Debits and Credits: A Bear Unchallenged

Morgenson's memory; A bad blog; Good Spitzer reporting, etc.

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.

This, to put it simply, is dumb. It doesn’t belong on the Wall Street Journal’s Web site. The videos are just not very good, interesting, or funny. Readers were not happy:

seriously, since when did this become a gossip news website? I get my gossip news from much better sources. WSJ, stick with what you’re best at. I don’t read you for gossip.

And:

I think we have a new verb on our hands. murdoch: (verb) 1. To purchase something of value for the purpose of degrading it. 2. A form of reporting in which prostitution becomes news, and news prostitution. 3. To exchange meaningful information for pornography.

And:

Now who the hell is going to get all the dirty Dick Grassos? Viva subprime, excessive CEO packages, less accountability and less regulation!

Is this evidence of the Murdoch-ification of the Journal? Probably not. It’s more likely a result of out-of-touch editors flailing to appeal to the young, hip, don’t-read-newspapers generation.

A tip: the people who read The Wall Street Journal are interested in high-quality information, not junk. The fraction of them who have hours to kill watching this kind of stuff are likely savvy enough to go to perezhilton.com, Gawker, or TMZ. Let them.


Helpful Spitzer reporting


In more Spitzer-related news, Credits to a few news organizations for enlightening us a bit on how the financial-transactions tracking systems work.

We learn from the WSJ that banks routinely sift through the transactions of high profile people:

Mr. Spitzer’s status as a prominent government official appears to have opened the door to investigation into the matter. Many banks now examine transactions involving so-called “politically exposed persons”—politicians, judges, prosecutors and their families—to ensure they’re not used to hide ill-gotten gains. At least one bank used by Mr. Spitzer, Capital One Corp.’s North Fork unit, flagged his transactions to federal regulators as a potential sign of corruption, people with knowledge of the transactions said.

The Times says the fact that Spitzer’s cash transfers went to shell companies (ones that have no business activity) alerted the banks, who tipped off the IRS.


Adam Davidson on NPR’s “Morning Edition” reports on the software programs that banks use to sift through massive amounts of transactions.

Davidson talks with a manager at Actimize, a company that designs this kind of banking software:

DAVIDSON: The computer scores risk based on who is making the transaction. Where does he come from, who is he associated with, what else is he up to? Every bank customer has somewhere in some computer database a risk assessment score.

Ido Ophir (Actimize): Immediately upon opening an account, the bank will look at all your characteristics, starting from your credit score to where you live to how much money you make.

DAVIDSON: The bank uses all this data to create your personal risk profile. It also checks a bunch of lists: are you on a terror watch list, a list of criminals?

Did Spitzer become a target because of the nature of his transactions, as the NYT’s account suggests or was it because he was a “PEP”? He’s what you could consider the financial industry’s ultimate PEP, so we’ll keep an eye out for more reporting here.


Watchdogs well-watched


Credit The Wall Street Journal’s Elizabeth Williamson for her story on industries that are pushing for friendly regulations in the corporation-friendly (to be euphemistic) Bush administration’s final year to blunt the calls for radical change that will surely come from the new government in January:

These so-called midnight regulations often characterize an administration’s final year. Industry lobbyists feel greater urgency this time because they are worried about what Democrats would do in power and because they also are uncertain about the presumptive Republican nominee, Arizona Sen. John McCain.


Power companies, public health groups, ranchers, environmental groups, small business consortiums, cable companies, and others want to grab all they can while the gettin’s good. May never see another Bush in the oval office! One example: the EPA wants to let livestock farmers promise they won’t discharge feces into rivers and the like—no monitoring necessary.

Keep a close watch on this developing story over the next nine months.

Noticing a vacancy

A Credit as well to Times op-ed columnist Gail Collins whose piece
on Saturday admirably demonstrated how checked-out President Bush is on the economy:

We’re really past expecting anything much, but in times of crisis you would like to at least believe your leader has the capacity to pretend he’s in control. Suddenly, I recalled a day long ago when my husband worked for a struggling paper full of worried employees and the publisher walked into the newsroom wearing a gorilla suit… Our credit markets are foundering, and all we’ve got is a guy who looks like he’s ready to kick back and start the weekend.

And:

O.K., so he’s not good at first-day response. Or second. Third can be a problem, too. But this economic crisis has been going on for months, and all the president could come up with sounded as if it had been composed for a Rotary Club and then delivered by a guy who had never read it before. “One thing is certain that Congress will do is waste some of your money,” he said. “So I’ve challenged members of Congress to cut the number of cost of earmarks in half.”

Besides being incoherent, this is a perfect sign of an utterly phony speech. Earmarks are one of those easy-to-attack Congressional weaknesses, and in a perfect world, they would not exist. But they cost approximately two cents in the grand budgetary scheme of things. Saying you’re going to fix the economy or balance the budget by cutting out earmarks is like saying you’re going to end global warming by banning bathroom nightlights.

It’s tempting to skip this topic altogether because the president, by his inaction, seems irrelevant to the financial and economic crisis. Collins’s column reminds us how low our standards have dropped.

Anna Bahney is a Fellow and staff writer for The Audit