Open Thread: Bear Stearns

On last night’s Kudlow & Company, I took some heat for my criticism of David Malpass’ ill-timed WSJ Op-Ed (The "Chutzpah" of Bear Stearns).

Then today, I read in Marketbeat that Bear took it in the tail in the credit markets:

Bear Stearns Pays a Heavy Price

For an indication of how less forgiving the corporate bond market has become, look no further than Bear Stearns’ $2.25 billion bond sale on Tuesday. The
Wall Street investment bank, which last week fought to dispel rumors of
liquidity problems, proved it still had access to the capital markets
when it sold new five-year bonds. But the interest rates it had to pay investors raised some eyebrows.

The bonds were priced to yield 2.45 percentage points above yields on Treasury bonds, half a percentage point above existing Bear Stearns bonds that also come due in 2012.

Just two months ago, a junk bond rated “B” was yielding that same 2.45 percentage points over Treasurys, a record low.  The so-called spread on junk bonds has since jumped to 4.18 percentage points. Bear sports an “A+” credit rating, but appears to be paying a lot more than most “A”  corporate bonds, which are currently yielding 1.25 percentage points more than Treasurys, according to a Merrill Lynch index.

The hefty rates Bear is paying on its new bonds illustrate “a willingness to secure liquidity at any price,”
analysts from Banc of America Securities noted in a report. The large
premium also implies that other companies that want to tap the
investment-grade bond market may have to pay significantly higher
rates, they added. (emphasis added)
-Mark Gongloff,  Marketbeat

Here’s my question for the assembled multitudes:

How much has this entire credit issue dinged Bear Stearns?
Has their Reputation been badly stained?
What about their Liquidity and Creditworthiness?
What other liabilities are on their books we may be unaware of?
Can they still attract and retain top talent?

I do not know the answers to any of these questions . . .


Bear Stearns (BSC), Daily Chart, One Year


And for the record, neither I, nor my firm or its clients, has any position, long or short, in Bear Stearns (BSC).

What say ye?

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What's been said:

Discussions found on the web:
  1. Ross commented on Aug 8

    Bare Sterns took it in the tail? How appropriate. Let’s not forget that all the torpedos have yet to reach the convoy. Rig for silent running Fritz!

  2. SPECTRE of Deflation commented on Aug 8

    Barry, they plan to file the papers on their Hedgies that blew up in the Caymans. They do this to screw their creditors and investors. They are slime.

    I wonder if this will have an effect on investors that now know their investments can go poof, and it’s off to the Caymans for the guilty. Ain’t America grand. END SARCASM!

    BR: I mention that absurdity in the original piece, The “Chutzpah” of Bear Stearns

  3. michael schumacher commented on Aug 8

    They lied to begin with while saying it was all ok. How can they have a reputation? They have complicity with agencies and this is just the one firm that’s been forced to be somewhat transparent. I cannot believe that BSC is the only firm that has this problem…..also that all the other firms are that much smarter???

    How willing are they?
    “a willingness to secure liquidity at any price,”

    That could answer all of your questions above.

    We may find out tomorrow if Fannie and Freddie will allow these idiots to offload there liabilities to us , as taxpayers, sad if that were to occur. But not unexpected.


  4. GerryL commented on Aug 8

    I think Kudlow was angry at you because you were negative about a Republican and member of the Reagan administration. I have long felt Kudlow’s main purpose is to support the Republican party. His show is the most biased show on CNBC.

    I suspect you go on his show because exposure on CNBC is a good thing. However, I think he has people like you Doug Kass and Herb Greenberg is so he has somebody to abuse. I really cant see why you put up with it.

  5. SPECTRE of Deflation commented on Aug 8

    Busy afternoon, so to complete my thought on Bear, why would you go to the Caymans at a time when you are trying to calm investor nerves regarding redemptions at your Hedge Funds?

    Whomever allowed this public relations nightmare to take place will be using the up elevator one last time before being shit canned. That or the be-atch gets promoted. Hey, it’s Wall Street.

