POINT OF VIEW: Bear’s ‘Remain Calm! All Is Well!’ Problem

Mar.17, 2008 in Market Outlook

NEW YORK (Dow Jones)–Within a couple of days after Bear Stearns Cos. (BSC) swore
up and down that it didn’t have any liquidity problems, it admitted Friday
morning that it had a liquidity problem.

Bear Stearns announced it was getting an influx of financing from JPMorgan Chase
& Co. (JPM) and the Federal Reserve Bank of New York - a move that amounts to a
bailout of Bear amid mushrooming concerns about its liquidity. The company said
its liquidity had “deteriorated significantly” within the past 24 hours.

This despite the fact that Bear had insisted all week that its liquidity wasn’t
at risk, persistent market rumors notwithstanding. The company said Monday there
was “absolutely no truth” to the rumors. On Wednesday, Chief Executive Alan
Schwartz said, “Our liquidity position has not changed at all. Our balance sheet
has not weakened at all.” (A Bear spokeswoman couldn’t immediately be reached for
comment Friday.)

So beyond the liquidity problems, at this point Bear would seem to have a
credibility problem. In fact, there’s a lot of that going around lately.

Thornburg Mortgage Corp. (TMA) acknowledged earlier this month that it had
experienced hundreds of millions of dollars in margin calls - requirements from
its lenders to post added collateral on its borrowings after sharp declines in
the value of the mortgage securities it had already posted. The firm got a
going-concern statement from its auditors as a result, and Thornburg later
restated its recent earnings to take a big charge to write down the securities’
value.

This came less than a month after Larry Goldstone, Thornburg’s CEO, touted “the
strength of our business model and our conservative approach to risk management.”

Even as the company was undergoing the margin calls, Goldstone’s focus wasn’t on
the company’s problems and how he planned to fix them, but on the investors who
in his mind were in too panicky a state to keep the prices of mortgage-backed
securities high enough to save Thornburg. “Quite simply, the panic that has
gripped the mortgage-financing market is irrational and has no basis in
investment reality,” he said. (A Thornburg spokeswoman declined to comment
Friday.)

Countrywide Financial Corp. (CFC) developed a credibility problem back in the
early days of the credit crunch, last August. At that time, the company said it
had “longstanding and time-tested funding liquidity contingency planning,” and
that its financial condition “remains strong.”

Two weeks later, the company borrowed $11.5 billion to bolster its finances, and
it went into a downward spiral that prompted it to sell first a stake and later
the entire company to Bank of America Corp. (BAC). The stock has plunged from
close to $30 a share to under $5. Countrywide representatives couldn’t
immediately be reached Friday.

You might call these “Remain calm! All is well!” moments. Remember “National
Lampoon’s Animal House” - specifically, the young ROTC cadet played by Kevin
Bacon? As the chaos generated by John Belushi’s Bluto and the other Delta House
brothers erupted all around him, surging and unstoppable, he was reduced to
tearfully shrieking his mantra of “Remain calm! All is well!”

There are other examples of lost credibility over the past several months. The
ratings agencies that awarded AAA ratings to exotic, risky securities that didn’t
deserve them. The banks and financial companies that dribbled out their
credit-crisis write-downs in a seemingly endless string of announcements, instead
of acknowledging just how bad things had gotten and taking the pain all at once.
Is it any wonder investors have a crisis of confidence? There’s not much left to
be confident in.

I’ve had a bit of personal experience here, when I was doing some reporting on a
major financial company. I can’t name the company, because the conversation was
on background, but I had asked one of its representatives whether it was at risk
for a write-down of its investments stemming from the subprime-mortgage crisis.
He reassured me that the company was being conservative and had strong procedures
to manage its risk. Later, the company indicate it would in fact take significant
write-downs.

To be fair, there are some other, reasonable ways to explain companies’ saying
things that proved not to be the case. The credit crisis has been so
wide-ranging, and has moved so fast, that it’s inevitable it would overtake some
companies who genuinely believed they were in good shape. And there’s no denying
that investors have indeed had something of a panicky,
dump-the-securities-first-and-ask-questions-later attitude.

In addition, a bank like Bear Stearns is in a delicate, thankless position here.
When you make any comment defending your liquidity, no matter how
well-intentioned, you run the risk of fanning the very concerns and rumors you
are trying to dispel.

Still, it strains credulity to think that a bank as large and sophisticated as
Bear Stearns detected no warning signs whatsoever that a liquidity problem might
be in the offing. And even if the market has gotten panicky, and thus endangered
companies which by all rights should be fine, this is something that’s been
building for months. Shouldn’t a reasonable company have taken steps by now to
reduce its exposure to these violent dips in the market?

In short, when companies contend they’re blameless for the way things unfolded,
and shouldn’t be held responsible for things they said that turned out not to be
true, they may not be entirely, uh, credible.

So in addition to “Animal House,” let’s haul out another pop-culture touchstone
for advice. As they used to say on “The X-Files”: Trust no one.

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