VERIDCT? VANITY NOT FAIR -
BRETT D SHERMAN; WALL STREET LAW BLOG
"Instead of evidence there's just pure speculation. 'Where there's smoke, there's fire,' might be a nice sound bite but its not evidence. Before we unleash the hounds of war on rumor mongers, shouldn't we require more than this?" Dealbreaker.com
PART ONE, INTRODUCTION
"Bringing Down Bear Stearns" - which appears in the August 2008 edition of Vanity Fair Magazine - is supposed to be a work of serious journalism. Instead of the crisp feel of hard news, however, writer Bryan Burrough's article comes across as a polished, slick page-turner. Allusions to "shadowy" conspiracies, corporate sabotage, and a complicit media abound. However, Burrough's near complete omission of actual evidence to support his story should consign "Bringing Down Bear Stearns" to the realm of pulp fiction.
With an appealing film noir style potboiler about the fall of Bear Stearns, Vanity Fair and Bryan Burrough dispensed misinformation (sometimes called propaganda) to an unwitting public. By creating a false perception of "events" that may never have happened and almost certainly did not bring down Bear Stearns, VF and Burrough dangerously manipulated the truth. Without objectively verifiable facts, without a reasonable number of reliable sources, and without better explanations of how Burrough's villains wrought supposed mischief, there is nothing in the article to make Burrough's "suggestions" credible.
Still, Vanity Fair published the piece like it was gospel. The writing, based on innuendo and rumor rather than on facts, was irresponsible. The publishing was equally so. "Bringing Down Bear Stearns" is dangerous because it portrays one man's theories as truths. Without a whole lot more evidence, Vanity Fair probably should not have published the article at all. In the alternative, VF could have published the article with disclaimers about the lack of corroboration for Mr. Burrough’s hypothesis. The magazine made the indefensible choice to present “Bringing Down Bear Stearns” as hard news.
PART TWO: BURROUGH’S MYTHICAL THREE-HEADED MONSTER
The article is the work of Bryan Burrough (co-author of the classic business expose Barbarians at the Gate). The basic idea of the VF article is that, between March 10 and March 16, 2008, Bear Stearns may have been the unwitting victim of a lightning-fast knockout by a three-headed monster.
First, Burrough points to an unidentifiable cartel of ruthless financiers who may have successfully pulled off a secret plan to destroy Bear Stearns through a combination of aggressively spreading rumors about alleged liquidity problems at Bear Stearns while they were shorting Bear Stearns stock on a presumably massive scale. We're talking James Bond villains, secret mountain hideaways, and a plot to rule the world. Okay, I may be exaggerating - but not by much.
In Burrough's words, many believe there was "a malicious attack by so-called short sellers, the Vultures of Wall Street, who bet that a firm's stock will go down." Interestingly, Burrough fails to point out to Vanity Fair readers what short-selling is, or that shorting is a perfectly legal and important hedging strategy. It is not even remotely a stretch to say that short-selling is a crucial component of everyday Wall Street trading. Firms like Bear Stearns are (or were) shorted every day. Moreover, Bear Stearns itself engaged in short-selling on a vast scale and made a lot of money loaning shares to short-sellers.
If short sellers did illegally bring down Bear Stearns, why does "Bringing Down Bear Stearns" fail to ever touch on what the alleged illegal activity actually was and how it was accomplished? Instead, Burrough - a talented writer - implies that all short-selling is evil . Burrough also uses his skilled pen to convey the impression that he believes ‘the short-selling conspiracy’ is fact without devoting even a sentence to explaining the facts behind the alleged conspiracy. Just what happened and when? Burrough can’t help us out there.
Cryptically, Burrough sums up by telling the reader that the short-selling conspiracy "theory is surprisingly difficult to prove..." Why is it difficult to prove? What type of evidence is required. Just what are you saying specifically Mr. Burrough? Without any answers, the writer simply moves on, leaving this reader thoroughly confused.
Though Mr. Burrough apparently is comfortable discussing short-sellers without at least a rudimentary definition of what short-sellers do, I am not. Please forgive the digression, but here is Wall Street Law Blog's short explanation of short selling -
Short selling is the act of selling shares you don't actually own because you are betting that the share price will fall. In a winning short-sale, you borrow shares you don't actually own from institutions like Bear Stearns, and sell them at today's price. If the price does go down, then your bet was right. You buy an equal amount of shares at the lower price, return them - called covering your short - and the spread between your sell price and the later lower buy price, minus the cost of borrowing the shares, is your profit.
Villain number two in Burrough’s rogues’ is financial news network CNBC. According to Burrough, CNBC drove Wall Street into a frenzy the week of March 10 by near-constant reporting of a rumored liquidity problems at Bear Stearns - a rumor that Burrough paints as unquestionably false without much explanation outside of his (or Bear's) oft-repeated mantra that Bear Stearns had $18 billion in cash reserves. Burrough claims that CNBC's reporting was a huge factor in scaring banks and other financial institutions into pulling assets from Bear Stearns and, by week's end, refusing to extend Bear the credit the firm needed to stay in business.