  6. rob commented on Aug 8

    “And for the record, neither I, nor my firm or its clients, has any position, long or short, in Bear Stearns (BSC).”

    How could you possibly know what positions your clients have re BSC?

    Did they swear to forsake BSC when they invested with you? I would imagine that you have no idea what your clients’ positions are re BSC.


    BR: Disclosures refer to either my own personal assets, or other holdings directly under my control.

    I assumed it was understood by most readers that anytime the phrase “clients of the firm” is used, it specifically references assets we directly manage . . .

  7. dblwyo commented on Aug 8

    First, a techquest: how did you get that Yhoo Finance pic over ? :). 2nd – as long as you’re looking at a 1yr of BSC try running it back to 2 yr and comparing it to the B/D index and/or the SP500. Looks like it might qualify as a spec bubble to me. That runup in the B/Ds has got to be based on the theory that a) liquidities would flow (must ?) and b) that BSC was going to see a permanently higher profitability. Ding, ding. Wrong.
    Now – the next question is, how dependent on they are their counter-parties for doing business and how much damage have they done ? And will that damage be measured in…higher spreads ? Likely at min. But if these guys could setup LTTC and then walk away to leave everybody holding the bag this is peanuts.
    Who else don’t we know about is in the same convoy ?

  8. wally commented on Aug 8

    Bear has behaved exactly like most Americans would expect a major New York investment bank to behave. Nobody anywhere expected honesty, forthrightness or anything else other than grubbing, deceiving self-interest.
    As far as the bond rate, it does not signify ‘liquidity at any price’ because it clearly puts a price on it. I expect the rates will go up for everybody else, too- that’s what re-pricing risk means.

  9. Werner Merthens commented on Aug 8


    I am going to pick up a small stake in BSC (~1% of net worth). Nobody wants it, so I want a bit of it.

  10. a guy called john commented on Aug 8

    nobody wanted it on monday @ 100, then everybody wanted it. you might wanna wait, as the trend suggests nobody will want it again soon.

    also, rob: barry means he controls no holdings for himself, no holdings for his firms, and no holdings for his clients.

  11. Shawn H commented on Aug 8

    Relative to revenue, Bear is among the Wall St. leaders in securitizing loans (likely #1). These are toxic loans to illegals for investment condos in Florida. Thru the magic of ratings agencies, they turn them into ‘AAA’ paper. Booked loads of fees and upfront revenue to do the securitizations.

    Hmm, what do we do with all this toxic paper? Why, of course, dump it on our high net-worth clients! Create funds with nice, safe names starting with “High-Grade”. Eventually, these funds will go belly-up, but in the meantime we collect our 2 & 20.

    The funds suffering a liquidity crunch? No problem, dump them onto the public thru and IPO (Everquest). Oops. That didn’t work out. PR time. Commit bank funds to save the funds (My Hero!). Then, when it’s time to use those funds to buy the ‘AAA’ rated paper you created, change your mind and let your best clients take a 100% loss.

    The icing on the cake? File the bankruptcy papers in the Caymans, just to make sure those pesky customers can’t bother you looking for some of those securitization fees or 2 & 20 fees back. Sorry, those funds are for a job well done.

    No, I think their credibility is fine. I wouldn’t worry about it.

  12. Greg0658 commented on Aug 8

    don’t your desktop computers report to the super mainframe computers at Wall Street on a regular basis where your buy & sell position points are?

  13. tabasco commented on Aug 8

    The corporate bond market sure has crashed fast, eh? Barry, when you get a chance, could you do a little digging into the month long crash of senior loan, floating rate, high yield, high income funds, whatever they choose to name them, funds? It’s been a while since a large segment of fixed income funds like that have crashed so drastically, yet I hear barely a peep about it in the wall street news. With all of the worries individual investors had about rate hikes the couple years prior, I have to imagine there are quite a few folks who have money tied up in those “conservative” fixed income funds. So when those folks start receiving their July statements and see 5,10,20% whacked off the market value of those positions, it will probably come as something of a shock. Oh yeah, and it’s all contained to subprime…..pfff.

