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Bear Stearns: The 'Immaculate Calamity'
From The Daily Capitalist
The Financial Crisis Inquiry Commission (FCIC) had the former execs of Bear Stearns under the hot lights on Wednesday. It seems it wasn't their fault, they said. Which caused Chairperson Phil Angelides to quip that the whole thing must have been an "immaculate calamity." Great line and it's been going around the blogosphere like a virus.
Here is what the executives said:
- None of the former Bear Stearns executives could point to particular actions they took that they felt contributed to the collapse.
- “The market’s loss of confidence, even though it was unjustified and irrational, became a self-fulfilling prophecy,” Former Bear Stearns Chief Executive Officer James Cayne told the Financial Crisis Inquiry Commission in Washington.
- Mr. Molinaro said that "market fears surrounding mortgage-backed securities and rumors and innuendo in the end resulted in fear-induced, irrational behavior that caused a run on the bank."
- Cayne said Wednesday that his firm's risk level was too high in the year before it collapsed. "That was the business," Mr. Cayne told a hearing held by the Financial Crisis Inquiry Commission, a congressional panel scrutinizing the financial crisis. "That was really industry practice. In retrospect, in hindsight, I would say leverage was too high.[42:1]
- Alan Schwartz, who became CEO at Bear Stearns after Mr. Cayne, agreed that the firm's leverage was high, but he also said gross leverage is "one of the most misleading" measurements. Schwartz told the panel the firm was well capitalized and blamed its failure partly on market rumors and speculation. He called Bear Stearns “the first firm to fall victim to the credit and liquidity crisis.”
- Former President Warren J. Spector said Bear Stearns had better risk management than many of its competitors.
- Mr. Cayne said he had hoped that the Securities and Exchange Commission would launch an investigation into a possible conspiracy against Bear Stearns as rumors began circulating that the firm was sinking.
- "Regardless of whether there was a conspiracy or not, the bottom line was that the firm came under attack," Mr. Cayne said. "In my heart I believe there was some stuff going on," Mr. Schwartz said. "Can I prove it? It's very hard to distinguish when a bunch of people are running out of a crowded theater, which one yelled, 'Fire.'"
In other words, insanely high leverage (up to 42:1), large holdings of MBS, poor risk management, and overnight borrowing from the repo market ($50 to $60 billion) had nothing to do with their collapse. They did nothing wrong and were the victims of a conspiracy of evil traders who seized upon their temporary lack of liquidity and sent them over the edge when investors irrationally lost confidence. Talking about an alternate universe, these folks should be sent to St. Helena to think about cause and effect for a while. Jimmy Cayne would probably just play bridge there.
It is rather interesting that a couple little books came out in 2001 and 2004 that turned all conventional risk models Wall Street were using on their head. Unfortunately no one read them. At least no one interested in believing that their methods of risk analysis may be wrong even though they had failed Wall Street time and time again.
These books were, Fooled By Randomness: The Hidden Role of Chance in the Markets and Life (2001) by Nassim Nicholas Taleb (based on the work of Benoit Mandelbrot) and The (Mis)Behavior of Markets (2004), a brilliant introduction to fractal financial analysis by Mandelbrot. Taleb's Black Swan came out in 2007; it was too late for that book to do any good.
Had these Bear executives picked their heads up from the herd, maybe they wouldn't have stumbled. But they didn't. Somehow mortgages where the borrower's FICA score was 500, with a 3% down payment, and liar loan documents, were wrapped up into AAA securities. The premise was, that since housing prices hadn't fallen since the Great Depression, they wouldn't ever crash.
My problem is that the same people who got us into the mess in the first place are still running the farm. They have not changed their investment or risk methodologies to account for the crash and its causes. Worse, most of them were bailed out. This only reinforces bad behavior. Regardless of what the financial reform bill does, the government has set a precedent that they will backstop Wall Street and the innocent will pay for the incompetent. And everyone on Wall Street knows that. Moral hazard.
Let me make myself clear: neither Bear Stearns nor Lehman nor greed caused the boom and bust. Only the Fed can do that. Money flows into opportunity and a lot of money, a lot of easy money, will mask risk with rising prices and cause malinvestment.
The big problem is that when the Fed starts the next business cycle, investors will be encouraged to take even more risks because of the bailouts. If Congress wishes to reform Wall Street, then we should let them fail. The cure is worse than the disease.
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Anybody can make money when the market goes up. Wall Street has proven that time and time again. The trick: how to keep your profits.
Isn't it just "the leverage, stupid"?
The leverage levels were insane. Can't a systematic
way be devised to, increasingly, discourage
leverage as it expands? Provide friction (through
tax or other policies) to make people taking increasing
risks, with other people's money, pay an increasingly
higher price the further they go out on a limb?
Is this such a bizarre concept?
Today Timmie is testifying and re-hashing the
same lines ( when is one of those guys going to be taken
for perjury ): In our system the Federal Reserve was a fire station, a fire station with important, if limited, tools to put foam on the runway, to provide liquidity to markets in extremis. However, the Federal Reserve, under the laws of this land was not given any legal authority to set or enforce limits on risk-taking by large financial institutions like the independent investment banks, insurance companies like AIG, Fannie and Freddie, or the hundreds of non-bank financial firms that operated outside the constraints of the banking system.
This is amazing, or rather shameful, regulation in the shadows,
the New York Fed did not even smell the Bear's match
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They use the text book excuse. But their line of crap is no different than what we here from the FED or our politicians. Its simple, they got greedy, they got stupid, and they got what they deserved. But you have to wonder what the high salaries are really buying.
