Cohan on the life and death of Bear Stearns

by Russ Roberts on September 28, 2009

in Podcast

The latest EconTalk is William Cohan, author of the fascinating House of Cards talking about the book, which covers the life and death of Bear Stearns.

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Anonymous September 30, 2009 at 12:24 am

Did I miss something, or did the board of Bear Stearns commit financial suicide to bail out creditors and investors in funds it managed? Who were these board members, and what interest did they have in the funds? I understand why Congressmen hand out other people’s money to nominal “capitalists”, but why would the Bear Sterns board behave this way with their own money? Something doesn’t add up here.

Anonymous September 30, 2009 at 12:14 pm

They didn’t know it was financial suicide.

But you make a good point. The parent, Bear Stearns, had only a small financial interest in the funds. They could have just let the funds die. Why didn’t they? There would have been reputational costs and other costs as well. The way Cohan reads it, the board felt it couldn’t face another “bail out” (like LTCM) where Bear sat on the sidelines especially given that these funds had their name on them.

Letting the funds die would also have caused a large sale of a class of assets (subprime MBS) that Bear had a lot of. That would have been an unpleasant thing to deal with. They ended up having to deal with it anyway, but at the time it seemed like a good idea. There were also allegations of fraud and maybe Bear felt that by compensating the creditors they would reduce potential legal problems.

Methinks September 30, 2009 at 5:56 pm

Russ,

Would the Street have bailed out Bear like it bailed out LTCM? Bear didn’t participate in the LTCM bailout and the rest of Wall Street was pretty bitter about that.

Anonymous September 30, 2009 at 6:09 pm

Maybe I wasn’t clear.

Cayne, the CEO of Bear, sat out the rescue of LTCM. When the two Bear hedge funds were about to default in June 2007, he wanted to sit that one out, too. The hedge funds had Bear’s name on them. But they only had $45 million of Bear’s money at stake. Other WS firms were owed billions and hundreds of millions. Cayne’s original view was too bad for them. They made a mistake investing in a bad bet. But his board argued that if he did that, it would engender a lot more bitterness, especially in wake of the LTCM non-participation.

So Cayne said yes, took a $1.2 billion write down for the last quarter and that began the run on Bear that killed it. If he had not participated, it might not have mattered.

Methinks September 30, 2009 at 10:05 pm

Thank you, Russ.

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