Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [76]
Despite David Askin’s belief that he could consistently produce returns as high as 15 percent in both up and down markets, he ran into pricing and liquidity problems.28 At the end of February 1994, Askin did not use the mark-to-market prices supplied by Wall Street firms that had lent him money—including Bear Stearns—but a court-appointed trustee could not find Askin’s models, either. Askin’s disclosure to his investors the following month about not using dealer pricing was one of the triggers that sparked the market sell-off that led to that fund’s bankruptcy.29
Questions were also raised about the prices used by the investment banks that eventually liquidated the assets they seized from the funds. The investment banks did not seem to be using a defensible model based on observable assumptions. Prices seemed to be arranged over the phone between dealers and designed to show a “print” for the records, since customer business had dried up. The prices became a market joke: I’m just Askin’ . . . What’s the price of this CMO?
The final bankruptcy report for the Askin funds noted that Bear Stearns had a 12-hour head start and seemed to make much more profit than the other firms when it resold the assets it seized from Askin. The hasty liquidation may have made any attempt for a bailout moot. The report said Bear Stearns’s seizure and sale of collateral was “at prices below its own contemporaneous assessments of value.”30 To be fair to Bear Stearns, we will never know how it came up with new prices over the phone on that day, since—despite a court order—Bear Stearns said it “inadvertently”31 recorded over its trading floor telephone tapes several months after it was required to produce them. What happened to the evidence? We’re just Askin’.
Bear Stearns was consistent in its take-no-hedge-fund-prisoners philosophy. In 1998, after Long-Term Capital Management turned down Warren Buffett’s bid, the New York Federal Reserve Bank helped arrange a bailout for LTCM with 16 banks and investment banks. James “Jimmy” E. Cayne, Bear Stearns’s CEO, famously refused to help. The rest of Wall Street never forgot it.
The head of risk management for J.P. Morgan wasn’t askin’ anything when he pointed out to Ralph Cioffi and his boss Richard Marin that they might have to seek help from Bear Stearns, their parent company, to figure out a way to meet margin calls. He thought they were “underestimating the severity of the situation.” When you are playing for keeps in finance, you dispense with insults such as “you’re a lying scumbag,” and replace it with something along the lines of “you are gravely mistaken”—meaning take it back, or there will be war.
On June 23, 2007, Richard Marin later wrote on his blog, Whim of Iron (whimofiron.blogspot.com), that he had spent the previous two weeks defending “Sparta against the Persians [sic] hordes of Wall Street.” One of my business contacts joked that Marin meant me, since my last name is a Persian name, an artifact of my ex-husband. But Marin seemed to be referring to the popular film, 300, about the battle at Thermopylae, in which a small army of Greeks perished after battling and delaying tens of thousands of Persians. Their sacrifice bought time for the Greek armies, who ultimately drove back their enemy. Marin thought he had prevailed, but like the doomed soldiers in the 300, he lost his battle to maintain his top position at BSAM. On June 29, 2007, Marin moved aside and became an advisor to Jeffrey Lane, BSAM’s new chairman and CEO, an import from Lehman Brothers.32
Initially, Alan Schwartz and Warren Spector, Bear Stearns’s cochief operating officers, emphasized that they were not bailing out the funds. Ralph Cioffi tried to save the funds and announced to his creditors that he had hired a consultant, Blackstone’s Timothy