Ralph Cioffi still seems to be getting along with Bear Stearns, according to forms the bank filed in connection with his termination. The former money manager was forced out of the bank after the two hedge funds he managed crashed and burned after making a series of wrong-way bets on subprime linked assets. Bear Stearns is now under investigation by federal prosecutors and investors in the hedge fund are suing, but in the termination form filed with security industry regulators Bear Stearns had nothing negative to say about Cioffi.

The NASD requires member firms to fill out a termination form, called Form U-5, whenever a registered employee is let go, explaining the reason for the termination. Wall Street firms have been known to use Form U-5s to smear departing employees who leave on acrimonious terms. Partial immunity to lawsuits for the contents of the Form U-5 encourages nastiness. But Bear's filing on Cioffi is very polite, which is raising some eyebrows.

"Bear Stearns clearly wanted an amicable departure," Jake Zamansky writes. "Often when firms are under investigation they look to scapegoat others. In this instance, Bear Stearns has a strong interest in keeping Cioffi 'on-the-reservation' given the firm's exposure to allegations of fraud in criminal and civil proceedings. The firm stands to benefit so long as their interest and Cioffi's are aligned. Therefore Bear Stearns doesn't have any incentive to include 'negative' disclosures which could shed light into how the hedge funds collapsed."

Bear Stearns & Ralph Cioffi: Breaking Up is Hard to Do [Jake Zamansky]

Bear Stearns has more than $1 billion of short positions on subprime, up $400 million from the end of November, Bloomberg reports. Of course, since Bear Stearns got the subprime trade so wildly wrong last year, people are already wondering if this might be a signal that it is time to go long subrime.

Over at The Big Picture, Barry Ritzholz writes, “While I do not expect us to be done with the subprime slime yet, I do get a ‘Is this a bottom indicator?’ sense from Bear on this.”

JPMorgan Chase, which emerged relatively unscathed from the credit market debacle, is apparently taking the opposite position. Yesterday Jamie Dimon was reported to have said that the bank plans to expand its role in the subprime mortgage business. Goldman is also rumored to have reversed it’s position on subprime, taking a net long position.

Bear Stearns Is `Short' Subprime Mortgages $1 Billion [Bloomberg]

The Justice Department has questioned former Bear Stearns asset management chief Rich Marin in its inquiry into the failed hedge funds at Bear Stearns, CNBC's Charlie Gasparino reported this afternoon. The Justice Department is seriously considering criminal indictments, possibly including an indictment of Bear Stearns itself. The Justice Department has been loathe to indict entire companies in recent years after its indictment of Arthur Anderson led to the collapse of the accounting firm.

Marin ran the division that managed the two hedge funds, and formally took control of the funds when they began to fail last summer. At the time, he described his actions in heroic terms.

“This pretty much sums up my last two weeks trying to defend Sparta against the Persians hordes of Wall Street,” Marin wrote on his personal blog. “Nothing like a good dog fight 24X7 for a few weeks to remind you why you chose the life you chose. The good news is that after two embattled weeks both I and my loyal staff are still standing to fight another day. If you want details....pick up any WSJ for the past week and we were in the top three stories every day. It's nice to know you can have an impact on the world....next time I'll try to make it a slightly more positive impact.”

The day after his blog was discovered by the media, Marin was replaced at Bear Stearns and the blog taken down. But he still has a profile on blogger. His profile describes Marin as a 54 year old Aquarius who likes the poker movie Rounders, is a fan of singer Meatloaf and lists Things Fall Apart and The Great Gatsby as his favorite books.

Credit Suisse is totally not going steady with Bear Stearns. Ruddy Brady Dougan—the Irishman who is somehow chief executive of the Swiss bank—told Credit Suisse bankers at the meeting of the Committee To Run The World in Davos, Switzerland that a deal to acquire Bear Stearns is a “non-starter,” according to Mark DeCambre at TheStreet.com.

But now everyone is awkward about it. Bear spokespeople decline to comment, look away embarrassed. The Swiss aren’t talking either, just staring down at their shoes mumbling about already having plans and such.

Credit Suisse CEO Squashes Bear Stearns Takeout Talk [TheStreet.Com]

So who is on this list of 14 companies under investigation by the FBI for their involvement in the subprime mortgage crisis? The FBI apparently intends to keep us in suspense because they won’t give details. All we know is that they are looking into “allegations of fraud at various stages of the mortgage process, from companies that bundled the loans into securities to the banks that ended up holding them.”

So let’s recklessly speculate. Two companies that are sure to be on the list are Bear Stearns—which is already under investigation by federal prosecutors and the SEC—and Countrywide, which is both the biggest home loan lender and also facing an SEC inquiry. Goldman Sachs is very likely on the list. It was accused on the pages of the Sunday New York Times of misleading clients by packaging CDOs while shorting the mortgage market. We know that at least one Senator read the article and has been making a stink, and we know that federal investigators often get their leads by reading the paper. What’s more, Goldman Sachs has said that it is cooperating with an unnamed government agency.

Morgan Stanley has also admitted to cooperating with unnamed government authorities. At first, everyone assumed this was the SEC. But why wouldn’t they come out and say that? More likely they declined to name the agency out of fear that saying they were cooperating with the FBI would tar them with serious criminality—rather than the everyday Wall Street shenanigans implied by an SEC investigation.

So that gives us four good leads. Who else is a cylon on the list? No doubt some additional mortgage companies and some home builders. Maybe the ratings agencies are also. Leave your guesses in the comments section below.

FBI Launches Subprime Probe [Wall Street Journal]

Now hear this Alan Schwartz. John Thain knows how to play this game, he studied at school of GSBS and he's got a Ph.D. Merrill Lynch is taking a $15 billion write down. You see that, that's called covering your ass. Analysts expected a $12 bn write down, but Thain said "No No" you have not lowered your expectations enough. So now he only has to live up to his newly self-lowered expectations Alan. Get that, UPOD. U "Under" "P" Promise "O" Over "D" Deliver. Do what Johny Thain does. Don't be a hero. Take the write downs now.

--Everett Stuckey, DealBreaker's advisor to newly minted CEOs.

Well its come to this. Another great Wall Street firm may go the way of the Dodo, selling itself to a hedge fund. According to the Financial Times, Bear met with both Fortress and Avenue Capital but talks fell through. All we can say is we hope they sell to Avenue. What better than to have Chelsea, and by extension Hillary, Clinton running things. If they sold to Fortress, well then what would that leave us, John Edwards? If either one of these accounts are true, it seems desperate. Let us make this suggestion instead, call up the head of Bear Stearns Merchant Banking (We hear they're a pretty good shop) and LBO yourself. That way you won't be dancing to HRC's tune.

--Everett Stuckey, DealBreaker correspondent.

Bear and Fortress held tie-up talks [Financial Times]

Lots of others in the business news media want to interview Alan Schwartz, the new head of Bear Stearns. We just want to tell him what to do. They can only report. We get to decide.

Look. Alan let us tell you a story. When Kruschev was forced out as Premier of the USSR, he sat down and wrote two letters to his successor. The outside of the first letter said "open this the first time you get into a situation that you can't get yourself out of.” Soon enough the new Premier got himself into a sticky situation. So, he opened the first letter from Kruschev and it said "Blame every thing on me.” So the new Premier did, and it worked like a charm and he was back up on his feet. Pretty soon though, he got himself into another mess and so he opened the second letter from Kruschev, it said "Sit down and write two letters".

So you see Alan, you're in that first golden period. Write down everything on your books that even possibly hints of nonperformance. Because right now, you can just blame everything on Jimmy Cayne. But if you don't take the write downs, and you miss your numbers later on... well then you'll need to sit down and write two letters.

Also, for Bear Stearns investors, you might want to take this advice into account. If the new boss has a clue about how to run things, we’re likely to see more write-downs and hedge fund collapses. Does anyone know if there are any more of these funds full-up with asset-backed securities hiding in the bathrooms at Bear? They don’t return our calls these days, so we’re not even bothering to call them.

--Everett Stuckey, DealBreaker correspondent.

So Alan Schwartz took some time away from his victory lap to sit down with David Faber yesterday afternoon. And being the crack business journalist that he is Faber got Schwartz to spill the beans on the turn around plan for Bear Stearns. It includes "execute", take advantage of "market opportunities" and "don't fuck up as much". Schwartz also claims Bear is over capitalized. And by over capitalized, I assume he means "not currently bankrupt."

Since Charlie Gasparino has been all over this story from day one—as long by "day one" you mean that day back in December when he broke the story that the board was looking for a successor to Jimmy Cayne—we wondered why he didn’t get tapped to interview Schwartz. Surely Gasparino has a more intimate knowledge of the situation and could therefore ask more salient questions. We assume Schwartz’s pride is still hurting from all of the Wall Street Journals references to Bear's "Small but respected" investment banking department—no man likes anything about him to be referred to as “small but respected”—and so he might have been a bit sensitive about who he would talk to at “America’s Business Network.”

So we decided to ask CNBC about how the Schwartz interview became a Faber Report. Did Bear Stearns request Faber? Did CNBC choose Faber? Of course, CNBC wouldn’t comment on internal editorial matters. Gasparino says he has no idea how the interview was set up. Bear Stearns told us they would call us back but never did. They totally hate us.

