Department of "Huh?" (Bear Stearns Edition)

I cannot believe my eyes:

Bryan Burroughs:

Bringing Down Bear Stearns: Cayne took the news peacefully. He resigned as C.E.O. on January 8, but remained chairman of the board. Schwartz was named the new C.E.O. His immediate priority was making sure Bear posted a profit in its current quarter, which ended February 29. There were still whispers out there about Bear’s financial health, many fanned by rumors of federal investigations into the hedge-fund collapse, and Schwartz badly needed some good news to report. As mortgage-related losses struck firm after firm that winter, Schwartz kept his fingers crossed, watching the calendar tick off the days until February’s end. He sweated out an entire extra day--leap day, February 29--but Bear made it. Preliminary figures showed they would report a quarterly profit of $1.10 or so a share. With luck, Schwartz said, that would end the whispers...

I do not know what is more unbelievable:

• That somebody who takes over halfway through a quarter thinks that his "immediate priority" as CEO should be to make it so that the business shows a profit that very quarter.
• That somebody who takes over halfway through a quarter thinks that he can make decisions as CEO that affect whether the business shows a profit that very quarter.
• That somebody who takes over as CEO in the middle of a financial crisis thinks that it is constructive for him to send an immediate signal that driving a wedge between actual fundamentals and reported financial results is a good business to be in.
• That any senior executive for any financial firm thinks that one-quarter financial results will materially impact market expectations of whether his organization is overleveraged--hence vulnerable to a liquidity problem.

As of the start of 2008, it was common knowledge in the circles in which I travel that Bear Stearns was the weakest and would be the first to collapse if any Wall Street institutions were to collapse. But getting Bear Stearns into a position where it was less rather than more vulnerable than, say, Lehmann does not appear to have been somethign Schwartz thought was his job...

Unbelievable.

Comments

[Ken Houghton]

Medium, tepid defense of The Old Firm: There had only been one (1) quarter =in its entire history= in which BSC reported a loss: the previous one. So a return to profitability might be taken an indication by the stock market that it really was an "extraordinary event" and "behind the firm," as it were.

That BSC bondholders knew the company wasn't investment-grade six months previous (245 over in early August of 2007) was probably a better indicator of the relative health of the firm, but stock market investor are dumber than the average investor (which Schwartz had a long history of knowing, e.g., suckering TWX into buying AOHell).

A profitable quarter might keep the stock market interested in the firm. A losing quarter and it probably wouldn't be possible to keep fooling even the stock investors. When you're looking at survival options and drawing to an inside straight flush, you need to know that there are some other suckers at the table, just in case. Especially if that might buy you three more months to get some new chips.

[christofay]

Absolutely no defense for BS, more of their papers' value should have been written down when it was subsidized-sold to Moregain.

Not here but elsewhere innovative finance firms are recognized as being black boxes, you don't know what you will pull out of the box. The right analogy is Bullwinkle pulling stuff out of the hat, most days this century it has been outsized record breaking bonuses for top management. One day the bridge player pulled out paper losses, enough so they couldn't paper over the quarter end reporting with profits.

[Bram Cohen]

And exactly this irresponsible, insane behavior is (a) exactly what this magazine article is saying he should do and (b) lauding him very highly for it. As does practically every other magazine. And such reviews are what's likely to determine how good of a next job this guy gets.

[Andy Colyer]

Among the interesting questions here is why the regulators do not require disclosure of shorts of size (say, >1% of the market cap). Well-informed shorts serve a useful function, alerting the market to problems in the fundamentals of a company (e.g., Einhorn). But shorts can also be dangerously irresponsible, as may have happened here, costing >7k people their jobs and many their life savings. Disclosure would create accountability and provide a more ready audit trail.

[Andy Colyer]

Among the interesting questions here is why the regulators do not require disclosure of shorts of size (say, >1% of the market cap). Well-informed shorts serve a useful function, alerting the market to problems in the fundamentals of a company (e.g., Einhorn). But shorts can also be dangerously irresponsible, as may have happened here, costing >7k people their jobs and many their life savings. Disclosure would create accountability and provide a more ready audit trail.

[Andy Colyer]

Among the interesting questions here is why the regulators do not require disclosure of shorts of size (say, >1% of the market cap). Well-informed shorts serve a useful function, alerting the market to problems in the fundamentals of a company (e.g., Einhorn). But shorts can also be dangerously irresponsible, as may have happened here, costing >7k people their jobs and many their life savings. Disclosure would create accountability and provide a more ready audit trail.

[Andy Colyer]

Among the interesting questions here is why the regulators do not require disclosure of shorts of size (say, >1% of the market cap). Well-informed shorts serve a useful function, alerting the market to problems in the fundamentals of a company (e.g., Einhorn). But shorts can also be dangerously irresponsible, as may have happened here, costing >7k people their jobs and many their life savings. Disclosure would create accountability and provide a more ready audit trail.