economists. Its titled "Apart From That, Mrs. Lincoln, How Was The Play?" You see, it turns out that because the Fed kept rates so low, we ended up with all this bad paper, which ultimately led to the increase in foreclosures, then a sub-prime implosion, a housing debacle, derivative collapse, counter-party risk, recession, etc. If only the Fed raised rates more rapidly, their argument goes none of this would have happened.
Um, sure it is, if you say so. Now, put the gun keyboard down, and back away from the laptop.
To me, this is the equivalent of blaming McDonalds (MCD) for your being obese. Why-oh-why must they make the Quarter Pounder (with cheese) so delicious? Who amongst us can possibly resist its mouthwatering sesame seed buns, its delectable, fat-laden goodness? Hmmmmm, so scrumptious!
Not everyone else gorged at the trough of mortgage backed securities the way Bear did: They were the most aggressive player in the mortgage backed underwriting arena, their internal hedge funds were amongst the most heavily leveraged to the junk. Indeed, of all the banks on Wall Street, one in particular stands out for how heavily tied they were to mortgage securitization industry: Bear Stearns. Of course, this obviously had nothing to do with Bears' current predicament.
Then there is the small matter of, shall we call it, a lack of diplomacy on Bear's part. Back in 1998, when Long Term Capital Management was going down, the major banks were brought together by the New York Fed President. The only party who refused to participate in the $3 billion bailout (which turned out to be profitable for asl involved) was Long Term's prime broker, Bear Stearns. That's the sort of poor Wall Street corporate citizenry which can make you quite a few enemies. If revenge is a dish best served cold, you can be sure plenty of people were thrilled on Sunday to announce Supper's Ready.
Finally, there seems to be this tendency amongst Bear economists of playing the role of imperfect messenger. Recall that just as the credit crunch was unfolding, it was Bear (of all people!) who advised everyone: Don't Panic About the Credit Market. Ironically, part of Bear's current criticism consists of blaming the Fed today for, well, not panicking back then -- even as they were telling everyone to calm down. Sorry, but you don't get to have it both ways.
The bottom line is that Bear went under because of the poor judgment of their management: their aggressive risk taking, their positions in the mortgage back market, their apparent lack of risk controls, their leverage, lack of liquidity and reserves, and the enemies they made over the years. Sorry to be so blunt, but get real: It was nobody's fault but their own.
>
Previously:
The "Chutzpah" of Bear Stearns http://bigpicture.typepad.com/comments/2007/08/the-chutzpah-of.html
Sources:
Apart From That, Mrs. Lincoln, How Was The Play? .pdf
John Ryding, Conrad DeQuadros, Meghna Mittal
Across the Curve: Bear Stearns Economics, March 18, 2008
Bear Economists Snipe at Bernanke
Andrew Ross Sorkin
NYT Dealbook, MARCH 19, 2008, 1:32 PM http://dealbook.blogs.nytimes.com/2008/03/19/bear-economists-snipe-at-bernanke/
Wall Street Ponders Extent Of the Woes At Other Firms
SERENA NG and JENNY STRASBURG
WSJ, March 15, 2008; Page B1
http://tinyurl.com/2dyv4s
Friday, March 21, 2008 | 09:12 AM | Permalink
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Comments
Hmmm....
I wonder whether the BLS will catch the Bear Stearns job losses?
Posted by: Chief Tomahawk | Mar 21, 2008 10:39:33 AM
Alas, again no fuzzy thinking on your part.
I would only add that Brer Bear were always rakish fellows who usually sailed close to the wind.
Posted by: Ross | Mar 21, 2008 10:42:45 AM
Comes 'round, goes 'round. The Finance Industry in general has proven that it lacks and needs adult supervision. You know why they have helmet laws ? Not to prevent idiots from brain-wiping the pavement but because the mopping up is expensive for the rest of society. Along the whole chain from mortgage borrower to originator to bank to investment fund you've had increases in self-destructive behavior that grew as much as the leverage. We're going to get re-regulation the only question is what kind. We'd hope for something that was market supporting and not overly bureaucratic but the guns (keyboards) won't be left in the hands of the kids.
Posted by: dblwyo | Mar 21, 2008 10:51:51 AM
ECRI yesterday has warned officially of a ongoing/coming recession.Either way not the greatest news for housing market.I personally know people who have close to a million dollar debt because they are carrying multiple houses.Let me tell u as long as job market was fine these things could have been swept under the carpet as one is able to meet his mortgage payment from his paycheck.No paycheck and how does one make the mortgage payment.This is gonna be real bad for main street, real real bad.In the meantime I think we are getting close to a bottom here for equities.