Also, Schwartz claims Bear plans no future write downs due to the current "credit crisis". Listen Alan, TAKE THE WRITE DOWNS. You only get one chance like this. Write everything down. Then if the mark downs were unnecessary mark the positions back up slowly each quarter to pad your freaking numbers, son. What have you been doing all month if it wasn’t learning how this game is played?

--Everett Stuckey, DealBreaker correspondent.

Is it too early to get nostalgic for Jimmy Cayne? He was a dream chief executive for those of us who worry that Wall Street may be getting a bit too buttoned-down, populated by cubicles full of gunners with Ivy League degrees who lack even the sense of confident entitlement that such pieces of paper once promised. Even while the credit markets crushed two funds bearing his firm's name, Cayne was providing fodder for headline writers to make puns about the funds going "up in smoke." Somehow we doubt Alan Schwartz is going to be anywhere near that much fun.

These reflections were prompted this morning by the news that a third Bear Stearns fund, known as the Bear Stearns Asset Backed Securities Fund, was going to be shuttered. As recently as August, BSABS held $900 million in assets. Now it is returning $90 million to investors, with promises to return a bit more once it finds a way to sell assets it thinks might be worth, well, something. Fingers crossed!

In retrospect, B.S. ABS may not have been the most auspicious initials for a hedge fund.

Bear Stearns Shuts Asset-Backed Hedge Fund After Loss [Bloomberg]

As long time readers of DealBreaker know, our site is blocked by Bear Stearns. Alone among Wall Street firms, Bear Stearns refuses to let its employees—at least those in the New York offices—read DealBreaker. It seems strange that any financial firm would want to cut its employees off from commentary and information—however irreverent and occasionally smutty—available to its competitors. But that’s what Bear Stearns has done.

We never got a satisfactory answer from Bear Stearns about why they had decided to jam the signal from DealBreaker’s bunker. Was it in retaliation for something we had written about the firm? Did we pay too much attention to the collapse of those hedge funds? Or was it the golfing and the dope smoking? Maybe Bess Levin was just too edgy for the famously delicate sensibilities of Bear’s bond traders.

We were told, at some point, that Bear had blocked us because our comments section was a breach of their internal confidentiality controls. They block every site that allows comments, Bear claimed. But this just isn’t true. You can comment on the Wall Street Journal’s DealJournal and on the New York Times’ DealBook. Neither the Times nor the Journal are blocked. So there must be something special about DealBreaker.

Whatever it is, Bear wasn’t willing to share. We tried raising this scandal to higher-ups at Bear but the management was, it seems, too “hands off” to get involved with what everyone kept telling us was an IT issue. So, with a new CEO taking office, we’re asking: Will Bear Stearns unblock DealBreaker? Or will they at least provide a credible answer about why they block us?

We won’t go through the litany of stories we’ve broken on this site or the market moving rumors we’ve been the first to make public. But we will say that we’re not exactly inspired by the competence of a firm that thinks it’s a good idea to make employees wait to hear the word on the street from someone who picks it up from DealBreaker a day or two later. Also, it hurts our feelings. We're here, risking our lives each and every day, for our readers. Blocking the site just seems rude. If the new CEO wants to make a splash, he might start by removing this weird dam in flow of information to Bear Stearns.

Come on, Alan. What are you afraid of?

Bear Stearns issued a press release this morning last night, basically telling everyone everything we already know. Jimmy Cayne is out as chief executive but remains chairman. Alan Schwartz gets CEO spot.

So what's the deal with Schwartz. News accounts depict him as well-liked and trusted, and he insists he is more than just an investment banker. He's supposedly spent the last month boning up on the various businesses of Bear Stearns. But his greatest strength may actually arise from his investment banking experience advising corporate leaders who are fending off bids from corporate raiders, unsolicited buyers and activist shareholders. If Bear Stearns thinks that it might come under fire from, say, Joe Lewis (who now owns 9% of the company) or become the target of an unwanted buyout offer, the selection of Schwartz makes perfect sense.

This might also explain why shares in Bear Stears continued to fall after the announcement, as any buyout premium in the 9.7 billion company has surely been snuffed out by the selection of Schwartz. If anything, the talk is now about what Schwartz might buy rather than who might buy Bear Stearns.

After the jump, read the entire press release.

Still NSFW. Still worth getting fired over (you can have Ron Blarney's job).

The people familiar with the matter have spoken once more, which can only mean one thing: another Wall Street chief is headed for the executioners block. The Wall Street Journal's Kate Kelly is reporting that Jimmy Cayne has started notifying to board Bear Stearns that he plans to give up the CEO desk while remaining chairman. Alan Schwartz is expected take over.

More tomorrow morning.

Bear CEO Expected to Step Down But Remain in Chairman Post [Wall Street Journal]

Money managers may start to move their business away from Bear Stearns, according to a low-profile manager of a large investment fund. He tells us that he is pulling away from doing business with Bear Stearns and that casual conversations with colleagues indicate that others may be making similar moves.

Bear Stearns has turned off some money managers with what sometimes appears to be a cavalier attitude towards lenders and other counter-parties. Today the Wall Street Journal reported that Barclay’s was suing Bear Stearns after two funds to which the British bank had lent money collapsed, leaving Barclays with holding the bag. Bear’s response—basically that Barclays should have known that it was risky to lend to the funds—has not endeared fund managers to Bear.

“They bragged about not having the firm’s money in the funds that had their name on it, and then told creditors to take a flying leap,” the fund manager said. “They’re a toxic counter-party. I don’t want them involved in any of my trades, in any way.”

Bear also owned a significant minority stake in ACA, the small bond insurer downgraded yesterday by Standard & Poor’s. Although Bear didn’t have a managerial role in ACA, it’s potential collapse does not sit well with some managers already wary of what the fund manager who spoke to DealBreaker called “the Bear curse.”

“To me, the report that their losses weren’t as bad as they might have been is just another stick in the eye to investors in their funds and counter-parties who lost money with these guys. I’m sure their shareholders are happy,” he said. “But let’s see how happy they are when Bear starts to lose business. People think reputational risk is hooey. Well, they’ll see.”

We didn’t contact Bear Stearns about this story because they still haven’t given us a reasonable explanation for why they blocked DealBreaker. So we’re counter-blocking them by not asking them to tell us they won’t comment on the story.

Update: More on the decline of Bear Stearn's prime brokerage business from the Financial Times. "Bear’s decline in prime brokerage began about three years ago and has been accelerated by its recent mortgage-related troubles, including the collapse of two hedge funds run by the bank’s asset management division," write Ben White and Deborah Brewster. "The troubles have raised questions about its financial stability."

Bear Stearns lost a bunch of money ($854 million, $6.90/share) in the fourth quarter, and is being sued by Barclays for allegedly starting a hedge fund in 2006 in order to offload the risky assets in another of its hedge funds that'd it lost interest in making profitable. Bear CEO James Cayne, bless his heart, is said to "not care less" about either piece of news, though a speech writer for Wall Street's Favorite junkie came up with this line, "We are obviously upset with our 2007 results," and attributed it to the guy. As an aside, I would just like to say that that I was not kidding about that thing I mentioned yesterday:

CNBC's Charlie Gasparino informs me that when he reported that Bear Stearns is holding talks to decide whether they're going to get behind Wall Street's favorite junkie or not, he was "hung over, not drunk." Meaning there's a chance JC really could get fired. I'm still choosing to say, "No, I don't believe it," but now, there's a quiver in my voice. Stay tuned.

Earlier: Please Say Charlie Gasparino Is Drunk And Making Shit Up, Please Say Charlie Gasparino Is Drunk And Making Shit Up

CNBC reports that Bear Stearns's board has been holding informal meetings in the 383 Madison Ave. 14th floor men's room to discuss replacing BSC CEO Jimmy Cayne. None of us here understand why something like this would happen! and therefore choose to believe it's not true. We're not going to add another thing to this smear campaign until Englewood Cliff's produces a body. We're just going to lay down on the floor of the DB HQs, get into the fetal position and light up. And maybe cry, though that doesn't have anything to do with this post, it has to do with Britney Spears's 16 year-old sister being pregnant. So in a sense, I guess you could say, yeah, it does have to do with this post.

Bear Stearns Looking for Cayne Successor [CNBC]

Each day without the name Bear Stearns in the headline must be a relief for Jimmy Cayne. And today Jimmy might need to blaze up a bit more than usual because Bear is back in the headlines.

The worst year ever for the once mighty trading house just got a bit worse. Business Week has uncovered a probe by the Securities & Exchange Commission and the US Attorney’s office in Brooklyn into allegations that Bear Stearns insiders pulled their own money out of Bear Stearns funds while the funds managers were urging investors to hold fast and weather the storm.

And as if that weren’t enough, the collapse of the High Grade Structured Credit Strategies and High Grade Structured Credit Strategies Enhanced Leverage funds are still sending shockwaves through Bear Stearns.
“In recent weeks, BSAM has begun notifying investors in the Bear Stearns Multi-Strategy Fund that it plans to liquidate that $100 million investment vehicle. The fund, which only invested in Bear-managed hedge funds, put several million dollars in the Cioffi-led funds,” Business Week reports.

