The Eerie Echo Of 2007: It Really Is Bear Stearns, All Over Again

Tyler Durden's picture

While there are numerous and often conflicting opinions about the underlying causes that lead up to the Great Financial Crisis, most agree that the proximal catalyst which finally exposed all the overvalued, illiquid "cockroaches" and confirmed that subprime "is not contained" in the process unleashing the chain of events that culminated with the collapse of Bear, Lehman and AIG, was the failure of one of Bear Stearn's credit-focused hedge funds in the early summer of 2007.

Here is how the conventional wisdom recalls this development:

On June 22, 2007, Bear Stearns pledged a collateralized loan of up to $3.2 billion to "bail out" one of its funds, the Bear Stearns High-Grade Structured Credit Fund, while negotiating with other banks to loan money against collateral to another fund, the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund. CEO James Cayne and other senior executives worried about the damage to the company's reputation. The funds were invested in thinly traded collateralized debt obligations (CDOs). Merrill Lynch seized $850 million worth of the underlying collateral but only was able to auction $100 million of them. The incident sparked concern of contagion as Bear Stearns might be forced to liquidate its CDOs, prompting a mark-down of similar assets in other portfolios. Richard A. Marin, a senior executive at Bear Stearns Asset Management responsible for the two hedge funds, was replaced on June 29 by Jeffrey B. Lane, a former Vice Chairman of rival investment bank, Lehman Brothers.

The rest is history.

We bring up this part of ancient financial history, because while looking at Stone Lion Capital Partners - the first hedge fund that gated investors as reported last night (Third Avenue's likewise gating high yield  fund was technically a mutual fund) - something curious emerged.

Here are the founders of Stone Lion Capital: Alan Mintz and Gregory Hanley. Those names sounded awfully familiar... and then we remembered why:

  • Alan Jay Mintz, CPA, a co-founder of Stone Lion Capital was Co-Head of the Distressed Debt and High Yield trading group at Bear Stearns
  • Gregory Augustine Hanley, a co-founder of Stone Lion Capital was Co-Head of the Distressed Debt and High Yield trading group at Bear Stearns

In fact, the co-founder of the now-gated Stone Capital Alan Mintz, is perhaps best known for his infamous locker room showdown with Bear 's CEO Alan Schwartz. The WSJ recalls this 2008 incident vividly:

Twelve hours after agreeing to sell Bear Stearns Cos. for $2 a share, Alan Schwartz wearily made his way to the company gym for a much-needed workout. It was 6:45 a.m., March 17, and Bear Stearns's chief executive had slept little since hammering out the ugly details of his fire-sale deal with J.P. Morgan Chase & Co.

 

When Mr. Schwartz, already dressed in his business suit, trudged into the locker room, Alan Mintz, still in his sweaty gym clothes, made a beeline for the boss.

 

"How could this happen to 14,000 employees?" demanded the 46-year-old senior trader, thrusting his face uncomfortably close to Mr. Schwartz's. "Look in my eyes, and tell me how this happened!"

 

Two and a half months later, Mr. Schwartz still isn't quite sure. To Mr. Mintz and others, he has blamed a market tsunami he didn't see coming. He told a Senate committee last month: "I just simply have not been able to come up with anything, even with the benefit of hindsight, that would have made a difference."

Seven years later, the former Bear Stearns distressed/high yield trading head Alan Mintz' own investors will be looking into his eyes and asking "how it happened" that their monthly performance reports, which were showing just a modest loss, were in fact grossly misrepresenting the underlying performance, and more importantly, liquidity (ahem Bear Stearns High-Grade Structured Credit Fund), of the hedge fund.

As for Alan's partner, Greg Hanley, what we do know is that reason why he rushed to start Stone Capital alongside Mintz, (initially with Tudor's support), is that there would be no place for him at JPM. From 2008:

Bear Stearns' leveraged finance division - which includes high-yield bonds, leveraged loans and distressed debt - is expected to contribute as few as two senior salesmen to JPMorgan out of an estimated 75 executives who reported to Greg Hanley, head of the division, according to people who worked in it. Hanley, who did not return calls to his mobile phone, is also not planning to join JPMorgan.

Instead Hanley, alongside Mintz, exited the rubble of the insolvent Bear Stearns and joined Tudor to create Stone Lion, which ultimately became an independent entity with $2 billion in AUM.

And now, in a supreme twist of irony, Bear Stearns is back - maybe not the firm itself - but the people who were in charge of its distressed and junk bond trading group, and just like the summer of 2007, it is an ex "Bear"-run hedge fund that was the first to gate, just as the credit cycle is turning and the default cycle has begun, as we explained last week, just one day before everyone's attention finally focused on junk debt with Third Avenue's gating.

