Posts filed under “Hedge Funds”

Who is to Blame for Bear Stearn’s Demise?

From our Things that make you go Hmmmm department:

There is a meme going around about the death of Bear Stearns (BSC). According to some people (mostly current and ex-employees) the collapse of the fifth largest investment bank in the US is the fault of many people, none of whom happen to be the management of Bear Stearns itself.

Let’s review some of the reasons why this was "not" Bear Stearn’s fault:

1) Various clients — like Renaissance Technologies Jim Simons, who pulled his prime brokerage account from Bear a few weeks earlier, as well as short sellers spreading rumors — caused a run on the bank.

2) The Greenspan Fed, for not giving iBanks a seat at the discount window when Glass-Steagall Act was repealed (K & Co, March 16). 

3) The Ben Bernanke Fed, for failing to raise rates more rapidly.

These excuses are a steaming pile of organic, enzyme-free donkey fazoo. One in particular stands out as more manure laden than the rest. I wish to draw your attention to the third excuse, as it was penned earlier this week by, of all people, three Bear Stearns economists. Its titled "Apart From That, Mrs. Lincoln, How Was The Play?"  You see, it turns out that because the Fed kept rates so low, we ended up with all this bad paper, which ultimately led to the increase in foreclosures, then a sub-prime implosion, a housing debacle, derivative collapse, counter-party risk, recession, etc.  If only the Fed raised rates more rapidly, their argument goes none of this would have happened.

Um, sure it is, if you say so. Now, put the gun keyboard down, and back away from the laptop.

To me, this is the equivalent of blaming McDonalds (MCD) for your being obese. Why-oh-why must they make the Quarter Pounder (with cheese) so delicious? Who amongst us can possibly resist its mouthwatering sesame seed buns, its delectable, fat-laden goodness? Hmmmmm, so scrumptious!

Not everyone else gorged at the trough of mortgage backed securities the way Bear did: They were the most aggressive player in the mortgage backed underwriting arena, their internal hedge funds were amongst the most heavily leveraged to the junk. Indeed, of all the banks on Wall Street, one in particular stands out for how heavily tied they were to mortgage securitization industry: Bear Stearns.  Of course, this obviously had nothing to do with Bears’ current predicament.

Then there is the small matter of, shall we call it, a lack of diplomacy on Bear’s part. Back in 1998, when Long Term Capital Management was going down, the major banks were brought together by the New York
Fed President. The only party who refused to participate in
the $3 billion bailout (which turned out to be profitable for asl involved) was Long Term’s
prime broker, Bear Stearns. That’s the sort of poor Wall Street corporate citizenry which can make you quite a few enemies. If revenge is a dish best served cold, you can be sure plenty of people were thrilled on Sunday to announce Supper’s Ready.

Finally, there seems to be this tendency amongst Bear economists of playing the role of imperfect messenger. Recall that just as the credit crunch was unfolding, it was Bear (of all people!) who advised everyone: Don’t Panic About the Credit Market. Ironically, part of Bear’s current criticism consists of blaming the Fed today for, well, not panicking back then — even as they were telling everyone to calm down. Sorry, but you don’t get to have it both ways.

The bottom line is that Bear went under because of the poor judgment of their management: their aggressive risk taking, their positions in the mortgage back market, their apparent lack of risk controls, their leverage, lack of liquidity and reserves, and the enemies they made over the years. Sorry to be so blunt, but get real: It was nobody’s fault but their own.

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Previously:
The "Chutzpah" of Bear Stearns    http://bigpicture.typepad.com/comments/2007/08/the-chutzpah-of.html

Sources:
Apart From That, Mrs. Lincoln, How Was The Play? .pdf
John Ryding, Conrad DeQuadros, Meghna Mittal
Across the Curve: Bear Stearns Economics, March 18, 2008

Bear Economists Snipe at Bernanke
Andrew Ross Sorkin
NYT Dealbook, MARCH 19, 2008, 1:32 PM    http://dealbook.blogs.nytimes.com/2008/03/19/bear-economists-snipe-at-bernanke/

Wall Street Ponders Extent  Of the Woes  At Other Firms
SERENA NG and JENNY STRASBURG
WSJ, March 15, 2008; Page B1
http://tinyurl.com/2dyv4s

Category: Corporate Management, Credit, Derivatives, Federal Reserve, Hedge Funds, Inflation, Psychology

New Project(s)

What a crazy week — and the market is the least of it!

We moved from our old space on Park Avenue & 49th (across from
the Waldorf) to larger quarters a few blocks over on 5th Avenue. I have been switching back and forth between Starbux and Bryant Park for internet access (and posting less because I have been out of the office more than in). The
furniture is in, the phones are hooked up, and tomorrow, rumor has it
Verizon will light us up with a big fat pipe, connecting us to that
series of tubes.

But what’s been really odd is that a dozen seperate projects I have been working on for a few years now — some big, some small, all eclectic — have practically all-at-once, simultaneously, lurched towards fruition.

These include:

A major media project

I may join a new BoD

A fun little web project (its potentially very, very funny)

A significant quant application (this is a very powerful tool)

A brand new video venture

Two fascinating blog related advertising concepts

An expansion of an earlier book blogging idea

A new private equity fund 

And that was just this week!

We will discuss more about these in the coming weeks; Just about all of them have a market/stock/economic component to them. I’ll keep you up to speed with these as they develop.

I expect/hope that at least 3 of these 7 close before Halloween. . .

Category: Digital Media, Hedge Funds, M&A, Video, Weblogs

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

One Way Days: Are the rules different this time ?

Category: Hedge Funds, Investing, Markets, Psychology, Quantitative, Technical Analysis, Trading

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.

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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

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“Dear Investor” — Quant Letters to Clients

Category: Hedge Funds, Psychology, Quantitative, Trading

The Quants Explain Disaster

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Open Thread: A Stealth Fed Rate Cut?

Category: Credit, Derivatives, Federal Reserve, Hedge Funds, Psychology