Bear Stearns Redux

I thought this e-mail from Vince interesting about Bear Stearns. I had forgotten the story (though it was resurrected when Bear's HF's were in trouble--and it's worth noting that these were the first HF's to fall in this CDO crisis) about Bear's failure to participate when LTCM failed.

From: vince farrell
Sent: Sunday, March 16, 2008 1:16 PM

"No man is an island, entire of itself..." John Donne didn't mean Bear Stearns when he wrote that ,but it's applicable. 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 companies 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." (Thanks to the NY Times for the quote.)

That's why this will be a one-off situation. The WSJ had a good analysis Saturday on Wall Street's liquidity positions. On November 30, 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.

Lehman is a big bond player, like Bear,and was much mentioned last week as a firm that should be watched carefully. But Lehman has a much larger pool of liquidity at hand. It has $182 billion in secured financings but only $28 billion come due in the next 12 months and the firm has a liquid reserve of $35 billion. While the cash is 19% of its total secured financings of $182 billion, similar to Bear's 17%, very little of the debt is due in the next year, let alone right away. Additionally, LEH has $60 billion in liquid assets that could be sold and just last week close a $2 billion UNSECURED credit line. So, LEH has total liquid assets of close to $100 million, or some 54% of its collateralized financings. This is better than Goldman (38%), Morgan Stanley (39%), and Merrill Lynch (34%), and those firms also have a more diverse business mix.j

Lehman, and the other firms, have something Bear did not. They have relationships forged in the recent history of financial chaos, where they stood next to one another. Dick Fuld runs Lehman. He knows not just the other Family heads on Wall Street, but you can bet he knows the counterparties that Lehman has borrowed from. If Fuld, or Blankfein of Goldman, or whoever, had to hit the phones, the calls would be answered.Bear and Cayne were never there for anyone else, so turn around was probably fair play.

What an interesting week it was. Bear liked to be a maverick which is all well and good, but you better not tell too many people to screw off and you better be on the job and not at a bridge tournament.