Tuesday, May 27, 2008

Weird WSJ article on Bear's demise

(Naked Capitalism) It doesn't take long to pick up on a news outlet's quirks. For instance, Bloomberg tries to be out first with stories, yet also provide relevant market details for busy investors. They often compensate for their artlessness via juicy quotes. The New York Times, lacking the staff to report on business comprehensively, looks to leverage its high caliber of writing and sniff out trends or under-reported aspects of other stories.

One of my frustrations with the Wall Street Journal is that it ought to do a better job of storytelling. It often has a flashy introductory paragraph or two, and too often its stories drift into the journalistic never-never land of reciting the views of dueling sources.

Today's first page article on Bear Stearns, "Lost Opportunities Haunt Final Days of Bear Stearns," fails to deliver on the promise of its headline, namely, to discern whether Bear might have been salvaged, and if so, what critical steps led to its demise. But the story instead goes 80% of the way, gathering lots of detail, but takes the lazy way out by giving a prurient "you were almost there" narrative and failing to highlight which errors really were crucial, and which were noise.

One of the most glaring oversights its discusion of the August ouster of Warren Spector. His departure meant that a trading firm at a time of highly unsettled markets had a chairman, Jimmy Cayne, a former salesman, and Alan Schwartz,an investment banker, neither of whom had had any experience in trading markets (the piece does mention that Schwartz considered hiring a replacement for Spector, but never mentions that Cayne had no real markets experience. That's a critical omission. It makes it sound as if the main problem with Cayne was his extremely removed style, which was also a problem in light of the weakness of the staffing underneath him). This was a huge gap in managerial knowledge, and can be argued to have led to a reluctance to take losses, both from lack of confidence and growing up with different reflexes (investment bankers are trained that mistakes are a Very Bad Thing; a mere typo can be a career limiting event. So deciding to take a trading loss would be an even harder call for a banker than a trader).

Similarly, the article goes through a litany of talks with possible equity investors, without clearly signaling which really seemed to have potential. For instance, it appears that the discussions with KKR got to be reasonably advanced (pddly, the story fails to mention that Kohlberg, Kravis and Roberts met and did their early deals at Bear). The piece suggests that KKR had reservations but never specified what they are; it says that the Bear side got cold feet, fearing it would lose the business of KKR competitors. Huh? Bear isn't much of a force in mergers and acquisitions, so it didn't have that much to lose. I'd guess the discussions fell apart over price; the other obstacles seem insufficient.

Chris Flowers swooped in after the KKR discussions broke off. The article implies that the Bear executives thought Flowers was bottom-fishing and intimates they might have read his intentions incorrectly. Flowers IS a bottom fisher and greatly prefers situations where he has no or few competitors in the wings.

The piece also describes at some length how various constituencies inside Bear, notably Wendy Wendy de Monchaux, head of proprietary trading, and Steve Meyer, co-head of stock sales and trading, later joined by Ace Greenberg, insisted the mortgage positions be cut. Tom Marano, responsible for that area, apparently resisted.

Again, this is strange and demands more probing, At most firms, the head of proprietary trading is the best trader in the house, and his/her views are taken seriously. The continued support for Marano, particularly since the hedge fund debacle was linked to his area (it used the same risk management tools; indeed, it was reportedly part of the sales pitch that investors were getting the advantage of Bear's skills in that area) is peculiar. Again, the article suggests that, contrary to normal trader "cut your losses" reflexes, Schwartz was worried about cashing out and possibly sending signals to the markets of weakness (I wonder it the real issue was the stock market reaction. I suspect there would have been far less hesitation had Bear still been private). So the firm instead entered into a bunch of hedges (and even a casual reader can see these hedges were way too approximate; some were on financial services stocks (!); you could wind up losing on the hedge and the position).

The article reports later that Greenberg, Monchaux, and Meyer ganged up on Schwartz, demanding that the hedges be abandoned and the mortgage position be cut. The article isn't clear on what was done. It says the approximate hedges were cut and it says Schwartz wanted more specific hedges. However, the reader is left in the dark as to whether new hedges were put on, the positions were cut (that seems unlikely) or the old positions were left in place, unhedged.

There are two more parts in this series, but so far, anyone who has a contract to write the tale of Bears' failure need not feel threatened.

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