James Cayne, chief executive of Bear Stearns, is notorious for having deep pockets and short arms, writes John Gapper in Monday’s FT. Alone among Wall Street’s finest, Bear refused to pony up $250m for the bail-out of LTCM in 1998.
Now that the subprime bullet appears, for the moment at least, to have been dodged – attention has turned to the softer stuff.
The New York Times reported on Mr Cayne’s angst at what has come to pass in recent weeks:
“I\’m angry,” he said as he took a deep puff on a freshly lit Montecristo cigar in a conference room next to his office. “When you walk around with the reputation for being the most rigorous risk analyzer, assessor, controller and that is trashed, well, you have got to feel bad. This is personal.”
Oh, the agony and the irony.
Gapper points out that when Bear produced a $3.2bn credit line to rescue one of its two funds, it was fair to assume self-interest was at stake. Indeed the bail-out restored some of Bear’s tattered reputation in hedge fund management. But he goes on:
For the market…Bear\’s bail-out was a poor idea. It set a bad precedent for other Wall Street banks and hedge fund investors, no matter how much they wanted the cash. It also delayed the necessary reckoning for mortgage-backed CDOs, a market that grew by $131bn last year but which is rife with opacity, illiquidity and shady valuations.
Everyone who stands to lose money from the Bear fund debacle can afford to do so. The bank made a distinction, rescuing the ordinary fund and letting its highly leveraged counterpart fend for itself. But the reality is that even the former were taking a big punt by investing in an aggressive CDO fund.
Holding off would have provided a lesson: that a fund may have the name Bear Stearns or Goldman Sachs on the front of the prospectus, but that only means the bank manages it, not that it stands behind it.
With investors attracted by fat triple-A yields from CDOs, there was a warning, says Gapper.
The yield on CDOs clearly suggested — long before the subprime mortgage downturn — that if a little went wrong with these cash flows, a lot could go wrong with the securities.
Gapper concludes:
Bear Stearns\’ rescue helped a lot of banks and investors who did not deserve it and encouraged the lurking suspicion that banks have propped up prices of CDO and mortgage-backed securities to avoid taking a hit. It made good sense for the investment bank itself. But, as has been noted before, what is good for Bear ain\’t necessarily good for everyone.
Poor old Mr Cayne shared his personal pain with the NYT:
“In the last 15 years, I have never walked into a room or been at a dinner party where I did not feel that when people looked at me they thought I was O.K., successful, agile,” he said. “That might have changed. I feel like people now look at me with a question mark.”
What a hardship.