by John Olagues
This article is about how Bear Stearns stock was artificially collapsed so that illegal insider traders would make billions and J.P. Morgan would be paid $55 billion of US tax payer money to shore up themselves and buy Bear Stearns at bankruptcy prices.
Massive buying of puts and shorting stock in Bear Stearns
On March 10, 2008, the closing price of Bear Stearns was 70. The stock had traded at 70 eight weeks earlier. On or prior to March 10, 2008 requests were made to the
options exchanges to open new April series of puts with exercise prices of 20, and 22.5, and a new March series with an exercise price of 25.
Their requests were accommodated and new series were opened for trading March 11, 2008.
Since there was very little subsequent trading in the calls with exercise prices of 20, 22.5 or 25, it is certain that the requests were made with the intentions of buying substantial amounts of the puts.
There was, in fact, massive volumes of puts purchased in those series which opened on March 11, 2008. For example: between March 11-14 inclusive, there were 20,000 contracts traded in the April 20s, 3700 contracts traded in the April 22.5s, and 8000 contracts traded in the April 25s. In the March 25s, there were 79,000 contracts traded between March 11-14, 2008.
Question: Why did the options exchanges not open the far out of the money puts for trading the first time that Bear Stearns stock hit 70, when the April and March options had far more time to expiration? Certainly if the requesters were legitimate hedgers or speculators, their buying the March and April puts with 2 and 3 months to expiration was more reasonable.
Answer: The insiders were not ready to collapse the stock and did not request the exchanges to open the new series when Bear Stearns first hit 70...
Second Request and Accommodation
On or prior to March 13, 2008, an additional request was made of the options exchanges to open more March and April put series with very low exercise prices.
These new March put options would have just five days of trading to expiration. The exchanges accommodated their requests, knowing that the intentions of the requesters were to buy puts. They indeed bought massive amounts of puts. For example the March 20 puts traded nearly 50,000 contracts (i.e. contracts to sell 5 million shares at 20). The March 15s traded 9600, the March 10s traded 13,000 and the March 5s traded 6300 all on March 14 (the first day of trading of the new March series).
The introduction of those far-out-of-the-money put series in the April and March months immediately before the crash provided a vehicle whereby extreme leverage was available to the insiders. In other words if an insider had $100,000 and he knew that Morgan would buy Bear Stearns at 2, he could make 5-10 times more on the $100,000 by buying the newly introduced March puts. This is so because the soon to expire far out-of-the-money puts were far cheaper than the July or October out-of-the-money puts. And that is why the illegal inside traders requested the exchanges to introduce
the far out-of-the-moneys just days before the crash.
But this scenario has serious implications. This means that the deal was already arranged on March 10 or before. That contradicts the scenario that is promoted by SEC
Chairman Cox, Fed Boss Bernanke, Bear CEO Schwartz, Jamie Dimon of J.P. Morgan (who sits on the board of directors for the New York Federal Reserve Bank) and others that false rumors undermined the confidence in Bear Stearns making the company crash, notwithstanding their adequate liquidity days before.
I would say that the deal was arranged months before but the final terms and times were not determined until maybe March 7-8, 2008.
On March 14, 2008, the April 17.5s, the 15s, the 12.5s and the 10s traded 15,000 contracts combined. Each put gives the right to sell 100 shares. So for example,
these 15,000 April puts gave the purchaser(s) the right to sell 1.5 million shares at prices between 10 and 17.5. Those purchasers expected to make profits on 1.5 million shares because they knew the deal was coming at $2.00.
That is the only plausible explanation for anyone to buy puts with five days of life remaining with strike prices far below the market price.
So there were requests, during the period of March 10-13, to the exchanges to open the March and April series for buying massive amounts of extremely out-of-the-money puts, which were accommodated by the options exchanges. Did the Exchanges aid and abet the insider trading scheme?
We do not [feel] able to have a strong opinion on that idea.
Media statements of adequate liquidity.
However, Reuters, on March 10, 2008 was citing Bear Stearns sources that there was no liquidity crisis and that there was no truth to the speculation of liquidity problems.
