Saturday, May 8, 2010
Jimmy Cayne is a truly despicable liar. You might not be familiar with his name, but Cayne was, until late 2007, a titan of Wall Street. He was the CEO and chairman of Bear Stearns.
For a long time, he was also the single-richest banker in history. Over his long career, he amassed more than $1 billion in compensation from Bear, mostly in the form of stock. Today, Cayne testified before Congress that the collapse of Bear Stearns wasn't his fault. In fact, if you believe Cayne, the collapse of Bear was everyone else's fault:
The market's loss of confidence, even though it was unjustified and irrational, became a self-fulfilling prophecy. The efforts we made to strengthen the firm were reasonable and prudent, although in hindsight they proved inadequate. – Jimmy Cayne's written testimony to Congress, May 5, 2010
I know very well that when you look at the mortgage debacle, you won't find any saints. Nearly every market participant was guilty of irresponsible or illegal actions. Borrowers willingly lied about their incomes and assets. Mortgage brokers willingly underwrote loans they knew couldn't be repaid. Real estate agents deliberately sold homes to buyers they knew couldn't pay for them at prices they ought to have known were unsustainable. Bankers behaved with reckless stupidity, buying loans they knew (or ought to have known) were garbage and reselling them to investors, who were stunningly ignorant of the risks of the securities.
Having said that... few people have more personal responsibility for the crisis than Jimmy Cayne. And no one is more at fault for the company's collapse. I say so primarily for three reasons...
First, Bear Stearns was the undisputed leader in the securitization of residential mortgages into bonds on Wall Street. No other firm was more aggressive or made as much money as Bear did on residential mortgage-backed securities (RMBS). Had Bear insisted on higher lending standards, Wall Street's capital would have never poured into subprime debt. Crack houses would have never come to stand behind triple-A-rated securities. Jimmy Cayne should have made sure this never happened.
Second, no other banker was paid as much or had more authority in his firm than Jimmy Cayne. Few people on Wall Street had enough power, experience, and gravitas to stop the kind of mania that gripped Wall Street during 2005 and 2006. Out of the handful who could have prevented the crisis, Jimmy was, by far, the most experienced, highest paid, and the most respected. If Jimmy Cayne had announced at the end of 2004 that underwriting standards had collapsed and Bear wouldn't securitize any additional mortgage bonds without vastly higher lending standards, the credit crisis wouldn't have occurred.
Finally, evidence shows that had he taken steps to raise large amounts of capital in 2007, Cayne could have saved the bank... Yet he did almost nothing to prevent Bear Stearns' collapse. In fact, during those critical months in the summer of 2007, he was routinely out of the office, playing golf in New Jersey or bridge at tournaments in Nashville and Detroit.
No one disputes these facts. Default rates on subprime mortgages soared in early 2007. Investors in the "equity" tranches of Bear Stearns' mortgage securitizations began blowing up in early 2007 – starting with Dillon Reed Capital. As the default rates worsened, one mortgage company after another went bust.
On July 10, 2007, Moody's and S&P downgraded $12 billion of subprime backed RMBS. As a result, two of Bear Stearns' hedge funds collapsed. One lost 100% of its investors' money.
Jimmy Cayne cannot testify he was unaware of these events. He cannot say he didn't understand the direct threat to his firm – his own mortgage hedge funds collapsed. Nor can he say he didn't know his firm was leveraged more than 50 to 1, implying that even a 2% reduction in the value of its assets could wipe out all of its equity.
Most important, Jimmy Cayne cannot pretend he didn't understand how the collapsing price of RMBS would hurt his firm, which held more than $15 billion worth of these securities. As I explained to our subscribers on August 14, 2007, the downgrade of previously triple-A-rated securities would require all of Wall Street to raise enormous amounts of additional capital:
To hold AAA-rated paper, banks, and other financial institutions need only to maintain $0.56 in capital for each $100 of paper. But as the paper is downgraded, the amount of capital they're required to hold goes up, exponentially. At a BBB rating, financial institutions must hold $4.80 of capital. At BBB-, they must hold $8 of capital per $100 of asset-backed securities. Thus, as the crisis worsens, the demand for capital from these firms could grow substantially. – The S&A Digest, August 14, 2007
Here's a question I wish Congress would ask Jimmy Cayne. He continues to claim Bear Stearns sank due to a crisis no one could have anticipated or prevented. If that were true, then how did I write what I wrote? In August 2007, I explained all of the core problems Bear Stearns faced. These facts led us to recommend shorting Lehman, Fannie, and Freddie. They led us to doubt (correctly) Goldman Sachs' accounting and to predict the collapse of Merrill Lynch.
So I wish someone would ask Jimmy and all of the other leaders of Wall Street: "How did you miss problems so obvious to everyone else?" For Pete's sake, even Fortune magazine pegged the housing bubble as early as 2004. Yet supposedly, none of Wall Street's most elite bankers saw it coming? I don't believe it. And neither should you.
The truth is, dear subscribers, these men – the top executives at all of the biggest institutions on Wall Street and most of the people in Washington who were supposed to be regulating them – took insane risks with enormous amounts of borrowed money. They did it because they thought, quite simply, that they'd get away with it... that, in some way, shape, or form, they could hedge their risks and still make a fortune.
They tried to pull it off by selling their mortgages to suckers from foreign countries and idiot hedge-fund managers. They believed they could hedge their risks by buying insurance from companies like AIG and MBIA, which were actually leveraged more than the investment banks themselves. In short, they willingly bought into the giant delusion that they could get rich at someone else's expense by selling toxic securities as being "triple A."
It was a lie. But it's a very powerful and seductive lie, and it fueled literally billions and billions of dollars worth of compensation. Keep this is mind: Wall Street banks routinely paid out 40% of revenues in employee compensation.
Keep this in mind too: Washington continues to take insane financial risks with a phony triple-A credit rating. That scheme won't last either.
A U.S. currency crisis will come sooner than most anyone thinks possible. A global run on the dollar could happen at any moment. And the dollar isn't just another major currency. It is the world's reserve currency, the foundation of the entire system.
I devoted more than a year of my Investment Advisory to this situation... including several easy ways to protect yourself and prosper in the event of a currency crisis. You can learn how to access my research immediately right here.
Date Range:4/29/2010 to 5/6/2010
Date Range:4/29/2010 to 5/6/2010