  14. spongetoddsquarepants commented on Aug 8

    Party P0ker entrepeneur and mortgage broker were the 2 largest source of job growth in the ownership society circa 2003-2006. Over educated, morally bankrupt and underemployed What will we do with these lemmings ?

  15. SPECTRE of Deflation commented on Aug 8

    Barry, they plan to file the papers on their Hedgies that blew up in the Caymans. They do this to screw their creditors and investors. They are slime.

    I wonder if this will have an effect on investors that now know their investments can go poof, and it’s off to the Caymans for the guilty. Ain’t America grand. END SARCASM!

    BR: I mention that absurdity in the original piece, The “Chutzpah” of Bear Stearns

    Indeed you did, and I hope you didn’t mind my repeating it. My gut reaction was the same as the day Merrill asked for collateral from Bear’s Hedgies to be sold at auction. These are not small mistakes.

  16. Groty commented on Aug 8

    Bear demonstrated excellent crisis management skills on the one hand, and horrible crisis management on the other.

    On the postive, to instill investor confidence Cayne acted swiftly to install highly regarded Jeff Lane as head of asset management. A few days later, he fired Warren Spector, who many believed was being groomed as his successor. He gets an A for those actions.

    On the negative side, stories surfaced that during the heat of the crisis Cayne decided to get away from the office by taking a helicopter to a relatively close golf course to hit a golf ball. Apparently that didn’t relax him enough, so he took time off to play in a bridge tournament. He gets an F for these actions. I wonder how infuriated investors who lost all their money are that the head of the firm was so unconcerned about their losses that he took some R&R during the middle of a crisis? I can’t imagine what he was thinking. I’d be livid.

    The balance sheet is the huge wild card. As with all the BDs, if you look at a 10Q and all the footnotes/disclosures, it’s so vague you have no idea what their trading and mark to market losses might be.

    Because its unknowable, I have no idea how anyone can assess the credit risk to price the bonds. That +245 was the spread that cleared the market is very surprising. Given all that’s happened, I find +245 a huge vote of confidence.

  17. bobby joe grooves commented on Aug 8

    Was not Larry K once an economist for BSC?

    IMHO your recent blog and comments on the program were as usual very much on point.
    Perhaps he “dost protest too much?” Guess he remembers the secret handshake of the fraternity.

    While I agree Malpass appears very bright in other writings, that piece was a bit preposterous. Hmmm, let me recollect as to the recent two toxic waste funds, didn’t conversations about them go a bit like this:

    These are good investments.
    You want your money back?
    We are now doing the accounting.
    Were putting up the billions to take the banks out.
    Oop’s, we are having a problem valuing them so we will mark them to model.
    Suprise, everything is gone.
    By the way your honor we decided to rip their faces off in the Caymans, so you are hereby advised that the matter is being effectively handled in the Carribean.

    Picture Cayne dressed like Luke Skywalker in Malpass office “You will write the report.”

    In my old age I seem to remember that a group of people used to believe the “biggest lie was the most believable”

    “Holy bubble, Batman, where can I buy some BSC calls”

    Your assignment Mr. Ritholtz should your choose to accept it………

  18. touche commented on Aug 8

    BS plunged headfirst into, perhaps, the biggest asset bubble of all time. Was it sheer incompetence or chutzpah? Its up to you, ladies and gentlemen of the jury.

  19. Winston Munn commented on Aug 8

    I simply believe BS fell into the Papal Paper Syndrome. When things are bubbling and money is flying, it is easy to get caught up and begin to believe in the infallibility of one’s own judgement and market acumen.

    The lesson? If you want to survive, stay humble.

  20. ignorant bystander commented on Aug 8

    Regarding 245 basis points

    I can only believe that the parties who purchased this latest issuance of BSC bonds did so, of course, with Other People’s Money.

  21. Shawn H commented on Aug 8

    “I can only believe that the parties who purchased this latest issuance of BSC bonds did so, of course, with Other People’s Money.”

    Money Manager Thought Process:

    If BSC defaults, the other 98% of my portfolio will tank as well, I’ll be down 15% and I’ll have to close the fund (and open another next store, starting at 0%). I can’t function without my 20% of profits.