Probe of Insider Trading at Bear Stearns [Business Week]

Before we send this off into the universe, I would just like to note a few things. First, what we're about to show you is horrifically immature, and if it's meant to be a joke, will probably only succeed in getting our 12 year-old boy readers to laugh, and probably only half of them at that. Second, we've received it from no fewer than twenty people meaning maybe, fingers crossed, I'm not sure in which direction, that it's real. Third, that it's NSFW, unless you work in an environment that's unusually accepting of you watching videos featuring scantily clad old white men. And last, that I believe it to be an impostor who's a good 20 pounds heavier than the real thing. But since I've never seen the big guy without his shirt on, I leave it to you: is this Jimmy Cayne?

It’s no secret that Jimmy Cayne’s fear of the media has increased three-fold since the Journal’s hit on his drug problem came out, and he began dramatically increasing the amount of PCP he was lacing his pot with supposedly as a coping mechanism but really just for fun. It’s also no secret that Jimmy Cayne isn’t terribly concerned about the credit crisis situation, and its various effects on humans and shellfish, which, most significantly for people, is the death of courtesanship, and for crabs who in better times would’ve been eaten by Stephen Schwarzman, longer life spans. Not concerned that is, until things start to hit a little too close to home.

We’re referring, of course, to the increasingly weak dollar’s impingement on Cayne’s ability to get high. Speaking to the Post on the promise of anonymity, Cayne told Page Six that “Most of the high-end marijuana sold here comes from Canada. With the Canadian dollar becoming more valuable against the US dollar, the dealers have had to raise prices about 25 percent, [and in some cases, by a whopping 50, making me RUE the day I enrolled my guy in night econ classes at Baruch College.]” What’s more, he got screwed royally last week while buying some chips during the intermission of a Pink Floyd laser light show in London due to the pound’s assault on the dollar, and because he didn’t realize that an order of chips to the Brits is a basket of fries. A source—named Carney, who was hiding in the brush the whole time—tells Dealbreaker that Cayne was so angry he barked, “This is why I never go to the theater” and tried to storm out in a huff but couldn’t find the exit. The bottom line is that something has to be done stat, or Jimmy’s going to follow-through on his threats to “do something drastic,” like kidnap Ben Bernanke and tickle-torture him ‘til he makes things right, or, more probably, develop an addiction to Oxycontin.

Stoners Suffer [NYP]

Ralph Cioffi, the portfolio manager of the two Bear Stearns Asset Management hedge funds that collapsed in June, has been quietly attempting to put together another fixed-income hedge fund, Roddy Boyd of The New York Post reported this morning.

His biggest obstacle?

If you said, "Investors pissed off that he lost all their money" you clearly haven't been paying attention. These days hedge fund failure might not quite mean never having to say you are sorry but it certainly doesn't mean you'll never eat lunch at San Pietro again.

Apparently Cioffi's biggest problem is that has been working as a consultant at Bear Stearns and they don't want to let him go. According to Boyd, they are using his millions of restricted stock to try to persuade him to stay on.

Welcome to Wall Street, 2007. You can take losses any time you like, but you can never leave.

Crushing Bear Hug For Hedge Fund Honcho [New York Post]

In an effort to "best position Bear Stearns for 2008 and beyond," which is the year it plans to "really start making this thing work," the securities firm will be laying off 650 employees. Ex-Bears will be given (probably uncompetitive) severance, benefits (that don't include dental) and outplacement services (with the majority of firees expected to land on their feet working as editors on the Think Equity blog).* In a remarkable show of compassion, James Cayne is said to have sent out a desperate e-mail to the members of the board early this morning, urging them to reconsider the drastic measure, on account of the fact that the staff reduction would translate to much fewer people for him to go in on 1/8ths with, and in Jimbo's words, "I don't have that kind of money right now." After being reminded that the layoffs had been an idea he had come up with on his own, after returning from a super frustrating smoking session in which he got a measly two hits before the spliff ran out because there were "like 30 people there" and "some first year fuck kept Bogarting the shit," Cayne, who had to read the reply six times before being able to process the information, responded, "Oh yeah. Ok, fuck it, get rid of them."

Bear Stearns Cuts 4 Percent of Staff [AP]

*actually, we don't know if any of these specs are true, we're just assuming. Got any info? Feel free to share.

Some guy whose money Bear Stearns lost sued the securities firm this week. Samuel Cohen (of the Baltimore Cohens) is accusing BS and its top execs of "recklessly" buying up billions in subprime loans and trying to hide its "tremendously risky subprime mortgage portfolio" from those who might have a vested interest in it by not so much lying but maybe "overstating" how it was doing. (Lying.) This all seems very three months ago to us, but we get that Cohen might feel differently.

In addition to seeking damages, Sam has said that he wants to see Bear Stearns implement better corporate governance practices, which could include, he suggests, splitting the chairman and CEO roles. We like this because what's a little lost money to Bear Stearns? Not such a big deal, it happens all the time. They pay this guy (really his company because it's a derivative lawsuit but that's not the point) and move on, relatively embarassment-free. The part about (*basically*) asking for James Cayne to be fired, or have his responsibilities significantly lightened adds a little bit of public shame we really appreciate.

Granted, Cayne would probably secretly love this, and is perhaps even in Cahoots with Cohen ("I don't think we should add that to the suit, can't I just ask for money?" "No, just do it!") but whatever. In other news, Fortune may soon be blocked at Bear because of the latest cover featuring Cayne and a bunch of CEOs who lost a ton of money, asking "What were they smoking?" (The special insert with commentary by L.Craig was apparently the breaking point, according to a BS spokesman.)

Bear, AIG Sued Over Subprime Exposure [NYP]

We’ve been digging deeper into how DealBreaker got blocked on the computers at Bear Stearns. We’ve finally learned the truth and it’s totally shocking.

DealBreaker didn’t get blocked because Bear Stearns wanted to censor our content, according to Bear Stearns. It wasn’t Bess Levin’s harping on golf, sex, drugs and cards. It wasn’t Opening Bell’s hatred of red apples. It wasn’t even our controversial stand on proxy access. And, even more shockingly, it wasn’t the dirty minds and mouths of some of our loyal commenters.

Bear Stearns has apparently blocked DealBreaker because they are afraid of their own employees. The company tries to block any website that allows its employees to speak out of turn. Facebook and Microsoft’s Hotmail are also said to be blocked in compliance with this policy. Bear Stearns has its baby bears on lockdown, unable to reach out to the outside world via the interweb. So DealBreaker’s commenting feature is what go us blocked, apparently.

When we learned this from Bear Stearns we had the distinct feeling that it was intended to make us feel better. “It’s not you. It’s me,” they were saying. But they underestimate the depth of our paranoia. After all, if they aren’t targeting us, why is DealBreaker blocked while some other prominent business websites that permit comments, including the New York Times’ DealBook, are not? Somehow we’re not convinced Bear’s desire to control their own employees is the entire story here.

But we have good news for our beleaguered Bear Stearns readers. You can still read DealBreaker by subscribing to our RSS feed. You can also subscribe to our daily newsletter by using that nifty little button on the left side of your screen.

First, the securities firm announces it’s only going to writedown $1.2 billion in the fourth-quarter because of some bad luck in the mortgage market, beating Creditsights analyst David Hendler’s expectation of $3.2 billion. Strange, we thought, but okay, it’s not like they can’t come back tomorrow or next week and say, “JK, we actually meant $12 billion,” Merrill does it all the time. Then Chief Financial Officer Sam Molinaro says that the firm that loves subprime, that can’t get enough o’ subprime, that has, historically, had such a sick and twisted fetish for subprime that the pictures illustrating Bear’s perversion for subprime on Rich Marin’s blog were deemed NSFW (and ultimately contributed to http://whimofiron.blogspot.com being blocked by BSC), is now short subprime. Hedge fund balances are “coming back,” as are customers, and the second-worst performing stock is up. Health code inspections are being passed, due in no small part to the fact that not one piece of human waste can currently be found on the equity trading floor on 5th, where, apparently, you can barely detect the aroma of rotting fish anymore. JIMMY CAYNE IS AT THE OFFICE. Sure, he’s only there because he’s frantically trying to find the bag of White Widow he stashed “somewhere between the lobby and the 14th floor men’s room” before his flight to Tennessee departs at noon (two week of bridge camp, count it), but, still, he’s there!

Bear Stearns to Take $1.2 Billion Subprime Writedown [Bloomberg]
Bear Stearns Expects Write-Down Of $1.2 Billion in Fourth Quarter [WSJ]

We’ve now confirmed that Bear Stearns has blocked employees from reading DealBreaker. After several phone calls to Bear Stearns, we’ve been unable to learn who made this decision and why it was made.

We began with the assumption that the blocking was an oversight. It seemed unbelievable that Bear would want to cut its employees off from the information DealBreaker provides each day. We realize that a lot of our readers drop by for some of our racier and more pure entertainment content. But a good amount of our readers also come for some more serious content—news about the latest development on the super SIV fund we call The Entity, analysis of backdating and shareholder access proposals, legal developments affecting Wall Street, layoffs and bonuses. Just last week we were the first to print the now widespread impression that the surprising stock market movements appeared to be caused to a major hedge fund liquidating certain positions.

Could it be something more? Could Bear think its employees, investors and clients are better off with less knowledge about this stuff than more? That didn’t make sense. We figured it was some monkey in the IT department or perhaps even some third-party blocker software that didn’t like all our references to some of the racier elements of life on Wall Street. (Which is kind of unfair. Sure we write about smoking dope—but Bear Stearns Jimmy Cayne is widely believed to actually smoke dope. Is writing about it worse than doing it?)

