27 Kate Kelly and Serena Ng, “Bear Stearns Bails out Fund with Capital Injection.”
28 Janet Tavakoli, Credit Derivatives & Synthetic Structures (New York: John Wiley & Sons, 1998). I wrote about Askin’s problems: “The investment banks were eager to extend financing because they wanted to get rid of the “nuclear waste” tranches of collateralized mortgage obligations (“CMO’s”). Once the risky piece was sold, investment banks could underwrite more transactions and book attractive underwriting fees. When liquidity for these instruments dried up, risk managers started asking tough questions, but much too late
29 Laura Jereski, “Wall Street Firms Profited by Ravaging Askin’s Holdings,” Wall Street Journal, 22 April 1996. In 1995, Askin settled charges with the SEC that he mismarked bonds at misled investors. He paid a $50,000 fine and agreed to a two-year ban from association with any investment advisor.
30 Ibid.
31 Ibid.
32 Jeffrey B. Lane left JPMorgan/Bear Stearns and became CEO of Modern Bank on July 1, 2008. (PR Newswire, “Modern Bank Appoints Jeffrey B. Lane as CEO,” June 24, 2008.)
33 Jody Shenn, “FGIC Sees No Need to Honor Agreement with IKB, Calyon,” Bloomberg News, 26 March 2008.
34 Kate Kelly and Serena Ng, “Bear Stearns Fund Hurt by Subprime Loans,” Wall Street Journal, 12 June 2007.
35 “Bear CDO Lists Total at Least $1.44 Bln - Sources,” Reuters, 20 June 2007.
36 Michael Mackenzie, “Credit Vehicle Defaults Reach $170 billion,” Financial Times, 24 April, 2008.
37 Kara Scannell, Siobhan Hughes, and David Reilly, “SEC Probes CDOs and Bear Funds, Wall Street Journal, 27 June 2007.
38 Kate Kelly and Serena Ng, “Bear Stearns Bails out Fund with Capital Injection.”
39 Kate Kelly, Serena Ng, and David Reilly, “Two Big Funds at Bear Stearns Face Shutdown,” Wall Street Journal, 20 June 2007.
40 Eric Martin, “U.S. Stocks Retreat, Led by Financials; Bear Stearns Tumbles” Bloomberg News, 10 March 2008.
41 Charlie Corbett, “Bear Stearns Lied To Us, Fund Says Sub-prime Exposure Underplayed,” Investor Daily, 8 October 2007.
42 Yalman Onaran, “Spector Ousted by Cayne Over Too Much Bridge, Money,” Bloomberg News, 3 October 2007.
43 United States of America against Ralph Cioffi and Matthew Tannin, CR 08 415. f.#2007R01328, filed June 18, 2008.
44 Patricia Hurtado and David Scheer, “Former Bear Stearns Fund Managers Arrested by FBI,” Bloomberg News, 19 June 2008.
45 Landon Thomas Jr., “Prosecutors Build Bear Stearns Case on E-Mails,” New York Times, 20 June 2008.
Chapter 9: Dead Man’s Curve
1 Benjamin Graham, The Intelligent Investor (New York: Harper & Row, 1973), 95.
2 Ibid.
3 Nikki Tait, “The Joyti De-Laurey Case: Queen of Deceit Duped City High-Flyers,” Financial Times, 21 April 2004.
4 James Mackintosh “Wheels Come Off as Crunch Hits Peloton,” FT.com [Financial Times], 29 February 2008.
5 Cassell Bryan-Low, Carrick Mollenkamp, and Gregory Zuckerman, “Peloton Few High, Fell Fast,” Wall Street Journal, 12 May 2008.
