Review: “Street Fighters.”

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The death knell for Bear Stearns came when the hedge funds began to pull out their billions of dollars- for Bear Stearns at that time was one of the largest clearing houses for hedge funds, and this put Bear Stearns at risk.

[Book Review]


 

 

“Street Fighters,” (Portfolio; a unit of Penguin Group, 2009) by Wall Street Journal reporter Kate Kelly vividly describes the last 72 hours in the life of Bear Stearns, once the scrappiest firm on Wall Street. 

 The portrait of the company and senior executives at Bear is on target.  Kelly states from the outset that Bear was more interested in recruiting PSDs, employees who were poor, smart and desirous of earning millions. It was precisely this greed which led to the collapse of Bear Stearns. 

Kelly’s book explains the lax management style of Bear with its Chairman, Jim Cayne, who deemed his avocations more important than managing the fifth largest investment firm.  During the summer, Cayne was more interested in spending extended weekends, which began on Thursdays at the New Jersey Shore, rather than in minding the store at Bear Stearns. 

As mind-boggling as it may seem, Cayne always preferred playing bridge to managing Bear.  When Chairman Cayne was late in joining a board call one Saturday, former CEO and fellow director Ace Greenberg lashed, “We can’t afford to have another story saying you’re playing bridge at this time,” (page 133-134).

Considering that Cayne was at one point in time the wealthiest chairman of a publicly held investment firm-- his net worth was in excess of $1 billion-- it seems strikingly peculiar that Cayne was not monitoring the position of the firm that made him a billionaire.

Even though Cayne had been replaced by Alan Schwartz as Chief Executive Officer in January 2008, Cayne was still a member of the Board.  During the weekend of March 15 2008, the weekend that Bear Stearns went out of business, Cayne was not in the office. 

While the house was burning, Cayne was playing bridge in Detroit, the home of GM, another bankrupt symbol of American capitalism.  Cayne was even late for the 11:00 am conference call that would determine the fate of Bear. 

Even when he arrived, he was still in denial favoring a bankruptcy reorganization. 

Kelly describes the animosity between Jim Cayne and Alan “Ace” Greenberg, whom Cayne deposed as CEO.  Although this relationship is portrayed as strained throughout the book, the two did drive in to work together and were united by their two loves-Bear and bridge.  And it was Greenberg, who had hired Cayne.

A major part of the book is the author’s description of the over-leverage of Bear Stearns- a ratio of 1 dollar of capital for every 30 dollars at risk, which made Bear a fortune in an up-market and would destroy Bear in a down-market.

Kelly further describes that Bear relied too much on the overnight repo (repurchase agreement) market where firms with excess capital would lend money to firms that needed capital- rather than on longer term capital, such as bonds.

The death knell for Bear Stearns came when the hedge funds began to pull out their billions of dollars- for Bear Stearns at that time was one of the largest clearing houses for hedge funds, and this put Bear Stearns at risk.

I found “Street Fighters” to be a very illuminating. When it was decided that JP Morgan Chase would take over Bear, we get to learn what roles the following key individuals played in the drama:  Secretary of the Treasury, then Henry Paulson; Ben Bernanke, then and currently Chairman of the Federal Reserve; and, the President of the Federal Reserve Bank of New York, Timothy Geithner, who is currently Secretary of the Treasury.

How could such a once mighty investment firm like Bear just disappear from the face of the earth? Read Kate Kelly’s book.

End Point:
I recently reviewed the book, Street Fighters, by Kate Kelly.  In this book the author provides much detail concerning the final three days, 72 hours, of Bear Stearns.

In this piece I will provide a trader’s perspective on thee decline of Bear Stearns. 

Bear Stearns was always known as a firm that was anxious to make a buck.  Believe it or not, when I first went to Wall Street the firm with the best reputation was that of Merrill Lynch- but that changed as I will discuss in a later article.

But Bear Stearns was always a little reckless.  Bear never managed risk very well- and there was a decided reason for this.  It was the culture of the firm.

Alan “Ace” Greenberg, Jim Cayne, and Warren Spector, the key executives at Bear Stearns were bridge players.  Bridge players are frequently very good traders- especially in normal times.  But their trading strategy is one based on selling premium- much as AIG would sell insurance based on a normal bell-shaped curve with expected probabilities.  Or as AIG sold credit default swaps- which caused the collapse of AIG and a United States bailout of $180 billion.

A bell-shaped curve is very useful for theoretical models.  But a bell curve assumes that all variables are known.  Just as in bridge.  There are a specific number of cards and a set of rules, which are followed.  There are no exogenous factors.  So everything is predictable.

But trading is very different.  I have called the extraordinary events the Krakatoa Paradigm, after the eruption of the Krakatoa volcano in Indonesia.  No one knew precisely when the volcano would erupt- but it was predicted that it would eventually erupt.  This was discussed more fully in The Black Star News article, Wall Street:  The Volcano This Time.

In the 1980s Bear Stearns cleared the equity options trades of a group of bridge players at the American Stock Exchange.  The group was led by two international bridge champions.  They made millions during the early to mid 1980s. 

When an option was overvalued, they sold it and hedged their position with a trade involving the stock.
But then came 1987- the market crashed 22% in one day.

The bridge players were wiped out.  Bear Stearns, as the clearing firm, had to guarantee their trades.  So Bear Stearns knew first hand the dangers of utilizing a normal bell curve as a basis for trading.

Bear Stearns also knew how difficult it was to collect money from some traders, who went out of business.  One seller of premium was Steve Lawrence, a member of the American Stock Exchange, who lost tens of millions of dollars in the October 1987 debacle.  Bear Stearns acted as the clearing house for Lawrence and therefore was liable for his debts- a sum in excess of $20 million.

Ten years after Steve Lawrence blew out, Bear Stearns was still trying to collect the money- and it never recovered the full amount that Lawrence owed to Bear.  So renowned were the efforts to collect the debt that The Wall Street Journal ran a front page article about the Bear Stearns-Steve Lawrence imbroglio.

The connection to the collapse of Bear Stearns lies in the numbers.  Bear Stearns was making too much money from the Collateralized Mortgage Market with AAA rated bonds in two of its funds.  When the housing market collapsed so too did the funds in the summer of 2007.

Bear Stearns assumed too much risk.  It should have learned a valuable lesson from past experience- but it did not.





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