And none other than the Chairman of the Securities and Exchange Commission on March 11, 2008 was stating that "we have a good deal of comfort with the capital cushion that these firms have".
We even had the "mad" Jim Cramer proclaiming on March 11, 2008 that all is well with Bear Stearns and that the viewers should hold on to their Bear Stearns.
And on March 12, 2008, Alan Schwartz CEO of Bear Stearns was telling David Faber of CNBC that there was no problem with liquidity and that "We don't see any pressure on our liquidity, let alone a liquidity crisis".
The fact that the requests were made on March 10 or earlier that those new series be opened and those requests were accommodated together with the subsequent massive open positions in those newly opened series is conclusive proof that there were some who knew about the collapse in advance, while Reuters, Cox, Schwartz and Cramer were telling the public that there was no liquidity problem.
This was no case of a sudden development on the 13 or 14th, where things changed dramatically making it such that they needed a bail-out immediately.
The collapse was anticipated and prepared for, even while the CEO of Bear Stearns and the SEC Chairman of the SEC were making claims of stability.
What was the reason that Cramer, Cox and Schwartz were all promoting Bear Stearns immediately before its collapse. That will be speculated upon for years to come.
Cramer has admitted that "truth" was not his friend and that he manipulated stocks to influence investors behavior. Was this one of his acts? But no apologies from Cramer as he claims now that he was referring to keeping money in Bear Stearns Bank not in Bear Stearn stock.
Proof of Insider Trading:
To prove the case of illegal insider trading, all the Feds have to do is ask a few questions of the persons who bought puts on Bear Stearns or shorted stock during the week before March 17, 2008 and before. All the records are easily available. If they bought puts or shorted stock, just ask them why. What information did they have access to which the CEO and the SEC did not have? Where did they get the info?
Why aren't Cramer and Cox, Dimon, Bernanke, Geithner, Paulson, Faber and Schwartz subject to a bit of prosecutorial pressure to get to the bottom of this. Maybe the buyers of puts and short sellers of stock just didn't believe Reuters, Cox, Schwartz, Cramer and Faber and went massively short anyway, buying puts that required a 70% drop in a week. Maybe they had better information than Schwartz or Cox. If they did, then that's a felony, with the profits made subject to forfeiture.
April 4, 2008 Congressional Hearings on the Bear Stearns Bail-out.
I watched both sessions and drew the following conclusions:
In the first session there were the following witnesses: Bernanke of the Federal Reserve Board, Cox from the SEC, Geithner representing the New York Reserve Bank and an incidental player Mr. Steel from the Treasury.
The only Senators that seem to be willing to attack these bankers were Bunning, Tester, Menedez and Reed. All the rest were useless and very respectful.
Absurdities
All witnesses did their best to keep their stories consistent but they did slip up a bit. They all agree that the bail-out was necessary without any proof that it was.
They all agreed that what caused the cash liquidity to dry up within one day was the rumor mongers. Apparently it is claimed that some people have the ability to start false rumors about Bear Stearns's and other banks liquidity, which then starts a "run on the bank". These rumor mongers allegedly were able to influence companies like Goldman Sachs to terminate doing business with Bear Stearns, notwithstanding that Goldman et al.
believed that Bear Stearns balance sheet was in good shape. (Goldman between March 11-14 warned their average customers that Bear Stearns stock was "hard to borrow" for shorting due to the fact that other customers had used up all of the stock available for borrowing for short sales).
That idea that rumors caused a "run on the bank" at Bear Stearns is 100% ridiculous. Perhaps that's the reason why every witness were so guarded and hesitant and looked so strained in answering questions.
Loans to J.P. Morgan total $55 billion from FED The Private New York FED lent $25 billion to Bear Stearns (described as the primary facility by James Dimon) and another $30 billion to J.P. Morgan (described as the secondary facility by James Dimon). So the bail-out cost was $55 billion not the $30 billion that is promoted. This was revealed at the second session of the Senate hearings in a James Dimon response to a question from Senator Reed.
