The demise of Bear Stearns happened almost a decade ago, yet the mystery about who dealt one of the final death blows has long persisted.
It happened on Wednesday, March 12, 2008, shortly after 9 a.m. in an interview broadcast on CNBC. There, reporter David Faber asked Bear Stearns chief Alan Schwartz to respond to reports that Goldman Sachs wouldn’t “accept the counterparty risk of Bear Stearns.”
Mr. Schwartz said the firm’s counterparties still were trading with Bear Stearns. Hours later, CNBC reported that Goldman was indeed still doing trades with Bear Stearns.
In the eyes of many on Wall Street, however, the damage was done. Confidence in Bear Stearns quickly evaporated—and with it the firm’s ability to survive.
As Carney recounts, the rumor mill set in motion by Faber's question crushed Bear's ability to keep playing its dangerous borrowing game. By Friday, Bear was well on its way to being acquired by JPMorgan for cents on the dollar.
But while we all know what happened in the ensuing days, weeks and months of terror after Bear disappeared, many on Wall Street have been playing a game of "Clue" ever since, trying to solve the mystery of who told Faber that Goldman was refusing to play with Bear Stearns... and likely caused Jimmy Cayne to put articles of office furniture through every television within throwing range.
According to Carney, the mystery has been solved: It was Kyle Bass in the study with the novation scheme.
A former Bear Stearns executive named Kyle Bass of Hayman Capital Management LP—a well-known hedge-fund manager—was the source for Mr. Faber, according to formerly confidential government records.
Mr. Bass, who is based in Dallas, is best known for making a fortune during the housing crisis by betting against subprime mortgages...
Mr. Bass’s role came to light in the Financial Crisis Inquiry Commission records released by the National Archives earlier this month. Those include a memorandum describing an interview with Thomas Marano, former head of mortgages at Bear Stearns. Mr. Marano told a panel of investigators that Mr. Bass was Mr. Faber’s source.
But why would Kyle say such a thing at such a tremendously wobbly moment in the history of finance?
At the time, hedge funds were concerned about Bear Stearns’s financial health. They were attempting to get other Wall Streetfirms to take their place in trades with Bear Stearns on credit-default swaps used to short mortgage-backed securities, in a trade known as a “novation.” Those trades would reduce or eliminate a hedge fund’s exposure to Bear Stearns.
“There were several investors who tried to novate, but Kyle Bass was memorable because I reached out to him to find out his concerns. I heard on CNBC that he had told them that he had tried to novate with Goldman, and they said that they would maybe take it, but he wasn’t sure,” Mr. Marano is quoted in the memo.
Oh. So Kyle was playing all sides against the middle to protect his short on the housing market and called Faber to get word out that sh!t was not very bueno at his former employer. Not the most lovable thing to do, but it makes Machiavellian sense...
“I reached out with a Bear salesperson to Kyle, and he indicated that he attempted to novate to Goldman and that he shared a conversation about Goldman not wanting to novate with David Faber of CNBC. I said it’s all over CNBC, and he said that he couldn’t believe that David Faber put that all over the air. He was shocked that it was out there,” Mr. Marano said, according to the memo.
"Shocked"?... Sure, okay.
But it also turns out that Kyle wasn't not telling some truth to Faber...
Although some have criticized Mr. Faber’s question or said it was planted by short sellers hoping to profit from Bear Stearns’s demise, emails obtained by the government’s Financial Crisis Inquiry Commission show that Goldman had indeed refused to take Bear Stearns as a counterparty on the day before the interview.
Goldman had received so many requests for Bear Stearns-facing novations that its traders were running up against rules limiting the bank’s exposure to a single firm, a person familiar with the matter said. Completion of some trades required risk officers to waive those rules. As previously reported in The Wall Street Journal, by Tuesday, March 11, risk officers at Goldman had begun to say no to trades.
Crazy days...crazy days.
But at least there was a happy ending. Bass got his novation from Goldman... so all's well that ends well!