The One Last Ethical Bank? Bear Stearns Just Said No To The Goldman-Paulson Scheme, Did Not Pass "Ethics Standards"

Tyler Durden's picture

Surprises these days come from everywhere: one day we find that some of the wealthiest hedge fund managers are only so thanks to clever schemes involving the enabling of investment banks who have the biggest rolodex of "putzes," finding the last remaining "greater fools" available, another day we discover that a deal that Goldman had no qualms about, was passed on by what may well have been the last remaining ethical bank, Bear Stearns. Greg Zuckerman, as pointed out by Wall Street Manna, in his book "The Greatest Trade Ever" describes Paulson's meetings with Goldman, Bear and Deutsche to "ask if they could create CDOs that Paulson & Co. could essentially bet against. Ironically, it was Bear Stearns that rejected the offer: "[Bear Stearns trader Scott Eichel] worried that Paulson would want especially ugly mortgages for the CDOs, like a bettor asking a football owner to bench a star quarterback to improve the odds of his wager against the team ... he felt it would be improper." Eichel told Zuckerman, " 'It didn't pass our ethics standards; it was a reputation issue, and it didn't pass our moral compass." Sure enough, Goldman et al (allegedly) took down Bear shortly thereafter, and gave it away to Jamie Dimon for pennies on the dollar. In the world of Wall Street, where everyone tries to destroy the dumbest, those who play by some ethical historical rulebook all end up seeing a "run" on their liquidity sooner or later.

Some more observations on Paulson's "moral compass" or lack thereof as Simon Johnson would say:

Paulson felt unburdened by any moral compass. (Of course not. He aleady fixed the odds. He wasn't gambling!) Though he had made clear that the CDOs should be stuffed with only risky slices of debt, Paulson accepted no personal responsibility, claiming “it was a negotiation; we threw out some names, they threw out some names, but the bankers ultimately picked the collateral. We didn’t create the securities, we never sold the securities to investors…”

And as we pointed out, much to the chagrin of a certain clown on CNBC, Goldman may have lost $90 million on Abacus (on one tranche: nobody knows how much the prop desk made - after all Mr. van Praag will never discuss anything about Goldman's prop positions), but made $12 billion via AIG:

Here's the real blockbuster. Abacus wasn't just any old mortgage-backed security. It was one of a toxic group that nearly brought down insurance giant AIG, as the New York Times pointed out last December. Goldman Sachs sold credit-default swaps to Paulson, according to the SEC. That left Goldman holding the risk on Abacus. According to a nice breakdown by the Wall Street Journal this week, here's how Goldman handled it: "Goldman bought credit-default swaps from AIG to hedge the securities firm's positions in some of the [Abacus] pools. When many subprime borrowers began defaulting on their loans in 2007 and 2008, the Abacus CDOs dropped in value, and AIG had to post billions of dollars in cash collateral to Goldman."

And there you have it. Wall Street can count its lucky stars that the bulk of the population gets dizzy when discussing such "complex" things as CDOs, which of course are best left to the Federal Reserve to manage, lest us mere morts misunderstand just how all our tax money (and soon precious metals) are being used to fill the vaults of the big banks, in the biggest legalized money laundering scheme of all time. Otherwise, the revolution would have erupted a long time ago.

h/t Arnaud

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Cistercian's picture

 I am going long on torches and pitchforks.

Mitchman's picture

Don't forget tar and feathers.

Fish Gone Bad's picture

For some reason, people always leave off bailing wire.  You just gotta have bailing wire to tie people up with.

Problem Is's picture

Bailing wire is SOOO Einsatzgruppen Russian front 1942...

Zip ties, man.... The thick ones....

sweet ebony diamond's picture

RFID tags - satellite version

with a special circuit that causes the ring of fire after every dump.

MarketTruth's picture

Plastic handcuffs (aka zip ties).


PS: Long lead and brass.

Howard_Beale's picture

This is getting really ugly. Bear turned down the deal? Yowsir. The bond shop at Bear was never really known for ethics, in fact, just the opposite. If this is really true, the GS house is on fire and nothing will put it out.

