David Brooks: Op-Ed Columnist - An Economy of Grinds - NYTimes.com

(c) 2010 F. Bruce Abel

David Brooks writes pieces that are often hard to categorize, but I read everything he writes.  This one deserves note and reading over and over again.  It covers an interesting class view that fits with my own.

Knowing Brooks's Republican political-history, this piece is not of small import.  David Brooks is slowly feeling his way into a world-view that is anti-establishment, anti-corporate.  Far from where he was during the Bush years.  Click on and start at the beginning.

Op-Ed Columnist - An Economy of Grinds - NYTimes.com: "Since the princes are nicer and more impressive, it is easy to be seduced into the belief that they also are more trustworthy. This is false. During the last few years, for example, the princes at Citigroup, Bear Stearns, Goldman Sachs and Lehman Brothers behaved with incredible stupidity while the hedge fund loners often behaved with impressive restraint."

Will Wall Street Go Free? - Opinionator Blog - NYTimes.com

(c) 2010 F. Bruce Abel; photo (c) 2009 Rebecca Abel Worple and owenemma.com

I've clipped the last paragraph of this very excellent detailed summary of the personages behind the Wall Street/world collapse.

Will Wall Street Go Free? - Opinionator Blog - NYTimes.com: "Now that the politicians in Washington have used Goldman Sachs as a bogeyman to help push through new legislation to re-regulate Wall Street — which is badly in need of it — the American people should now get the justice we deserve, in the form of prosecuting the people on Wall Street who had major roles in causing the financial crisis in the first place. Unless, of course, we would prefer to pretend that no one was responsible and it was just another one of those once-in-a-lifetime tsunamis we’ve been hearing so much about lately."

I'm a 350!

(c) 2010 F. Bruce Abel

So I go over to the Sharonville Convention Center about this time yesterday to see the scores on the wall from Tuesday Regionals afternoon's breakout session. At the partnership desk Lorna D. sits with two others.

Throughout the ensuing conversation I am facing Lorna with my back to the seats where people are waiting for their partners, comparing scores, etc.

"Do you want to play in the 9:00 A.M. game?"

"Who's asking?"

"That lady sitting behind you."

"How many points does she have?"

"How many 'points' (masterpoints) do you have and do you want to play with a 350?" she calls out to the lady sitting behind me.

Now I interject this thought. Bridge is such a game! Lorna, who knows me through years of playing intermittently, knows exactly how good I am, 350, (and knows that I am a kind, caring partner who never shows displeasure with his partner, and always apologizes over his own mistakes), and that number (350) is about right in terms of my playing ability. But the ACBL computers will not show this number (for a while) because I've been devoting the last few years to watching Emma play basketball and Owen play baseball, and being in plays. Oh, and practicing law. Oh, and trading the market.

The lady calls out that she has 130 points.

"Is she pretty?" (the lady can't hear this comment.)

No answer from Lorna and the smiling sitters.

So without turning my back, I refuse, go back into the hall and continue searching for the results of the Tuesday afternoon side game, which I finally find.

Then I go to the men's room.

Coming out, Lorna passes me -- it's almost game time but the lady still sits-- "Won't you play with her?" (Her normally steely eyes -- she's a 1500 -- pleading.)

"Is she from out of town?"

"Missouri."

"O.K."

Another story:

We're getting into the car in Indy in the spring of 2001, ready to go to federal court to try to get an injunction against the The American Contract Bridge League, ACBL, which has banned J.B., my client, from playing for two years, for cheating. The President of the ACBL, (a 5,000) who arrived at midnight to testify in support his friend J.B., says "Is Carol (a 600) going to take me on direct?"

"No, I am."

"How many points do you have?"

Now a third incident:

Jimmy Cayne, testifying before the Financial Crisis Inquiry Commission of Congress Tuesday, under intense grilling for Bear Stearns going under (he was at the ACBL nationals playing bridge), turns the tables on the Chariman by saying:

"How many points do you have, Mr. Chairman?"

Don't believe it? Click on the title to this blog above! (I'll save you the trouble, it's not there.)

The Big Short

(c) 2010 F. Bruce Abel

April 2, 2010



"How'd they do it? The answer is clearly spelled out in the footnotes to AIG's (nyse: AIG - news - people ) 2007 consolidated financial statement. "In most cases AIGFP (American International Group Financial Products) does not hedge its exposures related to credit default swaps it has written."


My notes from listening to the NPR interview of Michael Lewis by Terry Gross with Michael Lewis about 13 days ago:


The Big Short
[verbatim as much as possible]
So much written and reported about the collapse is through the eyes of the people "who had no idea" -- the Treasury Secretary, the Chairman of the Federal Reserve, the heads of the investment banks -- as the crisis was gathering force.

[Lewis got to "Ground Zero" and, in his own words, found that a handful of people were not clueless and were themselves the cause of the crash, after (supposedly--ed note) they tried to warn Wall Street and the NYT and the WSJ.]

"Everybody was working with same set of facts."

The vast majority of people in the markets painted a “very pleasant” picture from the set of facts.

"We 'see' what we want to see."



Michael Burry

Had been studying to be a doctor, was a resident on his way to being one.

Instead went full-time into investing. Formed a hedge fund. Began studying the bond mkt.

Had/has asberger’s syndrome. Didn’t know it at the time.

Having asberger's he studied the prospectuses of mortgage companies.

2003-2004, early 2005

saw the phenomenal growth of interest-only mortgages and negatively amortizing mortgages

“the lending couldn’t get any worse”

he saw the "end of the madness" coming and wanted to bet against it, but didn't know how.

he begins to bet against the subprime mortgage market

the bond mkt is "the wild west;" it's much less regulated and for the investor it's much easier to get ripped off; he’s aware of that. In corporate bond mkt there were a credit default swaps and had been for 10 years. He felt that Wall Street was "bound" to invent them on subprime mortgage bonds.

Michael Burry pesters Wall Street to create credit default swaps for subprime mortgage bonds

He is Ground Zero; "Patient No 1;" March to May 2005

Makes the "bet" (with GS) in March; gets a written contract in May.

GS – why willing? GS had persuaded AIG to sell GS

AIG had unlimited appetite. In a few months $20 billion, at very low prices; close to free,

GS took some on as a bet. Turned around and multiplied price by 10 and sold to Michael Burry.

All of sudden a big institution in the picture.

GS was already thinking along these lines. In other words it wasn't just Michael Berry.

AIG had been insuring corporate bonds for almost a decade.

In 2004 and 2005 GS comes (to AIG) with “diversified consumer loans”

“we’ll do that too.” (said AIG)

GS went to AIG with subprimes too. “Yep.”

Burry dealt with GS, Deuche Bank, Morgan Stanley, Bank of America, Merrill Lynch too. Wall Street firms were on the other side of the bets. For the most part they had sold the bets on and AIG was on the other side.



Charley Ledley and Jamie Mai

Cornwall Capital

Started with $100,000 in a Schwab Account.