But Bear’s refusal to provide a plausible explanation—indeed, even to respond to our requests for information—raises a darker possibility: Bear Stearns might be retaliating against DealBreaker for reporting on fixed-income losses and executive high-jinx. If that’s so, it would be highly ironic since most of our work in this field has been emphasis and aggregation—pointing toward buried ledes in the Wall Street Journal or aggregating diverse resources to draw a fuller picture of the company. Surely if DealBreaker gets banned for writing about Cayne’s golf and smoking, the Wall Street Journal should be banned too. But they’d never get away with that. Banning DealBreaker is easier.

It’s still possible we’ve been banned by accident and not out of fear. But we’re tired of wondering, tired of being ignored by Bear's PR department and, frankly, we miss our loyal readers at Bear Stearns. So we’re giving Bear a chance to explain itself publicly here. Who banned DealBreaker and why? Send us an email (tips@dealbreaker.com) or call us at 212-334-1871.

By now it’s been confirmed that Bear Stearns is enforcing martial law on its employees’ ability to access the subversive information found at Wall Street tabloid DealBreaker.com. At one point earlier in the year, a unit at Merrill Lynch had imposed the same fascist policy, but later reconsidered the wisdom of having its traders work with less information (about Jeffrey Epstein’s predilection for transsexuals) rather than more (which could be directly related to the firm’s recent money troubles). We’re told, by people who think they know, that despite what I promise will be our best efforts to publicly shame Bear into unblocking DB, the firm will never lift the ban. Fine, whatever, we’re still going to try (lot of time on our hands at the DB HQs). First, though, let’s get to the root of the issue:

From the text line:

Bear is blocking Dealbreaker but Above the Law is still open. I agree that all the bathroom talk must have been the last straw. Fortunately, I can still read Dealbreaker on my cell phone. Btw, I have a great story to tell you from back in August how someone at Bear nearly caused a catastrophe by manually pricing Bear’s stock at the end of the day as $1.15 instead of $115.

Another employee informs us that "those with RSS can still read."

A loyal reader this morning tells us that Bear Stearns--apparently attempting to cement its reputation as the most paranoid bank on Wall Street--has blocked our website. We're trying to get to the bottom of this now. Clearly we provide important and up-to-date news that Bear Stearns employees need to know in order to get their jobs done. So this must be some kind of mistake.

But if it is true, it makes us wonder exactly what Bear was afraid its employees would find out by reading DealBreaker.

If you are reading this from Bear, please leave a comment below.

As a bank of normal intellectual capacity, Goldman Sachs is sort of unfairly taking home the title of most profitable securities firm in the U.S., as result of having snuck into the Special Olympics of making money and smoking the competition. But whatevs, they did, and now they’ve set aside $16.9 billion to pay salaries, benefits and bonuses in the first nine months of 2007. Bloomberg points out that since Bear Stearns’s market cap is $14.7 billion, Goldman employees could buy Bear, and still have money left over for snacks. Yes, those catty Bloomberg bitches went there. But mudslinging aside, what would the Masters of the Universe do with the bank at 383 Madison, presuming they’re not too squeamish to enter a building so filthy that new employees are given information regarding how to treat everything from scabies to staph on their first days of work? Some ideas that have been floating around the GS bullpen include: (1) make Global Alpha Bear’s problem (at last a way to shuffle off that two-year embarrassment, and it’s not like BSC doesn’t have hedge fund expertise), (2) flood the building and create Wall Street’s largest corporate fish tank (added bonus: no need to pay severance to drown Bear employees), (3) make it one gigantic grow house (Cayne’s office already has a number of built-in heat lamps, so it wouldn’t be that difficult).

Goldman Pay Tops Bear Stearns's Slumping Market Value [Bloomberg]

...that the higher-ups at Bear Stearns are smarter (and the employees dumber) than we thought, and the James Cayne all-employee memo re: smoking weed was just an elaborate plan to get people to break IT rules so Bear could fire them without coughing up the money for severance? From the text line:

Bear Stearns fired several people last week for forwarding Jimmy Cayne's memo outside the firm. The email system normally blocks messages that say internal use only in the text. These 2 dozen or so idiots thought they could just erase those words and it would go through without getting caught. This lets Bear cut more people but this time without paying severance.

Earlier: P.S. Who's Got Fritos?

They may routinely lose on the not blowing up hedge funds/passing drug tests/having a good reputation in general fronts but last night, Bear Stearns finally got to taste victory, when its stock price surpassed those of all its competitors on the Street, including Goldman’s. I mess, but that’d be pretty rich, wouldn’t it? The real story is that at the first annual Extell Wall Street Boxing Charity Championship, a benefit that raised money for a variety of causes ranging from prostate cancer to child abuse, Bear Stearns’s Josh “The Matrix” Weintraub, knocked out Goldman’s Shane “Second Coming” Kinahan in the first round. It’s almost paralyzingly shocking to find out that Godman doesn’t employ the best athletes on the Street but what can you do? Here's a video of Kinahan pumping up to lose. Thanks for stopping by.

Boxing: Wall Street style [Fortune]

Yesterday, the Wall Street Journal wrote a profile on Bear Stearns CEO James Cayne, in which it was alleged that the 73-year old chieftain regularly took time off from work to golf with Maury Povich and play bridge this summer while BSC ran two hedge funds into the ground, and once smoked marijuana in the men’s room of a Doubletree in 2004. Today DealBook carries the memo that Cayne sent to his staff after the news broke. Problem is, someone thought it would be fun to mess with Andrew Ross Sorkin, and sent the ‘Bookies a fake. You can read it here. The actual memorandum is after the jump.

Your company’s in trouble and you need to relax. You’ve tried taking every other day of the week off from work to play in golf and bridge tournaments, but that’s not doing the trick because, as it turns out, you’re almost as bad at those things as you are at not losing money, and you routinely turn in unimpressive scores on the green and sometimes place close to dead last at the card table. Skipping out on conference calls two minutes after they’ve started isn’t helping you to unwind (which is surprising, because you were leaving for your three hour deep tissue massage/nap combo, and those usually do the trick), and neither is playing dead. What’s a CEO to do? If you’re Jimmy Cayne, the answer is simple—get high. Get really, really high.

Yes, according to today’s Journal, James Cayne is a pothead, and may even be stoned right now (you would be, too, if you’d recently been outed in a Page One article for being friends with Maury Povich). It’s apparently common practice for Cayne to light up at the end of the day during bridge tournaments, and the old boy once hotboxed a men’s room at a Doubletree hotel in Memphis with “a woman.” He denies the story, though telling, so very tellingly, Cayne told Journal reporter Kate Kelly that he would only respond “to a specific allegation” and not general questions regarding the fact that he loves weed. That the very next thing he did was fish an empty Fresca can out of the recycling bin and ask Kelly if she had “anything sharp enough to poke a hole” is also suspect.

What else did we learn about Cayne today that we didn’t already know? He fancies himself more important than the leader of the free world, refusing to meet with the President about economic issues unless Bushie comes to 383 Madison Avenue (a visit GWB has yet to make, probably because he’s scared the temptations surrounding him in the office of a drug addict will be too much for him to handle). He’s dying to use the term “Mick” (in July, Cayne told mortgage-division head Tom Marano to “keep [his] Irish down”). And perhaps most telling, this: Cayne can no longer enjoy the singular bliss that is lighting up and enjoying a bowl of Count Chocula, because a few years ago, he was diagnosed with a breakfast-cereal allergy, an affliction which he spoke at length about on July 12. And this would probably explain why he has a tendency to act like an unmitigated prick, a trait illustrated by the fact that Cayne regularly schedules time not to work, per se, but to tell employees the various ways in which their children suck (once informing investment chief Alexandra Lebethal that her 11 year-old son had a “rotten handshake” and will be going “nowhere in life” and sending an email to Alan Schwartz that said, “I bet your kids are going to grow up to be just like me”).

Bear CEO's Handling Of Crisis Raises Issues [WSJ]

Speaking of Jimmy Cayne, he’s just announced layoffs of about 300 people. That’s about 1.9% of the firm.
Dow Jones newswire quotes from a memo titled "workforce reduction" that bears (heh) Cayne’s imprimatur. According to DJ, the cuts will come "in various business units at all levels of the organization." Their will also be an attempt to throw more resources into areas where growth opportunities are greatest reduce them in areas that "can no longer justify their current level of infrastructure."

These three hundred come on top the 550 layoffs from its two mortgage-origination units, as well as the asset management executives who were let go following the collapse of two Bear hedge funds.

“Does this mean Matt Cooper will call for Cayne to be fired again today?” we were asked by the words appearing on our screen as we typed this.

Also, we can't help but wonder if the number of layoffs was in anyway related to this.

Bear Stearns Lays Off 300 Employees Firmwide [DJ Newswire at CNNMoney.com]

Earlier this afternoon we asked if some of the guys at Bear Stearns might be smiling in the darker parts of their souls at the troubles—losses, snakepits, messes, ousting, disorganized succession plans—Merrill Lynch has been going through lately. Or, more likely, some of the guys who used to be at Bear Stearns, like former head of trading, equities, fixed income, energy and asset management Warren Spector.

We thought that maybe the guys who saw first their hedge funds and then their jobs go down the drain after a Merrill led rush of creditors started grabbing their assets—which, for all anyone knows now, might have turned out of have been worthless anyway—might be experiencing some joy at watching credit market losses take down some of the folks who took them down.