Oh regional Indian's picture

Great point HB. Actually you could have said  : 

"The bond shop at "Bank X" was never really known for ethics"

In my understanding not just of WS, but unfortunately most American corporations,

"ethics" was mostly a matter of a discussion that probably went something like this.

CEO: Can we do this?

Sycophant 1 : Yes.

CEO: Should we do this?

Sycop 2: Depends....

CEO: On what?

CFO: If our model is correctly predicting that the "X" million we will set aside today will grow into a large enough pool to pay out a "No-fault" admission in the resulting class action lawsuit to the families/individuals/nations that we intentionally defrauded/denuded/harmed/killed/maimed/screwed/pillaged/fooled.....

In the old days it was products and the entities you needed to pay off were the FDA and 

other "regulatory (hahahahahahahahah!!!) agencies.


Now, with money (synthetic, that is a real kicker, kind of like Teflon)being the US of A's primary product, it is the SEC.


Feel bad for greater america. They have an undeserved reputation for being arseholes (well mostly (I met the best, nicest people in the deep midwest and the deeper southeast)but the "elite".


Phew.... stink of something rotten.


Unfortunately, ethics as a word/way of life had long lost it's meaning there and took conscience right along with it.


SWRichmond's picture

I confess I am truly enjoying watching this thing unravel.  Stage 2: fingerpointing can't be far off.

Cookie's picture

Thank God for ZH

Sucks_to_be_Smart's picture

I sincerely hope their CEO, COO, CFO all go to jail for a WHIIIILE.  This needs to be the start of a legal movement against all the banks who were involved in this mess.  The more this builds momentum the better it is for the country, as well as for the next generation of Americans who might grow up in a world not ruled by TBTF.  Lets go ZH!  Keep spreading the word!

theadr's picture

"Yowsir" is right Howard.  BS has a home mtge subsidiary in TX that was not an FDIC insured bank...which they used as a way to circumvent the flood insurance requirement law.

SayTabserb's picture

The key thing over at the Squid Grotto, the single criterion, was this: if we jam the blood funnel into this deal, will we smell money?

zerosum's picture

Nobody can be sure this is IT for GS...but the odds are good enough to bet it is.

Spitzer's picture

So everyone think tomorrow will be a down day ?

I thought the same when CIT went broke but it wasn't. DOW was up 50 the following Monday.

chindit13's picture

I still am wondering why the Bear "sale" has never caught anyone's interest.

In a nutshell, on that fateful weekend, the following happened:

Jamie Dimon, Chairman of the Board of Directors of the Federal Reserve, and just coincidentally CEO of JPM, met with NYFedGovGeithner and TreasSecPaulson, arranged to have enough new Bear stock issued so that Dimon could control 50.1% of the company, and then approved the "sale" to JPM, with the taxpayer taking their "partnership" in the deal in the form of the downside.  Thus, Maiden Lane I was formed and funded.  Bear shareholders on the Friday before had ZERO say in the new share issuance.  So much for shareholder rights.  And to allow Dimon to work a deal that was to his advantage smacks of at least a little bit of conflict of interest.  (Bondholder rights were latter destroyed in the Chrysler deal, when "Car Czar" and junior Chrysler debtholder Steve Rattner changed the rules of seniority in a bankruptcy, completing the Daily Double of Debt-Equity Holder "Rights".)

All that is now coming to light is Reason Number One why TBTF should not exist, and why it is in the greater interest of the country to break up the banks until none is large enough to hold the country hostage or place a finger on the financial nuclear trigger.

After THAT is done, we can then discuss what should or should not be legal.

For the pychopath Dimon to argue, as he did this weekend, that bankers need even greater access to politicians and more control over the system---after they have demonstrated to all of humanity that they can royally fuck up with the best of them---is the height of arrogance and self-absorption.  I am peaceful by nature, but I think even saying something like that should be a capital crime.

Maybe we can not legislate morality, but we can immunize the system from exposure to the frailties and weaknesses of the human character, so clearly on display on Wall Street.

