Lehman Shorts Scared by Bear Stearns Investigation

Does anyone really think that the shorts put Bear Stearns (BSC) out of business? Someone needs to get the blame, but deep down, we all know that Bear had take on way too much risk and got stuck in one big margin call. Lehman (LEH) seems to be next in line; Bear's Achille's heel was subprime residential mortgages, and Lehman's is over-leveraged commercial real estate. Lehman was trading down yesterday until the article below crossed the wires, and the shorts went scrambling.

US senator asks Justice, SEC to probe Bear trading

A Democratic senator said on Thursday that he was asking the U.S. Justice Department and the Securities and Exchange Commission to investigate stock trading prior to JPMorgan Chase's agreement to buy Bear Stearns in a deal engineered by the Federal Reserve.

"Congress must continue to look into this deal and possible illegal behavior," said Montana Sen. Jon Tester. "I am calling on the proper law enforcement authorities to investigate whether illegal insider trading may have fueled Bear Stearns' downfall," the first-term member of the Senate Banking Committee said in remarks on the Senate floor.

Tester said he was asking the Justice Department and the SEC to investigate and report on "the role that short selling played in the events surrounding Bear Stearns' collapse."

Disclosure: none

Comments

[Chris Marshall:]

Short selling isn't, to my knowledge, illegal.

But the Senator is missing the point with Bear Stearns, the problem was a weak balance sheet and an over exposure to risk.

If somebody willfully sells a decent stock short, just to make a quick buck, I would understand his point of view ( but it still would not be illegal).

But as the short sellers analyzed the company, and quite rightly saw it as massively over priced, owing to its risk profile and liquidity, an investigation will be without foundation, and likely to be for political posturing purposes only.

2008 Apr 11 04:10 AM

[WaveNet Pharma:]

No doubt that Shorts propagated fear, engendered investor panic and then profited from the demise of Bear. The unusual surges in trading volumes, the extremely risky put positions and the speed with which they happened cannot be explained by probabilistic theories, no matter how far fetched.
If stock price manipulation by spreading rumors from which the originators derive a financial gain is an illegal act, then the Bear case deserves to be investigated until the perpetrators are found and dealt with.

2008 Apr 11 04:18 AM

[gonzo:]

Hallelujah to that comment! I sold my stock just before the collapse and saved a bundle. Wish I had gone short too!

2008 Apr 11 04:27 AM

[gonzo:]

I meant the first comment...the market is always flush with rumours. Sometimes they are true. If the rumour was that Bear was going bust, who can refute that? It happened. So let's not start some MaCarthyist movement here to get the shorts.

2008 Apr 11 04:33 AM

[jimmy46:]

I have some shorts myself, but if I look at some of the message boards, I see other shorts are spreading ridiculous rumors if they have a short position.

Here's one from GRMN garmin: message board

"Garmin will announce Bankruptcy"

There are lots of examples of phony rumors like this.

2008 Apr 11 01:01 PM

[Manifestor:]

Rumors can take many forms. It is one thing to put a blatant rumor on a message board, quite different when it is passed on to say an influential analyst or a TV reporter who may not have the time to validate it, but would be doing clients/readers injustice if he/she does not pass it on in a timely manner. Bottom line it looks like these days,with big money (hedge funds), fast computers, influential connections, removal of an uptick rule, and high volatility, it is quite easy for a network of perpetrators to manipulate specific stocks, if not whole markets. Bear Stearn paid the price. They tried on Lehman but something in the chain didn't quite help out...

2008 Apr 11 03:32 PM