* * *

So much about the past, now what about the future, because while we know that the avalanche of redemptions is only just starting, a more pressing question is what was Stone Capital invested in, how will its "gating" impact the market, and what is the most immediate contagion pathway.

For the answer, keep your eyes open on Puerto Rico, where Stone Capital was a rather aggressive hedge fund investor in in the past year. Here is the Caribbean Business with its profile of a hedge fund that "raised $500 million to invest in Puerto Rico"

A prominent New York-based hedge fund has raised around $500 million to invest in opportunities in Puerto Rico, according to CARIBBEAN BUSINESS sources. The $2 billion Stone Lion Capital Partners LLP has created the fund to invest in "credit structures, loan portfolios, alternate financing and private assets," according to official documents obtained by CARIBBEAN BUSINESS.

 

"Stone Lion is one of the few hedge funds with a mandate to invest in Puerto Rico. Its team saw an opportunity, given the depreciation in asset prices and the lack of liquidity on the island. The fund is a source of capital that could partner with Puerto Rico's public and private sectors," said one source, who attended recent presentations made by the fund.

 

Reached by telephone, Stone Lion officials declined to comment on the fund. However, Stone Lion representatives unveiled their plans in meetings with lawmakers, government officials and local financial executives over the past month, the sources said. Participants in the meetings included Government Development Bank officials, prominent lawmakers, private bank officials as well as Puerto Rico Electric Power Authority (Prepa) and Aqueduct & Sewer Authority (Prasa) officials.

 

Besides participating in government- bond deals, Stone Lion is also analyzing alternatives to provide financing to Prepa and Prasa as well as private companies on the island, the sources said. The hedge fund is in discussions with a commercial bank regarding the potential purchase of a troubled loan portfolio and is analyzing the possible purchase of real estate, they added.

 

Stone Lion is a member of the Ad Hoc Group of hedge funds that publicly back the Puerto Rico government's fiscal efforts, which entail making the public corporations self-sufficient and shoring up central government finances. There are 20 members with more than $240 billion combined under management and holding about $4.2 billion of Puerto Rico securities. Other members include Brigade Capital Management, Fir Tree Partners, Monarch Alternative Capital LP and Perry Capital LLC.

 

Besides the Puerto Rico fund, Stone Lion runs an $835 million Opportunistic Credit Hedge Fund and a $625 million Liquidation Focused Fund.

 

Stone Lion was founded in 2008 by Alan Mintz and Gregory Hanley, who have more than 20 years' experience in credit investing, and previously served as global heads of the distressed credit and research groups at Bear Stearns & Co. The firm has vast experience in debt reorganizations and has worked on both the Detroit and Jefferson County, Ala., bankruptcies, the biggest in the U.S. municipal-debt market so far. It also has experience dealing with bond insurers, with some of Puerto Rico's outstanding debt insured.

 

Looks like the experience was only "vast" as long as the market was going higher. The second the bottom fell off, however, and the former Bear Stearns professionals pulled a, well... Bear Stearns.

However, we reserve judgment to declare that the second coming of Bear Stearns has truly come until we hear some iteration of this:

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Looney's picture

I always confuse Gartman and Cramer.

Which one of them idiots is in the video? ;-)

Looney

Dame Ednas Possum's picture

'Cramer reads your emails!'

Great.

'Go fuck a donkey Cramer'

Bullish for lampposts and rope.

Looney's picture

Are there any Lampposts and Rope manufacturers left in the USA? ;-)

Looney

tmosley's picture

I hear Italy has some left over. Military surplus.

hobopants's picture

Hang down your head, Benito...

Mr.Sono's picture

Its time for government defaults.... and fuck corporations in this day of age.

The Pope's picture

 "I always confuse Gartman and Cramer" - Alas, Chosen all look alike - lol (but NOBODY COULD HAVE EVER SEEN IT COMING!!!)

Captain Debtcrash's picture
Captain Debtcrash (not verified) The Pope Dec 12, 2015 1:09 PM

Could this be the critical mass default event we’ve been waiting for?  Doubtful considering its size but with how overleveraged this sham of an economy is you never know. 

nope-1004's picture

The $2 billion Stone Lion Capital Partners LLP has created the fund to invest in "credit structures, loan portfolios, alternate financing and private assets,"

 

Birds of a feather get screwed together.  Alternate financing? lol  We have a system built on debt that is glaringly insolvent.

The reason this is far from over, and the reason these credit financeers don't see the structural problems, is that a financial system that is built on debt needs two things to survive:  Infinite growth and constant liquidity priced at something of value.  Not more debt.