Let them all fuck each other nine ways from Sunday, but on their own dime.

aus_punter's picture


chindit13's picture

Truly I don't know what a First Rate Investment Banker would be after all the world has gone through because of them.  Is it like winning Ms. Congeniality at a Nazi Wives Gettaway Weekend?

market cynic's picture

10+  !!!


But you know, as well as I do, that when this all eventually comes crashing down for the final time and America is hanging on by a thread for its very economic and political survival, Dimon, Blankfein, and the rest of these evil cocksuckers will be enjoying the view from their limosines, mansions, and protected enclaves while the country that enabled them to have it all burns.

Ned Zeppelin's picture

Chindit dead on as usual.

There is a business reason to avoid a deal like ABACUS, if you think about it.  It's the possibility of your entire business imploding if you go through with it, and the inevitable massive losses hit, and those who have been screwed start to review their options for payback.  And it catches the eye of a certain government agency looking for a no-brainer to restore its lost luster, at a time when your "friend" POTUS is also looking to burnish his brand in the eyes of voters.


tip e. canoe's picture

"Maybe we can not legislate morality, but we can immunize the system from exposure to the frailties and weaknesses of the human character, so clearly on display on Wall Street.

Let them all fuck each other nine ways from Sunday, but on their own dime."

my thoughts exactly, chindit.  unfortunately, this entire dog & pony show isn't even close to that part of the act yet.


wallstreetnobody's picture

Funny that Bear Stearns thought the deal was too unethical while Goldman Sachs jumped all over it.  Definitely not the narrative Goldman has been trying to cultivate all these years.  Even funnier (or more infuriating) that the ex-Goldman CEO Hank Paulson forced the firesale of Bear Stearns just months before he bailed out all his buddies at Goldman with the most massive taxpayer funded bailout in history - after which Goldman went on to pay themselves record bonuses.  If Goldman Sachs isn't the posterboy for unethical behavior I don't know who is.  

verum quod lies's picture

Let's all settle down and think for a moment about this story/narrative. Not to burst your bubble, but I would put the odds of the story being specifically true at less than 50%. I know for a fact the two things dominate stories like that one:

1) Cognitive dissonance (form Wikipedia: "The theory of cognitive dissonance proposes that people have a motivational drive to reduce dissonance by changing their attitudes, beliefs, and behaviors, or by justifying or rationalizing them." - people just want to feel good about themselves and what they have done, especially if they have been monsters), and

2) A planted story (see #1).

Therefore, while possibly partially true, given Bear Stearns' equally scummy reputation, I find it hard to believe they passed on the deal due only to 'ethics' (i.e., at least ethics as we know it). It is most likely that at the Bear they had the quick conversation/evaluation of whether internal rules/ethics would allow such deal yet they passed on it for a different reason than primarily 'ethics'.

As an example of a planted finance story with cognitive dissonance, I can remember that after the initial credit market meltdown in the Summer and Fall of 2007 I head risk people at Wall Street firms were under scrutiny, furthermore I was told the story of how at least one genius (let's call him person X) had someone (a friend at another firm) plant a story that it wasn't person X's fault at all for what seemed to be falling asleep at the wheel, person X tried to do the right and ethical thing but was fired for it, all blame should go to the evil person Y. In reality, X f_ked-up and Y was looking for a scapegoat, but X was fully complicit in the f_k-up (i.e., they both royally messed up, as well as being asleep at the wheel). It was ammusing to all how well it worked, and how so many, as Woody Alan would say, "bought it". In the end Y was fired and X got promoted. So I implore people on this sight, and I understand the venom directed at Goldman, but please think these things through.

Anyway, I think you guys have just been had (i.e., the odds are that you have). Again, that may be a small part of the story, but I seriously doubt that is the whole story, or even close to it. People want to feel good about themselves and no doubt they discussed internal ethics (as they no doubt did at the Giant Vampire Squid, at least as part of internal policy and to cover their behinds), but please don't tell me they passed for purely 'ethical' reasons.


