Kate Kelly's Pulitzer-fodder describes how Pimco, the most famous bond fund in the world, told Bear Stearns on December 21st, 2007 that it wanted to immediately unwind several billion dollars of trades it had agreed to with Bear. But what she doesn't say is that Pimco wasn't alone. Other customers also began fleeing. And, in many ways, the December actions by Bear's customers and counter-parties eerily foreshadowed its final days.
The Pimco withdrawal described by Kelly was avoided due to high-level negotiations. As Kelly explains, things really began to unwind in March, when large customers like Ren-Tech began pulling their business. But the first round of customer withdrawals began earlier.
On December 20th, after Bear recorded its first quarterly loss ever, we reported that money managers were beginning to move business away from Bear Stearns. We called the item "Bear Stearns: Toxic Counterparty?"
It wasn't just Bear's losses that were driving away customers. Bear turned off money managers with what struck many as a cavalier attitude towards lenders and other counter-parties. Some cited Bear's response to complaints from Barclays, which had lost money when two hedge funds managed by Bear infamously collapsed. Basically, Bear said Barclays should have known that it was risky to lend to the hedge funds . This did not endear money managers to Bear.
"They bragged about not having the firm's money in the funds that had their name on it, and then told creditors to take a flying leap," a money manager told DealBreaker. "They're a toxic counter-party. I don't want them involved in any of my trades, in any way."
The money manager seems to have predicted the run-on-the-bank that was to come months later.
"To me, the report that their losses weren't as bad as they might have been is just another stick in the eye to investors in their funds and counter-parties who lost money with these guys. I'm sure their shareholders are happy," he said. "But let's see how happy they are when Bear starts to lose business. People think reputational risk is hooey. Well, they'll see."
Indeed, they did see.