“Wall Street underestimated the likelihood of unlikely events.” (they felt)

They bought options on extreme things happening. Each bet cost them very little. Wrong most of the time but right enough…

Stumble into the subprime mortgage mkt

For paying 2%/yr on dicey subprime mort loans

They knew nothing re bond mkt but they pieced together a picture

They go to SEC; NYTimes, WSJ “there’s fraud in the system.” Nobody understands or pays attention.

They ended up betting against financial instutions themselves – Bear Stearns, etc.

“Who’s taking all this risk?” they asked. Figured out that the WS firms themselves were the dumbest guys at the table. Afraid that BS couldn’t honor their contracts. So bought credit default swaps CDS’s on Bear Stearns too.

Turned $100,000 into $100 million.

None of these guys are natural short sellers. They wanted to be investing in the stock markets but they saw that these markets would be killed by what was going on in the bond (CDS, etc. market).

Personally, although they were making a fortune they had panic attacks; stressed (being right); a bet against an entire financial system; their insight that the system had become rigged; Charlie worried about riots


They were by nature ordinary stock investors; the world forced them into this position.

Herein, on April 2, 2010, I add the following from this, my blog, which indicates that one person,

Joseph Cassano

http://natgagu.blogspot.com/2009/03/joseph-cassano.html

was the cause of the meltdown. Read the whole interview above plus the link to Joseph Cassano, and you can see that we had a financial terrorist in our midst, one who started with Michael Milken.

And the NYT Article of April 1, 2010 adds to the list of names who make billions per year:

http://www.nytimes.com/2010/04/01/business/01hedge.html?scp=2&sq=soros&st=cse

And this review in the WSJ which served as the research for Lewis's book:

http://blogs.wsj.com/deals/2010/03/15/michael-lewiss-the-big-short-read-the-harvard-thesis-instead/tab/article/

But this reviewer says Michael Lewis has it all wrong:

http://www.huffingtonpost.com/yves-smith/debunking-michael-lewis-t_b_512542.html

Duplicate Bridge and Options Players

(c) 2009 F. Bruce Abel

From November 11, 2009 CNBC clip on duplicate bridge and Bill Gates and Warren Buffett.

Interview with Barry Rigal, who, it turns out, has a British accent, or else he is weird.

http://www.msnbc.msn.com/id/21134540/vp/33890874#33890874

Who Plays Bridge

My entries have been sparce this week because there is a regional bridge tournament at the Sharonville Convention Center, about 1 1/2 miles from my house!

Remember Jimmy Cayne of Bear Stearns? Well, he might be there.

Who else plays bridge? See:
http://www.acbl.org/about/Who-Plays-Bridge.html

An Interesting Side Issue With the Madoff Case

Seizure of assets and how America falls behind:
http://www.nytimes.com/2009/04/28/opinion/28intriago1.html

And a separate lawsuit charging J.P. Morgan with complicity:

http://www.nytimes.com/2009/04/25/business/economy/25madoff.html?fta=y

William Cohan Talking Bear Stearns on Jon Stewart Friday

And it sounds like his book House of Cards, must be read too!
http://paul.kedrosky.com/archives/2009/04/william_cohan_t.html

(I can't believe I have not set up a previous "label" for Jon Stewart.)

LIBOR 1-Month April 5th vs Today

On April 5, 2008 I noted that the one-month LIBOR was 2.68% as follows:

http://natgagu.blogspot.com/search/label/Bear%20Stearns


Today it is .34%

And This Must Be Read

http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

How to Figure These Messes

These Are Extraordinary Times

All the king's horses

All the king's men

* * *

Were gathered Friday night...

U.S. Gives Banks Urgent Warning to Solve Crisis
writePost();
new_york_times:http://www.nytimes.com/2008/09/13/business/13rescue.html

By ERIC DASH
Published: September 12, 2008
This article was reported by Jenny Anderson, Edmund L. Andrews, Vikas Bajaj and Eric Dash and written by Mr. Dash.
As Lehman Brothers teetered Friday evening, Federal Reserve officials summoned the heads of major Wall Street firms to a meeting in Lower Manhattan and insisted they rescue the stricken investment bank and develop plans to stabilize the financial markets.
Timothy F. Geithner, the president of the New York Federal Reserve, called a 6 p.m. meeting so that bank officials could review their financial exposures to Lehman Brothers and work out contingency plans over the possibility that the government would need to orchestrate an orderly liquidation of the firm on Monday, according to people briefed on the meeting.
Flanked by Treasury Secretary Henry M. Paulson Jr. and Christopher Cox, the chairman of the Securities and Exchange Commission, he gathered the executives in person to impress on them the need to work together to resolve the current crisis.
Mr. Geithner told the participants that an industry solution was needed, no matter what, and that it was not about any individual bank, according to two people briefed on the meeting but who did not attend. They said he told them that if the industry failed to solve the problem their individual banks might be next.
A spokesman for the New York Federal Reserve Bank in New York confirmed the meeting but declined to provide details on the discussions. The Wall Street executives included the following chief executives: Lloyd Blankfein of the Goldman Sachs Group, James Dimon of JPMorgan Chase, John Mack of Morgan Stanley, Vikram Pandit of Citigroup and John Thain of Merrill Lynch. Representatives from the Royal Bank of Scotland and the Bank of New York Mellon were also present. Lehman Brothers was noticeably absent from the talks.
The meeting was reminiscent of the circumstances that preceded the near-collapse 10 years go of Long Term Capital Management. At that time, William J. McDonough, then the president of the New York Fed, summoned the heads of big Wall Street banks to the Fed to stop the failure of L.T.C.M., a hedge fund firm that had made big bets on esoteric securities using borrowed money and which had already lost $4.5 billion.
The bankers ended up committing $3.65 billion to save L.T.C.M., though Bear Stearns, the hedge fund’s clearing broker, refused to contribute to the investment. Traders from the banks wound down the fund over time, averting what might have been big losses across the financial system. But the fallout from a failure of Lehman Brothers could be even more severe, given the firm’s much larger size and its entanglements with trading partners around the globe.
Policy makers fear its losses could ripple through the financial industry at a time when banks and securities firms are trying to overcome $500 billion in write-downs.
One observer briefed on the situation described the session as a “game of chicken” between the government and the heads of the major banks.
Bank of America and two British firms, Barclays and HSBC, have expressed interest in bidding for Lehman Brothers, according to people briefed on the situation. But they have indicated that their bids are contingent upon receiving support from the government, just as it did with the rescues of Bear Stearns, and the government-sponsored agencies, Fannie Mae and Freddie Mac.
But Mr. Paulson and Mr. Geithner made it clear to the company, its potential suitors and to the meeting participants on Friday that the government has no plans to put taxpayer money on the line. The government is deeply worried that its actions have created a moral hazard and the Federal Reserve does not want to reach deeper into its coffers. Instead, Mr. Paulson and Mr. Geithner insist that Wall Street needs to come up with an industry solution to try to stabilize Lehman Brothers and calm the markets.
Still, some of the other Wall Street banks, facing billions of dollars in losses themselves, have resisted this approach. They argue that Lehman Brothers overreached and brought its current troubles on itself. If there are no bidders for Lehman Brothers, these banks say they can collect their collateral and liquidate the troubled firm’s assets. In this high-stake game, they may also be trying to call the government’s bluff, knowing that if push came to shove, it would provide financial support.
Mr. Geithner, who led the session, firmly stood his ground. He told the banks that this was about fixing the system and preventing the crisis from worsening.
By the time Lehman’s shares went into a spiral this week, Fed and Treasury officials were convinced that Lehman posed far fewer real risks than Bear Stearns had back in March. The confidence by Washington officials stemmed from the fact that, after the Bear Stearns collapse, they obtained stronger regulatory powers that gave them the ability to peer into the activities and risk exposures of institutions on Wall Street.
Fed officials, for example, are now embedded at each of the big Wall Street investment banks and have at least some capacity gauge the firms’ exposure to hedge funds and other big players, as well as their positions in financial derivatives and other opaque markets. Fed and Treasury officials have also been taking the daily pulse of executives and traders on Wall Street for months, and much of that discussion has been about Lehman.
Officials detected a rising number of defections by Lehman’s institutional customers to other firms, but nothing near the panic that caused Wall Street executives to bombard Mr. Paulson with dire warnings about a Bear Stearns collapse in March.
Fed officials also saw few signs that fears about the future of the investment bank were spilling over to fears about its customers and trading partners.
And in practice, taxpayers could still end up on the hook for at least as much money as they were in the case of Bear Stearns. Lehman’s successor will still be able to borrow from the Fed’s new lending program for major investment banks, which the Fed created in response to the collapse of Bear Stearns in March. If Lehman were to borrow money and then default on its loans, the Fed’s losses would reduce the amount of money it turns over to the Treasury.
For political and economic reasons, both the Federal Reserve and the Treasury Department are loath to save financial institutions from their own folly.
But as the housing crisis has deepened, they have abandoned free-market orthodoxy, fearing that the collapse of institutions like Bear Stearns or either Fannie Mae or Freddie Mac could cripple the financial markets, and perhaps the economy itself.
One of the biggest differences between the challenge facing Lehman and the one that faced Bear Stearns is the availability of the Fed’s emergency lending program for investment banks.
When confidence evaporated in Bear, with major hedge funds pulling their prime brokerage accounts, Bear’s financing ran out almost overnight, creating a panic situation. Lehman has had the power to plug any cash shortfalls by borrowing from the Fed, though it has not actually borrowed any money from the program since March.
Edmund L. Andrews reported from Washington, and Jenny Anderson, Vikas Bajaj and Eric Dash reported from New York.

