It was perhaps the single most important moment leading to the
downfall of Bear Stearns.
On March 13, 2007, reporter David Faber, live
on CNBC, said, “I’m told by a hedge fund that I
know well…I’m told that [last night] Goldman would not
accept the counterparty risk of Bear Stearns.”
Faber and that hedge fund might as well have flown an airplane
into the side of Bear Stearns’s headquarters on
47th Street. Previously, there had been rumors about
Bear Stearns, but this was the first time that anyone had stated as
fact that a major bank was refusing to accept Bear Stearns risk. It
wasn’t until Faber and that hedge fund unleashed the
explosive news — right in the middle of a crucial interview
with Bear Stearns CEO Alan Schwartz – that the run on the
bank began.
This raises two important questions: Which hedge fund told
Faber that Goldman wasn’t accepting Bear’s counterparty
risk? And, was the news true?
The answer to the second question is a definitive
“No.” We know this because some hours later, Faber
reported that, actually, “Goldman did say alright, now we
will accept Bear as a counterparty.” Oops. Of course,
at this point it was too late – clients were fleeing Bear
Stearns in mass, panicked by the news that Goldman might or might
not have accepted Bear Stearns as a counterparty. The run on the
bank had started, and Faber’s retraction did nothing to stop
it.
To answer the first question, it is necessary to understand that
short selling hedge funds often “foment” the markets by
spreading incendiary information about the companies they are
attacking. In a video sold
to hedge fund managers and other high paying subscribers,
CNBC’s Jim Cramer, a close associate of David Faber,
once encouraged hedge fund managers to
“foment.” He said, “Now you can’t foment.
That’s a violation of…But you do it anyway because the
SEC doesn’t understand it…This is actually blatantly
illegal…But I think it’s really important to
foment.”
It is also necessary to understand that
one particular network of hedge funds has, for several years, have
accomplished much of their “fomenting” by placing false
or hysterical stories with a specific group of dishonest
journalists. After the hedge funds have demolished a
company’s stock price, they turn to those same journalists to
cover up their misdeeds and present skewed versions of what
happened to the company.
One of these journalists is Jim Cramer. Another is David Faber.
A third is Roddy Boyd, formerly of Fortune magazine. Roddy is
particularly humorous because
he unwittingly tends to reveal the miscreancy of his hedge fund
sources. By reading between the lines of his stories and turning a
keen ear to his public boasting,
we can often discover nuggets of truth. So it is that Roddy has
revealed the likely identity of the hedge fund that crashed that
airplane into the side of Bear Stearns.
In a story published
on March 30, 2007, Roddy repeated the assertion that Goldman had
refused to serve as a counterparty to Bear Stearns. He noted that
Goldman had stated this refusal in an email that Goldman sent on
March 11, 2007. And in support of this assertion, Roddy quoted Kyle
Bass, the manager of a Dallas-based hedge fund called Hayman
Capital. “I was astounded when I got the [Goldman]
e-mail…” Bass said to Roddy. “Goldman told Wall
Street that they were done with Bear, that there was [effectively]
too much risk. That was the end for them.”
Kyle Bass is known to be a close friend of David Faber. The two
men worked together on “House of Cards,” Faber’s
CNBC special documentary on the collapse of Bear Stearns. It
appears quite likely that it was Bass’s hedge fund, Hayman
Capital, that fed Faber the death-knell news that Goldman had
refused to serve as a counterparty. And to convince Faber that
Goldman had cut Bear off, it is likely that Hayman alluded to the
same supposed “email” from Goldman to Hayman that
was later cited by Roddy Boyd.
Beyond these suppositions, the story gets a bit murky. Depending
on whom you ask, there was either no such email, or there was an
email, but it was an utterly routine email that merely stated that
Goldman could not immediately process counterparty requests, but
would do so in short order. While Roddy gives absolute credence to
Bass’s claim that “Goldman told Wall Street that it was
done with Bear Stearns,” he also states, in parenthesis, that
Goldman denied that it had refused to accept Bear’s
counterparty risk, which is another way of saying that Bass’s
claim was an exaggeration to say the least.
In hopes of getting to the bottom of this, I called Hayman
Capital. Hayman’s lawyer, Chris Kirkpatrick, told me that
neither Bass nor anyone else at the hedge fund would comment on the
matter. Apparently, Hayman only speaks to Roddy Boyd, David Faber
and a few other journalists known to be tools of short selling
hedge funds. Certainly, Hayman would not provide me with a copy of
the famous email.
The most I could get out of Kirkpatrick was a vague statement
that “what has been reported in the media is not
accurate.” I do not know if he meant that Roddy’s story
was inaccurate – that Bass, in fact, no longer claims that
“Goldman told Wall Street that it was done with Bear
Stearns.” I do not know if he meant that it was
inaccurate to suggest that Bass had received an email that said as
much.
