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Thread: Vanity Fair: the greatest financial scandal in history

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    Jun 2006

    Default Vanity Fair: the greatest financial scandal in history

    Bringing Down Bear Stearns

    On Monday, March 10, Wall Street was tense, as it had been for months. The mortgage market had crashed; major companies like Citigroup and Merrill Lynch had written off billions of dollars in bad loans. In what the economists called a “credit crisis,” the big banks were so spooked they had all but stopped lending money, a trend which, if it continued, would spell disaster on 21st-century Wall Street, where trading firms routinely borrow as much as 50 times the cash in their accounts to trade complex financial instruments such as derivatives.

    Still, as he drove in from his Connecticut home to the glass-sheathed Midtown Manhattan headquarters of Bear Stearns, Sam Molinaro wasn’t expecting trouble. Molinaro, 50, Bear’s popular chief financial officer, thought he could spot the first rays of daylight at the end of nine solid months of nonstop crisis. The nation’s fifth-largest investment bank, known for its notoriously freewheeling—some would say maverick—culture, Bear had pledged to fork over more than $3 billion the previous summer to bail out one of its two hedge funds that had bet heavily on subprime loans. At the time, rumors flew it would go bankrupt. Bear’s swashbuckling C.E.O., 74-year-old Jimmy Cayne, pilloried as a detached figure who played bridge and rounds of golf while his firm was in crisis, had been ousted in January. His replacement, an easygoing 58-year-old investment banker named Alan Schwartz, was down at the Breakers resort in Palm Beach that morning, rubbing elbows with News Corp.’s Rupert Murdoch and Viacom’s Sumner Redstone at Bear’s annual media conference.

    It was an uneventful morning—at first. Molinaro sat in his sixth-floor corner office, overlooking Madison Avenue, catching up on paperwork after a week-long trip visiting European investors. Then, around 11, something happened. Exactly what, no one knows to this day. But Bear’s stock began to fall. It was then, questioning his trading desks downstairs, that Molinaro first heard the rumor: Bear was having liquidity troubles, Wall Street’s way of saying the firm was running out of money. Molinaro made a face. This was crazy. There was no liquidity problem. Bear had about $18 billion in cash reserves.
    I have referenced this affair elsewhere

    Also from Deep Capture

    All in all, this is a pretty good article. But it could have done more to describe the full scope of “the greatest financial scandal in history,” noting that this scandal has touched hundreds of other companies, and that its most worrying component, ignored by the financial press, is the sale of billions of dollars worth of phantom stock. More than 13 million shares of Bear Stearns stock that was sold on the day of Faber’s bombshell was not delivered on time – no doubt because the stock did not exist.

    So who provided that bogus tip to Faber? Who sold all the phantom stock? Who killed Bear Stearns?

    Further down, Vanity Fair reports:

    According to one vague tale, initially picked up at Lehman Brothers, a group of hedge-fund managers actually celebrated Bear’s collapse at a breakfast that following Sunday morning and planned a similar assault on Lehman the next week. True or not, Bear executives repeated the story to the S.E.C., along with the names of the three firms it suspects were behind its demise. Two are hedge funds, Chicago-based Citadel, run by a trader named Ken Griffin, and SAC Capital Partners of Stamford, Connecticut, run by Steven Cohen. (A spokesman for SAC Capital said the firm “vehemently denies” any suggestion that it played a role in Bear’s demise. A Citadel spokeswoman said, “These claims have no merit.”)

    I think it’s wrong to point a finger at Ken Griffin of Citadel. My initial reporting suggests that Griffin was not even short Bear Stearns. Also, Griffin’s rivals routinely throw his name around – usually when they are trying to distract attention from their own misdeeds.

    It will be up to the SEC and DOJ to indentify the true culprits, but perhaps they could start by interviewing the hedge fund managers who were short Bear Stearns. These include Griffin rivals David Einhorn, Jim Chanos, Dan Loeb (who once vowed to go “to war” against Griffin), and, yes, Steve Cohen.

    As described in “The Story of Deep Capture,” all of these hedge fund managers are in some way closely connected to CNBC’s Jim Cramer. They routinely conduct gang tackles on companies, employing the services of a small, but influential group of financial journalists, most of whom are also connected in some way to Jim Cramer – himself a former hedge fund manager.
    Last edited by Rajiv; 06-30-08 at 10:11 PM.

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