Posts filed under “Derivatives”

Buffett to Buy Bear? Bull$%*# !

Yesterday, the NYT floated a rumor that Warren Buffett was considering taking a stake in Bear Stearns. Have a read of the actual flailing report itself:

Bear Stearns, its shares and reputation beaten down
after the collapse of two hedge funds, is in serious talks with several
outside investors, including Warren E. Buffett, about selling as much
as 20 percent of the firm, people briefed on the discussions told The
New York Times Wednesday.

Other investors who have expressed an interest in buying a minority stake include the Bank of America, Wachovia and two Chinese institutions — the Citic Group and China Construction Bank, these people said.

There are many rumors I give a smidgen of credit for being very loosely based on fact. Where there’s smoke, there’s fire, etc.

This is not one of them.

First off, Bear Stearns (BSC) has become a giant rumor factory itself. First, a Chinese bank was taking a big stake. Then, a major money center bank was an acquirer. And now, Warren Buffett.

That’s right, the world’s best known value investor wants to own a company that could very likely have zero book value. A buyer of businesses with reliable earnings streams now wants to get into trading?  Buffett is the guy who had an unpleasant time running the ego factory at Salomon Brothers, and now we are told is looking at Bear? The man who is the chief spokesperson for the "Derivatives are financial WMDs" — he’s a tire kicker for the poster boy for MBS derivatives driven hedge fund disasters? 


As we noted yesterday, much of the broker’s reported earnings gains are accounting sleight of hand. Bear Stearns’ earnings benefited from a drop in the value of their own debt — about $225 million. Some people have estimated that the gains from such write downs were 140% of the quarterly earnings.

So while I doubt Buffett is seriously considering buying a stake in Bear, it does make sense that BSC needs a deep pocketed partner. Let’s go to Punk Ziegel analyst Richard Bove, the man who had a very timely sell call on the brokers months ago:

"According to Bove, Bear needs a third party to make an
investment for a few reasons. First, the company’s cost of funding has
increased, making it less competitive in a number of businesses where
it is a factor, with prime brokerage at the top of the list.

“Therefore,” Bove said, “Bear needs a deep pocket partner to shore up its balance sheet.”

also noted that the company’s main business, the origination,
packaging, securitizing and structuring of mortgage products is under
pressure and will remain under pressure for some time."

However, it does not take more than a nano second of contemplation to recognize
this as little more than an end of quarter goosing from the usual

Indeed, it seems that every time a given sector or stock is in trouble, someone floats a rumor that Buffett is a buyer. I had the same reaction to this absurdity that I did back in February when we heard Warren was buying a major stake in a large public home builder (Surprise! turned out to be nonsense). A commenter yesterday pointed out this November 2006 story regarding the Bill & Melinda Gates Foundation, a charitable trust that for some reason was taking a stake in 7 homebuilders. (Also, if you forward this email to 10 people, Bill Gates will give you $1000!)

It looks like someone is simply wildly throwing shit against the side of the barn, hoping something will  stick. That may work for cooking pasta, but its not a way to base your trading and investing.

The timing of these rumors — option expiry, end of quarter mark up, or pre-earnings — always seems to be suspect.

Then there’s the companies themselves: Funny, these rumors always seem to fly around troubled firms or industries that just happen to have very large short interests.

Gee, do you think anyone is trying to squeeze the shorts?

UPDATE: September 27, 2007 3:30pm

Why am I not surprised by this announcement?

"At Bear Stearns, timing is everything. The struggling brokerage house raised at least $1 billion this afternoon with a surprise sale of 10-year bonds. The sale, which was met by strong demand in the bond market, comes just a day after Bear shares surged nearly 8% on rumors that the Wall Street firm was near a deal to bring in a big outside investor. One report said Bear has been talking with billionaire value investor Warren Buffett.

On Thursday, Bear Stearns took advantage of that momentum and some strong demand in the corporate bond market to raise some money. Sources say the deal drew more than $3 billion in orders for $1 billion worth of bonds, though it may be upsized.

The bonds are expected to be priced at 190 basis points over comparable 10-year Treasury bonds. Investors say that is attractive for the senior bonds, relative to subordinated Bear Stearns bonds and comparable Lehman Brothers (LEH) debt, both of which traded recently at about 175 basis points over Treasuries."

