Thursday, March 27, 2008

Devil Take the Hindmost

From Bloomberg News this afternoon:
Bear Stearns Chairman Cayne Sells His Entire Stake in the Firm
By Yalman Onaran

March 27 (Bloomberg) -- Bear Stearns Cos. Chairman James "Jimmy" Cayne sold his shares in the firm prior to a shareholder vote on the company's pending takeover by JPMorgan Chase & Co.

Cayne sold 5.6 million shares at $10.84 a piece on March 25 on the New York Stock Exchange, according to a regulatory filing today. Bear Stearns spokesman Russell Sherman had no comment on why or to whom Cayne sold his shares.

Good for you, Jimmy. After all, if Lazard said $2.00 a share was fair, and $10.00 a share was fairer, then surely $10.84 is even more fairer-er.

Send us a postcard from the Plaza, will ya?

© 2008 The Epicurean Dealmaker. All rights reserved.

Wednesday, March 26, 2008


Large man: "Who's that, then?"
Cart driver: "I dunno, must be a King."
Large man: "Why?"
Cart driver: "He hasn't got shit all over him."

Monty Python and the Holy Grail

I'm still here, Dear Readers. Truly.

I have just been struggling a little with uncharacteristic tongue-tiedness in the face of the magnificently operatic Cluster Fuck of the Century we have all been witnessing for the last week or so; namely, the Bear Stearns Imbroglio.1

I mean, what can one say? It is magnificent, it is operatic, and it makes Hiroshima look like a damp squib in a Folgers coffee can.2

Depending on which source you listen to, JPMorgan's Jamie Dimon is either a reluctant pawn in Hank Paulson and Ben Bernanke's vengeful plot to ram a splintered stick up Jimmy Cayne's ass for DK-ing the Fed and Wall Street when Long-Term Capital blew up ten years ago, or he is a Machiavellian monster who is taking out his two-dollar broker's insecurities by buggering anyone in a three piece suit he can get his greasy little hands on.

Bear Stearns' shareholders, of course, are totally fucked. I do not know what the market rate for bareback anal is in this town, but Eliot Spitzer's recently publicized travails lead me to believe it is a lot more than $2.00 (or $10.00) per share. I am sure no-one, including me, feels sorry for billionaire Joe Lewis, but you do not need to be Bill Clinton to feel the pain of thousands of BSC support staff and administrative assistants in Staten Island, Brooklyn, and elsewhere who are gazing hopelessly at a smoking crater where their company stock retirement plan used to be.

The investment bankers and traders at Bear have been royally rogered, as well. No-one feels sorry for them, of course, especially the Lord of the Flies crowd clogging the comment pages of the New York Times DealBook and the WSJ Deal Journal. Although I suspect each and every one of those pseudo-socialists cackling merrily at the evaporation of billions of dollars of wealth from the personal balance sheets of BSC bankers would themselves be far more willing to chop their little peckers off with a rusty knife than suffer a similar percentage hit to their own financial position. Risk-averse pussies.

Some of the bankers and traders with marketable skills (or salacious photographs of Jamie Dimon and Jessica Bibliowicz) will land on their feet, either at JPMorgan or elsewhere. But Wall Street is contracting, so many will not. The ones who don't are probably gone for good, and face the prospect of limping off to a corporate development job at Pfizer with a permanently shrunken balance sheet, to boot. The ones who do survive, weakened but employed, will be an interesting test case of Martin Wolf's thesis that incentive clawback is the proper way to pay financial workers. ($170 to $10 per share is a helluva clawback.) I, for one, think these bankers will be even more motivated to rape and pillage the financial system in order to rebuild their ill-gotten gains as fast as possible. Plus, you can bet their wives and girlfriends will give them the Lysistrata treatment until they have enough coin to send Sweetcheeks back to the Metropolitan Museum Gala in this year's dress.

The professional commentators and kibitzers have already weighed in on What This All Means to life, the universe, and everything, so I will spare you my trite regurgitations on moral hazard, social justice, and the price of peas in Shenzhen. Suffice it to say that this was a political decision by the Treasury and the Fed to intervene, and we will all enjoy years of political theater as various demagogues dissect, revile, and second-guess decisions made in the heat of the moment two weekends ago. Already, Senators Baucus and Grassley are sharpening their pitchforks and dusting off their torches for a nice, public lynching of the Great and Powerful involved. I could offer worse advice to Ben Bernanke and Hank Paulson than for the former to shave his shit-eating beard and the latter to practice looking short and humble, for a change.

