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New York Times Death Spiral Watch (Liquidity Problem Edition)

 June 30, 2008 03:30 PM

Andrew Ross Sorkin fails to get what a liquidity problem is:

What Really Killed Bear Stearns?: Did Bear Stearns melt down — or was it murdered?: That is one of the big questions that Bryan Burrough, who co-wrote the best-selling 1990 book "Barbarians at the Gate," tries to answer in a lengthy article in the August Vanity Fair magazine. Mr. Burrough spoke with many Bear executives and board members who described in vivid detail the events that unfolded that fateful week in March when Bear Stearns was ultimately forced to sell itself to JPMorgan Chase for a pittance. According to Mr. Burrough's account, Bear did not have a liquidity problem, at least at first. In fact, he said it had more than $18 billion in cash to cover its trades when the week began. There were no major withdrawals until late in the week, after rumors flew that the company was in trouble...

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And here we have to stop the tape. It doesn't matter what your cash reserves are: if they are less than your callable short-term liabilities, you are vulnerable to developing a liquidity problem; and if your cash reserves at the start of a week are less than desired withdrawals during that week, then you have a liquidity problem.

To say that "Bear Stearns did not have a liquidity problem" is simply wrong on so many levels. As is Sorkin's next paragraph:

[Related -How bank reserves make the gap between deposits and loans disappear]

A top Bear executive told Mr. Burrough, "There was a reason (the rumor) was leaked, and the reason is simple: someone wanted us to go down, and go down hard."

No. It was not the case that "someone wanted (Bear Stearns) to go down, and go down hard." The various "someones" did not care whether Bear Stearns lived or died. The "someones" wanted to make money--and thought that if they moved fast and shorted Bear Stearns that they could be the ones who made the most money fastest.

Sorkin goes on, summarizing Burroughs:

Bear executives frantically tried to find the source of the rumors, but failed to do so. They have their suspicions, and they have turned over the names to federal authorities that are investigating the matter. Two possible sources named in the article — albeit with few supporting details — are hedge funds: Chicago-based Citadel, run by Ken Griffin, and SAC Capital Partners of Stamford, Conn., run by Steven Cohen. The third was one of Bear's main competitors, Goldman Sachs.... Bear executives also told Mr. Burroughs that an individual may have been spreading rumors about the firm that week — Jeff Dorman... (who) briefly served as global co-head of Bear's prime brokerage business.... But the rumors caused a run on the bank and depleted Bear's capital base...

Well, yes. But if Bear Stearns cannot find timely financing to replace the cash that the rumor-generated withdrawals have produced, then the rumors that Bear Stearns is illiquid and unstable aren't rumors, are they? They are facts.

Why oh why can't we have a better press corps?



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