    If BSC does not default, the spread will come in and I’ll gain a few bps over the next guy. Then I will have an edge in EOY money recruiting.

    There you have it. Guy running your money likes the risk-reward of 15 bps upside vs. 1500 bps.

    The ideal return curve for a fund manager is a steady, slightly above treasury return above 0%, and a slope approaching negative infinity just to the left of 0%. Is it any wonder that the CDO was created, which exhibits that exact return curve?

  22. Richard commented on Aug 8

    here’s a sign of the times. RSF. that tasty yield looked oh so attractive until the subprime meltdown exposed this for what it was, a fancy named fund with a rotten middle and gum plugging the holes in the boat.

  23. anon commented on Aug 9

    Bear Stearns is not in the same league as GS, MER, MS, LEH.

    And they prove it again and again.

  24. ajw commented on Aug 9

    Their behavior during LTCM probably earned them a lot of ill will on Wall St., but outside of the investment community there was little awareness of what they did. This time is different – it’s front page, global news, and they’re likely to bleed reputationally for quite a while.

    For another point of reference, Merrill issued 2.75B of 5-yr paper today at 138 over:

  25. David Merkel commented on Aug 9

    I’ve managed corporate bonds in my time, and I can almost guarantee you that Bear sold the bonds cheap to give a small gift to bondholders. It makes the bondholders happy, gets the deal done, restores liquidity and confidence. I would have bought some of the issue, and flipped some or all of it upon tightening after a few weeks.

    The brokers always trade cheap to their nominal ratings. They also have a higher “credit beta” than other similarly rated bonds. I would buy the brokers in size when the market was panicky, but not widening much, and sell when complacency re-emerged (and spreads stopped tightening).

    For all its faults, and there are many, Bear’s culture is more entrepreneurial than most investment banks. In general, they have a good risk control culture, though it has failed on some specific issues recently.

    The brokers are interesting here. I’m not buying any now, but maybe I might at my next portfolio reshaping (scheduled for September).

  26. curmudgeonly troll commented on Aug 9

    245 basis points on $2 billion? $50m, give or take?

    That’s Warren Spector’s comp, plus maybe a couple of MDs and SMDs.

  27. VJ commented on Aug 9

    Floyd Norris on Charlie Rose Tuesday night:

    Bear Sterns, these hedge funds that went under, they were having decent months until the end, if you believe their numbers, and then PLUNGE. So one of the issues you’ve got with hedge funds now, with some of them, is your not sure if the numbers they are giving you on their performance are accurate.

    Good point.

    And that may answer the question as to why Bear Sterns had such “a willingness to secure liquidity at any price“.

  28. Chief Tomahawk commented on Aug 9

    BMP Paribas shutting 3 hedge funds reported by CNBC.

  29. jj commented on Aug 9

    the dirty little secret is that the majority of these subprimes are held by European and Asian funds …..

    it’s not just BNP and Oddo in France , it’s also CL ,La Poste , CCF and Dexia , Santander and Atlantico in Spain , and Allianz and Dresdner who have the biggest exposure in Europe……the big US hedgies are short LCDX vs. these institutions …

    more stories will come

  30. michael schumacher commented on Aug 9

    Let’s see…trot out the POTUS..check
    Tresasurey Sec. check
    spike the market into the close check
    calm the nerves of “investors” check

    OBTW that sub prime thing…….well

    I knew something was coming as you do not have what happened yesterday (see above) and not expect something out of it.


  31. RobT commented on Aug 9

    How could their derivative business not be imploding. Why would you enter into a CDS contract with Bear when they have counterparty credit risk of 200+bps implying junk. You might as well go with a Citi or BofA. Comments.

  32. SPECTRE of Deflation commented on Aug 9

    Looks like a flight to the Caymans may be a very crowded affair.

  33. SPECTRE of Deflation commented on Aug 9

    Looking at CNBC right now with the headline, “reasons to be optimistic
    “. Can they cheerlead anymore than they are already doing? Unfrigging real. I guess this is part of the efficient market concept. RGGGGGGGGGGGGG!

