The winner of the Euromoney award for excellence in risk management, and also named best investment bank in 2006, is…..
Bear Stearns. (Thanks to Greg Newton at Naked Shorts). So why, Finbar Taggit quite reasonably asks, did their praised MeasurRisk fail to alert risk managers there that one of their funds was levered 10 times on illiquid, hard-to-price assets:
“As its two credit focused hedge funds with about $20bn of highly leveraged assets are put on ventilators, there is real pressure in the market for the creditors not to sell the collateral for fear of undermining the value of the CDOs and other debt packages. As we all know, they are near impossible to price accurately, due to the nature of the underlying distressed assets, and if these CDO’s are valued downwards, then all hedge funds who own similar subprime assets will have to do the same and hey presto we have a falling market, more defaults and the house of cards comes tumbling down.”
It was, it seems, Merrill that hung Bear out to dry – pushing ahead with its plan to sell $850m in collateral assets held against loans to the Bear funds. Deutsche Bank then jumped on board with its $350m in assets seized from the funds.
But JPMorgan, rose above the fray. The bank began seizing collateral on Tuesday but on Wednesday halted the sale and made a private deal with Bear to eliminate its exposure to the fund — the kind of deal apparently rejected by Merrill. The Nattering Naybob claims that Goldman and Bank of America agreed to be taken out by Bear rather than heading to the market.
Beyond the concerns about a whole sale revaluation of the CDO market, further liquidations, knock-on effects and so on, this is a fascinating window onto the inter-bank linkages, or politics, on Wall Street – and the ability for the banks, who all themselves run fund money, to pull the plug on each other.
JPMorgan has experience of playing this game. Last time round was Amaranth when JPMorgan, as one of the fund’s prime brokers, was assumed to have done some of the plug pulling. It then scooped up the bust fund’s energy portfolio, before flogging it on to Citadel just 10 days later for a tidy return.
So what makes JPM seemingly friendly – while the others leave Bear to burn? The Wall Street Journal suggests that JPM may have been forced to settle because the loans it had put up for sale would have fetched so little in the market.
The Naked Capitalism blog notes that the sales of weaker credits were at “atrocious prices,” and “the last thing funds in this sector want to do is sell more securities into a market that is already choking (that’s why JP Morgan pulled back on its sale: it was clear that any settlement with Bear would be better than the alternative, particularly since forcing the market lower could damage other hedge funds and along with them, [the] investment banks).”
So the picture becomes clearer: eat, be eaten, eat each other, but stop before you accidentally eat yourself.