The Last Days of Bear

Did Goldman (GS) email trigger death spiral?

Roddy Boyd, the long-time New York Post reporter who recently hung his shingle at Fortune, reports on the Bear Stearns (BSC) melt-down, with evidence that Bear Stearns’ chief executive Alan Schwartz and chief financial officer Sam Molinaro were, at best, economical with the truth in the days leading up to the firm’s collapse.

But by March 10, the problem had metastasized into something direr than a rumor. Late the preceding Friday, a major bank—accounts differ on which—had rebuffed Bear's request for a short-term $2 billion loan. Such securities-backed repurchase (or “repo”) loans are crucial for investment banks, which borrow and lend billions to fund their daily business. Being denied such a loan is the Wall Street equivalent of having your buddy refuse to front you $5 the day before payday. Bear executives scrambled and raised the money elsewhere. But the sign was unmistakable: Credit was drying up.

On Tuesday, Mar. 11:

That morning Goldman Sachs’s credit derivatives group sent its hedge fund clients an e-mail announcing another blow. In previous weeks, banks such as Goldman had done a brisk business (for a handsome fee, of course) agreeing to stand in for institutions nervous, say, that Bear wouldn't be able to cough up its obligations on an interest rate swap. But on March 11, Goldman told clients it would no longer step in for them on Bear derivatives deals. (A Goldman spokesman asserts that the e-mail was not a categorical refusal.)

Both Schwartz (Mar. 12) and Molinaro (Mar. 11) appeared on CNBC denying rumors about the firm’s stability. In what was doubtless mere coincidence, Mar. 11 was the day that 55,000 March puts (which expired Mar. 20) traded at the $30 strike, while Bear’s stock was trading around $65.

Nobody would be surprised to find a strong correlation among recipients of the Goldman email and the put buyers. But Boyd’s story strongly suggests that Bear’s demise was based on much more than mere ‘rumor.’

The last days of Bear Stearns
by Roddy Boyd
Fortune Mar. 31 2008

Comments

[Briggsy]

When does smart money become insider trading and/or market manipulation?