FischerBlack's picture

I don't know anything about cognitive dissonance or planted stories, but I agree that Bear Stearns probably wanted to do the deal. My guess would be that either their lawyers advised them not to, or they were fast coming to the realization that they could not afford any more long exposure to housing or subprime loans. Either way, it makes for good television to be able to say you passed on the deal for ethical reasons. It's probably bullshit, but nobody's going to verify it.

verum quod lies's picture


My God, you're alive. The last time I saw you, why hell, you were working for the Giant Vampire Squid, something about currency hedging. They told me you passed away, wow, that was well before your bud Scholes got involved with LTCM. Welcome back to the land of the living, and I hope, so to speak, that this is a new dawn for you.

Anyway, the whole point of stories like this is to plant the idea that it was all about ethics, not that they were, as you mention full up on that flavor of exposure or anything else that really drove them to pass.


WmWallace's picture

We as Americans have just witnesses and been a willing victim to the greatest heist in the history of mankind.

MarketFox's picture

Dumbing it down is the whole point.

1) Plain vanilla debt with $1000 par or better yet $10 par

2) Plain vanilla stocks

3) A defragmented direct access electronic worldwide seamlessly accessible exchange

4) No taxes

5) Boiler plate entry and reporting

6) NO derivatives

7) 1 to 10X simple margin

8) No account minimums

9) No short sale rule: number of shares that are shortable are restricted by float outstanding and quantity available by electronic tag....thus no locates required.

10) Maximum size restrictions per account

11) The direct access electronic exchange will be in electronic BATS format....whereby costs per 100 units should not exceed 20 cents per 100 units.

12) No matching of any securities off the exchange....all out in the open public domain.

13) Worldwide, in the language and currency of choice....24/7....

14) All securites information fact based wiki style....replaces rating agencies...

15) Easily electronically supervised


The globalized world needs to view the securities market like it does electricity.

It should be provided reliably to everyone.

Capital is as necessary as electricity.

WmWallace's picture

The sudden attack on Goldman Sachs is orchestrated to support the "financial reform". The financial reform efforts will lead to more power to the Federal Reserve Bank and the IMF. This will allow the fascist (government/private industry collusion) oligarchs more power to support those of their tribe and to eliminate ot...hers - a' la Bear Stearns. This has everything to do with power and corruption of the oligarchs

WmWallace's picture
Is there an effort to overthrow the united States Constitutional form of Government?!/note.php?note_id=385633773339
George Costanza's picture

we could sure use Eliot Spitzer now.   Cuomo, are you up for the task ?

boooyaaaah's picture

Who was the harmed party?

Who was defrauded



Calls AIG

Puts GS

convexity's picture

I wouldn't worry too much about GS, they are represented by the best in class lawyers from the ivy league and remember that they also have law firm of Roberts, Scalia, Thomas and Alito on retainer.  The SEC's case will be argued by a bunch of community college flunkies who could never have gotten a job at GS if they tried.  If your laws can't beat em' you might as well buy em' (GS US market is $159.80 -$159.85)

chindit13's picture

They might walk all over the SEC lawyers, but if Lone Star Funds files suit against them (Lone Star bought IKB), it will be a fair fight.

Game not over.

mitack's picture

And IKB only lost 150M, how about RBS that lost 850M- hey if nothing else its e(r/l)ection time over in UK...

Magua's picture

This saga reads like the Godfather. Tattaglias (Goldman) wants to introduce drugs(CDO trash) to the "coloreds" (stupid Europeans), as proposed by its main proponent Sollozzo (John Paulson). When Don Vito (Bear Stearns) says no, the Tattaglias turn to their enforcer Capt McCluskey (Hank Paulson) to take down Don Vito.

Dehrow's picture

I wonder if a word as cool as Abacus will forever be marred, and carry with it a connotation of disgust, due to this shit.

Read, House of Cards, Talks all about the Bear Stearns dealings and what not. Nothing's left out. Geithner looks like a Fool in it. Good read.