Update: Bear Stearns Bails Out Exploding Hedge Fund -- “You Might as Well Juggle Nitroglycerine”
This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.
On second thought, we’re glad we promised to stay on top of the Bear Stearns hedge fund mess. Bear Stearns has now pledged to bail out one of the two nightmare hedge funds. The second one could be a bigger problem. There is more to this story.
In simplest terms, Bear’s big bets on subprime mortgages -- with the backing of Wall Street bankers and insiders -- were idiotic. Lou Barnes at Inman News tonight: : ‘Insiders entered the market for mortgage trash in the fall of 2006 when several million civilians knew that you might as well juggle nitroglycerine.’
This is a big story -- the developing crisis drove stocks down 185 points today. It is turning into the costliest -- and most humiliating -- hedge fund bailout in a decade.
From NYTimes.com: ‘Bear Stearns Companies, the investment bank, pledged up to $3.2 billion in loans yesterday to bail out one of its hedge funds that was collapsing because of bad bets on subprime mortgages.’
How badly did Bear Stearns miscalculate the subprime fallout? “They didn’t realize this was Katrina,” an investor tells the Times. “They thought it was just another storm.”
Why is Bear Stearns bailing out out the fund? ‘Because it is worried about the damage to its reputation if it stuck investors and lenders with big losses.’
More from Lou Barnes at Inman News: ‘It never occurred to me that the insiders didn’t know what they were doing. They were so drunk on money and power that they didn’t know their incompetence.’
More (he’s on a roll): ‘As of this morning, rumor has it that Bear is offering a self-rescue injection of $3.2 billion (double the initial capital), theoretically for pride. I believe that there is more going on. It is a serious accusation, but the Street for months has appeared to be in a conspiracy of silence, working to conceal the real value of $1.5 trillion in bad mortgage ideas created from 2004 to 2006, abetted by the glacial pace at S&P and Moody’s to acknowledge their massive rating error. The Federal Reserve is just as silent, which may preserve calm for a time, but transparency is the only antidote to episodes like this one.’
Powerful stuff. Your thoughts?
Photo: Bear Stearns headquarters in New York
Photo Credit: Wikipedia.org.