The last gasps of Bear Stearns

The Los Angeles Times today has an interesting review of ‘Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street’ by Wall St. Journal reporter Kate Kelly, which purports to show the extent to which federal officials — mostly then Treasury Secretary Henry Paulson — orchestrated the first domino in the country’s financial collapse.

No paragraph is more compelling than this one:

“Regulators may never know what really happened. But one thing is clear: Once confidence in a company falls away on such a grand scale, it can never recover. Bear started that week with more than $18 billion in capital, its largest cash position ever. Three days later, negative headlines, a stock drop, lender reticence and big withdrawals from client accounts had cut those capital levels in half. Eight hours later, it was nearly dead.”

Another YouTube video says Kelly’s book reads nothing like the newspaper stories that were coming out at the time of the collapse. You decide. Here’s Kelly’s lengthy blow-by-blow account in the Journal a year ago.

  • There is no mystery here. People in the market knew that they were riding a bubble and had no safety cushion. So at the first bad sign they all ran as fast as possible. That is because they knew that derivatives would highly magnify any minor problem. The federal reserve had gone to almost 0% interest in propping up the economy in face of huge war costs. The first ones out in a bubble burst win, while the stragglers are best off waiting for a rebound.

    The people at Bear Stearns were always skating the edge counting on the government to bail them out. They were very integrated in the market and knew what would happen if they failed. What Bear Stearns did not count on was that Treasury Secretary Henry Paulson believed the conservative talk that he preached. Secretary Paulson then set out to prove that conservative philosophy works. Instead he proved that regulation and government intervention works better.