You've Gotta Have Friends: How Bear Stearns Dodged Misvaluation Charges

Yet another bud should soon be nipped from the senior ranks of the US Securities and Exchange Commission, with David Nelson, head of its Miami office, joining the ranks of those nominated for disciplinary action by inspector general David Kotz. 

The Securities and Exchange Commission failed to “vigorously” enforce securities law when it closed an investigation into how Bear Stearns Cos. came up with values for certain debt, the agency’s inspector general said in a report Friday. 

All you need to know?

Mr. Kotz’s report on the Bear matter charges that David Nelson, head of the SEC’s Miami office, contacted Bear Stearns’ outside lawyers in August 2007 and told them the SEC was dropping an enforcement case against Bear involving allegations that the investment bank overvalued certain securities.

“Christmas is coming early” this year, and “Bear Stearns can keep their money,” Mr Nelson told Bear lawyer Michael Trager, according to the inspector general’s report. Messrs. Trager and Nelson had worked together at the SEC in the 1980s, the report states. [Emphasis added].

Interestingly enough, August 2007 was a matter of weeks after the imploding hedge funds story broke (pun intentional); had Bear Stearns been charged with overvaluing securities then, the action would likely have greatly accelerated the market’s price discovery function. Better yet, had the staff recommendation been acted on when it was originally made in 2005, it may well have prompted investors to take a more skeptical view of valuations generally, and Bear Stearns’ valuations specifically.

Trager is a partner in the Washington DC office of Arnold & Porter where “he chairs the firm’s preeminent securities enforcement practice and co-chairs the firm’s securities enforcement and litigation practice group.” 

Regrettably, and somewhat curiously given the easy availability of such delicacies as ‘Audit of Premium Travel’ and earlier Bear Stearns reports, neither particularly flattering of the SEC’s performance in monitoring that firm or its peers, Kotz’s latest encyclicals have yet to be posted to the SEC website. They must be running out of pixels.

SEC Watchdog Faults Agency in Bear Case
by Kara Scannell
The Wall Street Journal Oct. 11 2008

Comments

[User 232593:]

is this a surprise?everyone that did the wrong thing should be jailed.maybe if we had some accountability things might get better.the stupid remark"lets not play the blame game" is part of the problem.yes,investigat... & find the ones to blame & get rid of them.from the top down.thousands of good hard working people lose their jobs because management thinks they can get away with what they are doing wrong & the co.collapses while these crooks walk away with their mil.parachutes.if you want capitalism to suvive clean it up.bring back some ethics & transparency.get bod's that serve the stockholders & not themselves or the ceo.

2008 Oct 14 09:19 AM

[axelrod608:]

I'll second that. There's too many perps out there keeping jobs they have proved they cannot do. I wouldn't invest my personal money in an American financial stock ever again. The guys who created this mess are still there, waiting to cook up a new scheme AND the books. NO amount of recapitalization with taxpayer funds will convince me they are solvent. There may be a few that are, but how is one to tell in the age of derivatives ?

Worse, Alan Greenspin is out on the streets.

2008 Oct 14 09:50 AM

[xsuddensam:]

Amen!

Let's get the Wall Street crooks and hang 'em high along with their politician friends. Convict 'em, jail 'em and confiscate their assets. We need to make an example of these sub-slime operators. White collar crime needs to be re-defined. If a convenience store robber can get 10-20 years, these Wall Street scumbags, who stolen billions on the backs of hardworking people, need to get life or worse.

2008 Oct 14 11:16 AM

[woodsey:]

Value was uppermost in the minds of Bear and JPM when Thornberg was forced to the wall.

2008 Oct 14 12:34 PM

[Kenneth J. ...:]

After a 21+ year career as a licensed stockbroker, I am now thoroughly convinced that we are destined to have "unprecedented" occurrances in the financial markets every several years. The regulators have repeatedly proven themselves (long before I came along) inept at protecting the public from suffering massive investment losses. The regulators show up with temporary fixes and hasty rule changes on short notice (without a period of taking input from the industry and the public) only after a crisis develops - their job is oversee that markets remain "fair and orderly", and they do a miserable job!

Yes, there is plenty of blame to go around. The fingers always point to "greedy Wall Street crooks" as the cause of the "problems" when things start unravelling. During the years of prosperity (on the way up) nobody from the media ever does a story praising the hard-working people on Wall Street for what they are doing.

Isn't it intesting how John Snow (former Treasury secy) , Alan Greenspan (former Fed Chairman), and a bunch of other very knowledgeable, respected, and well-connected people obviously saw long ago that sticking around was not the thing to do. Why decide to resign a very prestigious position? To go out on top, and be out of the public eye (and probably profiting immensely) while the proverbial stink hits the fan!

2008 Oct 14 02:58 PM

[5kDow:]

These guys knew they were holding securities that weren't worth the paper they were printed on, it's unreal how we let corporate America steal our money and stick us with the bill.

2008 Oct 14 03:50 PM