Trading Halted in Common and Related Preferred of Fannie and Freddie

Press Release
Source: NYSE Euronext
New York Stock Exchange Halts Pre-Market Trading in Fannie Mae (FNM) and Freddie Mac (FRE) for Monday, Sept. 8, 2008 News Dissemination -- Trading Expected to Open at 9:30am (EST)Monday September 8, 12:41 am ET
NEW YORK--(BUSINESS WIRE)--The New York Stock Exchange (NYSE) announced that the common and related preferred stock of Fannie Mae (ticker symbol FNM) and Freddie Mac (ticker symbol FRE) will be halted news dissemination during the pre-market and available to all markets for trading at 9:30am (EST) on the morning of Monday, Sept. 8, 2008 due to U.S. federal regulators action related to Fannie Mae and Freddie Mac. After consultation with the FHFA, Treasury and the Securities and Exchange Commission, we feel that this decision will allow investors to digest the news that has been disseminated over the weekend, to interpret the news and the analysis that will be generated on Monday morning and to evaluate the resulting aggregate supply and demand. All markets will be free to trade both FNM and FRE as of 9:30am (EST), Monday, Sept. 8, 2008. Securities affected by the halt to Fannie Mae and Freddie Mac are:
Freddie Mac

FRE
Voting common stock
FRE 19Z
Zero Coupon Subordinated Capital Debentures, due November 29, 2019
FRE PR B
Variable Rate, Non-Cumulative Preferred Stock
FRE PR F
5% Non-Cumulative Preferred Stock
FRE PR G
Variable Rate, Non-Cumulative Preferred Stock
FRE PR H
5.1% Non-Cumulative Preferred Stock
FRE PR K
5.79% Non-Cumulative Preferred Stock
FRE PR L
Variable Rate, Non-Cumulative Preferred Stock
FRE PR M
Variable Rate, Non-Cumulative Preferred Stock
FRE PR Q
Variable Rate, Non-Cumulative Preferred Stock
FRE PR P
6% Non-Cumulative Preferred Stock
FRE PR N
Variable Rate, Non-Cumulative Preferred Stock
FRE PR O
5.81% Non-Cumulative Preferred Stock
FRE PR R
5.7% Non-Cumulative Preferred Stock
FRE PR S
Variable Rate, Non-Cumulative Perpetual Preferred Stock
FRE PR T
6.42% Non-Cumulative Perpetual Preferred Stock
FRE PR U
5.9% Non-Cumulative Perpetual Preferred Stock
FRE PR V
5.57% Non-Cumulative Perpetual Preferred Stock
FRE PR W
5.66% Non-Cumulative Perpetual Preferred Stock
FRE PR X
6.02% Non-Cumulative Perpetual Preferred Stock
FRE PR Y
6.55% Non-Cumulative Perpetual Preferred Stock
FRE PR Z
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, $1.00 Par Value


Fannie Mae
FNM
Common stock
FNM 19Z
Zero Coupon Subordinated Capital Debentures due October 9, 2019
FNM 14Z
Zero Coupon Debentures due July 5, 2014
FNA
8.75% Non-Cumulative Mandatory Convertible Prefered Stock, Series 2008-1
FNM PR H
5.81% Non-Cumulative Preferred Stock, Series H
FNM PR L
5.125% Non-Cumulative Preferred Stock, Series L
FNM PR M
4.75% Non-Cumulative Preferred Stock, Series M
FNM PR N
5.50% Non-Cumulative Preferred Stock, Series N, without par value
FNM PR G
Variable Rate, Non-Cumulative Preferred Stock, Series G
FNM PR P
Variable Rate, Non-Cumulative Preferred Stock, Series P
FNM PR Q
6.75% Non-Cumulative Preferred Stock, Series Q
FNM PR R
7.625% Non-Cumulative Preferred Stock, Series R
FNM PR S
Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series S
FNM PR T
8.25% Non-Cumulative Preferred Stock, Series T
FNM PR F
Variable Rate, Non-Cumulative Preferred Stock, Series F
FNM PR I
5.375% Non-Cumulative Preferred Stock, Series I

Trouble at Fannie and Freddie Stirs Concern in China, etc.