The incredible blindness about this event that is coming is the absolute neglect about how the banks' financial books have been marked to fantasy.  If we were to ever get close to how loans were valued 10 yrs ago, Mintz and Hanley would have blown up Stone years ago.

It's my belief these financial engineers are very short sighted individuals and truly not that smart.  Unfortunately, they are the ones (the Fed) controlling billions of lives.

 

McCormick No. 9's picture

In one form or another, I've been around here for years. What the fuck does "gate" "gating" and "to gate" mean??? I've tried looking it up- no luck. If you're going to toss out neologisms, please fucking at least give us some context to be able to suss out the meaning of the new made-up verb.

My best guess: "to gate" means "to close one's doors for trading." But this is JUST a FUCKING guess.

Escrava Isaura's picture

 

 

This might help

http://www.investopedia.com/terms/g/gateprovision.asp

 

VinceFostersGhost's picture

 

 

 

 

I always confuse Gartman and Cramer.

 

I always mistake Cramer and Kudlow.

 

 

Gartman isn't even on my radar.

The Pope's picture

It's the Wall St version of 'Thunderdome'. Two go in, one comes out. So basically, "May the Schwartz be with you"

NoPension's picture

If these two idiots don't suffer personally, walk away without jail time, don't get lynched and wind up with millions in the bank....why not?

fockewulf190's picture

Somebody please tell me these two chumps also happen to have a large silver short position to boot. I need the shits and giggles.

booboo's picture

considering the entire new world paper planet was created with the printing of the first dollar I don't doubt it, hell Stone Lion could have rehypothicated the mens room hand dryer into a cool 3.5 million.

stocktivity's picture

We are such a fucked up country today - example

Lyrics to the song "Stardust" - 1927 by Hoagy Carmichael

""And now the purple dusk of twilight time steals across the meadows of my heart"

 

Lyrics to the song  "Stupid Hoe" - Nicki Minaj  2012

"You a stupid hoe, you a you a stupid hoe
You a stupid hoe, you a you a stupid hoe
You a stupid hoe, you a you a stupid hoe
You a stupid hoe, you a you a stupid hoe
You a stupid hoe, yeah you a you a stupid hoe
You a stupid hoe you a you a stupid hoe
You stupid stupid, you a stupid hoe
(Stupid, stupid)"

 

Don't believe me? Google it.

actionjacksonbrownie's picture

Now that is pretty damn sad, and extremely fucking hilarious.

buzzardsluck's picture

No I didnt believe you so I did google it.  Fuck you and your fucking 'song', WTF was that shit?!  Why the fuck do you even know it exists? Why not reference a video of barbara boxer and feinstein scissoring/masturbating for the increased shock value?  Why the fuck do I even bother with a computer? 

 

FUCK this world and everyone in it, including myself.  We all deserve what is coming (but at least we allowed mutlicultural shit right?).

CuttingEdge's picture

I prefer piano wire to rope.

It sings a nice melody in the wind to accompany the knee-jerking.

813kml's picture

Those are heartwarming pics, but the reality is that the "masterminds" behind all the deceit and fraud have the means to fly anywhere in the world at a moment's notice and thus will never get the punishment they deserve.

Still, it is nice to have dreams...

Barnaby's picture

I like to think they all end up on Ken Lay's private island. After a while they bust out and end up taking work wiping down the seats at the local sea kayak livery.

Steroid's picture

One extra reason to have a piano!

DirkDiggler11's picture

I'm not sure these guys quality for swinging from a lamppost quite yet, but it is far past the time to start perp walking these fuckers and locking them in prison so they get to enjoy the term "prison sex" first hand.

The lamp posts should be reserved for Fed board members including Mr Yellin as well as the TBTF bank CEO's such as brother Dimon from the Silver Scam bank JPM, and representing the giant vampire squid muppet crushers GS is brother Lloyd B.

Hanging may in fact be far too kind for these fuckers, I'm thinking its time get get some pipe hittin' niggers with a blowtorch and a pair of plyers to go to work on the Holmes here ....

Dame Ednas Possum's picture

+1 for Pulp Fiction reference...

Zed's dead baby... Zed's dead.

Money_for_Nothing's picture

Sorry, baby, but I had to crash that Honda.

NoPension's picture

Zed's dead, baby. Zed's dead.

Debt-Is-Not-Money's picture

"Are there any Lampposts and Rope manufacturers left in the USA?"

Not any that make their rope out of HEMP!

