Bear raid?

There are rumors floating around that Bear Stearns was the victim of a bear raid. That's when you short the stock and then use one of a variety of manipulations--such as spreading rumors that Bear Stearns might be insolvent--to make the stock plunge so you make a killing.

No doubt the share price--currently $5.58--is being buoyed in part by short covers. But a deliberate conspiracy? Bear raids are illegal, and the SEC is a bit touchy right now--and of course, shorting financial stocks wasn't exactly an original idea these last six months. I'm also suspicious that so far no one I know who works on Wall Street has offered this as a potential explanation. Readers?

Comments

Andrew Ross Sorkin mentioned it yeterday, http://www.nytimes.com/2008/03/18/business/18sorkin.html?_r=1&st=cse&sq=sorkin&scp=1&oref=sloginalthough the Times seems to have shifted to their new story on bondholders propping up the price: http://www.nytimes.com/2008/03/19/business/19bear.html?ref=business
I presume they'll have a new story tomorrow.

Posted by jfalk | March 19, 2008 12:19 PM

It's more than a rumor or Bear Raid when you really can't meet your obligations. Bear Stearn's situation.

You can yell from the rafters that I don't have a enough money to pay my bills, but my checking account says otherwise. You can't drive me to insolvency and I won't need a Fed loan.

Bottom line, most of America's financial structure is built the way a 2 year old would build with Lego's. Too top heavy. It's a scam that will ultimately lead to "predictable" hyper-inflation.

Posted by Sidney | March 19, 2008 12:19 PM

This is going to sound conspiracy theorist but Bear got put out of business due to it's lack of help during LT Capital debacle in 1998. If you remember the Federal Reserve bailed out LTC. This was after all the banks had gotten together to put their own bailout together only to be scuttled by Bear. Memories on long on Wall Street and when Bear's hedge funds went belly up and their mortgage business went into the tank, the other Investment Banks called their loans and Bear didn't have the liquidity to pay them. Read Scott Rothbart's blog about it. He was in the room when during LTC.

Posted by michael sicuranza | March 19, 2008 2:41 PM

Securities lenders know the answer, and some say there is lots of interest in borrowing Merrill stock right now.

Traders jump on those that show weakness. It doesn't have to be formally coordinated.

Posted by "Mindles H. Dreck" | March 19, 2008 2:49 PM

I do not think it was a bear raid, the shorts piled on once BSC was dropped as an acceptable counterparty by GS. Were traders moving on non public information? Yes. Illegal? Probably not.
Sidney, you miss the point. They could meet their obligations until a panic caused a run on the bank. The hot short is ML, and it might work. LEH was in the crosshairs earlier in the week and the shorts got carried out. Play at your own risk...

Posted by dave | March 19, 2008 7:13 PM

@ Dave

No I did not miss the point. Most financial institutions are vulnerable to bank runs because of the structure of their balance sheet. Borrowing short term and lending long term.

If the Fed did not step in, and those who lent to Bear got burned, then other institutions would as fast as possible readjust their balance sheets and match, term wise, borrowing and lending (or also go under).

The Fed is just setting up a bigger problem down the road where they will have to print hyper-inflationary quantities of money to bailout the distorted balance sheets in the financial system.

Posted by Sidney | March 19, 2008 9:00 PM

Sidney,

The trouble with your analysis is that it assumes that Investment Banks and Hedge Funds should as a rule keep the time-lines of their borrowing and lending more or less equivalent.

This is not how a bank operates, nor is it how one should, because their ability to lend and invest on a longer time frame than they borrow is integral to their ability to generate good returns. A short term loan is simply cheaper than a long term one, and there is a lot of money to be made mining that difference.

Also, it assumes that the Fed will simply dismiss its primary responsibility (a stable monetary base) in order to bail out poorly performing banks indiscriminately. I suppose such a thing is possible, but you would need to provide a bit of evidence for the proposition. Assertion is not enough.

Posted by heedless | March 20, 2008 12:43 AM

@ heedless

"Also it assumes that the Fed will simply dimiss its primary responsibility (a stable monetary base) in order to bail out poorly performimg banks indiscriminately. I suppose such a thing is possible, but you would need to provide a bit of evidence for the proposition. Assertion is not enough."

Duh!!

Where do you live?

The Fed just bailed out Bear Stearns and openned their borrowing to investment banks at the same time M2 money growth on an annualized basis over the last three months is over 10%.

Just what madf scribbling monetary god do you follow with out question that you don't see basic facts?

BTW: Hedge funds have severe restrictions on when and how much money can be pulled out of their funds.

"The way they operate allows them to generate good returns" !!!??!!

Oh yeah, Bear Stearns stock dropping from $170 to $2 is a great return.

Posted by Sidney | March 20, 2008 5:20 AM