Posted by: Jagmohan Swain | Mar 21, 2008 11:10:52 AM
But I thought everything bad was Bill Clinton's fault. To think that those nice, upstanding banking boys are being blamed! The banks always do what is in the best interests of our country because they are stake-holding patriots.
Posted by: Marcus Aurelius | Mar 21, 2008 11:12:28 AM
I NEED MORE! Perhaps they were mis-understanding education (tools to carry out day to day life) and experience with good judgement and leadership.
I am no expert but my couple of pennies on this:
Regulate and bring banks/ brokers/ Inst.Investors/Hedge Funds/PE guys/RE investor/CTAs -- and all the damn human beings who are in the market for just making money -- to using the same maximum amount of leverage ratios, same as what individual investor can do using publicly traded contracts and rules.
That way wall street will free up some quant head Physics PhDs and they will start doing what they were supposed to do in the first place -- and the crazy brains/ education will stop pursuing "chasing money" as a career option.
Guess who is smiling right now? May be they should have all these quotes as a part of MBA program around the world.
- Chains of habit are too light to be felt until they are too heavy to be broken.
- If a business does well, the stock eventually follows
- In the business world, the rearview mirror is always clearer than the windshield.
- It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.
- Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.
-Only when the tide goes out do you discover who's been swimming naked.
-Risk comes from not knowing what you're doing.
- When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.
Posted by: Nihilism | Mar 21, 2008 11:21:13 AM
That's the sort of poor Wall Street corporate citizenry which can make you quite a few enemies.
It reminds me of the line in Field of Dreams about Ty Cobb: "We couldn't stand the Son of a Bitch when he was alive!"
Posted by: Dan W | Mar 21, 2008 11:27:47 AM
If by point 3 they mean that the Fed has kept rates artificially low for too long, then yes, that was the reason for Bear's collapse. In fact, the low interest rates are the *root cause* of this whole problem.
The low interest rates that the Fed has been setting are destroying the dollar. Yes, raising them will create a severe recession. But that is what this country needs--to save the dollar and to purge the excesses of not only the mortgage bubble but the dot-com bubble (the mini-recession of 2001 was not allowed to complete its work).
Barry, I've recently discovered this site and I think you've been pretty good about analyzing the current "downturn", better than most of the shills on the cable news channels. But your analysis needs to penetrate to the root of the problem. When you have a crisis like we have now, and you find so many people to blame (greedy Wall St. bankers, unscrupulous mortgage lenders, stupid no-doc mortgage borrowers, overleveraged hedge funds), then you're not really seeing the root of the problem. The root is the Fed and the inflation it causes. Yes, people took advantage of the all cheap money that was going around. Bear Stearns was one of them, and they deserve to be held accountable for their actions (i.e. their company is dead). But it's not only valid and appropriate, but also vital, that we place the blame on the Fed if we want to find a way out of this mess.
~~~
BR: Hey Jack
Welcome to the site. We've been hitting that topic for about 4 years now.
Do a quick search for inflation ex inflation and you will see what I mean.
Or, just pull up ALL of the inflation posts.
Posted by: Jack | Mar 21, 2008 11:29:12 AM
If the Ibanks had been given a seat at the discount window would we now be talking about them writing off trillions instead of billions?
Posted by: John Jacobs | Mar 21, 2008 11:39:21 AM
It's been astounding to watch the excuse making and the finger pointing that's been done on behalf of Bear. F those guys. They reaped the whirlwind. Kudlow can suck it.
Posted by: Florida | Mar 21, 2008 11:41:49 AM
What I would ask is: who shorted BSC in the days before its collapse? Did they have insider information? This thing happened way too fast.
Posted by: Lars | Mar 21, 2008 11:50:50 AM
I agree with many of the above. Consider why every one of BSC's competitors moved offshore aggressively, they did not.
Call it a lack of - relatively - long term planning, call it a cultural problem, call it a management problem. This glaring omission reveals a thoughtlessness that any retail schmuck putting money into EEM for the last four or five years had figured out.
Posted by: VennData | Mar 21, 2008 11:51:22 AM
If we are talking about the looming recession (depression?) and the tanking of the real estate market, then yes, the Fed is ultimately responsible for holding interest rates low so long. They created the bubble the collapse of which will return some 3-4 million home owners to home renters.
If we are talking about Bear's collapse- thats another matter. This was a organization of finance professionals- people who are, at the very minimum, supposed to be able to accurately judge the risks to their business and plan accordingly. They failed to do so, completely mismanaged their risk, and thus have removed themselves to the dustbin of history. The Fed cannot be blamed for how Bear acted as an organization.
