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 U.S. is the fault of many people, none of whom happens 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.
3) The Ben Bernanke Fed, for failing to raise rates more rapidly.
These excuses, are, of course, a steaming pile of organic, enzyme-free donkey fazoo.
One in particular, however, happens to be more manure laden than the rest. I wish to draw your attention to the third excuse, as it was penned earlier this week by three Bear Stearns economists, titled "Apart From That, Mrs. Lincoln, How Was The Play?" 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, if you say so.
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 the mortgage securitization industry: Bear Stearns. Of course, this obviously had nothing to do with Bear's 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 about to go under, the major banks were brought together by the head of the New York Fed. The only one who refused to participate in the $3 billion bailout was Long Term's prime broker --Bear Stearns. That's the sort of poor Wall Street corporate citizenry which makes quite a few enemies. If revenge is a dish best served cold, you can be sure plenty of people were thrilled to announce on Sunday, Supper's Ready.
Finally, there seems to be this tendency amongst Bear economists to play the role of imperfect messenger. 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 criticism consists of blaming the Fed today for, well, not panicking back then, while 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 their management: their aggressive risk taking, their positions in the mortgage back market, and the enemies they made over the years. Sorry to be so blunt, but get real: It was nobody's fault but their own.
The "Chutzpah" of Bear Stearns
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
Wall Street Ponders Extent Of the Woes At Other Firms
SERENA NG and JENNY STRASBURG
WSJ, March 15, 2008; Page B1