Trouble at Fannie and Freddie Stirs Concern Abroad
new_york_times:http://www.nytimes.com/2008/07/21/business/21bank.html

By HEATHER TIMMONS
Published: July 21, 2008
For more than a decade, Fannie Mae and Freddie Mac, the housing giants that make the American mortgage market run, have attracted overseas investors with a simple pitch: the securities they issue are just as good as the United States government’s,
The marketing plan worked. About one-fifth of securities issued by Fannie, Freddie and a handful of much smaller quasi-governmental agencies, some $1.5 trillion worth, were held by foreign investors at the end of March. One out of 10 American mortgages is, in effect, in the hands of institutions and governments outside the United States.
Now that the two companies are at risk, how their rescue is handled will ultimately test the world’s faith in American markets. It could also influence the level of interest rates and weigh on the strength of the dollar for years to come, analysts say.
“No less than the international perception of the credit quality of the U.S. government is at stake,” said Richard Hofmann, an analyst with CreditSights, an independent research house with offices in London and New York.
Also at stake is Americans’ future ability to gain access to credit. If foreign companies and governments abandon United States investments, home, auto and credit card loans will be much more difficult to come by.
That helps explain why Treasury Secretary Henry M. Paulson Jr. is pressing American lawmakers for the authority to inject unspecified billions in cash into either company or both. The “blank check” nature of his request has raised concerns on Capitol Hill, but Mr. Paulson is betting that Congress is even more fearful of the consequences of doing nothing to rescue Fannie and Freddie.
On Sunday, in an appearance on the television program “Face the Nation,” Mr. Paulson said he was “very optimistic that we’re going to get what we need from Congress.”
“Congress understands how important these institutions are,” Mr. Paulson said.
Asian institutions and investors hold some $800 billion in securities issued by Fannie and Freddie, the bulk of that in China and Japan. China held $376 billion and Japan $228 billion as of June 2007, the most recent country-specific Treasury figures.
In Europe, roughly $39 billion in Fannie and Freddie debt is held in Luxembourg and $33 billion more in Belgium, countries that are home to large investment management firms. Investors in Britain hold $28 billion, and Russian buyers hold $75 billion. Sovereign wealth funds in the Middle East are also believed to be big investors in Fannie and Freddie debt.
The trillions in securities issued by Fannie and Freddie and backed by American mortgages were never explicitly guaranteed by the United States government, but foreign and domestic investors alike have always believed, because of the companies’ integral role in the housing market and their marketing pitch, that the guarantee would be backed up if it were tested.
As the United States government’s debt, and the corresponding amount of Treasury securities, shrank in the late 1990s, foreign investors with currency reserves needed a safe alternative to park their cash. Fannie and Freddie stepped up their overseas marketing efforts and, with the help of Wall Street banks, sold billions of dollars in securities overseas.
Asian banks and insurers bought Fannie’s and Freddie’s paper because it gave a little more yield than a straight Treasury note — “the same risk at a better price,” said Deborah Schuler, an analyst with Moody’s Investors Service in Singapore.
Investment managers at Asian banks and central governments are “very comfortable with the idea of implied government support” because it is so prevalent in Asia, Ms. Schuler said.
Still, this week’s Congressional debate on the issue “is going to worry people,” Ms. Schuler said, though she, like most analysts, is confident that Washington will deliver, just as it has in past financial crises like the savings and loan industry bailout of the late 1980s and early 1990s.
Because America’s relations with a host of countries are intricately tied to Fannie and Freddie, the only realistic option open to lawmakers may be to hand the Treasury Department that blank check, analysts say.
The two housing agencies have always been fierce competitors, and they made no exception in their expansion into international markets. Top executives wooed governments, banks and insurance companies in Asia and Europe, and lent executives to help foreign governments, including Russia and Hong Kong, set up their own American-style mortgage markets.
Both companies often compared their product to United States Treasuries when they talked to international investors, and adjusted the way that bonds matured and were priced so they looked and acted more like Treasury bonds.
In an interview with a London financial trade paper in 1999, Jerome T. Lienhard, Freddie Mac’s senior vice president of investment funding, said, “Investors that make the transition from U.S. Treasuries to our securities will be pleased with the performance.” Freddie Mac’s program is “designed to mirror that already used by the United States government,” he said.
The Treasury will not comment on Fannie and Freddie’s international marketing pitches, but in the past it has tried to rein in the two institutions.
In March 2000, Gary Gensler, then Treasury under secretary, proposed more oversight of Fannie and Freddie, testifying to Congress that the two agencies “receive no funds from the federal government, and the government does not guarantee their securities.”
The companies “have been promoting their debt securities as an alternative market benchmark” to Treasuries, he noted, particularly as the amount of Treasuries issued by the government shrank with the deficit. Mr. Gensler’s comments roiled mortgage markets, sending prices down sharply on traded Fannie- and Freddie-backed securities and on both companies’ stock. Ultimately, the controls he proposed were softened.
The bulk of investments related to Fannie and Freddie are in the form of mortgage-backed securities, often called agency securities or agency paper. This agency paper is considered of much higher quality than securities backed by subprime loans because Fannie and Freddie generally lend to borrowers with good credit histories and require higher down payments.
Prices on senior Fannie and Freddie securities, the highest quality, have not changed significantly since the end of last year, even as the two companies’ stock prices have plummeted, Moody’s noted. As of June 30, 2008, prices on a typical Fannie or Freddie security maturing in 10 years were off only about 2 percent from December 2007.
Questions about Fannie and Freddie have prompted individual institutions and governments in Asia and Europe to specify their exposure in recent days, but so far international concern has been limited. Ingo Buse, a spokesman for Zurich Financial Services, Switzerland’s largest insurer, said it held $8.3 billion in mortgage securities backed by Freddie Mac or Fannie Mae, and felt “comfortable with our position and asset allocation.”
Swiss Reinsurance, Switzerland’s largest reinsurer, said on Wednesday that it held $9.6 billion of corporate debt from Freddie Mac and Fannie Mae and $12 billion in mortgage securities backed by the two companies. Swiss Re’s holding of Freddie Mac and Fannie Mae shares is minimal, it said.
Hannover Re, Germany’s second-largest reinsurer after Munich Re, said it held 125 million euros, or $199 million, in securities issued by Freddie Mac and Fannie Mae. “We are not worried about the exposure,” said Stefan Schulz, a spokesman for the company, “because we expect the U.S. government to step in if there is any problem.”
Julia Werdigier contributed reporting.

CNBC Absolutely Brilliant Today

I wish I didn't have appointments this morning. That guy an hour ago who shorted Fannie and Freddie and now has a plan to "save" them (after common stock goes to zero and he profits).

Was on doing the same thing with Bear Stearns!

But it's good to see the bad guys in the light of day. And he is brilliant.

