Prominent alpha seeker Kyle Bass is named in the March 29 Wall Street Journal with a headline and lead paragraph that suggest that he was the man who set in motion the avalanche that brought down Bear Stearns in the spring of 2008.
The truth, as one discerns only from details much further down the story, is more complicated. This was an example of the children’s game “telephone” gone awry. A fair statement is that Bear’s weakness caused a brief halt in some of Goldman Sachs’ Bear-facing transactions on March 11. The fact of that halt reached a CNBC reporter through Bass. But the CNBC reporter, by means of a leading and weighted on-air question, effectively overstated the nature of the halt, and that helped turn a bad week for Bear into a catastrophic one.
To review: back on March 12, 2008, CNBC broadcast an interview with Alan Schwartz, Bear’s chief executive officer. The interviewer, David Faber, asked Schwartz about a report that he, Faber, had heard that Goldman Sachs was no longer willing to be a counterparty of Bear’s. Schwartz immediately denied it and CNBC itself, hours later, issued a clarifying statement: Goldman was still trading with Bear. Still, Faber’s statement wasn’t entirely false. More on that in a bit.
Markets were already nervous. Stocks had lost 55% of their value in the preceding 17 months. It was becoming clear that the problems with subprime mortgages were not “contained,” although that was the word greybeards kept using to try to re-assure people.
The Killer Moment
CNBC itself had been edging toward this moment for two days. That Monday, just after noon, another of its reporters, Bill Griffeth, said that he had heard “rumors [that] some unnamed Wall Street firm might be having liquidity problems.” In the hours that followed, Dennis Kneale and Charlie Gasparino joined in the fun, and it became clear the rumors in question centered on Bear.
But the killer moment for Bear was that Faber interview the following Wednesday. So much as any single event can ever be said to have such a consequence, it was this interview, dependent on Bass as Faber’s until-now unnamed Deep Throat, that set off the panic selling that in turn doomed the august investment bank. By the following weekend, the firm was forced to sell itself to JPMorgan at a fire-sale price.
There was much talk at the time (there has been much more since) about the prevalence of a short-and-distort tactic among short sellers. The allegation is always that short sellers spread spurious negative news about a company precisely in order to drive down the price and reap a quick profit for the shorts, the symmetrical match of the pump-and-dump boiler rooms. In 2008 I had something of a reputation as a skeptic in such discussions. I believed (and still believe) that those on the short side are as justified in talking their book as those on the long side, and that their talk is as likely to be thoroughly researched and, simply, honest, as is that of their long peers. I believed (and I still believe) that most firms that complain that they are the victims of short-and-distort are in general victims of their own folly, which the shorts simply (and fairly) leverage.
No Repentance
Assuming the Wall Street Journal has this story right – it cites newly released records of the Financial Crisis Inquiry Commission – should this make me mend my own skeptical ways? Did I go too far back in the day in playing down the risks of short-and-distort?
Bass and Faber have both themselves apparently declined to comment. But my own answer is: No. Or at least, this story carefully read doesn’t justify sackcloth-and-ashes. The first point to call to mind is that Bear Stearns’ real trouble was its own book, which was badly mismanaged, in respects that have been documented in some detail. People were right to be nervous about Bear Stearns. Whoever was the source for the comments on CNBC on Monday of that week, there was merit to them. The market was sniffing out weakness, which is what markets do.
Second, as to the Wednesday comment by Faber, the only one for which Bass is now cited as a source: emails obtained by the FCIC show that Goldman had refused to take Bear Stearns novations on Tuesday, the day before the interview. Rules limited its exposure to any single firm, and the many novation requests Goldman had received were hitting those limits. Bass had learned of this the hard way: his hedge fund had tried to close out a subprime derivative position, and had been refused. Early Wednesday, a Goldman rep emailed him, “Our trading desk would prefer to stay facing Hayman. We do not want to face Bear.”
It was not a distortion for him to pass this along to Mr. Faber.