Bear Stearns

JPMorgan Chase Chief Executive Jamie Dimon said his company has lost up to $10 billion as a result of the government asking him to buy teetering Wall Street firm Bear Stearns during the financial crisis. “Someone said the Fed did us a favor to finance some of this or something like that. No no no. We did them a favor,” Dimon said, speaking at a Council on Foreign Relations event. “I’m going to say we’ve lost $5 billion to $10 billion on various things related to Bear Stearns now. And yes, I put it in the unfair category,” the CEO added. [CNBC]

A pair of BSAM’s most successful hedge funds were run by Ralph Cioffi, one of the firm’s top traders, and Matthew Tannin. The funds traded in the kinds of exotic assets Mr. Marin and Bear Stearns were experts in, collateralized debt obligations. When the housing market on which these bundles of mortgages were based seized up, the funds tanked and Bear Stearns had to spend $3.2 billion bailing them out, the second-largest intervention in Wall Street history (though it would pale in comparison to what was coming). When asked about these events, and how Mr. Marin comported himself, Mr. Schwartz was insistent. “I do not want to talk about that,” he said from his car Tuesday morning, on the way to a meeting. “If you want to talk about the ferris wheel and Rich, great. Every article doesn’t have to be dredging up what happened at Bear Stearns. Rich is a good guy, a creative guy, a good business man. I don’t want to reminisce about what happened at that time. It’s frankly a disservice to drag it back up.” [NYO]

So, subprime mortgage-backed securities. Here’s a schematic:

  • Banks packaged subprime mortgages into bonds and sold them to people.
  • Something.
  • The bonds were bad and the people lost money.

What’s the something? There are two main theories. Theory 1 says that everyone knew at some lizard-brain level that it was a bad idea to give lots of money to poor unemployed people with low credit scores to buy overpriced houses, but figured it would work out fine if house prices kept going up. This worked until it didn’t; when house prices went down, badness ensued.

Theory 2 says that, while mortgage originators and securitizers knew that they were giving mortgages to people who had no chance of paying them back, the buyers of those mortgages had no idea: they thought that the originators were holding them to rigorous underwriting standards, where “rigorous” is read to mean “other than requiring a job, or an income, or assets, or a credit score.” When that turned out to be false, badness ensued.

Theory 1 has the benefit of probably being right.1 Theory 2 is superior on every other metric. For one thing, it fits well with deep cultural desires to find villains for the subprime crisis, and punish them. For another, it better fits the explicit facts. No subprime offering document actually said “these guys are all just terrible reprobates and the only way you’ll get your money back is if they can find a greater fool to buy their overpriced house when their rate resets.” But there’s no shortage of internal emails that say – well:

In connection with the Bear Stearns Second Lien Trust 2007-1 (“BSSLT 2007-1”) securitization, for example, one Bear Stearns executive asked whether the securitization was a “going out of business sale” and expressed a desire to “close this dog.” In another internal email, the SACO 2006-8 securitization was referred to as a “SACK OF SHIT”2 and a “shit breather.”

Thanks Eric Schneiderman! Read more »

  • 04 Apr 2012 at 4:33 PM

This Is A Thing That Happened


All-Star executives Dick Fuld and Alan Schwartz break bread in Midtown today [Erik Schatzker via BI]

  • 21 Mar 2012 at 4:05 PM

Jimmy Cayne May Be About To Come Into Some Money!

10-pound bag of Chronic Supernova, consider yourself bought. Read more »

“I got crucified because I said you can keep your money in Bear Stearns. I got crucified in this country!!! I learned my lesson, you can’t be as confident as you’d like. I never said you should buy Bear Stearns, I said you should keep your money there. In 36 hours Bear Stearns fell apart. It was fine to say it wasn’t going to fall apart and then it fell apart. My first call was that it was okay to keep your money there which turned out to be true.” Read more »

She told clients in London. She also typed up a note. She even emailed it to herself. But she didn’t send it to anyone else, because after seeing how she’d moved markets with her Citi call and the magnificence of her influence, the idea of being responsible for putting Bear out of business made her hesitate. Read more »