Trillion Dollar "Black Hole" of Citicorp Mentioned on Cramer Tonight

Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings
By Bradley Keoun

July 14 (Bloomberg) -- At an investor presentation in May, Citigroup Inc. Chief Executive Officer Vikram Pandit said shrinking the bank's $2.2 trillion balance sheet, the biggest in the U.S., was a cornerstone of his turnaround plan.
Nowhere mentioned in the accompanying 66-page handout were the additional $1.1 trillion of assets that New York-based Citigroup keeps off its books: trusts to sell mortgage-backed securities, financing vehicles to issue short-term debt and collateralized debt obligations, or CDOs, to repackage bonds.
Now, as Citigroup prepares to announce second-quarter results July 18, those off-balance-sheet assets, used by U.S. banks to expand lending without tying up capital, are casting a shadow over earnings. Since last September, at least $100 billion of assets have flooded back onto Citigroup's balance sheet, accompanied by more than $7 billion of losses.
``If you start adding up all the potential exposures, it's a huge number,'' said Sam Golden, a former ombudsman for the U.S. Office of the Comptroller of the Currency who now heads the financial-industry practice for restructuring adviser Alvarez & Marsal in Houston. ``The banks will say that it was disclosed. Investors are saying, `Yeah, but it was cryptic. We really didn't know what you were telling us.'''
U.S. banks already are reeling from more than $165 billion of writedowns and credit losses, so shareholders are wary of unknown obligations that might force them to take responsibility for additional troubled assets. The risks have become so obvious that accounting officials are proposing new rules -- some of which Citigroup opposes -- that would force many assets back onto balance sheets.
On the Hook
Seven of the biggest U.S. banks, including Citigroup, are on the hook for at least $300 billion of credit and liquidity guarantees for off-balance-sheet loans and bonds, according to a June 30 report from consulting firm RiskMetrics Group Inc. in Rockville, Maryland. Such guarantees were remote when pledged as an inducement to bond buyers. Now, the first year-over-year decline in housing prices since the Great Depression and rising home-loan, commercial-mortgage and credit-card delinquencies have begun to trigger them.
``You will rapidly realize what a farce these off-balance- sheet things are,'' said Ladenburg Thalmann & Co. analyst Richard X. Bove. ``You could pick up a lot of loan losses with the stuff you're putting back on.''
It's impossible to predict what the losses might be from off-the-books assets or liabilities because disclosures are thin relative to what is required for balance-sheet assets, said Neri Bukspan, chief accountant for Standard & Poor's in New York.
``A lot of information tends to disappear or becomes second or third class,'' Bukspan said.
Second-Quarter Loss
Citigroup has had to bail out at least nine investment funds in the past year, including seven structured investment vehicles, or SIVs, whose funding withered. The bank had to assume $45 billion of securities from those SIVs, which are now included in the $400 billion of on-balance-sheet assets Pandit says he's trying to unload in the next three years.
The bank probably will report a second-quarter net loss of $3.7 billion later this week, according to the average estimate of seven analysts surveyed by Bloomberg. A loss would be the company's third straight and add to $15 billion of losses recorded during the previous two quarters.
Citigroup plunged 69 percent in the past year in New York Stock Exchange composite trading. It closed at $16.19 on July 11, down 52 percent from April 6, 1998, when Citicorp agreed to form the modern company by merging with Sanford ``Sandy'' Weill's Travelers Group Inc.
JPMorgan, Merrill
JPMorgan Chase & Co., which has more than $400 billion of off-balance-sheet assets, also reports second-quarter results this week. The New York-based bank, the largest U.S. bank by market value, may say second-quarter profit fell 55 percent to $1.9 billion, analysts estimate.
Merrill Lynch & Co., the third-biggest U.S. securities firm by market value, also reports results this week. New York-based Merrill had to buy about $4.9 billion of mortgage-linked assets last year from an off-balance-sheet financing vehicle, resulting in a $170 million loss. It may post a second-quarter loss of $1.56 billion after reporting about $14 billion of net losses in the previous three quarters, according to a Bloomberg survey of 11 analysts.
``The riskiest assets we had, our CDOs, weren't even on our balance sheet,'' Merrill Chief Executive Officer John Thain said on a June 11 conference call with investors. Merrill would have to provide $15 billion in financing for CDOs and related obligations under a ``severe stress scenario,'' according to a Merrill regulatory filing published in May.
VIEs, QSPEs
The Financial Accounting Standards Board, the five-member panel in Norwalk, Connecticut, that sets U.S. accounting rules, voted earlier this year to eliminate ``qualifying special- purpose entities,'' or QSPEs, a category of off-balance sheet financing exempted from tighter standards enacted following the collapse of U.S. energy trader Enron Corp. FASB also plans to clamp down on ``variable interest entities,'' or VIEs, that banks used when their vehicles couldn't qualify as QSPEs. And it voted June 11 to force banks to consolidate off-balance-sheet assets whenever an ``obligation to absorb losses can potentially be significant.''
Banks are required to disclose their off-balance-sheet assets in annual reports. According to Citigroup's most recent financial statement, filed in May, the bank's $1.1 trillion of off-the-books assets as of March 31 included $760 billion of QSPEs and $363 billion of unconsolidated VIEs.
`Full Disclosure'
``Our quarterly financial report provides full disclosure of our off-balance-sheet assets, including our maximum exposure to assets in unconsolidated VIEs,'' Citigroup spokeswoman Shannon Bell said. That figure was $141 billion as of March 31 and included funding commitments and guarantees, company reports show.
To lose the full amount, all the assumed assets would have to be written down to zero. The figure exceeds Citigroup's market value of about $90 billion, which dropped more than $180 billion since the end of 2006.
Citigroup's financial statement also says that about $517 billion of the QSPEs are related to mortgage securities, and that they are ``primarily non-recourse,'' which means the risk of future credit losses is transferred to purchasers.
Sharon Haas, an analyst at Fitch Ratings, said anyone who has studied Citigroup's disclosures would be familiar with the off-balance-sheet risks.
``A lot of these so-called off-balance-sheet exposures, there's no mystery about this,'' Haas said. ``Whether they're on or off balance sheet is frankly not as important from an analytical perspective as understanding the inherent nature of the businesses that they're involved in.''
`Impractical' Rule
Pandit, 51, who replaced Charles O. ``Chuck'' Prince III as CEO in December, said in a June 27 report posted on Citigroup's Web site that regulatory reform must include ``public disclosures to investors about pertinent risk and financial information that give the market a chance to make informed judgments.''
The comments came after Robert Traficanti, Citigroup's deputy controller, sent a letter to FASB Chairman Robert Herz on June 9 objecting to a provision that would force banks to reevaluate their off-balance-sheet assets and liabilities every quarter. Citigroup has more than 7,000 VIEs and more than 100 QSPEs, he wrote.
``We believe that this model is impractical from an operational standpoint,'' Traficanti wrote. ``We would not be able to perform this analysis given the resources we currently have. We would need to hire many more accountants.''
Capital Concerns
Regulators may part ways with accounting overseers and grant banks a waiver from having to raise capital against assets that have to be consolidated on the balance sheet, said Tanya Azarchs, a managing director at Standard & Poor's in New York.
``They really don't want to introduce any more instability into the banking system,'' Azarchs said.
Mortgage-finance agencies Freddie Mac and Fannie Mae plunged to their lowest in 17 years in New York trading last week, partly on concern that off-the-books assets might swamp their capital.
James Lockhart, director of the Office of Federal Housing Enterprise Oversight in Washington, said on July 8 that an ``accounting principle should not drive a capital decision by a regulator.''
That doesn't mean regulators aren't paying attention. Examiners keep offices inside the headquarters of large banks, and they have access to non-public records that help them analyze off-balance-sheet risks, said Bill Isaac, a former Federal Deposit Insurance Corp. chairman who is now chairman of Secura Group, a consulting firm in Vienna, Virginia.
What-If Scenarios
``The bank examiners are probably more thorough now and even skeptical in looking at these things,'' Isaac said. ``They're probably doing more what-if scenarios and stress tests. People thought there was a 1-in-100 chance of something happening, and as we see now, it has happened.''
Citigroup had $25 billion of ``liquidity puts'' -- a kind of guarantee -- last year on off-balance-sheet ``commercial paper CDOs'' set up to sell short-term debt known as commercial paper, according to the May financial statement. In the second half of the year, after a surge in market rates for the commercial paper, the bank had to preempt the formal exercise of the guarantees by buying the debt, according to the statement.
By the end of 2007, the full amount had been brought back on the books. The assets had to be written down by $4.3 billion in the fourth quarter and $3.1 billion in the first quarter. The remaining balance stood at $16.8 billion as of March 31.
Failing SIVs
The commercial-paper CDO assets are in addition to the assets Citigroup took over last December from its failing SIVs. In that case, the bank didn't have a contractual guarantee; it intervened to cushion the losses for its clients. Citigroup had $212 million of losses related to the SIVs in the first quarter, according to the financial statement.
``People say they don't have any liquidity backstop, they don't have any guarantee,'' said Russell Golden, the FASB's technical director. ``But then they act like they always had a guarantee.''
Murkier still are the $15 billion of assets Citigroup has had to import this year from four off-balance-sheet hedge funds that unraveled. They include the Old Lane hedge fund that Pandit helped open in 2006. Citigroup bought Old Lane Partners LP last July for about $800 million. Earlier this year, the bank said it would close the fund because Pandit and other Old Lane founders had moved on to management jobs at the bank.
Citigroup incorporated about $9 billion of Old Lane assets into its trading desk.
`Back to Roost'
``You had risks off the balance sheet that came back to roost,'' said Marc Siegel, head of accounting research and analysis at RiskMetrics.
While Citigroup has more off-balance-sheet assets than its peers, it isn't alone. Bank of America assumed about $6.6 billion of commercial paper issued by off-balance-sheet CDOs last year. About $5 billion related to ``written put options'' and $1.6 billion related to ``other liquidity support,'' according to the Charlotte, North Carolina-based bank's financial statements.
Bank of America held $32.1 billion of VIEs on its balance sheet as of March 31, compared with $22.4 billion at the end of 2006. It still has $43.2 billion of VIEs off balance sheet.
JPMorgan has off-balance-sheet ``conduits'' with about $54 billion of commercial paper outstanding, according to its first- quarter financial statement. The bank says it is ``not obligated under any agreement'' to buy the debt. Even so, the bank provided a chart showing the impact if assets had been consolidated: First-quarter net income would have been $2 billion instead of $2.4 billion.
``As soon as the cycle turned, all of these risks started to come back, and companies weren't prepared,'' Siegel said. ``It wasn't transparent to the investors what was going on.''
To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net. Last Updated: July 13, 2008 19:01 EDT