6 Emiliya Mychasuk and Emiko Terazono, “Hedgie Heroes,” Financial Times, 29 January 2008.
7 Cassell Bryan-Low, Carrick Mollenkamp, and Gregory Zuckerman, “Peloton Few High, Fell Fast.”
8 James Mackintosh, “Peloton Partners in $2 billion Assets Sale, Financial Times, 28 February 2008.
9 Cassell Bryan-Low, Carrick Mollenkamp, and Gregory Zuckerman, “Peloton Few High, Fell Fast.”
10 Ibid.
11 James Mackintosh, and Daniel Thomas, “Peloton Puts Office on Market,” FT.com [Financial Times], 9 March 2008.
12 Cassell Bryan-Low, Carrick Mollenkamp, and Gregory Zuckerman, “Peloton Few High, Fell Fast.”
13 James Mackintosh and Gillian Tett, “Peloton Fund Fall Highlights Danger of Overreaching, Financial Times, 4 March 2008.
14 The Carlyle Group,“Firm Profile,” www.carlyle.com/company (14 June 2008).
15 “Carlyle’s Debt Team Is a Secret Weapon” Investment Dealers’ Digest, 29 September 2003.
16 Ed Vulliamy, “Dark Heart of the American Dream” The Observer, 16 June 2002.
17 “Carlyle Capital’s Troubles Since IPO: Timeline,” CNBC.com, 13 March 2008.
18 Peter Lattman, Randall Smith, and Jenny Strasburg, “Carlyle Fund on Ropes as Banks Get Nervous” Wall Street Journal, 17 March 2008.
19 “Carlyle Capital’s Troubles Since IPO:Timeline.”
20 Ibid.
21 Edward Evans,“Carlyle Capital Nears Collapse as Rescue Talks Fail, Bloomberg News, 13 March 2008.
22 Roddy Boyd,“The Last Days of Bear Stearns” Fortune, 28 March 2008.
23 Kate Kelly, “Fear, Rumors Touched Off Fatal Run on Bear Stearns,” Wall Street Journal, 28 May 2008. Alan Schwartz left Bear Stearns two months after the sale of Bear Stearns to JPMorgan Chase was completed.
24 Mark Pittman, “Moody’s, S&P Defer Cuts on AAA Subprime, Hiding Loss,” Bloomberg News, 11 March 2008.
25 Kate Kelly and Serena Ng, “The Sure Bet Turns Bad,” Wall Street Journal, 7 June 2007.
26 “Testimony, Ben S. Bernanke, Developments in the financial markets: Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, April 3, 2008, Federal Reserve press release. See http://www.federalreserve.gov/newsevents/testimony/bernanke20080403a.htm.
27 “Financials Lead Sell-Off After Carlyle News,” CNBC.com, 13 March 2008.
28 Ibid.
29 Carlyle Group, “The Carlyle Group Issues Additional Statement on CCC,” Carlyle Group Press Release #2008-025, March 13, 2008.
30 James Tyson, “Freddie Mac has 1st-Quarter Net Loss of $211 Million,” Bloomberg News, 14 June 2008. This article referenced remarks made on June 11, 2008 by James Lockhart, director of the Office of Federal Housing Enterprise Oversight, in which he said Freddie Mac and Fannie Mae owned $170 billion in subprime mortgage-backed securities rated AAA.
31 Peter Lattman, Randall Smith, and Jenny Strasburg, “Carlyle Fund on Ropes As Banks Get Nervous.”
32 Ibid.
33 Ibid.
34 “SEC, CFTC Formalize Cooperation Agreement,” CNBC.com, 11 March 2008.
35 Roddy Boyd,“The Last Days of Bear Stearns,” Fortune, 28 March 2008.
36 Kate Kelly,“Fear, Rumors Touched off Fatal Run on Bear Stearns,” Wall Street Journal, 28 May 2008.
37 Roddy Boyd,“The Last Days of Bear Stearns,” Fortune, 28 March 2008.
38 Alan Schwartz and David Faber, “Bear Stearns CEO,” Squawk on the Street, CNBC, 12 March 2008.
39 Ibid.
40 Ibid.
41 Serena Ng and Randall Smith, “Another Source of Quick Cash Dries Up,” Wall Street Journal, 17 March 2008.
42 Lester Pimentel, “Fed’s Action May Have Hastened Bear Stearns’ Decline, UBS Says,” Bloomberg News], 17 March 2008.
43 Kevin O’Leary’s comments were made on Canada’s Business News Network, BNN’s “Squeeze Play,” March 14, 2008.
44 Roddy Boyd,“The Last Days of Bear Stearns,” Fortune, 28 March 2008.
45 My comments were made on Bloomberg TV and Canada’s Business News Network, BNN’s “Squeeze Play,” March 14, 2008. Bruce Foerster’s comments were made on Bloomberg TV.
