Thursday, January 10, 2008

Its hard to have your stock price drop 40%...

...and still keep your position as CEO.

By most metrics, Mr. Cayne was an extremely astute businessman. It is telling that someone of his caliber and experience got caught up in the valuational and "Delta" problems inherent in sub-prime mortgage derivatives.

Jan. 7 (Bloomberg) -- Bear Stearns Cos. Chief Executive Officer James ``Jimmy'' Cayne faces pressure
to resign as the securities firm's shares languish following unprecedented losses from mortgage
holdings coupled with a slump in trading and investment banking.

Cayne, 73, began notifying members of his board yesterday that he plans to step down as CEO and
remain chairman of the New York-based company, the Wall Street Journal reported on its Web site
today, citing people familiar with the matter. He's expected to be succeeded by President Alan
Schwartz, 57, the paper said.

Friday, January 04, 2008

Hard to lose...

...why anyone would have bought BS shares (or provided capital in another manner as we have seen from sovereign wealth funds) without waiting to see what "ballpark" the legal liability would be is beyond my feeble powers of reasoning.

As I have said here before, this is just the beginning, and if it comes out that BS's prop desks benefited from the collapse...that would be very bad indeed.

I also have some anecdotal evidence that Bear is "nickel and diming" its customers at the moment...presumably in order to scrape every last bit of earnings it can to shine up the vehicle prior to selling (another) portion.

Feds Claw At Bear Stearns
Carl Gutierrez, 01.04.08, 6:50 PM ET

Bear Stearns probably wishes it could hibernate through the winter.

On Friday morning the New York-based brokerage house, along with its
peers, fell after the Labor Department reported the unemployment rate
increased more than economists had expected, casting a gloomy shadow
on the coming year (See "Dreary December For U.S. Jobs").

But shares of Bear Stearns (nyse: BSC - news - people ) were pushed
down 5.9%, or $4.96, to close at $78.87, after investors learned that
company officials are expected to meet in the middle of January with
U.S. prosecutors to discuss the collapse of two of its hedge funds.
The news was first reported by CNBC.

According to the report, investigators from the U.S. Attorney's Office
in Brooklyn are examining conference calls between managers and
investors to see if the company made appropriate disclosures to

Over the summer the two funds, the High-Grade Structured Credit
Strategies Fund and the High-Grade Structured Credit Strategies
Enhanced Leverage Fund, sought protection from creditors after
investing heavily in collateralized debt obligations, commonly known
as CDOs, backed by the subprime mortgages. The blow-up lead to the
ouster of Bear executive Richard Marin

The probe is expected to focus on officials in charge of the funds,
and any indictments could prove disastrous for Bear Stearns.

Bad bets on subprime mortgages and related write-downs led to an $859
million fourth-quarter loss at Bear the first loss in the history of
Wall Street's fifth-largest investment bank

Thursday, January 03, 2008


A musing about "information" in the financial markets.

The "Big Boys", or the largest investment management houses and traders, don't read the Wall Street Journal or the Financial Times. Rather, they just speak to the reporters writing the story and get a "feel" for the putative articles contents.

In other words, what you are reading in these publications is very much old news. This is not to say "information" is not extremely valuable, but one must be cognizant of what kind of information one has access to. In the financial markets, several categories are important.

Price information. Everyone has it. Thousands of sophisticated algorithmic models use it, and financial services has seen a massive inflow of quantitative analysts all looking for that next correlation trade. Excessive profits attract competition and only the most sophisticated "Big Boy" players will do well over time using price information.

Economic Forecasts from brokerage firms. Almost entirely useless. It is a curious thing about information in recursive systems with thinking, self-interested participants: A case can ALWAYS be made for the bullish or bearish sides, depending on what magical factors one sees as having the most weight...and this is ALWAYS dependent on one's interest in the outcome. There simply is no such thing as an "objective" macro-economic forecast.

"Buy", "Sell", "Hold". Again, almost entirely useless for most players. The "Big Boys" have preferential access to the analysts providing these "calls" and know when a "SELL!" announcement will be made. As an aside, this is one of the reasons I do not agree with the "efficient markets hypothesis" - valuable "information", almost by definition, is never distributed to all market participants simultaneously.

However, there are certain talented AND experienced participants that are able to use "information" effectively. These are likely players that have actually been through more than one credit cycle and understand factor-based "balance points". Unfortunately, the business models (which is not to say its a conscious effort by executives) of large investment houses preclude this type of development, as the worst thing an experienced person can do in his or her career is putting the brakes on the gravy train.