Ben Steinway

Ben Stein and Bear Stearns: Getting It Wrong

It was reported that a few huge hedge funds began pulling their money from their Bear Stearns prime brokerage accounts. These withdrawals constitute a "run" on Bear. No problem so far as these hedge funds are free to bank whereever they choose, just as you and I can switch money between different brokerage houses as we wish. Impropreity, however, arises if Citadel or Rennaissance or whatever hedge funds involved had on significant short positions in Bear Stearns at the time of withdrawing thier capital. (These shorts could take the form of short stock, long puts, swaps, or long CDSs -- in other words, many ways to hide their tracks.) A Prime Brokerage account is often termed a "Joint Back Office" relationship which to me, sounds like the hedge funds may potentially be related as insiders with respect to Bear. So their brilliant trade would be to short Bear, and squeeze them by withdrawing their accounts. Brilliant, yes. But legal??