This afternoon Portfolio’s politics guy asks the same question but for a totally different reason. “If Stan O'Neal is out at Merrill, doesn't that offer some comfort to the likes of Warren Spector,” writes Matthew Cooper. “Merrill is a case of the guy at the top taking the fall. At Bear, it seemed like the number 3, Warren Spector, took the hit instead of James Cayne. Where's the fairness in that?”

We’re not sure that why exactly anyone would comforted by this. But whatever. Maybe that’s why we’re not writing about politics. But we’re not convinced that Cooper is right when he says that the “guy at the top ought to take the fall when things go so wrong.”

It’s not the first time he’s said it. Back in August Cooper wrote: “It's hard to see why the firm's chief executive, James Cayne, would summarily execute Spector but not take the rap himself. The Buck Stops Here, not there.” But we weren’t convinced that time either.

Cooper’s model is clearly a political one—although we can’t remember when the last time a top guy resigned after being disgraced by the activities of his underlings either. Well, we’ve heard about Nixon but that was a long, long time ago! And Nixon is not usually held up as a model of American leadership. So let’s say Cooper’s is a model an idealistic one that is rarely realized in reality.

It’s hard not to suspect that Cooper is trying for some sort of hobgoblinistic, liberal consistency. Liberals think Bush should step down or get impeached because of the activities of, say, Alberto Gonzalez. So that means everyone should step down when their underlings allegedly lead things off the rails.

But should Cayne go? The market, the business media and the rank-and-file if Bear is hardly clamoring for his ouster. There have been losses at Bear Stearns—and investors in those two ridiculously named funds lost buckets and buckets of money—but not on the scale of Merrill Lynch’s. And, perhaps more importantly, Cayne has left investors and employees with a feeling that he understands what went wrong and is acting to contain the damage. O’Neal failed this damage-control test, in part because he had made enough enemies who went for the kill when they scented blood. And that failure, more than anything else, appears to be what doomed him

That may not be ‘fair’ in some cosmic sense. But Wall Street is hardly a place to be if you want cosmic justice.

James Cayne v. Stan O'Neal [Capital blog, Portfolio]

You think James Cayne and whoever he’s playing golf with today (maybe Ralph Cioffi, but who really knows) are having a good laugh over the fact that Merrill lost billions and Stan O’Neal is getting canned? A of all, because this is exactly the kind of thing that Cayne likes to laugh about (people losing their jobs, dogs being born with only three legs, feline leukemia) and B of all, because Merrill tried to get back at Bear this summer for telling Komansky to get lost during the LTCM bailout, by selling off its assets that were in the “enhanced” fund, hastening its ultimate collapse? Could be a stretch, but apparently the theory’s not too crazy for Rich Marin to blog about, which sources tell us he’s doing as we speak. And is it really that crazy to laugh, or at the very least send a few mean-spirited emails (which we’ll reprint later) out over the fact that the firm that tried to screw you for screwing it like a thousand years ago is now taking it up the tailpipe? The answer is no. Go on James Cayne. Today you have our blessing to yuk it up (but only because we’ll probably write something cruel though maybe entirely justified about you tomorrow. Starting with a possible involvement in SAC's ho'mone case, and a penchant for Kung Pao chicken, stories we're running with unless you call us before 5). Anyway, the rest of you, answer our question.

Haven’t heard much from the Bear Stearns Department of Failure lately, have we? Probably because everyone’s too busy piling on Merrill and Stan (including Bear Stearns, which may have something to do with some unresolved anger toward MER for sort of screwing BSC this summer by grabbing assets from the funds with the impractically long names, and accelerating their demise). Good to know things are apparently still chugging along, business as usual: we’ve heard from a few places (probably all Stan O’Neal, calling from different numbers to throw us off) that Bear Stearns laid off approximately 600 people today, across all lines. Did you hear that, too?

There’s a quick piece in today’s Wall Street Journal about how Bear Stearns got to be “Wall Street’s best known bond house.” It’s all the fault of Salomon Brothers apparently. A decade or so after the firm was founded, Salim Lewis came over from Salomon and transformed Bear Stearns from an stock trading shop into “an institutional bond player.”

A common—perhaps trite—observation about Bear is that it has a “contrarian streak.” The Journal doesn’t go into details about how Bear has preserved this contrarian streak through the decades but a recent conversation with a banker who had left Bear for a larger, more diversified financial institution shed some light. (At his request we’re leaving off the name of his new employer.)

“Bear was a very entrepreneurial place,” he told us over drinks on the terrace of a tavern overlooking the Hudson river. “If you had an idea—and people thought it was a good idea—you might find yourself very quickly in front of the biggest names at Bear Stearns. More than once I found myself in front of Jimmy Cayne. At [the new place], I’ve never even come close to speaking to the top guys.”

According to our source, Bear’s entrepreneurial culture is part of what has kept it contrarian. The entrepreneurialism of it’s employees creates a entrepreneurialism on the part of the firm as a whole, allowing it to move against the grain and avoid some of the herd mentality that afflicts many Wall Street institutions.

But might the very qualities that have marked Bear as a different kind of Wall Street firm be those that have put the firm in a precarious position as the credit crunch spreads. In classical tragedy the protagonist typically gets laid low by pushing his virtues to far. Some now think Bear may be suffering a similar fate.

“Cioffi may have had a bit too much entrepreneurialism,” the source said. And at a time when most banks claim 50 cents of every dollar from global markets, Bear Stearns may now regret not following that particular herd into international diversification.

Bear Stearns Is Big in Bonds But Didn't Start Out That Way [Wall Street Journal]

Though China Citic Bank Corp, the banking unit of China Citic Group, said as recently as Thursday that it hadn’t spoken with Bear Stearns about buying a stake in the awesomely declining Madison Avenue stock, nor did it plan to “in the next three months,” China’s Citic Securities Co., another unit of Citic Group*, agreed to pay $1 billion for about 6 percent of BSC (with the right to buy an additional 3.9% in the public market), and to also give Bear a 2% stake in the Beijing-based firm for $1 billion, with the option to buy an addition 5% of the company over the next five years. Sneaky! And also, pretty good news for both firms. For Citic (Securities), whose shares have more than tripled so far this year, the deal offers a larger presence in the global market, even if that entryway comes at the price of being associated with Bear Stearns. For Bear Stearns, whose shares are down 28% on the year, the deal means that there’s at least one company out there still willing to work with Bear Stearns. The odd couple is also said to be planning a venture that will combine their operations outside of China. The deal apparently came together in the last few months, though its roots can, completely unsurprisingly, be traced back to 1992, when Citic Group President Chang Zhenming first met Jimmy Cayne, while “playing cards.” (Both men, along with Citic Securities Chair Wang Dongming, are said to share each other’s philosophy of placing hobbies before actual work).

On a related note, Warren Buffett maintains that he "wouldn't touch Bear Stearns with an 80-ft pole," and that the only way you'd ever see something "so sickening" actually come to pass would be if it were the conclusion to a series of escalating dares. But he could very well be lying so...on your toes.

Bear Stearns, China's Citic to Invest in Each Other [Bloomberg]
Bear Stearns, Citic Reach Deal [WSJ]
Bear Stearns and Chinese Bank to Form Joint Venture [NYT]
Bear, Citic Strike Deal [CNN Money]
Bear Stearns and Citic enter a finger trap [Market Watch]
Citic Says It Doesn't Now Plan To Seek Stake in Bear Stearns [WSJ]
China Citic Bank: No Plan To Buy Bear Stearns Stake In 3 Months [CNN Money]
Buffett and Citic Deny Bear Stearns Talks [DealBook]

*Start at the beginning and take a shot every time I say “China” or “Citic.”

Would you rather have a CEO who’s become a joke only recently (let’s say June) or one who’s been a joke since day one? A CEO who’s going to kick it any day now or one who’s probably got a few good years left? A CEO who comes into the office or one who works from the green? A CEO with his own ballpark (in association with a certain 88-win team) or one with none? A CEO who’s built something or a CEO who’s danced? A CEO who holds a gun to his board’s collective head to encourage them to nod in agreement when he says stuff like “everything’s going as planned” on conference calls or a CEO who walks out of conference calls two minutes after they’ve begun? A CEO who commissioned an employee to blog about his failures or a CEO who just yesterday stopped a suspicious looking secretary in the hallway and said “If you tell anyone about this, I’ll fucking kill you”? A CEO with white hair or a CEO with black hair with streaks of white? A CEO who’s cut out meat from Bobby Van’s for both “health reasons” and out of respect for animals or a CEO kills a calf every morning “to start the day on a high note”? A CEO who’s fired one or two people so as to cover his own ass or a CEO who’s gotten rid of at least 1,000 (think mysteriously disappearing first-years who were asking too many questions about maintaining positive operating leverage)? In other words:

You knew this was coming. Apparently US prosecutors are investigating the two failed Bear Stearns hedge funds. The U.S. attorney in Brooklyn requested that Bear Stearns turn over information on the two failed funds hedge funds, whose failure cost investors $1.6 billion, said these people. This is just the beginning of course, no one has been subpoenaed. Yet.

While the Bear funds certainly made colossal mistakes, nothing we’ve heard so far has indicated criminality. Of course, creative prosecutors have found ways to criminalize business failure in the past, so don’t dismiss this investigation too quickly. There are people in jail right now who never could have known that what they were doing would be considerable a criminal offense by the courts.