There's More Gold About Wall Street Here Than Any Book

What Really Killed Bear Stearns?June 30, 2008, 8:30 am

Did Bear Stearns melt down — or was it murdered?
That is one of the big questions that Bryan Burrough, who co-wrote the best-selling 1990 book “Barbarians at the Gate,” tries to answer in a lengthy article in the August Vanity Fair magazine.
Mr. Burrough spoke with many Bear executives and board members who described in vivid detail the events that unfolded that fateful week in March when Bear Stearns was ultimately forced to sell itself to JPMorgan Chase for a pittance.
According to Mr. Burrough’s account, Bear did not have a liquidity problem, at least at first. In fact, he said it had more than $18 billion in cash to cover its trades when the week began. There were no major withdrawals until late in the week, after rumors flew that the company was in trouble.
A top Bear executive told Mr. Burrough, “There was a reason [the rumor] was leaked, and the reason is simple: someone wanted us to go down, and go down hard.”
Bear executives frantically tried to find the source of the rumors, but failed to do so. They have their suspicions, and they have turned over the names to federal authorities that are investigating the matter.
Two possible sources named in the article — albeit with few supporting details — are hedge funds: Chicago-based Citadel, run by Ken Griffin, and SAC Capital Partners of Stamford, Conn., run by Steven Cohen. The third was one of Bear’s main competitors, Goldman Sachs.
All three firms denied any involvement in spreading the rumor, according to the article.
Several Bear executives also told Mr. Burroughs that an individual may have been spreading rumors about the firm that week — Jeff Dorman. Mr. Dorman briefly served as global co-head of Bear’s prime brokerage business until resigning to take a similar position at Deutsche Bank. One Bear executive said, “We heard Dorman was saying things last summer […] At the time we reached out to Deutsche Bank and told them he better stop it.”
But the rumors caused a run on the bank and depleted Bear’s capital base. Alan Schwartz, the firm’s chief executive, then reached out to his counterpart at JPMorgan, James Dimon, for help. Mr. Schwartz called Mr. Dimon, who was eating dinner with his family, celebrating his 52nd birthday.
Mr. Burrough described the call this way:
Dimon stepped outside onto the sidewalk. Schwartz quickly explained the depth of Bear’s plight and said, ‘We really need help.’ Still irked, Dimon said, ‘How much?’ ‘As much as 30 billion,’ Schwartz said. ‘Alan, I can’t do that,’ Dimon said. ‘It’s too much.’ ‘Well, could you guys buy us overnight?’ ‘I can’t — that’s impossible,’ Dimon replied. ‘There’s no time to do the homework. We don’t know the issues. I’ve got a board.’
Mr. Dimon then called the New York Federal Reserve and worked out a deal where the government would lend the money to JPMorgan, which would then lend it to Bear Stearns. Bear would live another day — but just a few more. Bear executives thought they had 28 days to pay the money back. The article recounts a conversation that Mr. Schwartz had with federal officials informing him that he had far less time than he thought:
Schwartz’s phone rang. It was Tim Geithner of the Fed, with the Treasury secretary, Hank Paulson. Paulson came right to the point. ‘You’ll recall I told you when we cut this facility [that] your fate was no longer in your hands,’ he told Schwartz. ‘Well, we don’t plan on being here on Sunday night like we were last night. You’ve got the weekend to do a deal with J.P. Morgan or anyone else you can find. But if you’re not done by Monday, we’re pulling the plug.’ And, like that, Bear’s 28-day cushion evaporated. The Fed’s credit line was good only till Sunday night.”
The news came as a shock to Bear executives.
When Bear’s chief financial officer, Sam Molinaro, heard the news from Mr. Schwartz he said, “You’ve got to be kidding me.” The firm was eventually forced to sell itself to JPMorgan to avoid a bankruptcy filing.
Go to Article from Vanity Fair »
20 comments so far...
1.
June 30th,20088:53 am
So a combination of former Goldman Sachs eexecutives and some very big hedge funds that do significant business with Goldman Sachs are coincidently at the center of the demise of a Goldman competitor. Rumors of how SAC Capital turns their profits [illegally] have been circulating for decades and yet somehow they are insulated from any enforcement risk. Must be that Goldman secret handshake and decoder ring they wear.
How is it the $30 Billion federally sponsored loan to Bear Stearns was good for a weekend but that same $30 Billion is a long term loan to JP Morgan?
— Posted by Dave
2.
June 30th,20089:02 am
Stop!….with these supposedly informed/insightful tidbits about Bear’s stellar liquidity and balance sheet. To say someone had $18 billion in cash presents a one-sided analysis. How much was out in repo against that $18 billion? Additionally, most execs pick a quote based on the day the balance sheet is gussied up.
When Bear’s liquidity crisis developed their repo book had expanded dramatically over the past year to the tune of 2x the previous year. During the same period Lehman’s repo book had declined by roughly 25%. Bear got a taste of their own medicine by virtue of committing the cardinal sin of overreliance on short term funding. For repo lenders perception in many instances is reality. The last man standing gains nothing, the first out gets his money back.
— Posted by former bear employee
3.
June 30th,20089:21 am
“The news came as a shock to Bear executives.”
So why did Mr. Burrough go to many Bear executives and board members to find the reason for Bear’s collapse?
It wasn’t murder; it was negligence and ignorance on behalf of Bear’s executives and board members. The outcome is that taxpayers and Bear stakeholders will pay, all while those executives blame others, demand everyone’s pity, and holdout to negotiate their next big contract.
— Posted by Perseus
4.
June 30th,20089:57 am
Barbarians at the Gate is one of my all-time favorite books, but honestly, hasn’t this story been told already? Didn’t the WSJ do a three-day expose on how Bear Stearns collapsed? The next article I read about Bear Stearns better be in Playboy, is all I’m saying.
— Posted by Dan Daoust
5.
June 30th,200810:36 am
The Vanity Fair piece blames everyone from shorts to CNBC to Charlie Gasparino and David Faber.
Yet bottom line remains: If your financial condition is so precarious that rumors can bring you down, then its the finances, and not the rumors, that are to blame . . .
— Posted by Barry Ritholtz
6.
June 30th,200811:02 am
Exactly. That’s what happens when you try to run with 30 to one leverage. All it takes is one rumor and…you are screwed. Not even commercial banks are allowed that kind of leverage.
— Posted by oldgeezerpilot
7.
June 30th,200811:04 am
Am I suppose to feel sorry for Bear Stearns or its employees?? When the going was good, did Bear Stearns care how it was making its money, its profits, the bonuses? Whether the death of Bear was by murder or otherwise, the executives made their money by murdering the consumers. Bears Stearns lobbyists in Washington made it so consumers couldn’t breath with so many hidden caveats to contracts. Chickens are coming home to roost. This article is blaming others for demise of Bear Stearns instead of the decisions made by the executives of the firm. The firm has to be pretty shaky if rumors takes it down. Greed, malfeasance, unscrupulous deals. Now if any other firms hire these executives from Bear Stearns, I would question those firms judgement and avoid those firms. If these executives of Bear Stearns were so good, smart, cunning , they couldn’t save Bear, how they going to help another firm. Think folks
— Posted by seedyrum
8.
June 30th,200811:12 am
