Bear Stearns Conspiracy Watch: Bloomberg Piles It On

The latest journalist to start waxing conspiratorial about the collapse of Bear Stearns is Gary Matsumoto of Bloomberg. He's looking at options trades which he reckons are very suspicious:

In a gambit with such low odds of success that traders question its legitimacy, someone wagered $1.7 million that Bear Stearns shares would suffer an unprecedented decline within days. Options specialists are convinced that the buyer, or buyers, made a concerted effort to drive the fifth-biggest U.S. securities firm out of business and, in the process, reap a profit of more than $270 million.

Wow, $1.7 million turned into $270 million? Nice trade! Except by the end of the article the cost of the trade has gone up substantially, while the pay-off hasn't:

Options bets that looked irrational on Friday proved brilliant on Monday, when the shares traded between $3 and $5. By Wollney's calculations, the traders who spent $35.8 million on the deep out-of-the-money puts reaped an estimated $274 million windfall from the plunge in Bear Stearns.

The thing which annoys me most about the article is that the people buying the puts are always described as speculators: there's no indication that there could have been any legitimate purpose to enter into these trades.

Of course, there are lots of reasons to buy short-dated out-of-the-money puts. The best reason would be if you'd been selling a lot of short-dated out-of-the-money puts at higher strike prices, and you wanted to protect your downside. And, guess what, it turns out that volume in Bear Stearns put options at $40 and $50 strikes had indeed been rising sharply.

More generally, there was good reason to believe that if Bear could make it through the week and start being able to tap the Federal Reserve's liquidity facility, then the worst was behind it and it would survive. In that case, a very sensible trade would be to go long Bear stock, and hedge with short-dated bankruptcy puts which would pay out in case Bear imploded over the course of the coming week.

But there's no indication of any of this in Matsumoto's feverish article. Instead, the piece is full of utterly baseless speculation that the people buying the puts were also spreading rumors which brought down the bank, and it's based entirely on the speculation of options traders who lost a lot of money in the Bear collapse and have an understandable desire to pin the blame elsewhere. This is one-sided journalism, and Bloomberg, of all media outlets, really ought to behave more responsibly.

Comments

[Wall Street...:]

Nice to a piece that explores the facts as opposed to the usual " shorts are guilty" trash which has been dominating this issue.

2008 Aug 11 12:53 PM

[Wall Street...:]

Nice to a piece that explores the facts as opposed to the usual " shorts are guilty" trash which has been dominating this issue

2008 Aug 11 12:54 PM

[Jimmy Lathrop:]

I was driving in my car listening to CNBC and they were pumping this Bloomberg piece and without even reading it, I knew there was one side of the story completely left out. Thanks again for providing some balance Felix.

2008 Aug 11 08:56 PM

[neeb??:]

So my buying 'puts' puts me into league with those nasty evil 'speculators' does it? Kind of like when I go and sell some stock befor a major stock price dump makes me an 'inside trader'?

2008 Aug 12 11:38 AM

[Content seeker:]

What a bunch of crap. You would also like us to believe that oil has retreated based on an increase in supply and less consumption. Get real! This was a setup but the bumbling SEC can't find their way out of a paper bag if you threw in a flashlight and roadmap. So don't expect them to uncover the truth. It will just shoot them in the foot and that will hurt our credibility in the financials and stock market. There will be books written about this fiasco that will bring all to light without a flashlight.

2008 Aug 12 09:42 PM