Street Fighters: The Last 72 Hours of Bear Stearns, by Kate Kelly

Kate Kelly's book, Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street, now on our recommended reading list, is a great source of information and fun to read. It is well sourced, authoritative, and always interesting.

Does it provide, through a look at Bear, the answers to our financial crisis? We think not, but that is part of the fun. The reader can collect information -- raw data -- with real confidence. There will be many accounts of the financial crisis. Anyone seeking a complete understanding should consult many sources.

The Approach

Street Fighters tells an engaging tale focused upon how a mighty firm was reduced to rubble in three days. You know the ending before you start reading, but it is no less engaging. The author has a nice sense of the characters and has done extensive research into backgrounds. We not only learn about the major players, we learn what everyone else thought about them.

Such an approach is open to challenge. Kelly provides footnotes for sources, and acknowledges disagreement. It is convincing support for her narrative.

The Result

The reader is treated to a view from several perspectives. It is an insider's take on the politics within an investment bank. There is genuine conflict over risk and which products to feature. Even the most jaded reader may have some sympathy for a wealthy guy who spent a lifetime building up his company and his position, only to lose it all in a few days. This is "inside baseball" at its best.

The story is dramatic and well-told.

Assorted Insights

The reader has raw data to draw conclusions on several interesting points. Here are some that stood out for us. Yours might be different. Please consider the following:

• Significance of CNBC. David Faber had a story about firms not trading with Bear. It was big news, but it was later denied by those in question. The damage was already done. The issue is how much information one needs to go with a story like this, when the story itself can affect the outcome. Should Faber have verified more completely before going with this story? Would it have made a difference?
• Significance of Kelly and the WSJ. Many readers will already be familiar with the three-part series in the Wall Street Journal. In the book, Kelly asserts that the series itself -- criticizing Cayne's leadership -- had an impact within the firm.
• Hank Paulson's Role. Paulson is portrayed as dictating a punishingly low stock price for Bear. Historians will combine this information with additional information, including his reversal on the use of TARP funds, the decision to force TARP on all of the major banks, and other similar decisions. From our perspective as public policy experts, this is an extraordinary and arbitrary use of powers. It is on a scale that is without precedent for a Treasury Secretary.
• The Fed Role. The decision of the Fed to expand lending to include investment banks, only two days after the Bear failure, was extremely arbitrary with respect to timing. We should all be concerned when public officials make decisions about which firms (and which investors) live or die, and do so without clear rationale. Bear was allowed to die while others were saved.

Conclusions

Kelly's conclusion is that Ace Greenberg built a firm on some principles and Jimmy Cayne violated those and lost it all. We are not convinced.

We can now see what happened to many other firms. It would not have mattered if Bear's leverage and risk had been a little less. Kelly is probably right in suggesting that Bear was an unloved firm on the Street, and therefore first to be challenged.

It was beyond her scope to consider other causes, although there is a paragraph or two on the trading in Bear stock. This was something we watched daily on our trading screen. Those betting against the firm could trade in the thin Credit Default Swaps market (CDS), buy puts (where premiums exploded in issues that were far out of the money), short the stock, pull your hedge fund accounts, and spread rumors.

These events were all taking place. The sequence of causation will never be determined. What we do know is that any business depending upon confidence and credit can be destroyed in three days. Those aiding the destruction can make millions as it happens. If that is a verdict on a business model, the entire banking industry is in question.

Final Take

The book is fun to read and has plenty of raw data with authoritative sources. You should read it, and combine what you learn with other information. The story of the 2008 crisis is complicated. We look forward to reviewing other books on the subject.

Comments

[Tom Armistead:]

You have correctly described the cause of the financial melt-down. Those who nearly brought down the system destroyed trillions in value in order to harvest billions for themselves.

The SEC, charged with preventing this type of manipulation, did nothing.

It was not good fun.

May 21 05:46 AM

[ain't no fo...:]

Jeff, good review.

I have several recollections of the events of that week, mostly thru watching CNBC and my trading screen, and doing a little reading.

1. Alan Schwartz was interviewed by David Faber a couple of days before the end. He expressed the typical spin/optimism about their financial situation, and about their survival chances. He was clearly muzzled, however, and I could see him look off camera after several questions as if seeking guidance from the corporate lawyers as to how or whether to answer some questions. I walked away believing they were in worse trouble than they were letting on.