It is preposterous to blame CNBC for the end of Bear Stearns. A rumor of a liquidity crisis at Bear Stearns (assuming the story is properly sourced) is a news story worthy of reporting. The financial media reports rumors every day of the week. More importantly, rumors are an important factor that drive market activity on Wall Street every single day. With respect to Bear Stearns, the primary activity during the week of March 10 was that assets were pouring out of the investment bank.
The story of a rapid weakening of Bear's financial position - whether started by fact or fiction - was certainly true by midweek. It was the type of news that CNBC, given its central role in the financial media, had a duty to report. For Burrough to imply that CNBC merits responsibility for Bear's rapid death because the network reported on a dynamic, evolving situation regarding Bear's liquidity (or lack thereof) tells me that he lacks a fundamental understanding of the role of the broadcast news media in America.
In a New York Post piece, CNBC anchor Charlie Gasparino - singled out by Burrough as one of the alleged rumor-mongers regarding problems at Bear Stearns - responded strongly to the Vanity Fair story: "What we were talking about [the week of March 10, 2008] was market activity. . . In those critical hours we were reporting what was happening in the markets. What are we going to do? Ignore it?" Gasparino continued: "If Bryan Burrough wrote something substantively and factually accurate about the way we covered the story there would be a problem [with CNBC's coverage], but he didn't. He was incredibly sloppy." CNBC's Ticked at Vanity Fair, New York Post, July 11, 2008.
In the very same New York Post article, even Bryan Burrough (one would guess with a lawyer whispering in his ear) backtracks from his attack on CNBC. Burrough now "says his intention wasn't to place the blame on CNBC. 'The idea that CNBC did in Bear Stearns [Burrough now claims] is ridiculous. ..' " Perhaps Burrough needs to spend some time re-reading Vanity Fair article before making such an indefensible claim.
To cite just one example of Burrough's numerous attacks on CNBC, describes the alleged fallout from an on-air exchange between CNBC's David Faber and Bear Stearns CEO Alan Schwartz after Faber asked Schwartz about a trade that another firm allegedly refused to complete with Bear Stearns (the trade eventually was completed):
"It was a killer statement: Faber was saying, in essence, that Bear’s status as a trader, the basis of its business, was in question."
“You knew right at that moment that Bear Stearns was dead, right at the moment he asked that question,” a Wall Street trader of 40 years told me. “Once you raise that idea, that the firm can’t follow through on a Trade, it’s over. Faber killed him. He just killed him.”
Does anyone who read the article honestly believe that Bryan Burrough did not intend to place blame on CNBC?
The third and final pillar of Burrough’s ‘Kill the Bear’ triumvirate is the great novation scandal. If you don't remember this part of Burrough's Vanity Fair article, that is because Burrough pretty much lets the topic linger until beyond the point in a very long magazine article where all but the most attentionally- gifted readers toss the magazine aside and start looking around the room for the remote control.
#a2a2a2;">Late in his article, Burrough halfheartedly (or maybe I was just tired) point a finger at investment bank Goldman Sachs and hedge funds SAC Capital Partners and Citadel, for instigating a "flood" of novation requests that gathered steam on March 11-12 (where investors looked to other investment banks to replace Bear Stearns as counter-parties in certain transactions). The flood of novation requests allegedly reached the point where Goldman itself (a rival of Bear in the lucrative business area of Prime Brokerage), Deutchebank, and Credit Suisse eventually felt that they had to refuse or delay decisions about whether to accept orders for Bear novations.
According to Burrough, Bear Stearns believes that this information was then intentionally leaked to - you guessed it – CNBC, in order to create a crisis of confidence in Bear. To date, former Bear Stearns executives have done a fair share of shouting about the novation issue as a deliberate attempt to bring the firm down. There hasn't been any publicly disclosed evidence of misconduct by Goldman or any other firm. Still, Burrough reports this part of the story as though Deep Throat had whispered the information to him in a dark parking garage.
PART THREE: A LESSON IN SPIN AND INNUENDO
As I read and re-read "Bringing Down Bear Stearns," it sure seemed that the writer's agenda was to exonerate the investment bank from any substantial blame for its own demise. At the very least, Burrough wanted to convince readers that there is a strong possibility that Bear Stearns fell due to some premeditated conspiracy, with villians and all.
After all, how many magazines can you sell by suggesting that bad leadership, multiple scandals, lousy finances, poor risk management, almost non-existent supervision, and plain poor business practices were the chief causes of Bear's death? How much buzz would a piece like that generate? No need to answer.