So here it is:
Being paid a huge salary does not make you smart, and these guys failed to resist the urge to be stupid.
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The red flag is why were they so illiquid? Simple, derivatives.
In the buying and selling of securities (conversion) we make our living at percentage gains usually below 6%. In other words, making and taking profits traditionally are close run things. The MBS holdings have a major flaw, that is, in finding buyers, who through price discovery, can recognize a transaction value at a point we you can still break even. Derivatives seem to adopt non-linear risk when the underlying assets lose value. From what I have seen, this reduction does not even have to be that great. So unless you can show that the underlying assets are rising in price, you are probably illiquid.
Now couple this with a high leverage ratio and you are in a world of hurt. Your only hope, being bailed out.
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The real "immaculate calamity" is the FED/Treasury and administration. Its interesting to see these guys beat up on the non-bailed out, when the politicians enacted legislation like TARP and the Health care bill.
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But really, lets talk about poor risk management. You will hear similar type excuses when the US has a currency crisis, but it will just be someone from government on the hot seat.
Same words, same stupid.
Mark Beck
You have to have the "I don't give a Fuck about my fellow man" and "How much money can I steal" attitude to be an American CEO in the 21st Century.
The French understood you need a good cleaning once in a while.
Stupidity and blame are the two truths these clowns will never admit.
Maybe they can reimburse the Fed for the money it is losing on all the crap they had to take in. These fools are lucky they were the first because it got them 10 dollars instead of ZERO. I guess the Bear Stearns H.F. failure due to CDOs was due to rumours also. Idiots. Be a man and say you messed up.
While neither Bear nor Lehman "caused" the boom/bust to occur, they were certainly not standing in the way of becoming enriched in the process. No one in senior management, MBS trading desks or whatever they used for "due diligence" on the whole loan packages (more like wholey crap packages). Buyer beware, indeed.
Same goes for those genius execs running FNM or FRE. Yes, that means Franklin Raines and many others.
Load the balance sheet with risk, lever up & come hell or high water we're gonna all be okay. If anyone's looking for a beacon or ray of sun, going to have to dig up old research comments from Einhorn / Greenlight Capital or someone similar.
Uhhhhh....I ain't no edoocated Wall Street CEO like Mr. Schwartz, but aren't leverage and soundness of capitalization inversely related? If you are leveraged 42:1 in risky assets, by definition you are not well capitalized. Why do those asking the questions of these guys never call them on stupidity like this?
Revenge is best served up cold. The other banks and investment houses never forgave Bear for walking out of the talks about bailing out LTCM with the Fed in 1998. And when they needed help no one came to their rescue. I believe this is why they were allowed to fail so easily and quickly.
Thanks for your post Econophile. Not having the time to watch the circus, I rely on others to report sometimes. I was hoping for information that would run contrary to the usual series of imbecilic denials of guilt or complicity. None here -- no surprise. That is not to detract from your informative post. You can only report the facts as you see them. Has anyone seen the Great Debate in any other light? That is to say, has anyone seen the testimony as confirming what the clowns... I mean witnesses... have had to say?
"pretend to fail"
To me the most important sliver of evidence of a conspieracy to take them down is finding out who twisted arms to get those way out of the money puts opened. That is a dark secret as shady as the fed itself.
1) when the methodologies just happen to maximize your gains and we continue to socialize losses, not put people in Jail, and don't recall the ill gotten wealth what do you expect to happen.
In truth it is a complete failure of weatern angol saxon capitialism in public companies that this happens. my solution is that people should be paid based upon roa not roe. no leverage effect. make a better roa make more. the current pay system encourages poor risk management and short term thinking. Perhaps give all bonus money, etc. in company bonds that vest only over many many years. last thing in world you want is to ties salary to equity. encourages window dressing, etc. disaster.
I am not a lawyer, but in this entire discourse I haev seen no mention of what would be the legal issues if there foolks came out and told the truth. I ramped up leverage and ran my company into the ground because I knew I would walk away with the most money. It was in my best interest to put the company in jeapordy because......
I believe this is the reason you will always hear the financial tsunami excuse. But I like a lawyer to comment.
It's a complete failure to apply capitalism. Not a failure of capitalism. If it had been able to work it's magic, they'd have had to have stopped taking on bad debt when failure was the other option. However, since it wasn't the only option, and the government was helping to provide some nice (agency) vehicles to remove the risk from their own balance sheet and onto everyone else's in little bits of AAA rated government liquidity fueled flying paper, (along with the promise of a bailout if things got really f'd,) everything was peachy. That isn't how capitalism works. There are no bailouts, and people have to plan for at least the possibility of a failure. Not here though.
"weatern angol saxon capitialism"
You really have a way with words, dcb!
these guys are imbeciles.
maybe there should be a new global currency for imbeciles.
anyone who thinks Cayne and Spectre are imbeciles clearly never met them - evil pricks ? maybe egotistical assholes ? definitely - but imbeciles they aint.
the results say everything.
and you must be a bankster.
if cayne or spectre or any other fuckwad bankster wants to defend the merits of option-arm mortgages or negative amortization mortgages or "stated-income" mortgages or any other "financial innovation" then here is the place to do it.
'It wasn't my fault I swear to God!" http://www.youtube.com/watch?v=9TuLBa-rgBk
JIMMY CAYNE'S UP IN SMOKE:
http://williambanzai7.blogspot.com/2010/05/bear-stearns-up-in-smoke.html