2. Regarding Paulson's (formerly of GS) role, I will use your quote:

"From our perspective as public policy experts, this is an extraordinary and arbitrary use of powers. It is on a scale that is without precedent for a Treasury Secretary."

5 months later, there was no Bear and there was no Lehman, and some would argue now that this was not a coincidence. I would stand in that camp.

3. I would also suggest that NAKED shorting, as opposed to legal shorting, played a big role in that collapse. I would further suggest that hedge funds were the major naked shorters, many of them probably having sprung forth from a particular investment bank's incubator over the years, and the conspiracy theorist in me would further opine that I have a pretty good idea who's trading desks those naked shorts were funneled through. Just a WAG of course. Of course.

4. It is my understanding that Bear was the only large institution that did not participate in the financial bailout of LTC approximately 10 years previously. If so, it is not surprising that their demise was somewhat gleefully accepted by the Street, for memories are very long there, and I suspect blood feuds are behind more than a little of what occurs on that street.

May 21 12:41 PM

[tjhorton:]

Much has been written about how tight the U.S. Fed and Treasury are with J.P. Morgan and Goldman Sachs. Don't you think that had something to do with it?

The Fed gave J.P. Morgan a $29 Billion sweetheart loan to buy Bear Stearns, with $1 Billion down and no further downside.

Bear Stearns was taken down viciously, and sold by decree for $2/share (bumped to $10 in the face of shareholder lawsuits). THEN they started saving investment banks 2 days later?

America is really starting to frighten me. The biggest financial and millitary interests seem to be running it like a banana republic.

The public seems astonishingly disinterested in the trillions flowing to these interests ... tens of thousands of dollars per taxpayer.

May 21 12:56 PM

[Missing_Link:]

On May 21 12:41 PM wpdragon wrote:

> 4. It is my understanding that Bear was the only large institution
> that did not participate in the financial bailout of LTC approximately
> 10 years previously. If so, it is not surprising that their demise
> was somewhat gleefully accepted by the Street, for memories are very
> long there, and I suspect blood feuds are behind more than a little
> of what occurs on that street.

So, wait ... you're telling me that in addition to all the naked shorting, bogus earnings, fraudulent ratings, and other forms of financial terrorism practiced by the largest investment firms and hedge funds, Wall Street is apparently ALSO like the Taliban in that they keep extensive records of their own internecine strife and all the minor transgressions committed against them to allow them to suddenly exact bloody screaming revenge decades if not centuries after the fact?

Wonderful.

May 22 07:06 PM

[Missing_Link:]

On May 21 12:56 PM tjhorton wrote:

> The public seems astonishingly disinterested in the trillions flowing
> to these interests ... tens of thousands of dollars per taxpayer.

Well, there are the Tea Party protesters, of course ...

But given that vocal protests are the Left's domain and most of the Tea Party protesters are somewhere along the conservative end of the political spectrum, this has officially been deemed "not cool." With Obama in the White House, protesting has suddenly stopped being chic, and giving a damn about your children's future makes you a "kook" and part of a "fringe element" these days.

May 22 07:10 PM

[dcb:]

My guess is that goldman was the big naked shorter, and payed a bigger role than anyone knows. people know what they are doing and jump on the band wagon. who had the connections at the time, who got rid of the competition, where did paulson work. In this matter these parties have to be considered guilty and prove their innocence.
Only a fool believes that so many random happenings occurred that left goldman standing alone. It would be like flipping a coin a hundred times and getting heads every time. Some things just do not happen by accident.

May 22 07:16 PM

[anarchist:]

A report by Lee Fang at Think Progress documents the involvement of corporate lobbyists FreedomWorks in organizing the teabaggers. FreedomWorks is run by ladies' man (and registered lobbyist) Dick Armey, and if they're not "organizing" the Tea parties, it's news to him. From a letter he wrote on March 10''
So you think this is a grassroots protest?




On May 22 07:10 PM Missing_Link wrote:

> On May 21 12:56 PM tjhorton wrote:

May 22 08:38 PM

[Missing_Link:]

On May 22 08:38 PM anarchist wrote:

> A report by Lee Fang at Think Progress documents the involvement
> of corporate lobbyists FreedomWorks in organizing the teabaggers.
> FreedomWorks is run by ladies' man (and registered lobbyist) Dick
> Armey, and if they're not "organizing" the Tea parties, it's news
> to him. From a letter he wrote on March 10''
> So you think this is a grassroots protest?

