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What Wall Street's CEOs Don't Know Can Kill You: Michael Lewis
On March 14, a Friday, the market believed that Bear Stearns Cos. was worth $30 a share.
Say what you will about Bear Stearns on that day, you can't say that it was flying below the radar. It was as intently scrutinized as a public corporation can be, by some of the shrewdest people on our planet, and perhaps some smarter people from distant planets, too.
For nine months it had been in obvious distress; in just the previous three days its shares had fallen $30. A billionaire from outside the place -- the sort of investor who has the power to know as much as it is possible for an investor to know about a Wall Street firm -- was long the stock at $107 a share.
Three days earlier, on theStreet.com, Jim Cramer listed Bear Stearns common stock as a ``buy'' at $62. On his CNBC program that day, he showed his viewers a chart of Bear Stearns stock price and hollered, ``Bear Stearns is fine! Do not take your money out of Bear.''
Over that weekend -- days when the markets were closed and there was no material news about the company -- Bear Stearns was believed to be worth $2 a share, so long as the Federal Reserve assumed the downside risk of almost $30 billion of its mortgage securities.
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon obviously thought it was worth more than that, or he wouldn't have bought it. How much more is hard to say but the number now being floated, $10 a share, appears to sound about right even to the sellers.
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And Cramer went back on CNBC to explain that he never intended for anyone to go and actually BUY shares in Bear Stearns -- only that, if they happen to bank with Bear Stearns, they shouldn't worry about losing their money (a public service to all those ``Mad Money'' viewers who use Bear Stearns as a bank.)
All of this raises an obvious question: If the market got the value of Bear Stearns so wrong, how can it possibly believe it knows even the approximate value of any Wall Street firm? And if it doesn't, how can any responsible investor buy shares in a big Wall Street firm?
At what point does the purchase of such shares cease to be intelligent investing, and become the crudest sort of gambling?
CEO Ignorance
There is, of course, a reason that the market doesn't understand Wall Street firms: The people who run Wall Street firms, and who convey news of their inner workings to the outside world, don't understand them either.
Jimmy Cayne plays bridge, and Stan O'Neal golfs while their firms collapse, not because they don't care their firms are collapsing, but because they don't know that their firms are collapsing.
Across Wall Street, CEOs have made this little leap of faith about the manner in which their traders are making money, because they don't fully understand what their traders are doing.
Late last November, in a superb account of the demise of Citigroup CEO Charles Prince, Carol Loomis of Fortune magazine revealed that Prince resigned after he was informed of the consequences of liquidity puts -- options that allowed buyers of complex and presumably safe mortgage securities to hand them back to Citigroup at par if they became hard to finance.
Crappy Mortgages
Liquidity puts were about to make Citigroup the new owner of $25 billion of crappy mortgage securities at par, cost Prince his job, and put the company into the hands of Robert Rubin. Rubin is an extremely smart man with keen instincts of self- preservation, and he sat closer to Prince than anyone else at Citigroup.
Rubin said he had never heard of liquidity puts.
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Contd.
Say what you will about Bear Stearns on that day, you can't say that it was flying below the radar. It was as intently scrutinized as a public corporation can be, by some of the shrewdest people on our planet, and perhaps some smarter people from distant planets, too.
For nine months it had been in obvious distress; in just the previous three days its shares had fallen $30. A billionaire from outside the place -- the sort of investor who has the power to know as much as it is possible for an investor to know about a Wall Street firm -- was long the stock at $107 a share.
Three days earlier, on theStreet.com, Jim Cramer listed Bear Stearns common stock as a ``buy'' at $62. On his CNBC program that day, he showed his viewers a chart of Bear Stearns stock price and hollered, ``Bear Stearns is fine! Do not take your money out of Bear.''
Over that weekend -- days when the markets were closed and there was no material news about the company -- Bear Stearns was believed to be worth $2 a share, so long as the Federal Reserve assumed the downside risk of almost $30 billion of its mortgage securities.
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon obviously thought it was worth more than that, or he wouldn't have bought it. How much more is hard to say but the number now being floated, $10 a share, appears to sound about right even to the sellers.
.
.
.
.
And Cramer went back on CNBC to explain that he never intended for anyone to go and actually BUY shares in Bear Stearns -- only that, if they happen to bank with Bear Stearns, they shouldn't worry about losing their money (a public service to all those ``Mad Money'' viewers who use Bear Stearns as a bank.)
All of this raises an obvious question: If the market got the value of Bear Stearns so wrong, how can it possibly believe it knows even the approximate value of any Wall Street firm? And if it doesn't, how can any responsible investor buy shares in a big Wall Street firm?
At what point does the purchase of such shares cease to be intelligent investing, and become the crudest sort of gambling?
CEO Ignorance
There is, of course, a reason that the market doesn't understand Wall Street firms: The people who run Wall Street firms, and who convey news of their inner workings to the outside world, don't understand them either.
Jimmy Cayne plays bridge, and Stan O'Neal golfs while their firms collapse, not because they don't care their firms are collapsing, but because they don't know that their firms are collapsing.
Across Wall Street, CEOs have made this little leap of faith about the manner in which their traders are making money, because they don't fully understand what their traders are doing.
Late last November, in a superb account of the demise of Citigroup CEO Charles Prince, Carol Loomis of Fortune magazine revealed that Prince resigned after he was informed of the consequences of liquidity puts -- options that allowed buyers of complex and presumably safe mortgage securities to hand them back to Citigroup at par if they became hard to finance.
Crappy Mortgages
Liquidity puts were about to make Citigroup the new owner of $25 billion of crappy mortgage securities at par, cost Prince his job, and put the company into the hands of Robert Rubin. Rubin is an extremely smart man with keen instincts of self- preservation, and he sat closer to Prince than anyone else at Citigroup.
Rubin said he had never heard of liquidity puts.
.
.
.
.
Contd.
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