Thursday, March 20, 2008

Was Bear unlucky?

Liquidity risk explains Bear's downfall more than any other factor. Bloomberg has some interesting statistics on this. Model-derived assets that are hard to value, known as level 3 assets, amounted to 239% of Bear's equity. But other investment banks seem to have about the same levels. They are safe- so far. The Fed announced a special facility for prime brokers only after Bear's collapse. That may have saved Lehman. But Bear was allowed to go under. Was Bear unlucky? John Gapper, writing in FT, puts it all down to poor leadership.

So Lehman got more support than Bear. But you make your own luck and Lehman had already taken firmer action to bolster its balance sheet – its cash cushion was double the size of Bear’s. It also mounted a tough and disciplined campaign to reassure the waverers; on its Tuesday results call Erin Callan, its 42-year-old chief financial officer, rattled off lots of figures to prove its strength.

Bear’s leaders were nothing like as hard-working or assertive in defending their bank in the year leading up to its demise. Mr Schwartz, a laid-back corporate financier and former analyst who lacked any experience of running a securities trading business, had put more effort into outreach but lacked the time, and perhaps the appetite, to fight back effectively.

The truth is that Bear’s leadership was old, self-satisfied and inbred. It had become used to telling the same jokes, travelling to the same bridge tournaments and treating the rest of Wall Street with disdain. And when the going got tough, it allowed its institution to perish.

Gillian Tett, writing in FT, has a slightly different take. She thinks Bear Stearns became a "sacrificial lamb" in the Fed's efforts to stabilise the market. The Fed had to organise a rescue of Bear; at the same time, it had to guard against moral hazard. Rescuing Bear while wiping out shareholders seemed the best course:

In place of a tethered goat, in other words, we now have a stricken Bear being offered up to attone for Wall Street sins – and, perhaps, slay the demons of moral hazard, at the same time.

Hmmm, sounds plausible. Could it be also that Bear paid the price for its hauteur and aloofness on Wall Street? Remember, Bear Stearns was the only top investment bank to refuse to get involved in the LTCM rescue orchestrated by the Fed in 1998. It ignored a key maxim for all financial players: always stay on the right side of the regulators

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