Oh, PLEASE. I've been part of the Tea Parties since day one.

This was inspired by Rick Santelli's outburst on CNBC www.youtube.com/watch?... and went viral from there.

Yes, there's been some organization since then, but a million Republican talking heads have tried to get on the bandwagon (Glenn Beck, Sean Hannity), and a million talking heads on the left have then used that as an excuse to claim that it's "corporate" and a "conspiracy" by this or that individual.

The Tea Parties are simple and it's about a lot more than just taxes. We're as fed up with Wall Street as we are with Washington. We're fed up with bailouts, stimulus packages, corruption, corporate dishonesty, federal deficits, and the rest of it.

Democrats are more than welcome to join.

May 22 10:08 PM

[LeoTheDog:]

1

May 23 02:15 AM

[The Aft Deck:]

Looking forward to reading it

May 23 10:14 AM

[User 412366:]

In regards to tjhorton's comment: "America is really starting to frighten me": I'm just beginning to study economics and our financial system in this country - the current crisis piqued my interest. I can tell you, the more I read the frighteneder I become.

May 23 10:48 AM

[Buckoux:]

"America is really starting to frighten me. The biggest financial and millitary [sic] interests seem to be running it like a banana republic." Comment by tjhorton.

I can tell from your post, quoted above, that you know little to nothing about the military except what you have been fed by television. Yes, the Wall Street-Harvard Business School-Financial Complex DOES really frighten me. But when the enemy is at the gate, who do you want to place themselves between your oblivion and its facilitator? A US Army Sergeant or a Wall St. investment banker? For that matter, who would you wish to find your lost wallet, a military person or a "trader"?

As a former member of the US military that frightens you so, on this Memorial Day, I would like to thank you for your vote of confidence. You have the freedom to piss on the military in the press because someone in the military that frightens you shed his blood, lost a limb or lost his life to enable you to do so. You're damn welcome! (I think)

May 23 12:35 PM

[Crocodilian:]

Thank you for the useful review, and I agree with your conclusion. Its also amusing that the author of the present volume wants to ascribe importance to her own reporting in the WSJ . . . my guess is that Bear's capital structure mattered much more.

"Causation" is never going to be something that people agree on here, with good reason . . .

Bear Stearns died of massive leverage, deteriorating asset values and near complete illiquidity of their structured finance products. The particular insult that pushed the whole structure over the cliff isn't the point-- its building a house on a cliffside.

Companies with more straightforward businesses and much less leverage would have gone bust in 2008, had not the Government bailed them out . . . so while its interesting to learn the specifics of Bear's collapse, there's no sense that I have "gee, this could have been avoided"-- except with a bailout.

May 24 09:43 PM

[tjhorton:]

> > "The biggest financial and millitary [sic] interests seem to be running it like a banana republic." Comment by tjhorton.

> You have the freedom to piss on the military ... because someone in the military that frightens you shed his blood, lost a limb or lost his life to enable you to do so" Comment by buckoux

The "biggest financial and millitary interests" does not refer to bank tellers or the brave soldiers that lay down their lives to keep America safe.

I'm talking about the millitary industrial complex that frightened Hoover so much that it was the subject of his farewell address
(see www.independent.org/pu...).

May 25 09:32 AM

[EdG:]

My view is that investments banks were so over-leveraged that a drop in the real economy meant that they had to disappear this depression. The pure investment banking model has been put away until the next boom.

May 25 10:46 PM

[Granville:]

Jeff, I would recommend Nicholas Dunbar's 'Inventing Money', the erudite story of the LTCM crisis, for anyone seriously interested in understanding 'Street Fighters'.
LTCM held 10-year CDS in excess of $1 trillion in notional value. These swaps don't get unwound, but they go to maturity, and the losses are reported at maturity. Let's see, 10-years plus 1997 equals...oops! 2007! Ergo, the banks then had to expand the CDS market in order to diminish the losses they would experience, hence the current problem.
Read more at:
www.safehaven.ca/artic...

The extent of all the relationship between the 1997-8 and 2007-8 events has not been detailed yet. It goes beyond Bear. Lichtenstein and their royals were very involved in LTCM and its aftermath in 1998. Fast forward to 2007, and you have the US Treasury authorities raiding Lichtenstein banks for alleged tax fraud.
Hmmm. Makes events in 2007-8 seem like Act II to the opening Act I in 1997-8.
Or, maybe it is all just a coincidence.

May 26 11:01 AM