Some will no doubt be happy that the guys who lost all that money may face criminal charges someday. But the less vengeful of us might want to think twice about enjoying the another instance of regulating finance through criminal prosecutions. How well has that been working out?

One thing is for certain: this will be red meat for shareholder plaintiff’s lawyers, who will seize upon the criminal investigation as a chance to file complaints about Bear Stearns. And, of course, hope to collect fees from an eventual settlement.

None of this is really surprising. But if we were slightly less hungover today, we might muster a bit more outrage over this.

Prosecutors Begin Probe of Bear Funds [Wall Street Journal]

This truly has to be the greatest story ever told. I submit that its magnificence is unparalleled. I’m not a very religious person but believe that the following information proves the existence of God. If ever you are lonely or poor or just plain sad, think about what I’m about to tell you and all will be good again.

In the last few months of Spector's tenure, the two men avoided each other in the executive dining hall, according to former and current associates. And as the storm over the hedge fund meltdown gathered force in July, Cayne was angry at Spector for spending almost two weeks at a bridge tournament in Nashville, Tennessee. Cayne, who is ranked 611th in the world by the World Bridge Federation, attended the same event for just a few days.

Got that? James Cayne took someone other than himself to task for not coming in to work. James Cayne, who took the entire summer off to cheat at golf, showed someone the door for allegedly shirking his responsibility to play games. JAMES CAYNE, who played and lost in the first round to the No. 15 seed at that same bridge tournament, stripped someone of his livelihood for taking too many personal days. JAMES CAYNE, who left the Bear Stearns conference call that was held to discuss the various way in which the company was fucking stuff up over the summer after two minutes because he was going to be late to his regularly scheduled (early) Friday afternoon golf game, forcing another Bear Stearns exec to tell an analyst who had posed a question at Cayne, “Um, Mr. Cayne has just stepped out. Let me see if I can answer that,” fired someone for doing things other than his job. It’s really all too magical for words. If you’re embarrassed about crying at the office, come over to the DB HQs where I say free of compunction I am getting misty right now.

Cayne apparently also didn’t like the fact that Spector is a Democrat, and censured him for making such information public, in a company-wide memo, and might have felt that he was making advances on the CEO parking space, and was probably jealous that Spector’s wife was in “9 1/2 Weeks,” but that stuff, in light of other revelations, means absolutely nothing.

Spector Ousted by Cayne Over Too Much Bridge, Money [Bear Stearns]

Bear Stearns shares shot up over 8% yesterday after reports surfaced that the Wall Street bank in serious talks with Warren E. Buffett about selling the Oracle of Omaha as much as 20 percent of the firm. But is Warren really riding to the Bear’s rescue? We're skeptical.

It’s hardly news that Bear Stearns has been out shopping a 20% stake to potential investors. There’s been talk of several US bidders and, of course, a Chinese take-out bank making bids. But does Warren make sense? That old guy made out decently with Salomon Brothers but he still hates on them. Yesterday Bess quoted him as saying he how much he found the “brash Salomon culture of big egos, big risks and even bigger salaries to be out of step with his down-to-earth demeanor.” Do you want to be the person who sells him the story that Bear is totally different? We’d rather tell him why Bess Levin was called DQ in high school than try to explain Bear’s internal culture to him.

More importantly, there's little about Bear Stearns to suggest that Buffett would look to put in that kind of money. Trading below book value? You're going to tell us anyone knows what Bear Stearns book value is? Even Bear Stearns admits its guessing about the value of some of the assets it owns. Reliable revenue stream? This company makes much of its money trading securities.

It's also hard to see what Buffett brings to Bear Stearns apart from money and a reputational boost. Bear Stears needs a large cash infusion and a partner that can help it build global exposure. How does Buffett add value to the business? We don't see it.

Probably the strongest point in favor of the rumor is that Buffett is unpredictable. And so that wascaly wabbit might have something this wacky up his sleeve. Just when you thought he was buying trains, he turns around and buys traders.

Yesterday, CNBC’s “simple country reporter” Charlie Gasparino sounded a skeptical note. Nothing we heard would cause us to think that the Old Man of Omaha is anywhere close to buying a huge chunk of Bear Stearns. We do a lot of rumor sorting here at DealBreaker, and we call bullshit on this rumor.

Warren Buffett’s petition for membership to the egalitarian brotherhood of People Who Are Fucking Nuts has been officially accepted. Last year, he decided that Berkshire Hathaway-owned Geico would not take part in the Caveman sitcom. Last week he reduced his company’s investment in genocide to an embarrassingly trivial 8.93 percent. Today comes the news that he’s in serious talks to buy a stake in Bear Stearns. Three times = a trend, this one being WB’s insanity.

The New York Times reports that Buffett first approached James Cayne about the purchase last month, when the bank’s stock was about to celebrate its one-year low of $100. Deals have faltered in the past because the bridge player (first, CEO second) has often insisted on premiums as high as 40 percent above share price from outside investors. This time, and no one can say for certain but it may have something to do with two failed hedge funds, a 61 percent decline in third quarter profits and the fact that BSC can no longer afford its much-needed cleaning staff, Cayne is reportedly holding out for a premium of only around 20 percent.

Bear’s shares jumped on the rumors of possible sale this afternoon, with the stock trading up over 8 percent. Punk Ziegel analyst Richard Bove upgraded BSC from “sell” to “market perform.” Spokesmen for both Bear and Buffett declined to comment, which generally means they’re up to something, though CNBC’s Charlie Gasparino said that he “doubts” the reports are true. (Gasparino also noted with what sounded like hurt feelings that “Jimmy Cayne has not returned my calls,” presumably because it’s a beautiful day for golf.)

In 1987 Buffett took a 12 percent stake in Salomon Brothers, a move he later regretted, finding the “brash Salomon culture of big egos, big risks and even bigger salaries to be out of step with his down-to-earth demeanor.” Hopefully he can be reminded of the bad taste SB left in his mouth, which not even a dozen Oreo Blizzards could purge, before it’s too late. Carney's got the keys to his house-- everyone meets there tonight at 8 for an intervention (power of attorney papers have already been drawn up). We lost him on the Sudan. Let’s not lose him on this.

Earlier: Why Doesn’t Warren Buffett Want To Fund Genocide Anymore?

Buffett Among Those Said to Consider Bear Stake [New York Times]

And it seems to be, roughly:

- Don’t monumentally fuck up--> get a nice bonus.

- Screw things up beyond all of our wildest hopes and dreams--> don’t get a nice bonus.

Reuters reports that Bear Stearns’s nine-month compensation fell 6 percent to $3.10 billion ($199,730/employee). Payout for all of last year was $4.34 billion. Anyone who can correctly identify the event that may have imparted losses on BSC’s trading, financing and hedge fund businesses is in for a treat.

On the other side of James Cayne’s golf game: Morgan Stanley, which set aside $13.4 billion for the first 9 months, up 25 percent and set to match or exceed last year’s $14.4 billion ($280,000/employee) and Lehman Brothers, which set aside $7.33 billion for the first 9, up 14 percent and about $255,000 per employee.

Goldman, because John Carney predicted it would, is also set to increase bonuses ($565,000 per employee), though this would be the case even if Lloyd Blankfein’s top secret hair restoration project went over budget. GS said it reserved $16.9 billion in the first nine months, up 21 percent from last year’s period and already exceeding the $16.5 billion set aside for all of 2006.

Goldman 3rd quarter shows bonuses poised to rise [Reuters]

Both Goldman Sachs and Bear Stearns beat analyst expectations today: the former, in its unfailing ability to emerge from a building on fire while everyone else burned to a crisp, the latter, in its unfailing ability to push the bounds of failure. BS posted its biggest decline in over a decade, with third-quarter net income dropping 61 percent to $171 million ($1.16/share), from $438 million ($3.02/share) last year (total net revenue fell 38% to 1.3 billion, from $2.1 billion quarter on quarter).

In a press release, Jimmy Cayne made mention of “difficult securitization markets” and “high volatility,” though chose not to name check the pair of pink elephants (Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd., Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd.) that gifted the firm with $200 million in losses.

Taking a cue from the CEO’s precipitously falling bridge scores, shares of BSC dropped 29% this year (though the stock was up 2.31% ($2.67) to $118.31 by noon today, after the company announced that it would be smooth sailing from here on out).

Matt Albrecht, an analyst at Standard & Poor's recommended a sell, but ever the glass half full kind of guy, spun a silk purse from a sow’s ear, noting: ``If there's a market turn, Bear Stearns has the most upside to go because its share price has dropped so much.” (Don’t even act like you’d pass up the chance to use such a fantastically old-timey proverb, given the opportunity.)

Bear Stearns Net Drops Most in Decade on Credit Rout [Bloomberg]
Press Release [Bear Stearns]

We’ve been asking around this morning about this Joe Lewis character. You know, the guy whose Cayman Islands hedge fund bought up a huge stake in Bear Stearns in August and September. We wanted something more than the ground breaking news we brought you this morning that he is not, in fact, the dead boxer who was sometimes called The Brown Bomber.

Fortunately, the boys at FT Alphaville provided a guide to Lewis for American readers. “Joe Lewis is perhaps the most successful British speculator of modern times,” FT Alphaville reports. “Born above a pub, the Roman Arms, in London’s East End, he left school at 15 to work in his father’s catering business. Early enterprises included tourist restaurants, foreign exchange bureau and also a tour operator running some of London’s first red open-topped buses.”

