Who is to Blame for Bear Stearn's Demise?
Big Picture

From our Things that make you go Hmmmm department:

There is a meme going around about the death of Bear Stearns (BSC). According to some people (mostly current and ex-employees) the collapse of the fifth largest investment bank in the US is the fault of many people, none of whom happen to be the management of Bear Stearns itself.

Let's review some of the reasons why this was "not" Bear Stearn's fault:

1) Various clients -- like Renaissance Technologies Jim Simons, who pulled his prime brokerage account from Bear a few weeks earlier, as well as short sellers spreading rumors -- caused a run on the bank.

2) The Greenspan Fed, for not giving iBanks a seat at the discount window when Glass-Steagall Act was repealed (K & Co, March 16). 

3) The Ben Bernanke Fed, for failing to raise rates more rapidly.

These excuses are a steaming pile of organic, enzyme-free donkey fazoo. One in particular stands out as more manure laden than the rest. I wish to draw your attention to the third excuse, as it was penned earlier this week by, of all people, three Bear Stearns economists. Its titled "Apart From That, Mrs. Lincoln, How Was The Play?"  You see, it turns out that because the Fed kept rates so low, we ended up with all this bad paper, which ultimately led to the increase in foreclosures, then a sub-prime implosion, a housing debacle, derivative collapse, counter-party risk, recession, etc.  If only the Fed raised rates more rapidly, their argument goes none of this would have happened.

Um, sure it is, if you say so. Now, put the gun keyboard down, and back away from the laptop.

To me, this is the equivalent of blaming McDonalds (MCD) for your being obese. Why-oh-why must they make the Quarter Pounder (with cheese) so delicious? Who amongst us can possibly resist its mouthwatering sesame seed buns, its delectable, fat-laden goodness? Hmmmmm, so scrumptious!

Not everyone else gorged at the trough of mortgage backed securities the way Bear did: They were the most aggressive player in the mortgage backed underwriting arena, their internal hedge funds were amongst the most heavily leveraged to the junk. Indeed, of all the banks on Wall Street, one in particular stands out for how heavily tied they were to mortgage securitization industry: Bear Stearns.  Of course, this obviously had nothing to do with Bears' current predicament.

Then there is the small matter of, shall we call it, a lack of diplomacy on Bear's part. Back in 1998, when Long Term Capital Management was going down, the major banks were brought together by the New York Fed President. The only party who refused to participate in the $3 billion bailout (which turned out to be profitable for asl involved) was Long Term's prime broker, Bear Stearns. That's the sort of poor Wall Street corporate citizenry which can make you quite a few enemies. If revenge is a dish best served cold, you can be sure plenty of people were thrilled on Sunday to announce Supper's Ready.

Finally, there seems to be this tendency amongst Bear economists of playing the role of imperfect messenger. Recall that just as the credit crunch was unfolding, it was Bear (of all people!) who advised everyone: Don't Panic About the Credit Market. Ironically, part of Bear's current criticism consists of blaming the Fed today for, well, not panicking back then -- even as they were telling everyone to calm down. Sorry, but you don't get to have it both ways.

The bottom line is that Bear went under because of the poor judgment of their management: their aggressive risk taking, their positions in the mortgage back market, their apparent lack of risk controls, their leverage, lack of liquidity and reserves, and the enemies they made over the years. Sorry to be so blunt, but get real: It was nobody's fault but their own.

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