To sum up: 30 different funds who did speculative CDS trades on subprime names with Bear are suing the bank for allegedly manipulating the market by flexing its renowned fixed income muscle and buying up some subprime bonds and servicing a few mortgages which would tighten up the CDS and cause the aformentioned hedge funds to incur losses serious enough that it could start that downward spiral of investors withdrawals.
Unfortunately for the hedgies, the fact is that Bear can make its own bets regardless of what its prime brokerage clients do. In fact, as counterparty by default (no pun intended) to the CDS trade it is entirely rational that Bear would scale its risk as needed. It's job as PB is to ensure that all trades are booked and executed correctly, nothing more. To those in the business who still haven't realized it yet - the prime broker is not your friend. It's not even a very good butler. More like the butler from Clue (sometimes helpful, most of the time full of shit), but that's just how the game works.
In any case, there's little that the hedgies could do against the dirty Bear even if they were correct. Neither the SEC, nor any other regulatory body has direct jurisdiction over CDS contracts.
Unfortunately for the hedgies, the fact is that Bear can make its own bets regardless of what its prime brokerage clients do. In fact, as counterparty by default (no pun intended) to the CDS trade it is entirely rational that Bear would scale its risk as needed. It's job as PB is to ensure that all trades are booked and executed correctly, nothing more. To those in the business who still haven't realized it yet - the prime broker is not your friend. It's not even a very good butler. More like the butler from Clue (sometimes helpful, most of the time full of shit), but that's just how the game works.
In any case, there's little that the hedgies could do against the dirty Bear even if they were correct. Neither the SEC, nor any other regulatory body has direct jurisdiction over CDS contracts.
Hedge-fund managers accuse Wall Street's Bear Stearns Cos. of attempting to manipulate the market for securities backed by subprime loans by purchasing shaky mortgages. Bear's main antagonist in the squabble, hedge-fund executive John Paulson of Paulson & Co., used to work for the investment bank. "All we're after is very simply to maintain the market's integrity," says Kyle Bass, a former Bear employee who is now managing partner of Hayman Capital, which oversees about $3 billion in the subprime market. Bear is one of Wall Street's largest players in the market for credit default swaps, or CDS, instruments that act as insurance policies on various kinds of bonds. Many hedge funds have bought these swaps, effectively making a bet on an acute downturn in subprime home loans. Bear is widely believed to have taken the opposite position, selling swaps and making a bet that conditions will improve or won't deteriorate as much as some people think. Bear's mortgage desk had sent Paulson a copy of new language it was proposing to the International Swaps and Derivatives Association. The proposed rules would codify its right to prop up a faltering pool of home loans in a mortgage security, even if it knew its clients bet those loans wouldn't perform. "We were shocked," says Paulson vice president Michael Waldorf, that a firm "like Bear would introduce language that would try to give cover to market manipulation." |
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