Page 2 of 2 Bear's death and the US way of banking
By Julian Delasantellis
the ones us average folk get requesting that we bring home cat litter and
hamburger meat.
"We really need your help," Schwartz begged.
"How much?" Dimon quickly got to the point, evidently wanting to get back to
his dinner.
"As much as $30 billion," Schwartz replied
"Alan, I can't do that. It's too much," Dimon said.
At which point, Schwartz played his final card. "Well, could you guys buy us
overnight?"
Dimon demurred on this, citing the need to consult his board, but with that the
die was cast, and the boulders had been set in
motion down the hillside. The outlines of the Bear rescue had been drawn.
Still, Dimon was cautious. He knew that if Morgan lent Bear the money and Bear
then imploded anyway, both Bear and Morgan (along with Dimon) would probably be
pulled under. He wasn't willing to stake everything, his bank, his
shareholders, his career, on the possibility that Bear's loan book wasn't as
poisonous as the market feared it was. Dimon wanted an insurance policy, and
the only insurance company writing policies this big was Geithner and the US
Federal Reserve Bank.
Come Friday morning, the markets awoke to unprecedented news. Through an
extraordinary procedure, Bear had been given access to the Federal Reserve's
discount window. In a rigmarole that impressed the markets that the Fed was not
rewarding moral hazard about as much as a courtesan lowering her skirt to
reclaim her virginity, the Fed would, for 28 days, loan Morgan an indeterminate
amount that Morgan would then loan to Bear to meet its financing crunch.
Bear thought that it had been given at least a four-week stay from the
executioner's blade, but by the end of the day the markets looked past the
immediate moment and saw only trouble - what would happen after the 28 days?
Bear's stock, which opened Friday at $54.24, closed at $30, down 57% for the
week.
Over the weekend of March 15 and 16 came proof of the old adage that things are
always darkest just before they turn absolutely black.
Bear was stunned to hear from Treasury Secretary Paulson that the 28-day line
of credit it thought it had was being withdrawn. (Paulson says that there was a
communications mix-up between the Treasury and Morgan/ Bear.) Bear had to make
a deal to sell the company that weekend or be in bankruptcy court Monday
morning.
In some delicious karma, Bear's lawyers informed the company's principals that,
because of provisions in the 2005 Bankruptcy Reform Act that big finance
capitalism had pile-driven through Congress, the standard option of a so-called
Chapter 11 bankruptcy, in which the company is given a breathing space to sort
out its affairs away from the braying hounds of its creditors, would be denied
them. Make a deal - or on Monday the company is liquidated, and everybody's
unemployed.
By Sunday evening, the deal would be done. Dimon, after finally having his
people look at the extent of the illiquid, probably toxic mortgage securities
on Bear's books, said it would pay no more than $4 a share for a company that
had traded at $170 a share just 13 months before.
Paulson hungry for more
That, however, was still not enough punishment to satiate Paulson's hungry
palette. He said it would be unseemly if Bear's shareholders walked away with
even that much at a time when hundreds of thousands of Americans were being
foreclosed out of house and home every month. He demanded that Bear be bought
at $2 a share, the price that was announced for the deal on Sunday evening.
(After Bear's shareholders screamed in pain, and after it seemed that the
bank's mortgage book might not be as rancid as Morgan first feared, the final
buyout price was raised to $10 the next weekend) If Morgan wasn't getting
enough of a bargain buying Bear on the cheap, the deal also included provisions
making the government liable for up to $29 billion if the securities Morgan was
inheriting from Bear were defaulted on.
For Bear Stearns employees who had invested their life savings in the company's
stock, the results were catastrophic. Former Bear chief executive Jimmy Cayne,
made famous in a November 2007 Wall Street Journal article that noted how he
spent the financial crisis of that August playing bridge and smoking pot, saw
the value of his stock holdings fall from just under $1 billion the previous
year to about $12 million (poor baby). For the rest of Bear's 14,000 employees,
their future dreams of comfortable retirement were now very much in question,
as was, of course, the prospect of the continuation of their employment at
Morgan.
So the question remains: who killed Bear Stearns?
Burrough advances some of the usual suspects. Noting that Bear Stearns had made
a lot of enemies from the time when it pulled out of the consortium of banks
that the Federal Reserve had organized in 1988 to bail out the Long Term Credit
Management hedge fund, he speculates that it was here that the long knives
which had been waiting so long to strike were finally thrown.
On his Most Wanted list are Goldman Sachs (where Paulson, Bear's personal
Torquemada, was previously CEO) along with Credit Suisse and Deutsche Bank,
working in conspiracy with some smaller hedge funds. These were the plotters
who were presumably feeding the bad news to CNBC, all the while holding huge
naked short positions in Bear's stock - positions that, of course, ultimately
proved insanely profitable.