46 Bruce Foerster’s comments were made during the segment referred to in endnote 45 in which we appeared together on Bloomberg TV, March 14, 2008.
47 Jim Rogers has made these comments on Bloomberg TV and CNBC several times in the past several months. Rogers made these particular comments from Singapore during a segment that aired June 5, 2008.
48 Josh P. Hamilton and Erik Holm, “Buffett Castigates Wall Street, Bankers on Blunders,” Bloomberg News, 5 May 2008.
49 Kate Kelly, “Bear Stearns Neared Collapse Twice in Frenzied Last Days,” Wall Street Journal, 29 May 2008.
50 Kate Kelly,“Lost Opportunities Haunt Final Days of Bear Stearns,” Wall Street Journal, 27 May 2008.
51 U.S. Senate Committee on Banking, Housing, and Urban Affairs, “Testimony of Jamie Dimon Before the Senate Committee on Banking, Housing, and Urban Affairs,” April 3, 2008.
52 Ibid.
53 Stephen Labaton, “Testimony Offers Details of Bear Stearns Deal,” New York Times, 4 April 2008. Jamie Dimon repeated the comment in an interview with Charlie Rose on July 8, 2008.
54 Alistair Barr, “Bear Portfolio Worth $28.9 Billion, Fed Says,” Market Watch, 3 July 2008. The revaluation mentioned in the title already represents a loss of $100 million for the Fed and it is not even based on market prices (which would have resulted in a greater stated loss); the Fed admitted it priced the securities based on its notion of an “orderly market.”
55 Ben White, “Bear Stearns Passes into Wall Street History,” Financial Times, 29 May 2008.
56 Kate Kelly,“Bear Stearns Neared Collapse Twice in Frenzied Last Days.”
57 Ibid.
58 Herbert Lash, “JPMorgan’s Bear Takeover Not Looking Good: Analyst,” Reuters.com, 9 June 2008.
59 “JPMorgan Chase: We Got Bear Stearns on the Cheap,” CNBC, 17 June 2008.
60 Landon Thomas Jr., “Buffett Said to Consider Bear Stake,” New York Times, 27 September 2007.
61 CNBC aired several segments on September 27, 2007, including: “Bear Hunting,” “Buffett Bearish?,” “Buffett Buzz Buoys Bear,” “Buffett Bear Hunting?,” and “Buffett Buying Bear?”
Chapter 10: Mark to Myth and the Black Box
1 “Risky Business,” Squawk Box, CNBC, 8 August 2007.
2 AIG, “Residential Mortgage Presentation (Financial Figures are as of June 30, 2007),” 9 August 2007. The CDO consisted of BBB tranches with an average of 29 percent subprime in the original residential mortgage-backed securities portfolios. AIG claimed most of this was 2005 vintage and therefore not as suspect as loans originated in 2006 and 2007. Even though the super senior originally had a 36 percent cushion, a significant portion of the cushion could be eaten through (in some of my probable scenarios and in other scenarios, all of it) and that should have been reflected in an accounting loss. Even if AIG did not believe that there would be any ultimate principal loss, the price what it protected had declined which should have shown up in a mark-to-market loss. By August 2007, the prices of BBB rated tranches of residential mortgage backed securities deals tanked. Since AIG was writing protection on the super senior (ultimately backed by that collateral), it would have shown a loss.
3 U.S. Department of Justice, “Former Gen Re and AIG Executives Found Guilty on All counts of Fraudulent Manipulation Scheme,” Press Release #80-141:02-25-08.