Its a stretch to say that a reasonable expectation of lowering interest rates is that major investment banks would completely abandon risk management.
Posted by: drtomaso | Mar 21, 2008 11:56:02 AM
Simons, Ken Griffin and S3 never would have pulled their assets if they had confidence those assets were safe. So blaming Bear's demise on anybody but Bear management doesn't hold water.
The irony is that Ryding and DeQuadros have consistently been the biggest inflation hawks (on the sell side) during this entire cycle. Bear management effectively made decisions that the FED would ignore the Bear economists concerns and spoil the party by aggressively raising rates to reign in inflation.
They were right. But still lost in the end.
Posted by: Groty | Mar 21, 2008 11:56:13 AM
Hmmmm...i was thinking.
unfortunately, these thoughts may make your stomach churn.
if a house was purchased for $1M two years ago (2006)...that same house may be worth about 800K today...in two more years it may be worth about 20% less...call it 640K
in the past 2 years, the $us lost about 20% of its value...and could probably lose another 20% in the next 2 years....
hmmmmm....
what would one be left with?
hmmmmm...
that 640K house will most likely lose about 40% purchasing power through the debasement of the $us (over 4 years)...could be worth about 384K +/- 50K in 2006 $ terms.
that is unbelieveable $1M down to about $400K over about 4 years time!
talk about evaporation of wealth
Posted by: 3rd inning | Mar 21, 2008 12:00:49 PM
Frankly, I don't give a damn whose fault BSC demise was.
What I am concerned about is the incalculable (is that a word?) liability the FED (~taxpayers) has taken on by giving the Investment Banks access to the Discount Window.
You know the Commercial Banks may not be nearly as financially strong as we might hope. We already know how deep in the hock Fannie Mae and Freddie Mack are and now getting even deeper and now the Investment Banks (~free market, yeah right) are also coming to the trough.
Is the FED going to place any kind of regulations on these free-wheeling stock swappers or just play dumb until the next crisis blows-up?
Posted by: BG | Mar 21, 2008 12:04:12 PM
>> ...would we now be talking about them writing off trillions instead of billions?
There's a Dr. Evil quote in there somewhere!
>> then yes, the Fed is ultimately responsible for holding interest rates low so long.
And Bear was with them every step of the way, willing to stay on the train even after they saw a train on the same track heading their way.
Posted by: wunsacon | Mar 21, 2008 12:04:43 PM
For failing to raise rates more rapidly?
Posted by: John Borchers | Mar 21, 2008 12:05:33 PM
There is a discussion on urban digs about the issue of what the tax payers' exposure is by this fed move.
Posted by: drtomaso | Mar 21, 2008 12:21:55 PM
What fascinates me about Bear Stearns' implosion is that I understood they virtually created the MBS market.
Wouldn't the group that created a market understand it's weaknesses? And even if they didn't create it, they (and others) were huge players in MBS. How was it possible for large groups of (at least) not totally stupid people not see how the housing slowdown was developing in 2005 and 2006 and not protect themselves?
It didn't take "genius" to see problems growing in FL, CA and elsewhere in 05-06. Yet, not only didn't Bear's people hedge against these developments, apparently the biggest guy in MBS at Bear INCREASED his bet in the hedge funds he ran.
People, regardless of intellect, make mistakes. But to so grossly miscalculate a market that you've practically built, that has pretty simple fundamentals (when you get right down to it), is amazing.
Posted by: jag | Mar 21, 2008 12:23:39 PM
barry - Another fine post, your satiric gifts are highly underrated, in case you ever tire of stirring the financial pot.
Posted by: cathompson | Mar 21, 2008 12:24:33 PM
'twasn't fraud what killed the Bear. 'twas Law Enforcement.
Posted by: Marcus Aurelius | Mar 21, 2008 12:25:28 PM
Did I read it here? Somebody made the point that the "bailout"/firesale of Bear protected their massive bonuses paid out in January. All of which would have to have been returned if they filed for bankruptcy. Hell, if you have to go under, you might as well go there with a huge golden parachute.
Posted by: Stoic | Mar 21, 2008 12:25:58 PM
It's either God or The Devil.... depending on your point of view.
Posted by: Bob A | Mar 21, 2008 12:46:27 PM
loose monetary policy of the Greenspan era
+ unregulated greed of the mortgage parasites = imploding debt instruments
Wait, Bernanke to the rescue !!!
Posted by: rickrude | Mar 21, 2008 12:48:07 PM
