Monday, May 11, 2009

How Goldman Sachs whacked Bear Stearns

There's a new book that's coming out tomorrow on the fall of Bear Stearns. It's called "Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street" and the author is WSJ reporter Kate Kelly.

Ms. Kelly picks up the story when BS is already in the emergency room with a fatal wound. But what she missed is the hit man's bullet that put BS in critical condition. A previous story by Roddy Boyd of Fortune Magazine gives us an insider's view of that hit. And the perp is a familiar face to FNT (Future News Today) readers.

[...cue up Godfather music. Dim theatre lights...]

The hit took place on March 11. That morning a memo was sent out by Goldman Sachs: Bear Stearns is a dead man.
That morning Goldman Sachs's credit derivatives group sent its hedge fund clients an e-mail announcing another blow [...] on March 11, Goldman told clients it would no longer step in for them on Bear derivatives deals.
"Goldman told Wall Street that they were done with Bear, that there was [effectively] too much risk. That was the end for them." 
Bear Stearns was whacked by Goldman Sachs. Just a few days later BS would succumb to the fatal blow. Then Godfather Paulson stepped in to mop up the mess. And get this - he warned his fellow traders from taking advantage of the situation.
In Washington, Treasury Secretary Hank Paulson was just beginning a conference call with industry executives. [...] He didn't want rapacious trading tactics to further wound a gravely injured Bear, so he decided to put it to the firms straight: I expect you to behave yourselves.
"I want you to deal with Bear Stearns as a responsible counterparty," he [Paulson] told the group.
That's right. According to WSJ reporter Kate Kelly, Paulson was telling his rival gangs on Wall St. to [...cue up West Side Story music...] "just play it coool boys, real coool". That's after Goldman Sachs, Paulson's former company had already stuck the knife in Bear Stearn's back. And now he wants everbody to play nice?

So how much you want to bet that as a condition of the deal where the Fed bought up Bear's bad asset, Goldman was payed back whatever Bear owed at one hundred cent on the dollar? Because that was what happened in the deal that the Fed made with AIG. Is anybody ever going to investigate Paulson, or is he going to be allowed to get away with [corporate] murder?

And in case you're starting to feel sorry for the Bear Stearns gang, here's a quote from their former CEO Jimmy Cayne that should let you know what kind of people we are dealing with here.
Tim Geithner [is] a "prick" who "thinks he's got a big dick ... He’s got nothing, except maybe a boyfriend."
I guess I should have put an R rating on the top of this posting. I usually try to keep my blog PG, but this quote is from the New York Magazine. And hey, if they can get away with it then why not me? That quote, by the way, comes to us from another book on the demise of Bear Stearns titled "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street" by William D. Cohan.

As a side note, there's a mutual animosity between authors Kelly and Cohan stemming from another Jimmy Cayne quote in the Cohan book.
In the book, according to the Observer, Cayne calls Kelly "a cunt ... whose capability is zero." Now Kate is mad because the writer, William Cohan, didn't call her and get her reaction to the slur. [...] “What was I going to say, ‘Hey, Kate, I don’t know you and you don’t know me, but Jimmy has called you this name, Do you have a reaction to that?" Cohan told the paper in his defense.
And whatever happened to Alan Schwartz? He's the guy that tookover as BS CEO just months before the final collapse. Well according to news reports, he's got a new gig on Wall Street.
Alan Schwartz, who took the role as chief executive of Bear Stearns just two months before the 85-year-old firm collapsed in January 2008, may be headed to Goldman Sachs Group Inc (GS.N: Quote, Profile, Research), Fortune magazine said on Monday.

Citing a source familiar with the negotiations going on between Goldman and Schwartz, Fortune said the chances are about "50-50" that Schwartz will soon be a partner-level managing director at Goldman.
"Hey Schwartz, you did such a good job at handling the boss's business at Bear Stearns that the boss decided to make you an offer you can't refuse at Goldman Sachs. Just a small token of our appreciationfor keeping your mouth shut. Capiche?"

[...cue up Godfather music. Roll titles. Fade to black. Turn up theatre lights...]

I wonder what will happen in the sequel? Go grab some popcorn folks, but don't go away. Today you're in for a treat because we've got a double feature!

----- intermission -----

I hope you all took advantage of the time off to take a bathroom break. Are you ready for more?