4 David Reilly, “In Subprime, AIG Sees Small Risk; Others See More,” Wall Street Journal, 13 August 2007. AIG is a multinational conglomerate doing business in aroudn 130 countries. AIG has insurance operations (life, property, casualty, retirement products, commercial), and manages investments related to its insurance obligations.The insurance business is supposed to be separate and regulated (by state regulators), but at one point, AIG (at the holding company) was given permission to have its insurance operations provide a bridge loan to AIG’s financial products operations—another unprecedented move by regulators. AIG’s finacial operations act as a credit derivatives counterparty (primarily selling protection) on mortgage products, corporate risk and other assets. AIG also has assests such as International Lease Finance Corporation (ILFC, which leases aircraft), among other valuable assets.
5 Ibid
6 Amir Efrati and Liam Plevin, “SEC, Justice Scrutinize AIG on Swaps Accounting,” Wall Street Journal, 6 June 2008.
7 Liam Plevin, “AIG’s Board Now Comes Under Fire of Dissidents (online title: “AIG Holders Add Change in the Board to Demands”)” Wall Street Journal, 12 June 2008.
8 Amir Efrati and Liam Plevin, “SEC, Justice Scrutinize AIG on Swaps Accounting.”
9 Charles Duhigg, “At Freddie Mac, Chief Discarded Warning Signs,” New York Times, 5 August 2008.
10 Gretchen Morgenson and Charles Duhigg, “Loan Giant Overstated the Size of Its Capital Base,” NewYork Times, 7 September 2008.
11 Mark Gilbert, “I Spy More Road Kill on the Credit-Crunch Highway: Mark Gilbert,” Bloomberg News, 21 August 2008.
12 Jay Yarrow, “Bill Gross Cashes in on Fannie Freddie Bailout,” The Business Sheet, 9 September 2008. The Pimco Total Return Fund had over $130 billion in assets at the end of June 2008.
13 “Fannie Mae and Freddie Mac removed from S&P 500,” Associated Press, 9 September 2008.
14 James R. Hagerty, Ruth Simon, and Damian Paletta, “U.S. Seizes Mortgage Giants,” Wall Street Journal, 8 September 2008. (Mr. Moffett’s affiliation with the Carlyle Group was not reported in this article but was available on the Carlyle Group’s Web site www.carlyle.com with his biography as one of the Carlyle team.) Richard Syron’s Freddie Mac exit package was estimated at up to $15 million; Daniel Mudd’s Fannie Mae exit package was estimated at up to $14 million.
15 Gregory Mott, “Dodd Plans Senate Hearing on Fannie, Freddie Takeover,” Bloomberg News, 8 September 2008.
16 Hugh Son and Shannon D. Harrington, “AIG May Disclose Its Strategic Review Before Sept. 25 Deadline,” 13 September 2008.
17 Hugh Son, “AIG Seeks Loan from Goldman, JPMorgan as Fed Resists,” Bloomberg News, 15 September 2008.
18 Christine Harper, “Goldman Net Drops 70% as Merger Advice, Trading Slow,” Bloomberg News, 16 September 2008.
19 Erik Holm and Christine Richard, “AIG’s Collapse Would Have Impact Around the Globe,” Bloomberg News, 16 September 2008.
20 Matthew Karnitschnig, Deborah Solomon, and Liam Pleven, “U.S. Plans Rescue of AIG to Halt Crisis; Central Banks Inject Cash as Credit Dries Up,” Wall Street Journal, 16 September 2008.
21 Federal Reserve (press release), 16 September 2008 (9:00 p.m. EDT).The (up to) $85 billion AIG facility has a 24-month term and will accrue interest at three month Libor plus 850 basis points.
22 Miles Weiss, “Gross’s Fund Guaranteed $760 Million of AIG Debt Through Swaps,” Bloomberg News, 16 September 2008.
23 Caroline Baum, “No Limit to Greenspan’s Once-in-a-Century Events: Caroline Baum,” Bloomberg News, 18 August 2008.
24 Hugh Son and Eric Holm, “Fed Said to Reverse Stance, Consider AIG Loan Package,” Bloomberg News, 16 September 2008.
25 Nicholas Varchaver, “What Warren Thinks . . .,” Fortune, 28 April 2008, p. 62.
26 Benjamin Graham, The Intelligent Investor (New York: Harper & Row, 1973), 315, 316.
27 McSheehy and Hugh Son, “AIG Chief Sullivan Seeks to Ease Rules on Writedowns” Bloomberg News, 18 March 2008.
28 Ibid.
29 Warren Buffett,“Shareholders Letter,” Berkshire Hathaway 2002 Annual Report, 14.
30 Telos Demos, Nina Easton, Adam Lashinsky, Eugenia Levenson, Carol Loomis, Brian O’Keefe, Patricia Sellers, and David Stires, “Crisis Council,” Fortune, 3 September 2007. 60.