More on Lewis after the jump.

Bear Stearns seems to have found a friend in British investor Joseph Lewis, who lives in the Bahamas and runs Aquarian Investments. In a filing with the Securities and Exchange Commission, Lewis reported that companies he controls paid $890.4 million to acquire a 7 percent stake in Bear Stearns.

Joe Lewis is not, apparently, the same guy as the boxer known as Joe Louis who died in 1981. The sport that ignites the passions of this Lewis is golf. Although originally British, Lewis lives in the Bahamas and has houses all over the world, typically near a golf course.

Lewis went from running his families catering business to currency trading in the 1970s. He is usually included in lists of the top 20 wealthiest Brits.

[WSJ; click to enlarge]

383 Madison is the house that “[un]sexy” trading and handling money for clients and looking really good when things looked really bad for Wall Street’s real players built. So why isn’t Bear Stearns busy getting permission from the city of New York to add a deck off its master bedroom, remodeling the kitchen and preparing to make neighbors jealous with a forthcoming in-ground pool? According to some catty bitches over at Fortune, because Bear got jealous of the Street’s heavy hitters*—Goldman Sachs in particular—and strayed too far from its decidedly “back office” roots. Oh yes, they went there.

When it should’ve been sticking to its tried and true “mundane business of trading, especially complicated debt securities,” a model that made Bear successful in good times, and very successful in bad times, the self-described “Spartan” of Wall Street was getting into the riskier game of hedge funds. This was a bad idea for three reasons.

The first is that no one at Bear Stearns has the slightest idea what these highly exclusive, unregulated private investment pools actually are. (To be fair, though, few do.)

The second is that when BS decided to get into the more volatile pastime, a departure from the firm’s historically conservative nature, it didn’t just say “oh, we’ll try something a little more dicey but do it the Bear Stearns way,” it said “fuck being conservative, if we’re going to play Russian Roulette why not do it blindfolded while dropping acid?” This would explain why the fund pretty much ignored/missed danger signs in the subprime mortgage market, and put together a management team that gave the impression (based on reality) that it couldn’t care less. (To play devil’s advocate for a moment, writing reviews of “Evan Almighty” really is important than keeping a watchful eye on billions of dollars.)

The third is that when James Cayne’s delusions of grandeur got the better of him, and he decided to go to head to head with Lloyd Blankfein out of petty jealousy, he didn’t realize that the Nebbishy Master of The Universe didn’t get to where he is today by taking four hour lunch breaks to play bridge tournaments and entire weeks off to cheat at golf.

Two failed hedge funds, a fired heir apparent, and a precipitously falling stock price later, BSC has seen better days. But according to Bear, its foray into big boy land will not hurt the firm’s bottom line. To the contrary, Bear Stearns is in exactly the type of environment in which it thrives, on “nimble[ness] and creativity.” It will be profitable and bonuses will not suffer. Because it just slashed 240+ jobs.

How Bear Stearns lost its way [Fortune]

*Let’s make a pact to never use that phrase or phrases like it (“big hitter” is no better) again. Deal? Deal.

Although the recent job cuts in two Bear Stearns mortgage units have sliced through obscure places called Irvine and Scottsdale, rumors have started to circulate on Wall Street that the axe may soon fall closer to home. Some, including Jim Cramer, have predicted that there will be serious bloodletting in areas tied to credit markets and hedge funds.

“I think that many of these firms have as many as 30 percent more people than they need right now in these departments, and all of them will be cashiered by the end of the year. The lists are being drawn up; the HR people notified,” Cramer wrote recently in New York magazine.

Many on Wall Street scoff at the idea that they have anything to worry about but recent history of market downturns suggest otherwise. When the markets suffered in the years following the bursting of the tech bubble, investment banks and brokerages laid off as much as 25% of their work force. In just one day in the winter of 2003—it was February 7th, to be precise—Goldman Sachs announced that it would cut roughly 20% of its 220 options traders.

Last time around the cuts began with the brokers, since it was a downturn in the equities market that began the bloodletting. This time it may start with those parts of the investment banks directly tied to mortgages, leveraged buyouts and hedge funds and spread from there. As the mortgage market contracts, structured finance could also get hit, with both product and sales people losing jobs as the pool of underlying assets dries up. Derivatives traders may also find the axe swinging in their direction.

But enough of this vague speculation. It’s time for specific speculation. Where are the job cuts coming next? A recent item on DealBook doesn’t exactly name Lehman brothers as the most likely candidate. Except that it sort of does. “Bear Stearns is the nation’s 12th-largest home lender, according to Inside Mortgage Finance. The company, the fifth- biggest U.S. securities firm, ranks second after New York-based Lehman Brothers Holdings Inc. among U.S. sellers of mortgage bonds,” DealBook explains.

There’s also been talk of more cuts coming from Citigroup. Despite claims that they are still dancing in the LBO market, the music seems to have stopped. And a few seats are probably going to get pulled away, leaving some left standing. Like musical chairs but with your job.

Anyone care to irresponsibly speculate about who else might pick up the job cutting axe?

As Bear Cuts Jobs, Some Wonder Who’s Next [DealBook]
Bloody and Bloodier [New York Magazine]

Wounded Bear Stearns is bleeding pink slips. Bear is the second-largest underwriter of mortgage bonds, and has felt a disproportionate amount of pain from the recent turmoil in the credit markets. Yesterday we learned that Bear had cut 100 jobs in its Encore unit, which is based in Irvine, California. This morning brings news of an additional 140 cuts from a Scottsdale, Arizona based mortgage unit.

These jobs cuts come while headhunters have started to talk about broader cuts that may hit Wall Street, particularly in the structured debt and other credit groups. With less leverage buyouts, a smaller market for structured debt products and tighter controls on margin lending, many believe that Wall Street firms will start looking for ways to make jobs cuts in these areas.

Bear Stearns Cuts 240 Mortgage Jobs, Person Says [Bloomberg]

Did you get ripped off by Bear Stearns? A bunch of lawyers are here to help you (and, because why not, themselves). Maddox Hargett, Aidikoff, Uhl & Bakhtiari, David P. Meyer & Associates, and Boyd Page have banded together and set up a one-stop shop for anyone in the mood to throw some lawsuits and arbitration claims Bear’s way, for reasons ranging from “their failure to execute trades that would do the opposite of lose money left me with nothing” to “their failure to execute trades that would do the opposite of lose money they left me with *practically* nothing.” The group has even set up a website, www.bearstearnshedgefundlitigation.com, to attract potential clients, of which a ballpark estimate tells us there are many. (It’s also nice see they came up with a name just as painful to utter as the two funds in question. Care is in the details, people).

“Bear Stearns told its clients that the fund were back by fixed-income securities of which 90% of the portfolio were AAA to AA- rated by Standard & Poor’s,” said Mark Maddox told FINalternatives. “The collapse of the Bear Stearns funds over the last couple of months is stunning.” According to Maddox, the lawyerly quartet has already lined up “a couple of clients,” whose complaints will be filed within 30 days.

Legal Eagles Seek Clients For Bear Suits [FINalternatives]

Bear Stearns gave 100 employees their walking papers yesterday, according to CNN Money. The cuts hit Bear’s subprime unit, Encore Credit. Headhunters say that more cuts are on the way thanks to the recent “meltdown” in financial markets.

In many cases, the divisions which have been hit most by the recent downturn are the ones that have been aggressively growing their headcount. The prime brokerage business, which services hedge funds, for instance, has grown dramatically in recent years, Sarch noted.

Alan Johnson, managing director of Johnson Associates, a New York compensation consulting firm, expects layoffs in the mortgage and structured products divisions of the big banks before the end of the year.

Business was brisk at Wall Street firms until turmoil hit this summer. At the heart of the crisis are complex securities that have exploded on Wall Street in recent years. Trading and issuance of these debt instruments, which often are backed by home loans, has stalled amid a mortgage meltdown.

"This is not going to help structured credit traders or even vanilla credit traders, nor is it going to assist the career prospects for those in synthetic structures by any stretch of the imagination," said Shaun Springer, chief executive of Napier Scott, a headhunter in London, where several Wall Street firms have been growing their ranks.

This is all getting a bit depressing. We suppose, however, that it’s better to know what to expect than not. Send word of layoffs or even rumors of layoffs to tips@dealbreaker.com. We’ll keep you posted.

Wall Street: Jobs at risk [CNNMoney]

James Cayne would probably love it if he could place a hand on Lloyd Blankfein's incredibly soft, smooth cheek (or head) and say, "You and me, we're not so different," but, according to Bloomberg, that's never going to happen. Because Goldman Sachs and Bear Stearns *are* different, despite the fact that both investment banks have guided their internal hedge funds through a sea of major-dare we say embarrassing-losses over the last few weeks. For starters, stocks and bonds-in GS's corner, stock is trading at 2.2 times book value, and the risk premium on bonds is 35 percent lower than for Bear, whose shares are now radioactive and whose A+ rated debt is viewed, and this is just clinical terminology, as a pile of junk.