OK, I did a bit more Googling on WSJ reporter Kate Kelly. You know that WSJ story about Stephen Friedman and how he was serving on the board of Goldman Sachs at the same time he was NY Fed Chairman in an apparent conflict of interest? Kelly wrote that, and as a result Friedman resigned from the NY Fed. Chalk one up for Kate.

And this is not the first time that Kelly has written about Bear Stearns. She covered the story in a series of articles in the Wall Street Journal last year. Here's one from July 2008 that has an interesting title, "Goldman Is Queried About Bear's Fall". And the subtitle only adds to the suspense, "Manipulation Talk Worried Schwartz; Lehman Also Calls".
Now, the big securities firm has come under suspicion, at least from the chiefs of two rivals who have questioned in recent months whether Goldman, even indirectly, might have put pressure on their firms' stocks.
OK, that's the same Schwartz that now appears to be inline to get a job at Goldman. I imagine he's not asking so many questions now. But look if there's one thing you should have figured out by now, it's that Wall St. is one big rumor mill. They're worse than a bunch of old church ladies.

What we need is an investigation by a government agency that has the power to punish the evil wrongdoers. And flying in to the rescue comes... daaaa-da-da-DAAA... the SEC! OK, I heard that snickering in the back of the theatre. No, really.
The Securities and Exchange Commission, which is investigating whether insider trading or market manipulation occurred in Bear Stearns's stock, options, or other securities, is examining trading documents showing that in the weeks prior to the firm's collapse, a number of parties curbed their exposures to the troubled firm, according to people familiar with the matter.

Cutting exposure to Bear Stearns and other financials was a compelling strategy at the time, and many parties may have done so legitimately. But making such moves in hopes of creating broader market anxieties is considered improper trading.
"Improper trading"? The whole world economy collapsed because of the fall of Bear Stearns and Lehman Brothers and the WSJ and SEC are talking about "improper trading"? That makes it sound like they just exhibited bad manners, like burping at the dinner table. And isn't the SEC the same government organization that couldn't figure out that Madoff was operating some kind of swindle when he hadn't made any trades...ever? It seems like someone should be investigating the SEC! And it's not as if the WSJ uncovered the Madoff story, so they shouldn't be feeling to smug either. Congress? Ditto!

It's been over a year since the fall of BS and still no prosecutions with regards to Goldman Sachs trading - not even a fine! No, instead it seems that GS has been rewarded for its criminal activity. Just take a look at who were the principal counterparties of Bear Stearns.
The documents indicate that in the weeks before March 16, when Bear Stearns reached its initial agreement to sell itself to J.P. Morgan, Goldman Sachs International, which encompasses the firm's European trading units, was one of the most-active parties in trading securities known as credit default swaps that it had bought from or sold to Bear Stearns -- more than most other Bear trading partners. 
Q: Who was one of the biggest beneficiaries when the Fed bought up AIG's bad assets?
A: Goldman Sachs.
Q: So when the Fed buys up Bear's bad assets, who do you think is the chief beneficiary?
A: Goldman Sachs.
Q: And who was the Chairman of the New York Fed at the time?
A: Gold Sachman's director Stephen Friedman, who was forced to resign due to "conflicts of interest".
Q: And who was the President of the New Yord Fed at the time?
A: Tim Geithner, who is now the Treasury Secretary.
Q: And who was Treasury Secretary at the time?
A: "Hank" Paulson, who was the former CEO of Goldman Sachs.

The problem seems to be that any serious investigation would lead back to Paulson and Geithner, or did I miss something?

I would suggest that the investigators at the SEC read FNT (Future News Today) and pay particular attention to my article on naked short selling titled "The Phantoms of the Stock Market".  They might just learn a thing or two about how stocks are manipulated. The basic recipe seems to be:
  • A cup of naked short selling.
  • Add liberal amounts of Credit Default Swaps to taste.
  • A dash of malicious rumors.
  • Stir until it achieves a creamy texture. Test that the peaks just collapse.
  • Bake in Hell's kitchen until well done.
  • Serve to gullible unsophisticated investors, without letting them know the list of ingredients.
I could go on and on and on, but all this talk of food is making me hungry. I think I'll go cash in my KFC coupons. Say what? Et tu, Oprah?

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