Gee, I guess yesterday’s rumors were just a coincidence . . .


Buffett Said to Consider Bear Stake   
NYT, September 26, 2007

Bear Soars On Buffett Rumors
Carl Gutierrez,
09.26.07, 4:15 PM

Bear Taps the Bond Market
Liz Rappaport, 9/27/2007 1:19 PM EDT

Category: Corporate Management, Derivatives, Financial Press, M&A, Valuation

Bernanke Blinks

Category: Credit, Derivatives, Economy, Federal Reserve, Inflation

Nine Reasons the Feds Can’t Save Stocks

Category: Credit, Derivatives, Economy, Federal Reserve, Investing, Markets, Psychology

Greenspan’s Legacy

Category: Credit, Derivatives, Federal Reserve, Investing, Real Estate

The Fine Line Between Investment Grade and Junk

Category: Credit, Derivatives, Federal Reserve, Financial Press, Hedge Funds, Psychology, Real Estate

Martin Feldstein on the Housing/Credit/Economic Mess

Category: Credit, Derivatives, Federal Reserve, Hedge Funds, Inflation, Psychology, Real Estate

A Thought Experiment

Category: Credit, Derivatives, Investing, Markets, Trading

Recursion, Reflexivity, Feedback Loops & the Fed

Category: Credit, Derivatives, Federal Reserve, Inflation, Investing, Markets, Psychology

Five Reasons Why the Fed Will Cut Rates

Category: Credit, Derivatives, Federal Reserve, Inflation, Psychology, Real Estate

A Demon of Our Own Design

I previously mentioned A Demon of Our Own Design in a linkfest a few weeks ago. I enjoyed the book a great deal, and just about finished it over the long weekend.

The opening paragraph just reached out and grabbed me: 

Bookstaberdemon_jacket"While it is not strictly true that I caused the two great financial
crises of the late twentieth century—the 1987 stock market crash and
the Long-Term Capital Management (LTCM) hedge fund debacle 11 years
later—let’s just say I was in the vicinity. If Wall Street is the
economy’s powerhouse, I was definitely one of the guys fiddling with
the controls. My actions seemed insignificant at the time, and
certainly the consequences were unintended. You don’t deliberately
obliterate hundreds of billions of dollars of investor money. And that
is at the heart of this book—it is going to happen again. The financial
markets that we have constructed are now so complex, and the speed of
transactions so fast, that apparently isolated actions and even minor
events can have catastrophic consequences."

Terrific stuff.

Indeed, I enjoyed the rest of the book. Bookstaber was on the scene in the early days of many of derivatives now contributing to market turmoil. He rather deftly makes complex issues readily understandable, regardless of how much advanced mathematics you may have under your belt.

And, he names names. LOTS of names. All the usual suspects come under scrutiny, as well as a lot of folks who probably assumed they were not int he public eye. There will be a lot of people not very happy with his blunt, insider descriptions of the analytical errors made by major players — many of whom are still around today and in positions of authority and power. 

He also accepts a lot of responsibility for many costly errors he himself made.   

Overall, a fun, very informative read.

I was intrigued enough by the book that I contacted Bookstaber (the author) and Wiley (the publisher), and asked for their permission to reproduce the first chapter. They graciously sent me a pdf and text version, which you will find after the jump: All of chapter one, in both text form and PDF. I also included some mainstream media reviews after the chapter. 

I have pretty good relationships with many of the publishing houses — they all want to get a book or two out of me. Anyway, if it turns out you guys like this idea, perhaps we can offer up a book or two that I am reading every month in this same format. Maybe we can have an online reading group club — it could be a good place to have a full discussion. Share your thoughts.

Enjoy chapter one.

Disclosure:  No, I don’t accept money for this — it was my idea, and I approached the publisher and author about this — not vice versa. Please don’t start bombarding me with offers to promote books I am not already reading. They will be unceremoniously deleted without response.

As noted in our disclosure section, we don’t do payola here (if you click thru and buy it on Amazon, I do see some scratch).


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Category: Books, Derivatives, Federal Reserve, Hedge Funds, Markets, Psychology