OK. Those who know me here know that I don't really order my tinfoil by the gross, and generally stay away from all that fun parlor game-style speculating. Everything in this post and thread will be speculation and fun, and I don't have anything like real evidence to support. Consider some of this what-if-ism. So, caveat made.
HOWEVER, I've been doing a ton of research on the 2008 financial crisis for an article I'm writing (the kind that appear in academic journals with 200 or so readers...it won't be ground-breaking, supposing it passes peer-review :-)). The point I am making here will have nothing to do with what I'm arguing in that article; it is, rather, a little fantasy I've imagined while I was reading, but one that has been increasingly reinforced as I read more and more. And it goes like this: I think Goldman Sachs was directly involved in kicking off, exacerbating, and executing the collapse of Bear Stearns the week of March 10, 2008.
Certainly, I'm not
the first to say that, but people who have made the claim before usually refer to a few specific incidents of that week, such as Goldman "preferring" not to face Bear as a counterparty on a particular deal, or Goldman emailing hedge funds that they would not backstop Bear's derivatives. These are both presented as opportunistic moves: the Goldman sharks smelled blood in the water, and pounced. I think there's more than that at work.
I don't have time to do a full work up, but I want to point to a few key players.
1) John Paulson (not SecTreas Hank, but hedge fund dude of the infamous ABACUS deals, about which more in a bit). Paulson, up until the previous year, had heavy business with Bear. Of course, as we all know now, he started shorting the hell out of residential mortgage backed securities (RMBS), and buying swap contracts on them, betting they would lose value. As the Bear mortgage backed hedge funds collapsed in 2007, Paulson started getting worried that Bear would
renegotiate mortgage terms with troubled home buyers (I shit you not), since that would "artificially" maintain the value of the RMBS he was shorting - he essentially went to war with Bear. We also know he was pulling fast ones with GS (the Fabulous Fab) at about that time as well. The plot begins here.
2) In one of the popular books I read for background (Street Fighters: The Last 72 Hours of Bear Stearns) I noticed an odd statement/omission: Treasury was in some sense first alerted to the danger of a Bear collapse by "Rodge Cohen," whom the author calls a prominent Wall Street attorney. Well, yeah. He's the Chairman of Sullivan & Cromwell, one of the more prestigious Wall Street firms, and merits wildly glowing reviews in
the NY Times. We also know that S&C is the firm that took Goldman public, and that there's probably no law firm/client relationship on Wall Street as cozy as S&C and GS. Clearly, we're in funhouse speculating mode here, but this is a curious fact indeed. Curiouser and curiouser, actually.
So, on to the tin-foil: Why does Goldman fold so quickly on the ABACUS transaction charge? I've read the documents carefully, and - to tell you the truth - GS could have put on a decent case in defense of the ABACUS deal. It wasn't as cut-and-dried as either I thought on first glance, or as was generally reported in the press. And the deal documents are certainly complicated enough for a jury to just split the difference. So why do they fold? As a non-tin-foil theory, I'd say they just wanted the bad press behind them and the price was right. But that's no fun! As a tin foil theory, I'd suggest something along these lines:
The SEC/Feds were essentially issuing a warning with the ABACUS complaint. There were bigger fish to fry than that silly little Fabrice Tourre, and everyone knew it. But the warning is very specific: the Feds found a deal that would drag the relationship between Goldman and Paulson into public view in all sorts of messy ways. And that presents a problem if a deliberate plan was hatched between these parties to take down Bear. So, speculating, we might say this: some smart guys at SEC and other federal agencies figured out how this plan worked. Rather than go public with
that, they offer up this little nothing ABACUS deal - a shot across the bow: "You don't really want us digging into what you guys were up to with Paulson 2007-2008, do ya? Because the collapse of Bear could be seen as the kick-off to the crisis, and it would be terrible if people could identify the cause of their current miseries, wouldn't it?" Goldman caves on July 15. FinReg passes the same day.
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This has been a fictional account, purely for entertainment purposes. :-)
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