Who gets the $55 billion? J.P. Morgan received the money on a loan pledging Bear Stearns assets valued at $55 billion. $29 billion is non-recourse to Morgan. Effectively the FED received collateral appraised by Bear Stearns at $55 billion for a loan to J.P. Morgan of $55 billion. That's a loan to value of 100%.
If the value of the secondary facility of $30 billion ($29 billion of which is non recourse) is worth only $15 billion when all is said and done, then J.P. Morgan
has to pay back only $1 billion of the $30 billion received and keeps the $14 billion the the Fed loses. If the $25 billion primary facility is worth only $15 billion when all is said and done, J.P. Morgan has to pay $10 billion of the $25 billion received. If J.P Morgan can not pay, then the Fed loses the $10 billion.
If after all is said and done, the $25 billion primary assets or the $30 billion secondary assets are sold for more that $25 billion or the $30 billion respectively, the difference goes to J.P. No matter how you cut it, J.P. Morgan wins.
If the $55 billion assets turn out to be worth only $20 billion when all is said and done, J.P. Morgan owes $1 billion on the $30 billion and the difference between $25 billion and the value received on the primary facility.
The best the FED can do is get their money back with interest and the worse they can do is lose about $25 -$40 billion. The FED would have been far better to just buy the
assets at Bear's and J.P.Morgan's valuation.
The question arises:
Why didn't the FED just make the $55 billiom loan to Bear Stearns directly? The FED received Bear Stearns assets valued by Bear Stearns as its only collateral for the 100% loan. I am sure that Bear Stearns would have guaranteed the full $55 billion and would have advanced more collateral and accepted a 90% loan to value. Everything would have been just fine for Bear Stearns and the FED would have had a better deal. But the Bear Stearns stock would have gone up and all short stock sellers and all put buyers would have massive losses instead of massive gains.
The bail-out is a great deal for J.P. Morgan, the illegal insider short sellers got a great deal. Bear Stearns stock holders and employees got a very bad deal and the sellers of puts sustained large losses.
This shows, in my view, that J.P. Morgan and the FED were in collusion with the short sellers and put buyers.
John Olagues
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User Comments
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Bill Brown
4-17-2008 at 3:20pm
"FED" up
Past time to get rid of the Federal Reserve, I think that company has stolen enough from the US citizens and so have our politicians. Sign me up for the revolution.
John Golowenski
4-17-2008 at 3:58pm
It was a play as described in the book "The Creature from Jekyll Island." JP Morgan along with several other large banker criminals hatched the scheme to defraud Americans of their money (and Constitutional Rights).
We need a Revolution as Bill says.
Daddio
4-17-2008 at 4:15pm
What are we waiting for
Seriously....why are these crooks being made to cough up the profits of these contracts? Yah, sign me up for the revolution also.
George Stafford
4-17-2008 at 4:23pm
Bear Stearns was raped, annihilated, thrown to the dogs, all in a tawdry, illegal scheme to benefit the chosen few criminals. It's not too late to open this Pandora's box and get full exposure. 48 hours after the Fed refused to inject funds claiming BSC was not a bank, they lent funds to Lehman and Morgan Stanley! This whole deal should be dissolved; put BSC either back on the map or find a sovereign wealth fund for capital infusion. Then prosecute the financial criminals, aided and abetted by Paulson. It's not too late
phil
4-17-2008 at 4:59pm
Real Reason
You tiptoe around it, but the real reason, was because the system was at risk of total meltdown. Not so much from Bear Stearns, although they may have been the fuse. The single largest player, holding most of the total derivative toxic waste, is JP Morgan. They were the one's at risk, if the derivative daisy chain started to unravel. That is why they got the sweetheart deal and used the transaction to provide tax payer funds to bail them out, under the guise of rescuing Bear Stearns!
Sam Mathid
4-17-2008 at 6:14pm
Interesting that the New York Attorney General Elliot Spitzer who had a history of investigating and prosecuting corporate malfeasance at the highest levels was sand-bagged (by the FBI!) and forced to resign on 12th March.
