Vanity Fair Writes Latest Chapter on Bear Stearns’ Demise

Although a series of miscalculations left Bear badly wounded, coup de grace theories have been floating around since mid-March. The usual suspects are in the crosshairs, including Wall Street's version of The Breakfast Club:

According to one vague tale, initially picked up at Lehman Brothers, a group of hedge-fund managers actually celebrated Bear’s collapse at a breakfast that following Sunday morning and planned a similar assault on Lehman the next week. True or not, Bear executives repeated the story to the S.E.C., along with the names of the three firms it suspects were behind its demise. Two are hedge funds, Chicago-based Citadel, run by a trader named Ken Griffin, and SAC Capital Partners of Stamford, Connecticut, run by Steven Cohen....The third suspect, at least in Bear executives’ minds, is one of its main competitors, Goldman Sachs. Vanity Fair

Goldman and SAC are predictably denying they played a role; and even if they had a hand in it, it is more likely to have been the work of random employees than a widespread conspiracy. But enough people were moving in for the kill, and not just shorts. Picking up market share and settling an old score might have been one guys motivation:

Several Bear executives also named an individual they believed was spreading rumors about them that week, Jeff Dorman, who briefly served as global co-head of Bear’s prime brokerage business until resigning to take a similar position at Deutsche Bank last summer. “We heard Dorman was saying things last summer,” says a Bear executive. “At the time we reached out to Deutsche Bank and told them he better stop it.”

The move to take down Lehman Brothers was essentially a copycat, but they playbook did not work, as the teams playing defense had wised up to the tactics. But I was only partially joking on March 25th when I surmised:

What the easiest way to make money on Wall Street?

1) Short shares of the publicly-traded parent of your prime broker

2) Spread rumors

3) Move your account to a competitor

4) Tell your friends you pulled the money

5) Cover your short

Of course, if there are any lessons to be learned, it might be in the way these events unfold. Media and even blogs are part of the process, and Vanity Fair’s most amusing anecdote concerns the various competition between CNBC’s talking heads:

That night Schwartz, Molinaro, and others discussed what to do. The talks centered on whether Schwartz should go public in an interview with CNBC. “We debated putting Alan on the air a long time,” says one board member. “Yes, it might draw attention to the rumors. But it would definitely answer the questions. Our view was: we had to get him out.”

Schwartz, though, wanted some assurances first. From experience, he knew he faced a risk in picking the wrong CNBC correspondent for the interview. All the network’s talent—Gasparino, Maria Bartiromo, Faber, Larry Kudlow—had requested the interview, and whoever didn’t get it, Schwartz feared, might retaliate on the air.

“Each of these correspondents has his own producer, and they all seem to hate each other,” one Bear executive told me. “If you choose Faber, you know Bartiromo will bash you the next day.” Schwartz directed Russell Sherman to identify the CNBC executive who supervised the correspondents, explain the situation, and ask that the correspondents who didn’t get the interview refrain from attacks. Sherman, however, couldn’t identify a single CNBC executive who seemed to have control over the correspondents.

“Everyone on Wall Street knows the joke,” says another Bear executive involved in the discussions. “At CNBC, there is simply no adult supervision.”

Schwartz’s decision to go on the air was a difficult one, but just one link in a remarkable chain of events. Ultimately Bear executives will have to look in the mirror when they assign blame; but in the end Bear’s competitors and Mr. Market told them to take a long walk off a short pier.
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Was Faber out of line? Not necessarily; going soft on Alan would have left him subject to ridicule. But Alan sure picked one hell of a time to make his “First on CNBC” appearance. But in hindsight, Faber’s opening salvo cut right to the chase. Perhaps Alan should have taken a tougher stance against Faber’s line of questioning. But he was in a no-win situation by this time.

March 12, 2008

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Bringing Down Bear Stearns
Vanity Fair

Prime Brokerage Biz Up For Grabs
1440 Wall Street
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position

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