From the perspective of Monty Python's cart driver, no-one has come off looking like a King in this scenario.

1 Plus, I just returned from vacation, fer chrissakes. Which of you bozos is it who decides to push the Big Red Button every time I leave town for a little R&R? Sheesh.
2 Back off, Political Correctness Police. This is a Wall Street rag, written from the point of view of the capital markets and investment banking. You want fair and balanced, go read the Bhutan Daily News. In the meantime, you can kiss my salty edamame.

© 2008 The Epicurean Dealmaker. All rights reserved.

Monday, March 10, 2008

Character Study

And as to you, Sir, treacherous in private friendship (for so you have been to me, and that in the day of danger) and a hypocrite in public life, the world will be puzzled to decide whether you are an apostate or an impostor; whether you have abandoned good principles, or whether you ever had any.

— Thomas Paine, Letter to George Washington

* * *

And this is the type of individual that Martin Wolf and others would have regulate the pay and benefits of those on Wall Street. Admirable.

© 2008 The Epicurean Dealmaker. All rights reserved.

Friday, March 7, 2008

Remember the Alamo

"Then I need say no more," said Celeborn. "But do not despise the lore that has come down from distant years; for oft it may chance that old wives keep in memory word of things that once were needful for the wise to know."

— J.R.R. Tolkein, The Fellowship of the Ring

Well, it seems that the geniuses at The Carlyle Group have finally shit the bed. And in public, too. Oops.

Another crop of yahoos, drunk on their own power, reputation, and greed steered themselves (and their trusting investors) into a ditch by ignoring the most basic rules of the road:

  • Do not borrow short and lend long
  • Do not overlever securities which might become illiquid
  • Do not believe your own hype
  • Do stick to your knitting

Prior to this, the Carlyle troika of Rubenstein, Conway, and Aniello were almost universally believed to be nearly as smart as Albert Einstein before he started smoking weed and hanging out with the fruitcakes at the Institute for Advanced Study. I guess they knew better.

As Felix Salmon points out, it's all happened before. Long-Term Capital Management, anyone?

And, if I read the timeline right, Carlyle Capital kept doubling down and throwing more capital at the problem even after conclusive evidence had surfaced that the Great Prime Broker Leverage Unwind of 2007/2008 was well underway. By the end of last year, those yahoos were running a portfolio of $21.7 billion of securities on a base of $670 million worth of equity. That's thirty-two times leverage. You read correctly: 32x. I'm sorry, but I wouldn't leverage even a sure thing like Giselle Bundchen on quaaludes, mojitos, and Spanish Fly thirty-two to one.

Of course, the people running Carlyle Capital were convinced that their strategy made sense, that the mortgage securities in their portfolio were worth more than what the market said they were, and that, given time, all would work out for the best:

John Stomber, Chief Executive Officer, President and Chief Investment Officer of the Company, said, “The last few days have created a market environment where the repo counterparties’ margin prices for our AAA-rated U.S. government agency floating rate capped securities issued by Fannie Mae and Freddie Mac are not representative of the underlying recoverable value of these securities. Unfortunately, this disconnect has created instability and variability in our repo financing arrangements. Management is actively working with the Company’s repo counterparties to develop more stable financing terms.”

Sound familiar? It should.

In addition to the delicious irony that Mr. Stomber comes to Carlyle from Cerberus Capital, the hedge fund that is making a royal hash of its forays into private equity, this is yet another example of why you should not rely on subject-matter experts like traders to drive your risk management strategy. For the same reason, it is not wise to put an arboreal botanist—no matter how smart and experienced—in charge of forest management: they tend to have trouble seeing the forest fire for the trees.

But this is nothing new. This should not be a surprise. In addition to the numerous empirical examples we can all point to throughout history, there has been an endless parade of wise men promulgating pithy aphorisms perfectly designed to penetrate the brain of any thinking person and lodge there. I think now, in particular, of a well-known adage coined by John Maynard Keynes which might have saved Mr. Stomber and his colleagues a great deal of pain, embarrassment, and money, had they taken heed of it:

The market can stay irrational longer than you can stay solvent.

Or this little beauty, from the pen of George Santayana:

Those who cannot remember the past are condemned to repeat it.

I begin to worry that Messrs. Conway, Aniello, Rubenstein, and Stomber cannot read at all.

Nevertheless, in the devout hope that I am wrong, I will leave behind my own little chestnut as a guide and a warning to the readers of these sentences:

Those who do not read this blog are condemned to be featured in it.

Put that in your pipe and smoke it.

© 2008 The Epicurean Dealmaker. All rights reserved.