Was Bear an anomaly?
Vincent Farrell makes the case that the Bear Stearns debacle was a one-off situation:
When Long-Term Capital Management failed in 1998 (see Roger Lowenstein’s “When Genius Failed“, a superb book), the NY Fed gathered the heads of the Families in a room and said figure it out, boys.
The hat was passed and, as I remember, about $300 million apiece was the ticket, and the system was saved. Except Bear Stearns. Bear walked out. The Bear has always been edgy. But when two Bear Stearns hedge funds failed in this credit cycle, and Jimmy Cayne, the CEO, was found to be playing bridge or golf while his section of Rome was burning, the company’s fate was sealed.
Wall Street has a long memory. Bear had no friends. While it is true that in Wall Street terms, if you want a friend, get a dog, it helps to have “relationships.” Cayne’s indifference set Bear off “entire of itself,” and when calls were made for help last week, there were no takers.
Alan Schwarz, the new CEO, is a competent, really good guy. But he had no institutional depth in this market, having been a banker his whole career. He probably has a golden Rolodex for investment-banking deals, but no relationships in this new world.
He also made a dramatic misstep. Walter Bagehot, the 19th century British financial journalist wrote: “Every banker knows that if he has to prove that he is worthy of credit, however good may be his argument, in fact, his credit is gone.”…
Bear had $17 billion in cash and owed $102 billion via secured financings. The $102 billion were loans made by “counterparties” and secured by assets Bear had on its balance sheet. If those assets declined in value, Bear would have to put up more collateral, or margin. Turns out the cash reserve was insufficient, and, and this is the big “AND,” the counterparties were no longer willing to make the loans, and the loans were all short term.
Bear was undercapitalized for its activities and only had $17 billion in cash. Farrell contrasts Bear with a company it is often compared to, Lehman Brothers. Lehman, he notes, “has total liquid assets of close to $100 billion, or some 54% of its collateralized financings. This is better than Goldman (38%), Morgan Stanley (39%), and Merrill Lynch (34%).” We’ll just have to see how this all plays out.
March 17th, 2008 at 4:37 pm
Around 12:30 Eastern time, Bear Stearns is trading around 3.75 instead of the nominal buyout price of 2.00. Although typical major financials are down, JPM is up about 8%.
Megan McArdle’s commenters Dave and Geoff (cf. Person and Peschel) suggest that the deal is so favorable to Morgan that Bear shareholders may not approve it.