Did Bear Sterns' lenders bet it would fail and then stop lending?

Jon Stewart interviewed “House of Cards” author William Cohan:

William Cohan: [Bear Sterns] made the crucial mistake of financing themselves to the tune of $75 billion a night in what was called the Overnight Lending market, and when that confidence was lost, the people who had provided that every night didn’t want to do it any more…

Jon Stewart: Hedge fund managers… suddenly see, “Hey, nobody wants to lend to Bear Sterns any more. I’m going to bet that Bear Sterns stock goes from $70 to $25 in eight days!” …It’s the same people who [regularly lend] billions of dollars [to] Bear Sterns. So they pull their money out of Bear Sterns [and] use that money to bet that Bear Sterns is going to go down.

William Cohan: …It might even have been a criminal act. That’s what the SEC is supposedly investigating, although they’ve been doing it for a year.

Jon Stewart: Oh, I’m sure they’ll get to the bottom of it. I have all the confidence in the world.

William Cohan: That’s a good bet.

Given the secrecy of hedge funds and the many personal ties between banking institutions, it’s also possible that Banks A, B and C conspired to kill Bear Sterns while tipping off their friends at Hedge Funds D, E and F to place bets against Bear Stern’s survival.

Of course, it’s also possible Bear Sterns doomed itself. But we need a strong SEC to distinguish between conspiracy to destroy Bear Sterns and profit from its demise and Bear Sterns doing itself in through complete incompetence and reckless gambling. Markets need watchdogs or else market participants will engage in self-serving, competition-destroying behavior.

My guess: Bear Sterns doomed itself, but circling Wall Street sharks smelled blood in the water and attacked. Bear Sterns might have been terminally ill, but that doesn’t justify others killing it. If you kill a terminally ill person, it’s still murder, and you’re still prosecuted for killing that person.

Posted by James on Tuesday, April 14, 2009