Five months after the fifth largest investment bank in the country was essentially murdered in the first degree, in broad daylight, at noon, in front of millions of witnesses, someone is finally looking into the mysterious bankruptcy puts guys were buying just one week before Bear went down! Bloomberg has a story this morning titled, "Bringing Down Bear Began as $1.7 million of Unsuspected Options."
Bear Stearns started the week of March 10, 2008 with a stock price of $70. On March 11, 2008 somebody or somebodies bought enough March puts (expiring on March 20) struck at $30 to have the right to sell 5.7 million shares of BSC. They paid $1.7 million for the puts. Later that day, someone requested to have $25 strike March puts to be put on the board and bought the right to sell 165,000 shares of BSC. We all saw this. It wasn't some secret over-the-counter trade (those took place in the credit default swap market!), it was right up on the Chicago Board. Bloomberg quoted Thomas Haugh, head of PTI Securities & Futures LP.;
"Even if I were the most bearish man on earth, I can't imagine buying puts 50% below the price with just over a week to expiration. It's not even on the page of rational behavior, unless you know something."
This is what we wrote on March 24, 2008 as part of a broader story making fun of Barron's call to get back into the financials;
Wait till the story unfolds about who was buying March puts on Bear struck at 30 when Bear was trading in the 70’s…..essentially betting that the firm was going to go out of business in two weeks! They are going to find that they were the same people buying default protection on Bear, short selling the stock….and……were customers of Bear Stearns!! That’s right…customers! Bear Stearns derived a lot of their liquidity from the cash big hedge funds kept at Bear, with Bear serving as their prime broker. These guys set their shorts, bought their puts and default protection and then essentially took out an advertisement in the paper to say, “We are pulling our billions out of Bear Stearns….you better get yours while you can!!” And the rest is history. You think Joseph Lewis, the proud owner of 8% of now worthless stock isn’t going to demand and get an inquiry on this?? That should all be great news for financials. Lets also not forget that it basically took a very public koom-by-yah (no idea how to spell that and I’m not going to use the spell check) by The Fed, Treasury and Goldman Sachs to turn the wolves back from Lehman Brothers. Essentially the Fed-JPM deal with Bear was a one-timer. Who is going to help next…Citi??? Hah!
Now it appears that the SEC is finally going to look into what happened. That's great guys. We have already gone off countless times about our belief that the Fed and Treasury knew much earlier than they are telling us how grave the Bear Stearns situation was, They also had to know of the very public shenanigans that were going on with regard to put buying and short selling because it was going on right in front of everyone. We wrote a piece on this May 12 and a follow up May 19 if you want to have a look. They, at a minimum, let Bear get murdered without lifting a finger and then after the fact, arranged a shot-gun wedding with JPM Chase, with all of us tax-payers paying for the reception! Here is the advice we gave the SEC a few weeks ago;
First lets map out what Cox should look for:
- Get records of all Prime Brokerage withdrawals from Bear Stearns starting in January 2008 to March 2008.
- Collect the names of hedge funds who removed sizable amounts of cash during that time.
- Investigate if any of those firms subsequently engaged, in short-selling of Bear Stearns stock, purchased March Expiry Puts on Bear struck at $20 when the stock was trading in the mid 70's, and bought Credit Default Swap (CDS) protection on Bear Stearns.
- If such trading did occur, Investigate whether anyone at the fund maliciously used the information that they had pulled significant amounts of cash out of Bear Stearns Prime Brokerage. This will be hard to prove, but a subpoena of emails and phone calls can yield surprising results.
- Subpoena emails and phone records of prime brokers that the big hedge funds moved their money too. Did anyone at those firms distribute information that sizable flows of cash were pouring out of Bear Stearns for the purpose of manipulating Bear's stock. That is going to be real hard to prove too, but that's what the SEC's is set up to do.
Finally, subpoena the following individuals and have them testify what the subject of their meeting in New York Citiy was on March 11, 2008
- Ben Bernanke - Federal Reserve
- Tim Geithner - NY Fed
- Lloyd Blankein - Goldman Sachs
- Dick Fuld - Lehman Brothers
- James Gorman - Morgan Stanley
- John Thain - Merrill Lynch
- Robert Rubin - Citigroup
- Steve Schwarzman - Blackstone
- Ken Griffin - Citadel
Cox should directly ask each of these individuals;
- Was Bear Stearns liquidity situation discussed?
- If so, what was revealed?
- If so, what action did each participants take, with regard to their relationship with Bear Stearns, immediately following the meeting?
The thing that kill me is, with all the red flags and sirens going off that Bear Stearns was being taken down in what has to be termed a criminal conspiracy, the authorities did NOTHING! Now, maybe in August if it doesn't interfere with summer vacation plans, they are going to get the bad guys. This reminds me of the great movie, "The Naked Gun". Frank Drebbin (Leslie Nielson) is going through the evidence room and he says to his partner (I'm quoting from memory), "Hey look, I found the missing piece of evidence that would have exonerated Joe Cook for that murder five years ago! Too bad they already sent him to the chair!"
The stench was so bad on this one, that it behooves the SEC and even the FBI to assume foul play, and investigate to prove otherwise.
That's what we pay them for.
And we know that many hedge funds would sell their grandmothers to make a buck,
And have.
Posted by: Jim Davis | August 12, 2008 at 12:13 AM
So many bad and very murky things happened in those couple of weeks. I still remember a buddy bberging me and telling me someone's buying $30 BSC puts in size for March! You pull up the options monitor for BSC and there was the open interest. The stock had a high sixty handle at the time.
Posted by: eric | August 11, 2008 at 04:57 PM
why would the cboe even list a $5 bear put if the stock was $50+? why would they ever think that would trade?
Posted by: RPB | August 11, 2008 at 04:47 PM