Maybe They Should Have Thought of a Different Name for Their Firm: The Fall of Bear Stearns in the 2008 Bear Market. Wow, what a quarter! The majority of trading days for the first quarter of 2008 were 100 point or more days for the Dow Jones. Three days (Tuesdays and Thursdays, by coincidence) generated about 1,200 positive points, leading us to suggest the markets close on Mondays, Wednesdays and Fridays. To us, a big news items was the collapse of Bear Stearns. Bear (funny name for a brokerage firm, huh?) was started in 1923. It was named as one of America’s most admired companies in 2004-2006. In the last year, the stock had traded as high as $172 a share. On March 18th, the Fed orchestrated a buyout by JP Morgan, where Morgan basically paid $2 a share for Bear (later revised to about $10). Tiny decline in value.
What caused the collapse? I call it the ‘World’s Smartest Man’ syndrome. A boy scout, a priest, the president and the world’s smartest man are on a plane. The pilot and co-pilot come out with parachutes and announce that despite their best efforts, the engines have failed and the passengers should seek a parachute. The four look over to see only three parachutes on the rack. The president jumps up, makes a brief speech about being the leader of the most important country in the free world, puts on a parachute, and jumps out of the plane. The world’s smartest man also stands up, announces that his brain is needed and jumps out of the plane. The priest and the Boy Scout look at each other. “Come on, father”, says the scout, “Let’s get out of here before the plane crashes.” The priest, puzzled, indicates that he is old and that the young man should take the last parachute. “No time for talk, padre, let’s move,” Says the scout. The priest is perplexed. “You have to tell me how you can be so calm in the face of death. I’m a man of the cloth, and have faith, and I’m afraid. What’s your secret?” the priest asked. “The World’s Smartest Man just jumped out of the plane wearing my backpack.”
Bear’s problem was two-fold: their World’s Smartest Men created some very highly leveraged hedge funds (using, guess what? Subprime loans!), and then also failed to recognize that maybe no-one would loan the company money if the funds blew up. The WSM’s at Bear (one of which was luckily fired before the bear poop hit the fan), were using their statistical models to figure out the risk levels of the relative funds. Their models projected a variety of scenarios, but alas, not the one that happened. The poor dummies that didn’t understand the statistical model and stayed away from the hedge funds did OK, the shareholders of the hedge funds lost 100%, and the Bear shareholders (Bearholders?) lost about 98% of their share value.
Is This Mess Over Yet? Hey look, the experts (WSMs?) have said we’re in a recession. Aren’t you glad you have that information? The weird thing about recessions is that the data needed to announce one is only available after the recession has started (and sometimes, not even until it’s over). The market turbulence and the employment and economic data seem to say we’re bottoming. Interest rates are way down, mortgage rates have been a little volatile, but are starting to decline, which changes the complexion on the real estate market. Our Fed Chairman (who is famous for getting one question wrong on his SATs), seems to have shed some of his WSM status and is using new and never before seen tools in the Fed toolbox. Cheap, avaible money is good. So, to answer our question, is the mess over yet? No, but the end appears near, barring some new catastrophe the WSMs missed.
Presidential Politics. I won’t get into the whole aspects of politics, yet. But this has surely turned into an interesting race with Clinton and Obama fighting, and McCain, sitting back and taking notes. The Democratic ‘superdelegates’ sound fishy to me, and I envision smoke filled rooms and deals being cut. It was nice to see Michigan got its say so in the Primary. Given the problems of energy, war, taxes and budgets, it’s hard to say what will be a worse job for 2009-2012; president of the US or president of Bear Stearns.
Hipster/Crips Update. Leon’s hip is going great. I can assure everyone that the metal detectors at the airport do actually work, in case a terrorist is planning on smuggling an artificial hip on a plane. Suzanne, feeling that I was getting too much attention, had her shoulder done, and is meaning well. Brian passed his kidney tests, so hopefully now the group is healthy again.
Happy spring. Please send an e-mail to the National Weather Service indicating that this IS spring and more snow is unnecessary. Maybe the WSMs predicting widespread global warming might like to know it as well.