In 1965, Bill Kaufamn, Joe Osorio then of Citibank,a Bear Sterns executive and I formed a Hedge Fund with a certain Jerru Tsai, guru. In those days the spector of Hedging as an institution frightened the SEC as well as the street.In view of the recent liquidity problems surrounding mortgage backed securities fiasco and the death of BearSterns, the Street and the SEC were right then and wrong in the recent past and now.Rumur mills that profit from false or true rumors should not co-exist in an orderly mnarket.John Wright
— Posted by John Wright
9.
June 30th,200811:27 am
I knew since the beginning that BSC was taken down on purpose; the book will be written by my guy Lowenstien, and will be out in a year or so detailing the ugly truth.
— Posted by Steve Raznick D.M.
10.
June 30th,200811:29 am
Hey Barry, listen sport you have a lot to learn about gearing; if you were to use your assertion(s) as de-facto governance, there is not a single firm that would survive!
— Posted by Steve Raznick D.M.
11.
June 30th,200811:37 am
Barry, ANY company can be destroyed by false rumors and a Bear Raid. A financial services company is at greater risk because unlike other businesses, financial services is susceptible to that run on the bank that a GE, IBM, Microsoft, etc… would not be.
— Posted by Dave
12.
June 30th,200812:04 pm
Spreading rumors on Wall Street to effect stocks is an old time ruse, everyone on a trading desk has been through this at one time or another.
Some geek decides he wants to sell or short an equity,so puts a rumor out there. The desks are so nervous, they react vs. responding and the originators use that opportunity to buy or sell.
We also have frontrunning by every major firm. They buy a position then lay it off on their unsuspecting clients. Many are still trying to get their money out of the Auction Rate Preferreds that the major houses sold to their clients knowing full well that the firms would never step up to the plate to support the auctions as they had been.
Where the hell are our regulators and legislators? That’s what I want to know.
— Posted by Kate
13.
June 30th,200812:21 pm
Funny thing is, the SEC went out and solicited the opinions of “seasoned economists” for their insight on the tick test removal. The panelists were a who’s who of short sale apologists including the most vocal apologist and Jim Chanos friend and Associate - Owen Lamont.
In the roundtable meeting every economist on the panel denied that a bear raid could exist in this marketplace because of the regulatory structrure we have. It goes to show how blind our so-called experts have become to the tricks of the trade in todays market abuse network.
Not only do bear raids exist, they are actually quite prevelant. They just don’t last as long as they did in the past because of all the potential for liquidity. Today market abusers can raid a stock and cover for profit before our regulators have even opened their eyes to the abuse.
— Posted by Dave
14.
June 30th,200812:53 pm
Could the short volumes taken on by Citadel, SAC, and GS be gathered from the records and plotted for the takedown week?
— Posted by dave
15.
June 30th,20081:24 pm
A sound institution cannot be undone by rumors.
— Posted by wendell tripp
16.
June 30th,20082:13 pm
No matter whether Goldman Sachs, Citadel, JP Morgan, SAC et al deepsixed Bear-Stearns or if B-Stearns oeverreached and pulled the plug themselves. The fact is that none of these money flows in either direction were productive investments, merely attempts to game ineffeciencies in the market with the vampires raking off every time money changes hands. No value created here; too bad they all didn’t go down together.
If this money had been used, say, to invest in fuel cell technology development, perhaps GM or Ford, instead of Honda, would have put the first pre-production hydrogen feul cell vehicules on the road.
This ghoulish posturing can be stopped by revisiting US fiscal history. Under Truman and Eisenhower the highest marginal income tax was 92%. All annual income over $100,000 was imposed at this rate. Allowing for inflation today the figure would be $400,000. If all net income (including wages, salaries, fees, investment gains, capital gains, realized stock options, partnership payouts…) exceeding this amount were imposed at 92%, these conflict of interest specialists wouldn’t have our money to play with.
400,000 dollars/yr is about 10 times US median household income.
Bill P
— Posted by Bill P
17.
June 30th,20082:19 pm
Bear Stearns demise was much like a baseball game. A team doesn’t lose a game because the last game strikeouts. There are 26 other outs where the team could have generated runs and 27 other outs they could have struck out the opponent.
BSC had opportunities to raise capital, it had opportunities to reduce expenses, it had opportunities to sell assets; but the incompetent senior executives stood by as the house was burning down. After years at the top of the mountain they forgot they could roll off the hill easily. And the trek downhill would be much faster than the slog uphill. Name calling, gamesmanship, and rivalry are part of the business and there is nothing illegal about it. BSC was like a patient that ate and smoke themselves to death. At many times they could have healed themselves if they only followed prudent business practices. Instead the king and prince spent their time playing bridge and gold. And the newly appointed prince was too inept to understand complex treasury management. The culprits may have had a hand in BSCs demise, but the management was the group that set the company for a fall.
— Posted by hammer
18.
June 30th,20082:27 pm
The analysis to be gathered would require effort by the regulators as it requires trade ticket information but to answer your question yes regulators can do exactly that. They can also analyze the trade settlement failures to determine who it was that was creating such volume. On teh Wednesday before the collapse the fails accumulated from 200K to 1.4 Million on a $60 stock marking over $60 Million in failed trades. Trading the Monday of the collapse generated over 10 Million additional failed trades at net settlement.
None of this accounts for day trading activity where a failed trade is closed net out on the same day. A raid can easily consist of selling out huge fails in early market trading and then covering most in the panic that ensues.
— Posted by Dave
19.
June 30th,20082:43 pm
Sir,
I you are right, then every bank or financial group can be murdered the way you describe. The financial system is therefore much more fragile than I could imagine.
It holds together by the strength of the belief of the people working in it.
I used to name it religion.
— Posted by Didier
20.
June 30th,20082:53 pm
What really brought down Bear Stearns was a dysfunctional bankruptcy system.
As trustees, receivers, etc. have become more aggressive about pursuing fraudulent-conveyance claims, financial entities have become increasingly nervous about the possibility of ending up as the defendant in such an action.
How can an entity avoid being the target of an avoidance claim? By not doing business with any who might soon declare bankruptcy, that’s how. But this means severing relations with counter-parties on mere rumor (because often there isn’t a lot more than rumor to go on before the actual filing).
This leave-on-the-rumor mentality is self-reinforcing. If some funds stop doing business because of a rumor, that fact itself looks like confirmation of the rumor to others, and a classic run-on-the-bank mentality develops, until somebody gives a Jimmy Stewart type speech about how we can’t let the old Bailey bank close down, that’s what the Mr. Potter (read: sovereign wealth funds?) wants of us!
Think of the rumor, however it started, as the butterfly in a classic chaos-theory thought experiment.
The butterfly couldn’t cause a tornado unless atmospheric conditions were already such as to allow that. And the crucial atmospheric condition in this case is the changing nature of corporate bankruptcy.
What can we do about it? That’s a tricky question. Anyone have any ideas?
— Posted by NotNasser