  34. Pat commented on Aug 9

    Here’s a good article dealing with how companies will be tested and what their response says. The question would seem to be whether they also sold some quality assets to meet part of their immediate liquidity needs or just paid the higher rate for all their needs.

  35. SPECTRE of Deflation commented on Aug 9

    They are trotting out “all hat and no cattle at 10:30 Eastern. Wasn’t he just pimping the economy yesterday?

  36. Fred commented on Aug 9

    Lost in the reams of work on this subject is the fact that there is NOT a lack of liquidity….there’s a lack of CONFIDENCE.

    These illiquid markets do not (in the face of fear/forced selling, offer true value of the assets…that’s what makes a market.

    Once again it’s all about sentiment…..(negativity). All the fear metrics are are RARE and hugely bullish levels.

    …pain to the levered idiots will be swift, and the patient buyers of value always come back….you have to have more than 1 week time frame.

    The grave dancers are getting suited up.

  37. SPECTRE of Deflation commented on Aug 9

    Now they trot out Kudlow who thinks there should never be a bear market. LOL! They sit there straight faced while they lie their asses off. It should be criminal.

  38. Michael Schumacher commented on Aug 9

    They obviously have the correct judge as well:

    Judge Grants Temp Restraining Order For Bear Stearns Funds
    Last update: 8/9/2007 11:28:12 AM

    By Christopher Witkowsky

    NEW YORK (Dow Jones)–A federal judge on Thursday blocked creditors of two Bear Stearns Cos. (BSC) hedge funds from seizing their U.S. assets while the funds await an Aug. 27 hearing on their request for U.S. bankruptcy relief.
    Judge Burton Lifland of the U.S. Bankruptcy Court in Manhattan granted preliminary injunctions against creditors of the High-Grade Structured Credit Strategies Fund and the smaller High-Grade Structured Credit Strategies Enhanced Leverage Fund, which collapsed after big bets on securities backed by subprime mortgage loans failed.
    Lifland said the injunction is an extension of an Aug. 1 stay he granted when the funds sought U.S. bankruptcy protection after they were placed in liquidation proceedings in the Cayman Islands.
    “For purposes of maintaining the status quo…the stay should be broad enough and short enough to deal with the situation,” Lifland said.
    The Cayman Islands-based funds sought the preliminary injunctions against creditors while they await a hearing on recognition of their U.S. Chapter 15 petitions. Under Chapter 15 – added to the U.S. Bankruptcy Code in 2005 – a company or court appointed administrator may seek a U.S. bankruptcy court’s recognition of a foreign bankruptcy case as the main, or controlling, proceeding. If granted, Chapter 15 protection blocks lawsuits against the funds and attempts to seize their assets located in the U.S.
    Lifland will consider granting Chapter 15 protection at the Aug. 27 hearing.
    The two funds collapsed earlier this year amid rising delinquencies on subprime mortgage loans.
    Bear Stearns stepped in and bought out investors’ positions after big Wall Street firms started fleeing the larger fund earlier this year. The brokerage assumed $1.6 billion of the larger fund’s assets and has pulled the plug on the more-leveraged fund.
    -Christopher Witkowsky, Dow Jones Newswires; 201-938-4296;
    (END) Dow Jones Newswires

  39. Fred commented on Aug 9

    Here’s a reality check on the Alt A loan situation….I suggest reading this piece:

    …Yesterday, Standard & Poor’s put out its long-awaited ratings update on the $455 billion of Alt-A securitizations it rated between October 2005 and December 2006.

    …After reviewing all $455 billion of Alt-A MBS the S&P rated over the time period in question, the agency put on CreditWatch all of $914 million. That’s roughly 0.2% of the reviewed bonds outstanding. As to the 99.8% of MBS that had their ratings affirmed even after S&P ran its stress test, credit quality looks awfully strong

    So, again what we’re dealing with here is a confidence issue in market bids, as over levered HFs meet panic redemptions….meanwhile the underlying assets are in fine shape — bonds and stocks for that matter.

    Thoughts Barry?

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