Did hedge funds push and profit from Bear Stearns's collapse?

Posted Mar 31st 2008 1:33PM by Peter Cohan
Filed under: JPMorgan Chase (JPM), Bear Stearns Cos (BSC)

A fantastic Barron's [subscription required] interview with Blackrock Inc. (NYSE: BLK) CEO Laurence Fink suggests that the collapse of The Bear Stearns Companies (NYSE: BSC) was aided by hedge funds. But my interview with an industry insider suggests that some hedge funds not only created the collapse, but profited from it through short selling.

Here's an excerpt from the Fink interview:

"The fall of Bear Stearns was a liquidity crisis. It has been rumored that there were hedge funds promoting hostile and negative comments, which accelerated the fear of doing business with Bear Stearns. I believe it would be prudent if the SEC investigated these rumors. Bear Stearns was a very fine institution destroyed by the profiting of a few. In a normalized market, Bear Stearns would have never fallen like this. The rating agencies caused the ultimate fall of Bear Stearns."

This is consistent with what I heard from a Wall Street insider who attended a March 14 speech by President Bush at the Economic Club of New York -- three days before the JPMorgan Chase & Co. (NYSE: JPM) deal to buy Bear at $2 a share. This insider sat at a table next to a New York hedge fund manager and asked him whether he was surprised by the collapse of Bear Stearns. What the hedge fund manager said came as a shock to me: "Bear's collapse didn't surprise me. We've been short Bear for five days. All the hedge funds have been pulling their prime brokerage business from Bear."

Prime Brokerage is the business of lending money to and processing the trades of hedge funds. And this hedge fund could have been among the ones that was pulling its business away from Bear. If it shorted Bear on March 10th at $70 a share, that hedge fund manager must have savored the profit from his short position on the 14th when Bear dropped from $60 to $30.

And while this Wall Street insider's story does not constitute an open and shut case that hedge funds pushed and profited from Bear's collapse, it certainly suggests that it would a useful area for regulators to investigate. After all, $29 billion worth of taxpayer's money was lent to make the JPMorgan deal go through.

And if the hedge funds had a role in Bear's collapse, they should use their short profits to pay their share of that bailout.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Tags: blackrock, blk, bsc, jpm, laurence fink, LaurenceFink