Corporate & Securities Law

"GUESS WHO SERIES" - In 2006, they predicted bad times ahead for housing, mortgages, global liquidity

By Brett D. Sherman

First installment in The Wall Street Law Blog's "Guess Who" Series

THE HARD-HITTING INTERVIEW THAT FOLLOWS IS SCRIPTED (part of our forthcoming screenplay), BUT THE UNDERLYING FACTS AND CONCLUSIONS ARE 100% GENUINE.

Q:  OK, I can't stand the suspense.  So who sounded alarm bells about the end of the housing bubble, credit bubble, the world economy and so on?

A:  What if I told you it was Francois Trahan, Kurt D. Walters, Caroline S. Portney.

Q:  I'd ask who those people are. [Pauses, gets no response, continues...]  OK, Who are Trahan, Walters, and Portney?

A:  Sr. Wall Street Research Analysts.  In fact, Trahan, at the time, was a highly regarded Chief Equities Investment Strategist for a major investment bank.

Q:  [Yahn].  You've told us about your "smoking gun" research reports before.  Deutche Bank.  HSBC.  Even Merill.

A:  BEAR STEARNS.

Q:  Come Again?    

A:  Bear Stearns.  In a September 13, 2006 issue of the Bear Stearns "Investment Strategy" research report called -

RAMIFICATIONS OF A U.S. HOUSING SLOWDOWN FOR EQUITIES-  

Chief Strategist Trahan and his colleagues emphasized that they had identified a housing bubble in 2005, they described the history of the housing bubble in detail, concluded with conviction that the bubble had begun to deflate, and predicted dire consequences for the global economy.

Q:  And this is important, why?

A:  Because it is BEAR STEARNS RESEARCH REPORT.  Because it is from 2006.  Because the report suggests similarities between the teetering housing market to the last phase of the dot.com bubble. The report also says, among many other things, that 

"housing activity is only just beginning to cool, and forward-looking series sugguest that there is no end in sight for a year or two."

That's on page six, by the way. The report also says that rising interest rates have long been an indicator of a coming down-cycle for housing, and warns that Bear's expected deflation of the housing bubble would drag down the mortgage market, restrict liquidity, and have serious negative impact on the U.S. economy and the global economy. [Takes deep breath] 

BECAUSE THE REPORT IS A FLASHING NEON LIGHT THAT SIGNALS THE END OF THE LINE FOR BEAR'S MORTGAGE-DRIVEN BUSINESS STRATEGY. THE REPORT MEANS THAT FAILURE OF BEAR'S BUSINESS MODEL WAS FORESEEN BY BEAR STEARNS. 

Q:  Hold on. Let's go back for a second.  Didn't you say this report came from the equities side of Bear Stearns?  If so, why would the report have any relevance?  Bear's problems were on the fixed income side.

A: Glad you brought that up.  Bear's troubled financial products - in particular mortgage-backed securities - were fixed-income division products.  But the real problem was at the top.  Senior management. Jimmy Cayne, Warren Spector, Alan Schwartz, and the rest of the Executive Committee. Not to mention the Board of Directors.  

Q:  Got it.  But aren't the opinions of a few Bear employees just that?  You don't expect the CEO to read every research report, do you?

A:  Not sure.  Maybe.  Maybe not.  But I certainly believe that the senior officers and the Board of Bear Stearns had the obligation to, at the very least, be familiar with the opinions of Bear's Chief Equities Investment Strategist regarding current state of the world economy, and the Chief Strategist's views about the immediate future.  

Q:  That sounds good.  You have me 95% convinced.  But your missing the one thing that would lock it up for me.

A:  Really?  What's that?

Q:  If you could show me on the report some sort of adoption and approval by Bear Stearns itself, that would do it.  I mean, that would tell me that the report is the opinion of Bear Stearns and not just Francois Trahan and his team.  You know what I mean?

A:  Sure. I understand.  The best I can do is here, on page 14, where the report states that it "has been adopted and approved for distribution within the United States by Bear, Stearns & Co. Inc. for its and its affiliates customers."

  ***

By Brett Sherman 

FOR A COPY OF "RAMIFICATIONS OF A US HOUSING SLOWDOWN...", CLICK HERE AND LEAVE YOUR NAME AND A FAX Number OR EMAIL Address.   

Full post as published by Wall Street Law Blog on June 11, 2009 (boomark / email).