One -- Particularly Bear Stearns -- Does Not Mislead a Bank

That's against federal law. Remember the Cincinnati Banker from a prominent family who borrowed from a bank and lied about his net worth? He went to jail in a clean case.

We can see the derivatives world using this approach, even if it involves German banks, apparantly.

The article just this afternoon:



By REUTERS
Published: June 25, 2008
Filed at 5:22 p.m. ET

Skip to next paragraph NEW YORK (Reuters) - Prosecutors are looking into whether two former Bear Stearns hedge fund managers, who were indicted last week on conspiracy and securities fraud charges for misleading investors, also broke the law in their dealings with banks, BusinessWeek reported on Wednesday.

Investigators are gathering evidence about possibly misleading comments that Ralph Cioffi and Matthew Tannin made to major lending and trading partners, BusinessWeek reported in its online edition, citing people close to the probe.

The report named Bank of America , Barclays , Dresdner Bank and Merrill Lynch & Co as having dealings with the pair that have attracted the attention of investigators.

Cioffi and Tannin pleaded not guilty after being charged last week for touting the financial health of two large hedge funds they oversaw to investors even as they knew the funds were about to collapse. The collapse helped kick off the widespread credit and sub-prime mortgage crises.

Prosecutors are focusing on a $4 billion collateralized debt obligation that the pair got Bank of America to guarantee and sell in the spring of 2007 when the market for risky mortgage-backed securities teetered on the brink of collapse, the report said.

The current indictment alleges that Tannin lied to a bank lender by understating the number of investors who wanted to pull their money out of the funds in May 2007, shortly before the collapse.

That lender was Germany's Dresdner Bank, BusinessWeek reported, citing people familiar with the matter.

The prosecution team is also talking to Merrill, another big lender to the Bear funds, the report said.

Allegations in a civil lawsuit filed by the U.S. Securities & Exchange Commission against Cioffi and Tannin also could point to additional criminal charges, the report said.

The SEC claims that the ex-Bear executives persuaded Barclays to sink an additional $100 million into one of the ailing funds in February 2007. That suit contends that the hedge fund managers provided the British bank with false performance figures for the portfolios.

Barclays, in a lawsuit it filed against Cioffi and Tannin in December, said it was the victim of "a series of misrepresentations," BusinessWeek reported.

Andy Merrill, spokesman for Cioffi and Tannin, declined to comment to BusinessWeek and could not immediately be reached by Reuters for comment.

The U.S. Attorney's office in Brooklyn, where the criminal case was filed, declined to comment on the BusinessWeek report.

(Reporting by Bill Berkrot, editing by Richard Chang)

Lehman No Bear Stearns

Wait a minute...hedge fund guy on CNBC says that it may be (between the lines), or at least that it may require a government bailout not benefitting the common stockholders...

Lehman No Bear Stearns

http://www.nytimes.com/reuters/business/business-lehman-capital.html