OldPhart's picture

I've been teaching myself, and a couple of children, how to make rope out of cedar.  It's a manual process that takes combined threads and twists and wraps them successively.  Doing more than ten feet however, is too exhausting for the kids.  But ten feet of cedar rope made by these kids is stong enough to snap a neck.

KnuckleDragger-X's picture

Not/biggest since Lehmans, which is soon to be known as "the good old days". Can we kill GS this time???

Bangin7GramRocks's picture

Don't be silly. That's just silly. The Fed will break every law of man and physics to keep that from happening again for a long long time. There was a semblance of a market in 2007. Now there are only "markets".

PutinLover's picture
PutinLover (not verified) Bangin7GramRocks Dec 12, 2015 12:35 PM

Yikes, this is one scary article!

Whenever my kids want to hear a super scary story we come and read some of the frightening fables published here daily. It's a veritable fright fest!

Then I remind them that Zero Hedge has been telling variations of these same stories for many years now and they're just for entertainment purposes (well, that and all the ad revenue).

10 minutes later, they're fast asleep!

i_call_you_my_base's picture

Looks like Cramer got an account again.

SimplePrinciple's picture

Sure am glad those kids won't grow up to be "silly."  No silliness allowed working at McD's.

ebworthen's picture

Time for you to put everything you have into Stone Lion Partners.

Have no fear, it's gated, like a gated community.  All is well!

Tall Tom's picture

Limited access means limited egress.

 

Yeah. Join your gated community today, PutinLover.

 

It...it...it is just like PRISON.

 

And the best part is that bullets and rockets fly over the walls. Yeah. Trapped in a cage.

 

Best to get some umbrellas made of Passports as may be raining shards of hot lead.

 

And those Blackwater Mercs will not put their lives on the line for you after the collapse, when you cannot pay them.

 

(If he has any money ebworthern, he would not put his money where his mouth is. He is just trollin'. He hates the fact that we hate his corrupted and fraudulent system that is raping the lifeblood out of the Republic. He is just as morally corrupt as those who he supports. He has no valor or honor, or honesty,)

 

 

Tall Tom's picture

Put the fear of God into somebody? GOOD.

 

That is the reality about Gated Communities.

 

You opted for "safety" and placed yourself within some prison walls. You traded your Liberty of free movement in order to have the illusion of safety.

 

I did not do that. YOU DID.

 

And when the shit goes down the wealthy are going to be the PRIMARY TARGETS of the hungry and maurading masses.

 

Willie Horton was asked why he robbed Banks. He replied that it was because that is where the money was at.

 

So just where in the hell do you think that the maurading masses will go? To other people who have nothing of value?

 

There is NO SAFETY...EVER.

 

And all of the junks on any of my posts will not change that fact...not one iota.

DanDaley's picture

Willie Horton - Out on furlough murderer

Willie Sutton - Bank robber

I never downvote you...you are the philosopher of the coming apocalypse.

Tall Tom's picture

Thanks for the correction...

OldPhart's picture

Prison.

Anyone else here gone to prison?

I did, but not as a convict, as a volunteer to give mock job interviews.

Prison is NOT like a gated community.  When I got there I had to go through security into a secured "locked" facility.  That wasn't prison, that was the gated community.  Then I had to go to a second place, after a short ride, where I had to go through a second secured "locked" facility, then was sent to a third place, where I got a hand stamp, sent into another area that was secured "locked", could not proceed until I proved I had the hand stamp, then walked to a fourth area where we met a door thirty feet high and had to stand until someone recognized the warden and remotely opened the door.

A weird experience interviewing people.  What did you do previously?  I was a bank robber.  Really, any money in that?  No, that's why I'm here.

I have to ask you, you were in prison, why?  I beat the fuck out of this guy.  Why?  He ratted me out for beating the fuck out of him the first time.

Tall Tom's picture

There are different levels of security,

 

I am in my open air prison. The guards just constantly monitor all of us here in Lakeside.

 

When someone commits a minor infraction (e,g. illegal camping...or as you would know it as being homeless) then they are just relocated to jail, which is just a higher level of security.

 

 

NeedleDickTheBugFucker's picture

ZH telling variations of these same stories for many years while you have been a member for all of two weeks.  Just trying to determine whether you are a silicone- or carbon-based disinformation agent.

Tall Tom's picture

His name was AmerikanPatriot....amongst others.

Tall Tom's picture

Awwwwwww...He does not like being exposed.

Tall Tom's picture

I will not expose everybody.

 

e.g. ~~~

 

I expose just the dishonest.

OldPhart's picture

Your exposure's a bad link.

malek's picture

And the Fed can do this until the public loses all faith in the US Dollar - in other words for a long time to go!