Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [85]
Earlier in the day, rumors spread that Goldman Sachs35 or CSFB36 or both had sent an e-mail letter bomb to hedge fund clients saying that it would no longer take fees for intermediating Bear Stearns’ derivatives transactions. Up until then, investment banks pocketed cash to stand in the middle of the hedge funds’ derivative trades with Bear Stearns. In credit derivatives speak, sending an e-mail like that was as good as saying you expected Bear Stearns to lose its investment grade rating and possibly go bankrupt. Goldman later told Fortune the e-mail did not say it would categorically refuse to sell credit protection on Bear Stearns.37 By the end of the day, on Tuesday, March 11, 2008, it seemed the entire credit derivatives market was reluctant to sell credit default protection on Bear Stearns.
That afternoon, I spoke with Jonathan Wald, CNBC’s senior vice president of business news, saying there was a lot of turmoil. I mentioned that it looked as if there would be a large fund failure. I was referring to Carlyle Capital Corporation Ltd., but did not name it (it collapsed two days later). Wald said we might get together for coffee the following day, unless Eliot Spitzer resigned since the sex scandal would cram his schedule. I responded,“In that case, we should schedule it another time.” Spitzer was out of options.
On the morning of Wednesday, March 12, 2008, Alan Schwartz, then CEO of Bear Stearns for less than one fiscal quarter, was in Palm Beach, Florida. He gave an early morning interview to CNBC. Schwartz claimed he saw no liquidity pressure on Bear Stearns. He said the holding company had a liquidity cushion of $17 billion in cash, plus there were billions of dollars in cash and unpledged collateral at the subsidiaries. He smiled and I thought he looked relaxed. CNBC was not trying to be funny when, partway through Schwartz’s interview, a female commentator broke in to announce that Eliot Spitzer would resign that day.38
Was Schwartz bluffing? It appeared to me he was. He said the previous week had been a “difficult time” in the mortgage market with rumors about problems at the government-sponsored entities (Fannie Mae and Freddie Mac), funds (he did not mention Carlyle Capital Corporation by name) invested in “very high quality” mortgage instruments with high leverage that were having problems, and that people might “speculate” that Bear Stearns also had problems since it was a “significant” player in the mortgage market.39 The only part of Schwartz’s spin that the market bought was his observation that in tough markets, there is a tendency to “Sell first and ask questions later.”40
While $17 billion sounds like a large number, if market prices moved down 5 percent—$17 billion and more could disappear faster than a car in Gone in 60 Seconds. For securitized lending, the market now asked for 3 percent more collateral for mortgage-backed bonds issued by Fannie Mae and Freddie Mac (Carlyle Capital-type assets); and was now asking for 30 percent collateral on Alt-A backed bonds. Jeffrey Rosenberg, head of credit strategy research for Bank of America, said this funding dried up and “that appears to have been Bear’s problem.”41
In fact, the Fed’s new lending program may have contributed to Bear Stearns’s downfall. Banks took Carlyle Capital’s assets knowing the Fed would soon provide liquidity for them, but the program was not yet in place, and Bear Stearns had fewer funding options than other banks.42 As one CEO of a boutique investment bank told me: “Bear Stearns had no friends.” The Fed indirectly bailed out Carlyle’s creditors—and saved the Carlyle