Supposedly, these are the people now receiving the subpoenas from Cox in order
to see if their actions rose to the level of criminal malfeasance. Burrough
quotes an executive of another financial institution, displaying the signature
worldview of the privileged that the universe revolves around them, that what
happened to Bear Stearns was nothing less than "the biggest financial crime
ever perpetuated".
Even if all of Burrough's speculations regarding the existence and perfidies of
an anti-Bear cabal at the penultimate levels of world finance were true, I'm
not at all sure that these actions rise to the level of an illegality under US
securities law, and I'm even less sure that these actions bear the primary
responsibility for Bear's collapse.
It is only since July 15 that naked short selling has been illegal in America,
and that is only as regards to naked short selling in the shares of 19
financial institutions, for a limited time. The second requirement for proving
illegal securities manipulation might be a hard sell for a prosecutor to
present to a jury, since, in the final analysis, the rumors that somebody
spread across Wall Street that Bear was in trouble turned out to be absolutely
true.
'Why?' - not 'who'?
But the most important policy issue here is not who killed Bear Stearns,
rather, it is why did it have to die?
Imagine a police detective coming upon a most peculiar crime scene. A group of
people standing in a swimming pool filled with gasoline have burned to death.
Investigating who shorted Bear's stock is like trying to ascertain who lit the
match that started the inferno. The much better question is, of course, what
were all those people doing standing in a pool of gasoline?
The history of political economy in the capitalist world, and after the fall of
the Communist bloc what was added to the capitalist world, since about 1979 is
a story of the progressive impoverishment and enfeeblement of governments, and,
in their place, the rise in power, influence and wealth of the private markets.
Taxes, especially taxes on capital, have been cut over and over again, across
many national borders. With these tax cuts heavily benefiting the wealthiest
members of society, the result was huge pools of wealth being amassed and
controlled by ever fewer and fewer hands. (See
Hedge funds: Playing dice with the universe, Asia Times Online, July 6,
2006, for my discussion about the world financial architecture being subjected
to ever increasing strains from the movements of these great pools of wealth.)
What befell Bear was nothing but a modern version of a 1930s bank run, with,
instead of seeing hardscrabble men waiting to withdraw their meager deposits
from the bank's vaults, what you saw was a stampede of computer mice directing
funds away from Bear's requirements for repo financing.
Even if Bear had been as financially healthy as its $18 billion cash reserve
implied, there was no way it was going to survive once these great pools of
wealth started moving in unison against it. What happened to Bear could happen
to any financial institution subject to the same stresses; Bear was only a
little bit more vulnerable due to the reputation as a troubled institution it
carried forward from its hedge fund debacles the previous year.
If you load a wheeled grand piano on a rowboat, and a rogue wave shifts the
piano and thus sinks the boat, was it really the wave that sunk the boat, or
was it the idiotic decision to put the piano on the boat in the first place?
That's much like the situation of the current world financial architecture -
the great pools of private wealth ever sloshing across the computer vaults of
financial institutions are subjecting it to far greater stresses and strains
than it was ever really expected to withstand.
As for Bear's protestations of being violated ("This is rape!" Burrough reports
one Bear employee screaming at Schwartz upon learning just how cheaply the
company was being sold to Morgan), aww, c'mon fellows. Did you really think
that you were immune from all the high inside fastballs (when an American
baseball pitcher throws hard at an opposing batter's head) and clothesline
tackles (a similarly underhanded and unpleasant move in American football) you
delivered to others? Like the jury's verdict in the Lucchese trial, wasn't your
victimhood here only what you in the past delivered to others? If not, why
would Goldman Sachs et al go through all the trouble to kill you?
In the words of Hyman Roth, wasn't this the business you've chosen?
Another classic in the American gangster genre, Martin Scorcese's 1995 Casino,
has mob-installed Las Vegas casino manager Ace Rothstein (Robert De Niro)
observing that, during his time in the 70s and 80s, "Running a casino is like
robbing a bank with no cops around." For influential players and traders in the
deregulated world financial markets over the past quarter century, their
professional life frequently matched Rothstein's experience in running a casino
without having to worry about any government intervention.
If Cox's crusade really does represent the forward wave of a re-regulation
movement, as economics Professor Paul DeGrauwe suggested in the Financial Times
on July 22, then a lot of wealthy hedge-fund investors are going to have to get
used to not beating the general market indices by 30-50% anymore, and a lot of
their previously well-compensated traders are going to have to see if they like
selling bakingwear as much as they did selling bonds.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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