Questions not asked of Bear Stearns …
A Debit to the financial press (The New York Times’ s Gretchen Morgenson is a big exception; see below) for not holding Bear Stearns and its CEO Alan Schwartz to account for dissembling all week to investors that the company was just fine.
The WSJ is particularly debited for a page-one story Saturday in which the paper says its Thursday Heard on the Street column pushed the eighty-year-old Bear Stearns over the edge.
On Thursday, an article in The Wall Street Journal reported that firms were growing cautious about their dealings with Bear. The exit by counterparties intensified. Bear executives spent most of this week fielding nervous calls and trying to put to rest rumors of banks being unwilling to trade with Bear and about Bear facing requests for more collateral on loans.
On Monday, Bear issued a statement in which Mr. Schwartz wrote that the firm’s “balance sheet, liquidity and capital remain strong.” On Wednesday, he ducked out of a Bear media conference in Palm Beach, Fla., for a CNBC interview in another effort to deflect speculation about Bear’s situation.
Here’s what really happened: Bear Stearns knew it was having cash problems and facing further ones, and Schwartz lied about it until it was impossible to keep lying. The markets knew it, and the press should have been asking serious questions of Schwartz and Bear Stearns and reporting the findings prominently.
…but Morgenson remembers
A Credit to the NYT’s Morgenson for putting the odious Bear Stearns in perspective. As she explains, we’ve allowed these firms to get so big that even the most unethical and irresponsible are “too big to fail” and are thus implicitly—and now, increasingly, explicitly—subsidized by taxpayers:
Agreeing to guarantee a 28-day credit line to Bear Stearns, by way of JPMorgan Chase, the Federal Reserve Bank of New York conceded last Friday that no sizable firm with a book of mortgage securities or loans out to mortgage issuers could be allowed to fail right now. It was the most explicit sign yet of the Fed’s “Rescues ‘R’ Us” doctrine that already helped to force the marriage of Bank of America and Countrywide.
She asks us to remember the bad old days at Bear Stearns, even before the current spike in default rates on its Alt-A mortgages and the collapse of two of its hedge funds last summer:
But why save Bear Stearns? The beneficiary of this bailout, remember, has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach. Until regulators came along in 1996, Bear Stearns was happy to provide its balance sheet and imprimatur to bucket-shop brokerages like Stratton Oakmont and A. R. Baron, clearing dubious stock trades.
And as one of the biggest players in the mortgage securities business on Wall Street, Bear provided munificent lines of credit to public-spirited subprime lenders like New Century (now bankrupt). It is also the owner of EMC Mortgage Servicing, one of the most aggressive subprime mortgage servicers out there.
To anyone who doesn’t remember A.R. Baron and Stratton Oakmont, let’s just say these were patently criminal enterprises aided and abetted by Bear Stearns.
Morgenson concludes that Bear Stearns is today’s Drexel Burnham Lambert, the rogue junk-bond firm dominated by Michael Milken in the 1980s. That firm collapsed, too, after causing massive harm to the financial system. The comparison is apt.
How not to blog
The Wall Street Journal got gonged by its own readers this week for a misguided post on its Buzzwatch blog. We’ll add to the ringing in the Journal’s ears with a Debit—clang clang clang clang!
A senior editor at the Journal thought it was a good idea to post two YouTube videos featuring remixes of a (very poor quality) song recorded by the Spitzer prostitute.