Although Burrough devotes a number of pages to descriptions of Bear's "self-inflicted wounds" in 2007 and early 2008, and admits that Bear's missteps did substantial damage to Bear's reputation and finances, Burrough is all too willing to discount these issues, consigning them to the dustbin of pre-March 10, 2008 history. It felt to me like Burrough wanted readers to believe that Bear's financial scandals, huge losses, change in leadership, etc., etc., etc., were in the past, events Bear was watching through its rear view mirror as they disappeared over the horizon into irrelevancy.
Consider the manner in which Burrough described the optimistic outlook of the CFO of Bear Stearns early on the morning of March 10, 2008:
[A]s 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.
What impression could Burrough possibly intend to create in this passage other than that the bad times were over for Bear Stearns? Following Burrough's imagery-rich description of CFO Molinaro's conclusion that, on March 10, 2008, everything at Bear Stearns was A-OK, most readers cannot help drawing the logical next inference - since Bear Stearns was (allegedly) financially healthy in March 2008, the company must have been destroyed by the outside. Bear Stearns - the Vanity Fair article seems to repeatedly shout - cannot be responsible for its own downfall.
But Mr. Burrough, were is the evidence? Any evidence? A few anonymous sources, some creative innuendo, and rank speculation are a poor substitute for objectively verifiable facts and specific explanations about how key players (such as the evil, secret short-sellers) could have possibly been responsible for "Bringing Down Bear Stearns." For that matter, in a magazine like Vanity Fair, shouldn't you have explained what short-selling even is? Do your editors even know?
A crucial fact - apparently unrecognized, ignored, or forgotten by Burrough - is that Bear Stearns was in fact a very unhealthy investment bank during the week of March 10, as it had been for a long time. For one thing, the firm still held far too many poorly regarded, and totally illiquid, “toxic” mortgage-backed securities in its portfolio. Bear Stearns also was way over-leveraged. Most reports put Bear's debt to equity ration at somewhere between 30:1 and 35:1, the highest of any big investment bank on Wall Street. (In layman's' terms an investment bank that is leveraged 30:1 means it has borrowed 30 dollars for every one if its own dollars it spends).
The fact was that, as a practical matter, Bear Stearns was insolvent the week of March 10, 2008. While Bear’s officers were busy telling the public that nothing was wrong with its finances, the truth was that Bear carried $29 billion of mortgage-backed securities and related investments on the asset side of its balance sheet. Bear certainly would have sold these securities to stay alive rather than just throwing in the towel and disappearing into the JP Morgan Chase behemoth. There were no buyers for the portfolio. It was illiquid.
When there are no buyers for a security a company needs to sell, the securities are worthless. Therefore, the so-called $29 billion in assets was, in reality, worth nothing to Bear Stearns. JP Morgan certainly wanted no part of the toxic securities portfolio. Jamie Dimon has insisted time and again that he would not have agreed to purchase Bear if it meant taking on the risky securities. Eventually, the federal government essentially bought the securities from JP Morgan in order to facilitate the deal between Morgan and Bear Stearns.
Why is this important? Because, during the week of March 10, 2008, Bear Stearns had $29 billion of worthless “assets” listed on its balance sheet. Subtract that $29 billion and Bear Stearns is insolvent. Its senior executives and directors were responsible for knowing that the $29 billion had nominal value. Officers like Ace Greenberg and CEO Alan Schwartz misled the public, including Bear’s shareholders, when they went on television or put out press releases to (falsely) assure the public that Bear’s financial condition was healthy and strong. Bear’s balance sheet was, in reality, a disaster. There is a legal term for this conduct – we call it fraud.
PART FOUR: BRINGING DOWN THE HOUSE OF BEAR
-CONCLUSION-
The BigPicture.com draws the main point against conspiracy theorists very well: "If your financial condition is so precarious that rumors can bring you down, then it is the finances, and not the rumors, that are to blame." The Big Picture; Who Killed Bear Stearns?
What killed Bear Stearns is no mystery. Bear died because the investment bank itself created an environment in which the banks with which it did business, and upon which Bear Stearns relied for the capital it needed to run its business, no longer had any faith in Bear Stearns. The company began to seriously founder in June 2007 with the now infamous and possibly criminal failure of two subprime dominated hedge funds. Bear Stearns never recovered from the hit to its finances or, perhaps more importantly, to its reputation from the hedge fund fiasco.
Thus, by March 2008, Bear Stearns found itself in very cold waters. The once-respected investment bank was sailing alone; the Titanic waiting for an iceberg. If the fatal blow had not come during the week of March 10, the odds are high that another disaster would have killed the firm another week. Bear Stearns was listing badly - undermined by scandal, massive financial losses, alleged criminal conduct, poor investment management decisions, questionable leadership, bad stock performance, and acts that put the company's integrity in question.
Bear Stearns created an unsustainable business model. The week of March 10, 2008 was simply the iceberg that sent Bear Stearns to the bottom.
BY BRETT SHERMAN, THE SHERMAN LAW FIRM
EDITOR - Wall Street Law Blog
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