A Conspiracy to Kill Bear Stearns?

Bear Stearns’ (BSC) liquidity dropped from $21B to $2B in 96 hours according to testimony in today’s Senate Banking Committees hearing. The SEC said Bear had adequate liquidity to last one year if it could not get any unsecured financing. But the SEC did not consider that the door would be closed to Bear getting secured financing. Bear could not even get financing with treasuries as collateral.

At the same time, Bear customers were rapidly withdrawing funds. The New York Federal Reserve Bank called it a “run on the bank,” and went on to say that Bear was not sound enough to be saved by access to funds from the Fed.

The SEC hinted that they are investigating the trading activity in Bear’s stock leading up to the meltdown. All of the witnesses at the hearing gave subtle hints that the refusal of secured financing may have been organized.

Both the Fed and the Treasury made it clear that “moral hazard” was critical in approving the JP Morgan (JPM) transaction. They made their intention clear, but they claimed that they did not dictate the stock price. The NY Fed said Bear’s credit line via JPM was not for 28 days, but only up to 28 days.

There is no doubt that the Fed and Treasury wanted a transaction over the weekend. Both the Fed and Treasury caused Bear to mislead investors on Friday, March 14.

Disclosure: Author is long BSC

Comments

[cheapybob]

I heard about a goldman sachs email telling the hedge funds they wouldn't back any bear stearns paper. Its surprising they aren't investigating into that.

[bruin532]

The worst part is its all legal! The investment side shorts BSC the ratings side down grades BSC while the corperate side refuses to lend to BSC because of the downgrade. All the big players get paid off insurers bond holders board members etc, while the stockholders get screwed. Business as usual in corperate America for the little guy.

[helplessobserver]

I suspect that the saga of BSC is far from over. Once investigators and the courts start examining this case patterns of questionable transactions and activities will emerge. Fat cats will get cold feet and BSC shareholders will recover a lot of lost wealth. It will take awhile, but Joe Lewis and the mutual funds will get a lot more than $10 per share.

[BalanceSheetChecker(BSC)]

helplessobserver, you may be right, but it is important that the market doesn't percieve that to be the case. If the market buys your arguement then the stability of the deal is put at risk and therefore the stability of the financial system is too (which is how the Fed justified its role in this deal). I believe it is crucial to the Fed that the markets see this is a done deal. If it is a done deal then you truly are a helpless observer (I assume you hold BSC). If it is not a done deal then you just might come out further ahead then you are now. Although I don't think the Fed intended (or intends) to screw BSC shareholders, I also don't think anyone is losing sleep over the prospects of crushing vocal opposition to this deal if they felt the objectors were putting this deal at risk of permanently colapsing before stability is restored in the system. The timing of when markets return to normal will be everything on this one. This is why JP Morgan is rushing the deal through (lock this steal away before stability is here and the deal can be justifiably challenged) and BSC sharholders are fighting for a delay (if enough time can pass they might yet escape from their role as the sacrificial lamb in the All Powerful Fed's quest for permanent financial market stability). The heavy short selling of BSC stock suggests the market doesn't agree with you. They know the Fed won't let them be squeezed because if they were there could be a whole world of trouble.

[BalanceSheetChecker(BSC)]

By the way, helplessobserver, if you do sell your BSC shares (which I presume you hold) AND end up being right about other shareholders getting more money, would you have any claim on more money too? My guess is no, so why would you (or any BSC shareholder) sell their shares before this is finalized?