31 Division of Corporate Finance, “Sample Letter Sent to Public Companies on MD&A Disclosure Regarding the Application of SFAS 157 (Fair Value Measurements),” U.S. Securities and Exchange Commission, March 31, 2008, http://www.sec.gov/divisions/corpfin/guidance/fairvalueltr0308.htm. The letter concerned Management’s Discussion and Analysis for their upcoming quarterly reports on Form 10-Q. Excerpt: “Current market conditions may require you to use valuation models that require significant unobservable inputs for some of your assets and liabilities. As a consequence, as of January 1, 2008, you will classify these assets and liabilities as Level 3.”
32 Ibid.
33 Joyce Moullakis, “Merrill Says Level 3 Assets Jump 70% in First Quarter,” Bloomberg News, 6 May 2008.
34 Bradley Keoun, “Merrill to Pay Ex-Goldman Trader Montag $40 Million,” Bloomberg News, 2 May 2008. Thain compensated Montag for $50 million in equity awards he would leave behind. He also agreed to pay him a $39.4 year bonus for 2008, even though the announcement was made in May 2008. In addition, Montag
would get a $600,000 salary for a total of $40 million.
35 Susanne Craig and Tom Lauricella, “Big Loss at Lehman Intensifies Crisis Jitters,” Wall Street Journal, 10 June 2008.
36 Ken Auletta, Greed and Glory on Wall Street: The Fall of the House of Lehman (New York: Random House, 1986), 158.
37 Ibid.
38 Ibid.
39 Jesse Westbrook, “SEC to Make Wall Street Banks Reveal Capital, Liquidity Levels,” Bloomberg News, 7 May 2008.
40 David Reilly and Karen Richardson, “For Financial Stocks, Is It Another False Bottom?” 16 Janaury 2008.
41 In a client note I observed that the difference between my numbers and Citi’s numbers are due to a combination of assumptions, and there is a lot of leeway in how one can account for structured products:“What’s a few billion anyway (except when one is trying to attract capital)? Since when do shareholders shrug off a 10% dilution in shareholder equity? It would be nice to have heard something along the lines of ‘We know what went wrong (and here it is. . . .), and we know exactly what to do about it (other than pass the hat).”
42 Lewis, Michael, “The Rise and Rise of Analyst Meredith Whitney,” Bloomberg News, 9 April 2008.
43 Yalman Onaran and Dave Pierson, “Banks’ Subprime Market-Related Losses 91 Capital Raised,” Bloomberg News, 16 October 2008.
44 David Enrich and Jenny Strasburg, “Citigroup to Close Hedge Fund; Blow to CEO,” Wall Street Journal, 12 June 2008; and Joyce Moullakis and Josh Fineman, “Citigroup Shuts Down Old Lane, Co-Founded by Pandit,” Bloomberg News, 12 June 2008.
45 David Einhorn, “Accounting Ingenuity,” remarks at the Ira W. Sohn Investment Research Conference, 21 May 2008. David Einhorn thought Lehman’s 1Q 2008 writedowns on its commercial mortgages were insufficient given the AAA commercial mortgage backed securities (CMBS) index fell 10 percent. According to Einhorn, Lehman had $39 billion in exposure to lower rated assets, yet it took a write down of only 3 percent. He questioned Lehman’s accounting for its share of KSK Energy Ventures. When he challenged Lehman’s statements, the stories changed (this happened more than once). He noted Lehman’s SunCal (California land developer) investment did not have a material charge unlike other home builders that took huge writedowns.
Dear Mr. Buffett: What an Investor Learns 1,269 Miles From Wall Street Page 29