How Goldman Sachs Secretly Destroyed Bear Stearns

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News that Wall Street powerhouse Goldman Sachs (GS) is taking the rest of Wall Street to the cleaners is nothing new, but now comes word that Goldman played a direct role in the destruction of competitor Bear Stearns (BSC). According to Fortune's Roddy Boyd, several days before the collapse, Goldman decided to stop backing up Bear Stearns derivatives deals -- and it announced this decision to hedge-fund clients in an email that was then forwarded around an increasingly panicked Wall Street:

[On the morning of Tuesday, March 11], Goldman Sachs's credit derivatives group sent its hedge fund clients an e-mail announcing another blow. In previous weeks, banks such as Goldman had done a brisk business (for a handsome fee, of course) agreeing to stand in for institutions nervous, say, that Bear wouldn't be able to cough up its obligations on an interest rate swap. But on March 11, Goldman told clients it would no longer step in for them on Bear derivatives deals. (A Goldman spokesman asserts that the e-mail was not a categorical refusal.)

"I was astounded when I got the [Goldman] e-mail," says Kyle Bass of Hayman Capital. He had a colleague call Goldman to see if it was a mistake. "It wasn't," says Bass, who is a former Bear salesman. "Goldman told Wall Street that they were done with Bear, that there was [effectively] too much risk. That was the end for them"...

When word of the Goldman e-mail leaked out, the floodgates opened. Hedge funds and other clients, eventually running into the hundreds, began yanking their funds.

The next afternoon, Bear CEO Alan Schwartz announced on CNBC that everything was hunky-dory (which it wasn't). And two days later, Bear Stearns effectively went bankrupt.

Should Goldman be blamed for this? Absolutely not. Bear Stearns was under-capitalized, over-leveraged, and stuffed to the gills with crappy debt. Once again, Goldman seems to have outsmarted the rest of Wall Street, spotting a problem before everyone else did. But because "runs on the bank" are often started when smart players cut and run, Goldman's decision appears to have at least contributed to the stampede.

Goldman Sachs: Giving new meaning to "crushing the competition."

See Also: Did Bear Stearns CEO Alan Schwartz Lie on CNBC?

Comments

[sfnative]

That's the funny thing about the less than transparent bond market in general. when the market goes south the bids dry up completely.poof. gone unlike stocks which are traded traded real time on an exchange or whatever where a price is at least obtainable. It's gonna get worse folks!

[Novista]

I have just a question or two ...

A lot of people are slagging off on Bear Stearns for being leveraged at 32:1 but it seems that is not uncommon in the derivatives market. I've seen ___ (one firm) alleged at 100:1 so ... what are people going to hang their hat on, on the next failure/imminent bankruptcy?

The irony is: BS questionable assets may not have been worse than other firm on The Street. Eh?

Near as I can see on much research and reading between the lines, about 53% of outstanding mortgages have been sold on to feed the food chain. This implies to me, many from the 90s of responsible borrowers are likely in good shape. But no one knows what is in these 'creative investment vehicles'.

Still, when I see a mention of GS peripherally involved, a firm that flogged their toxic paper and shorted their own product -- and JPMC brand involved, I say the whole story does not pass the smell test.

[CFSM]

The gargantuan amounts of money made by and stratospheric share prices of the financial institutions post the internet bubble for doing what is still not entirely clear will be grist for much future analysis, fairly clear though both the bubbles enabled by (silicon chip etc) technological advances. Obviously a lot of warts now on display, however the technology is also facilitating the sorting out of the problems at the grass roots via blogs such as this - a reminder to me to invest only in countries that have freely functioning internets.

[Rog49Thomas]

Brother Henry, I'm confused by your piece.

The headline is "How GS Secretly Destroyed Bear Stearns" So sending around an email to all one's hedge fund clients is way of hiding one's hand. Especially when the Street which has more inherent gossips than McCrazy's old age home?

What's also confusing is the change between the the first paragraph in which you state GS played a "direct role in the destruction of competitor Bear Stearns" and then in the penultimate they "at least contributed". Big difference.

You've got my head spinning more than the neocon changing explanations for Iraq.

The first rule of good security analysis is make up your mind if it's a buy or sell and then say so.

Which is it?

[research]

Fine the Sterns exec's till they are left with minimum wage for the work that resulted in this failure.

[joebhed]

"Allow me to create the nation's money, and I care not who makes the laws."

It seems to me that GS' actions destroyed BS not for its own sake, but as the price for shoring up the other IBs.
You look around the lifeboat, and you realize that SOMEBODY has got to go.
Then you choose the most vulnerable, the weaker.
A little email to the other potential survivors, and over the side she goes.
For just a little while longer.
So that we can get the public teat in place for a "confidence-booster?
So the IBs can be, you know, "backstopped" by the good ole US taxpayer.
In the form of a Treasury-backed security. Of their own design.
If any of the rest of the group get threatened, the taxpayers come-a-bailing.

What's wrong with this picture?
The Treasurer - in the person of the SecTreas - is using the full faith and credit of the American people to save a bunch of no-gooders who only wanted the freedom to make as much money as they could, or fail.
That's what they wanted.
A land of free-marketeer capitalism.
"Allow me to create the money, and I care not who makes the laws."
When the private banks control the power to create the money, they control the government and the people. Taxpayer Bailouts Rule!
When the people control the power to create the money, then the government will be controlled by the people.
Taxpayers Rule!

[Uselessboy]

Gee, you'd think that this kind of behavior would be somehow frowned upon.

[KarlRoves3rdchin]

Not when the Bush appointed Treasury Secretary Henry Paulson is the former CEO of Goldman Sachs!!!

People WAKE UP!! Our country has been hijacked by greedy neocons and their STEALING our treasury -yes, OUR treasury that we HAVE to pay every fricking year!

[bac]

A pox on all their houses! It is the same old story, just like during the telecom/internet bust. The fat cats all continue to getter fatter, while the gullible public takes all the losses. There is just no credible oversight anywhere anymore.

[ProudNeoCon]

The fat cats at Bear lost their shirt...

[ProudNeoCon]

Goldman started a run on the bank. I would not be suprised if we later find out that Goldman was short Bear stock and credit... Goldman is the most dis-honest organisation on the street and everyone knows it. Unfortunatly they are in bed with goverment (take a look where treasury secretaries worked before joining the goverment).

[ProudNeoCon]

It is no different when Goldman front-run LTCM they were suppose to be "rescuing"....

[joebhed]

ummmmmm.....
and you are a proud neocon...... why?