It would have been very uncomfortable having him around during such shenanigans. Questions might have been asked, make that WOULD have been asked. What sort of a country have we become?
deanfv
4-17-2008 at 8:35pm
Write your congressman
Get on the fucking phone and complain to your elected officials. Otherwise, you cannot bitch and you know in the end you will be the LOSER. GET ON THE PHONE NOW!!!
Fred S.
4-20-2008 at 7:21pm
One important part of this analysis that is missing is who worte those way out of the money BSC puts?
unless their put exposure was hedged (eg. by shorted BSC shares), they would have taken a huge loss.
doesn't add up to me and while I agree that there is widespread fraud being conducted on an unprecedented scale re: ratings, level III assets, naked shorting, etc., I do think the financial system is cratering and on the verge of complete & utter collapse. the day of reckoning is coming sooner than many think.
John Olagues
4-20-2008 at 9:52pm
In responce to Fred
The sellers (writers) were generally traders who thought that the probability was near zero of the stock dropping that much that fast. The sales of some out of the moneys could have been hedged somewhat.
But given that the stock was hard to borrow, firms were not allowing short sales of the stock on the 12-14 of March .
You are correct that the sellers lost large amounts.
John
13thgeneration
4-23-2008 at 10:18am
protest 4/25
In case anyone can attend, there will be a protest outside Bear Stearns HQ this Friday. If not, please consider supporting through a donation towards travel expenses for some far-away atendees.
http://market-ticker.denninger.net/2008/04/protest-coming-up-in-nyc-april-25th.html
Frederick
4-23-2008 at 10:50am
Our markets are now far too manipulated, and as such, I have taken all my money out of the stock market. This is not a market timing attempt. I don't care if it goes higher without me. Go ahead and PPT it 'til the cows come home...I don't care. I'm still not buying stocks. I'll clip coupons on treasuries while our unelected officials play chemistry set with all their new toys.
Jonezing
4-23-2008 at 12:36pm
You're missing one key element
You say that the market makers opened way OTM strikes on BSC puts. Fair enough. But do you think that the Options Market Makers were going to just take the other side of those trades without offsetting their own risk?
No. Because they are Options Market Makers (OMMs) they have an exemption and are able to short stock without finding a borrow (not that the SEC seems to care if anyone does). Point is that the OMMs could short stock as their exposure to the puts increased, thus, as the puts (which they sold) increased in value, the OMMs simply shorted stock -- stock that may not have even existed (called phantom shares or FTDs or what have you) -- through their OMM exemption.
The cycle was self-fulfilling. As the stock fell and put those puts into the money, the OMMs had no choice but to use their exemptions to force new shares on the market using their exemptions. Then they fixed the sale price at $2 a share, and everyone got to cover in the money at a fixed (non-market) price.
One of the greatest financial scams ever - if anyone every cares to write about it.
Maria Marsala
4-23-2008 at 5:06pm
just wonder...
I wonder if whole thing occured and is part of the Fed and Banks to get rid of brokerage firms in general? Or at least primary gov't bond brokerage firms?
GK
4-24-2008 at 9:52am
U forgot Blackstone-Blackrock's involvement
The Blackstone Group, a major private equity firm tied to foreign policy influence lobbying groups such as Kissinger Associates, Scowcroft Advisors, and the Madeline Albright Group, had an affiliated spinoff company, BlackRock, a Caymans Island foreign bank associate, evaluate the “fairness” to shareholders of the JP Morgan Acquisition of Bear Stearns. ...The lead negotiator of the deal, the President of the NY Fed, Geithner, is a former employee of Kissinger Associates, a Saudi-China lobbying firm, and was appointed to the Fed by Peter Peterson of Blackstone. He also worked for Secretary Rubin at the Clinton Treasury Department. Secretary Rubin is now an executive with Citibank a major beneficiary of the bailout.
Peter
4-24-2008 at 11:35pm
So who SOLD all the puts?
Those greedily attracted to the premium caused by skyrocketing demand?
Copyright 2002-2008 Truth in Options
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