What I do know is this: at the time that Faber and his hedge
fund source (probably Hayman) delivered that deadly blow to Bear
Stearns, Goldman Sachs was accepting Bear
Stearns counterparty risk. That is an absolute fact.
So here’s the kindest scenario: Goldman at one point
sent out some kind of email. It is possible that Goldman is lying
(it does that sometimes), and this email did, in fact, state that
Goldman would not serve as a counterparty to Bear Stearns. Or it is
possible that the email stated no such thing. Either way, by the
time of Faber’s report Goldman was accepting Bear as a
counterparty so the email was no longer relevant.
Although the email was no longer relevant, Hayman Capital was
either confused or super-excited by said email, and in its tizzy,
Hayman couldn’t control itself – it just had to call
David Faber with the shocking news right before Faber was to
conduct a life-or-death interview with Bear Stearns CEO Alan
Schwartz. But that’s all it was – an innocent tizzy.
Hayman certainly did not mean to spread inflammatory information
about Bear Stearns.
The other scenario is that a cabal of hedge funds, including
Hayman capital, orchestrated a “conspiracy” to destroy
Bear Stearns for profit. That is the scenario that Bear
Stearns’ former CEO, Jimmy Cayne, laid
out for Fortune magazine. When a Fortune reporter (not
Roddy Boyd) quoted Cayne’s “conspiracy” remark,
Hayman Capital’s lawyer, Kirkpatrick, wrote a letter to
Fortune in which he stated that “Cayne’s rant”
was a “feeble attempt to deflect blame…”
Hayman’s lawyer added that Hayman “did not have any
positions in Bear Stearns’ securities at the time of its
failure…In short, Hayman did not stand to profit from [Bear
Stearns’s] failure.”
Because our markets are defined by their opacity there is no way
to confirm whether Hayman had any “positions in Bear
Stearns’ securities” or any other kind of bet against
Bear Stearns. The SEC does not require hedge funds to report their
short sales, their credit default swap positions, or any of the
myriad other derivatives by which a hedge fund might profit from
the demise of an investment bank.
But given that Hayman reportedly was
betting big against subprime mortgage derivatives, and given that
the value of such derivatives plummeted as the result of the Bear
Stearns fiasco, it is a bit disingenuous for Hayman to suggest that
it “did not stand to profit” from Bear’s
failure.
Moreover, Hayman failed to mention that one of its most
important investors was Dan Loeb, manager of a hedge fund called
Third Point Capital. As Deep Capture has detailed elsewhere,
Loeb is very much a part of that network of short sellers that has
habitually disseminated false information through a clique of
dubious journalists, including David Faber and Roddy Boyd.
Most of these hedge fund managers, including Loeb, are connected
in some way to the famous criminal Michael Milken or his close
associates. (Loeb worked side-by-side with many of Milken’s
former traders at Jefferies & Co., and got his first big break
by obtaining preferential access to certificates of beneficial
interest that had been issued by Milken’s bankrupt operation
at Drexel Burnham Lambert). And members of this network, including
Loeb, were by far the biggest short sellers of Bear Stearns
stock.
Most of these hedge funds invest in smaller hedge funds with the
expectation that the smaller hedge funds will somehow participate
in their attacks on public companies. I do not know what
preconditions came with Loeb’s investment in Hayman, but I
think it’s fair to say that Hayman is an honorary member of
the network.
As a measure of the lengths to which this network goes to spew
false information, consider that Loeb once
contracted with an outfit called Magic Consulting –
owned by convicted stock manipulator Michelle McDonough (formerly
Michelle Sarian). Emails obtained by Deep
Capture show that McDonough’s job was to coordinate
a stable of internet stock message board posters and journalists
who bashed stocks shorted by Loeb and his friends. McDonough was
herself a fairly prolific message board basher, prior to going to
prison.
One of the internet message board bashers in McDonough’s
stable was Floyd Schneider, a former employee of a Mafia-connected
short seller named Anthony Elgindy, who is currently serving an
11-year sentence for short selling crimes. One of the journalists
in McDonough’s stable was the above-mentioned Roddy Boyd.
In one email to Schneider, Roddy refers to McDonough as
“our mutual best friend.”
So we might question Roddy’s version of the Goldman email
story. We might question Roddy’s relationship with Hayman
Capital. We might question Hayman Capital’s relationship with
Loeb and his network of “fomenting” short sellers. And
we might also question whether these short sellers deliberately set
out to destroy Bear Stearns.
Actually, it is not we who must question. It is the SEC. But as
Jim Cramer said, the SEC “doesn’t
understand.”
Mark
Mitchell is a reporter for DeepCapture.com. He previously
worked as an editorial page writer for The Wall
Street Journal in Europe, a business correspondent
for Time magazine in Asia, and as an assistant managing editor
responsible for the Columbia Journalism Review’s online
critique of business journalism. He holds an MBA from the Kellogg
Graduate School of Management at Northwestern University. Email:
mitch0033@gmail.com