Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [77]
There was talk of Bear Stearns coming to the rescue with a $2.5 billion loan. “People close to the situation”34 claimed that losses would have little impact on Bear Stearns.They were wrong.
On June 15, Merrill Lynch seized collateral and others began testing the market. The news was dismal. Even though most of the assets on bid lists were nominally rated AAA, only some of assets fetched prices close to asking prices. Others were less than 50 cents on the dollar, and some of the harder to sell assets were not even shown around. Many people were angry that BSAM had not managed the funds better. Now that the bid lists were hitting the market, it would be harder than ever to avoid marking down the investment banks’ enormous exposures to CDOs. Bid lists from JPMorgan Securities and Morgan Stanley found their way to Reuters. It counted $1.44 billion in CDOs. Managers included Tricadia, headed by Michael Barnes, an alumnus of the Bear Stearns’s mortgage department and later UBS, Cohen Brothers’ Strategos—later to distinguish itself with highest notional amount of defaulted CDOs, and BSAM.3536
Among the funds’ assets were collateralized loan obligations partially backed by leveraged loans.The SEC had several pricing investigations underway into these types of securitizations. The leveraged loan market had not been getting as much attention as the mortgage market, but collateral quality was mixed. Some loans had assets backing them, and some did not. Investment banks looked at the bid lists and saw that they did not have time to drill down into the loans to figure out how to bid.37
By late June, Bear Stearns said it would invest $1.6 billion to bailout the Enhanced Leverage fund. BSAM had already begun reducing leverage. Bear Stearns also stated that the less-leveraged Bear Stearns High-Grade Structured Credit Strategies fund would not need to be rescued.38
By not stepping up immediately, Bear Stearns let BSAM circulate asset lists that aired Wall Street’s dirty laundry. At the end of June 2007 I told the Wall Street Journal’s Serena Ng that the poor bids raised the question of why investment banks were not reporting losses, and no one wanted to ask the question. “That would open the floodgates. Everyone is trying to stop the problem, but they should face up to it. The assets may all be mispriced.”39
It wasn’t as if the coming market mess could have been avoided. Bear Stearns simply had the misfortune of an arrogant past, and now it was the first to show everyone’s losing cards. By the end of June, Bear Stearns’s share price closed just under $139 per share, down 15 percent for the year. The worst was yet to come. As Warren Buffett joked to me during lunch, you cannot multiply your investments when you multiply by zero.
Bear Stearns had only bailed out creditors, not fund investors. By mid-July, Bear Stearns told investors in the Enhanced Leverage fund that they would probably get back nothing. Investors in the less-leveraged fund were told they would probably get only 10 cents on the dollar.40 In the eyes of some investors, Bear Stearns Asset Management went from hero to zero.
Iain Hamilton, a portfolio manager for Infiniti Capital, a fund of funds in Zurich that had invested a 3.25 percent allocation in BSAM managed hedge funds, felt misled. At a conference in Sydney, Hamilton exclaimed that BSAM represented the subprime exposure was “6 percent, but it had 40 percent hidden elsewhere.”41 He could take losses. He had losses in another fund, but hadn’t felt misled. According to him, it was misrepresentation. Whether this was a misunderstanding of net versus gross exposures, or something else, will have to