Another topical difference between the two concerns their approaches to failures. Now, you're probably saying yourself, "Bear Stearns has A LOT more experience managing things that are the opposite of successful. So it should stand to reason that they're better at it than Goldman, who, up until recently was perfect." And you'd be wrong. Because when Bear Stearns fails, it sees its failure as an opportunity-to fail yet again. First, BS attempted to stave off a collapse in June by locking up money and unloading securities in order to meet lenders' requests for more collateral. This strategy, not unlike the hedging strategies employed in the first place Bear Stearns's High-Grade Structured Credit Strategies and High-Grade Structured Credit Strategies Enhanced Leverage, failed. When Goldman lost several hundred truckloads of money, it turned to fellow money-changers Hank Greenberg and Eli Broad to take advantage of its "not a rescue." While it's certainly not winning any awards for excellence in hedge funditry, Goldman has managed to keep its funds afloat, while the Bear Stearns funds, for all intents and purposes, exist only on paper in bankruptcy court.

Let's keep going with the diffs: you've got geography-Bear's in midtown, Goldman's way down on Broad Street. And confidence--people have some in Lloyd Blankfein/Goldman (in lieu of "confidence," terms "respect for", "fear of", and the like work, too). The answer to the question, "Where can you find the bank's CEO at approximately 3 pm on a Tuesday?" (A. Blankfein-his office; Cayne-the golf course, except on the last Tuesday of every month, when it's "at a bridge table, not doing a very good job of earning the title 'championship bridge player'.") Laxity versus stringency regarding health codes. Company-mandated hairstyles. Etc.

Blankfein-Cayne Spread Widens to '01 High in Flight to Quality [Bloomberg]

We noted the other day that immediately after he fired Warren Spector, James Cayne shot a golf personal best, probably because stripping someone of his livelihood is a good way to tighten your wrist cock and improve the explosion through your hips. (I shot a 30 after firing Bressler). Today DealBook compares Bear Stearns’s closing stock price between June 14 and August 9 and Big Jim’s golf score. A 35 percent correlation between BSC’s price and Cayne’s score reveals that when Bear is down—which is most of the time—Cayne's game is down, too, by which we mean up, because that’s how golf is tallied, and if you don’t know that, you shouldn’t be reading this site.

Now, by personal best, we mean 88, which is not good at all, unless it’s amateur hour. The Bear Stearns press office, staffed—out of necessity—by con artists, came up with an excuse that would no doubt please shareholders worried that he was spending too much time away from the office: “[Mr. Cayne] regularly plans an evening round after work on Thursdays and again on Fridays,” and the reluctant CEO: “Why, you think he should spend more time on the green?”

The Bear Stearns Golf Index [DealBook]

We’re in the middle of an GLOBAL FINANCIAL MELTDOWN! (Carney's caps, emphasis, punctuation). Everyone’s panicking, running for their lives and spreading rumors. Many of the rumors aren't true but enough of them have turned out to be close enough for horseshoes, hand-grenades and volatility traders.

The latest one is that Bear Stearns CEO Jimmy Cayne has either been fired or resigned. While some have already called for Cayne's head after recent trouble of Bear Stears, and—if it one of those “we’re going to have to ask you to leave the bar, sir”-type situations—perhaps even a blessing in disguise for a guy who just wants to relax and play some golf in his last days on earth, we’re inclined to believe the old boy’s going to buried in the building. And, of course, that he remains as CEO.

Senior MD of Investor Relations, Elizabeth Ventura, told Dealbreaker, “These types of rumors are irresponsible and have no basis in fact.” And prior to being put through to Ms. Ventura, we were told by a Bear Stearns operator, “We haven’t heard anything on the switchboard.”

First he goes from being really bad at golf (for someone who leaves the office every day at noon to play, after coming in late) to just being bad at golf, and now we’ve learned that while there are many Bear shareholders voming over the side of the George Washington Bridge (we’re going out on a limb and assuming that most BS stockholders are from New Jersey), James Cayne isn’t one of them. Why? He doesn’t own that much of the company. Alan Greenberg, Sam Molinaro, Warren Spector, and James Cayne were among the few investors who took (a good amount of) their money and ran, just before the anvil of a stock crashed to $117.78 from $172 on high. Between the four Bear higher-ups (sorry: 3 Bear higher-ups and one guy who’s unemployed, coincidentally, the working title of my forthcoming sitcom on CBS), they cashed out in excess of $57 million in company stock before things got ugly. What the investors saved—nearly $16 million—in well-timed sales, they passed on to a bunch of sad sacks lacking luck, who one hopes didn’t also have their money in the “no value” or “little value” hedge funds.

Oh, and this guy wants him to be fired. So:

His golf business, that is. You didn’t think we meant Bear Stearns, did you? Come now. Deck chairs on the titanic (sandbags in New Orleans). The day after Cayne fired Warren Spector, co-president and heir to a kingdom only a sadomasochistic prince would want to inherit, Papa Bear shot one of his best games ever, at the Hollywood Golf Club. Granted, a score of 88 is only respectable if you’re a complete amateur, but it was a proud moment for the 73-year old championship cigar smoker, who in the week’s previous, was clocking in at around 102. And that was when he was (allegedly) cheating. Will Spector’s canning do anything to improve Cayne’s in-le-toilette bridge game? Stay tuned.

Cayne's Double Bogey [NYP]

People have been offering advice to James Cayne since he announced his intent to take off more days from work to play golf than any other CEO on Wall Street by '08. Now that he’s achieved his goal ahead of schedule, it’s time to reevaluate many of these recommendations. The following are four main mistaken pieces of advice:

Mr. Cayne should never, ever play golf again. His father, Mr. Cayne, who contributed to this story by the power of a Ouiji board, agrees with the treatment programs his son has tried and believes that he should never, ever play golf again. The elder Cayne swore off golf himself not long ago, after a posting one horrendous handicap after another leading to his being banned from the club. Although this advice is well-intended, it is implausible. What are the chances Mr. Cayne will abstain for the rest of his life? After his second stint in golf rehab, wearing a golfing monitor, he lasted about a week before playing golf all night.

The alternative view is that the 73-year-old Mr. Cayne will almost surely play golf again and he needs a fallback position to be safe. This might include having his "people" shut him off from playing golf too much, or setting a max for how many days he can take off work per week to hit the links. Failing this, someone -- if not Mr. Cayne himself -- needs to keep him from making decisions that directly affect investors and/or shareholders when he’s been on the green all day and has no idea what’s going on in the world of business. That way, he can at least survive to try to do better down the road.

Got any plans for lunch? If not, or if you can get out of them, might we suggest Bear Stearns’s “Bank Stock Opportunities in Turbulent Times,” part of the firm's “Summing up in the Summertime” Lunch Series? It’s being hosted by David Hidler (large-cap banks) and Sal DiMartino (mid-cap banks), and starts at 12:15 pm. Dial In: 1-800-683-1535 (domestic); +1-973-633-6740 (outside US); Passcode: 9036490. Slides will also be available on Bearstearns.com (User ID: "Conference"; Password: "Bear383"). We're giving you all these specs you're probably all dying to hear what these guys have to say, no? How could they *not* know what they're talking about? These people are at the top of their game.

…that shares of Bear Stearns dropped $3.37 (3.1%), to $104.98 in composite trading on the NYSE at 2:33 this afternoon, dipping as low as $100.08 earlier today, their lowest level since August 2005? Even after James Cayne got on the phone for five minutes on Friday to say (lie, etc) that the company is “solidly profitable” and just today “reassured debt and equity investors that there’s a depth of managerial talent” at the firm just hidden beneath a layer of incompetence that he is excising and, at the same time, using as a scapegoat to cover his own ass? Seriously, how? Doesn’t is just defy logic? It’s almost as though the market *senses* Bear has no idea what it’s doing.

Or does Thestreet.com just have an unusually—and unwarranted—sunny outlook on life and subprime? Or a little bit of both? As of yesterday, the Bears were still riding their red-hot 52-week low. Today, their shares fell as much as 7% following the Standard & Poor’s rating change from “stable” to “negative.” CEO James Cayne took the unusual step of coming into the office, where he signed off on a press release that took issue with the S&P’s move and claimed that the agency’s questions about Bear’s hedge fund problems were "unwarranted, as these were isolated incidences and are by no means an indication of broader issues at Bear Stearns."

After that little exercise in “you want to question our authority? Okay, well how about this—we’ll undermine your questioning of our authority by questioning your authority” shares of Bear bounced off their 52-week low of $106.55 to trade up to $113.83, prompting Thestreet to proclaim the Bears to be BACK BABY! Sign of the times—no longer falling precipitously = let’s get this party started.

Bear Stearns Bounces Back [thestreet.com]
Why Not to Short Bear Stearns Here [thestreet.com]

Merrill Lynch, apparently, in an effort to—get this—protect its clients. Papers recently filed in U.S. Bankruptcy Court in Manhattan reveal, among other things (like: Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund started taking a turn to negative town in early 2007, and by May began to suffer significant devaluation of its asset portfolio, resulting in a bunch o’ margin calls), that around June 20, Stan O’Neal’s Lynchettes threw their clients a bunch a bunch of life savers (butterscotch and wintergreen) and then sold off assets that were in the “enhanced” fund.

Lawyers representing liquidators in the case claim that “this resulted in further downward pressure on the relevant asset classes and a revaluation of the Enhanced Fund’s assets,” hastening the fund’s ultimate collapse. Translation: “Everyone knew these funds were just a train wreck waiting to happen, the question was, ‘when?’ If it weren’t for Merrill, it would’ve been, uh, later. Not ‘never,’ god no, but ‘later,’ as opposed to ‘earlier.’ We still would’ve failed, but, given adequate time to prepare, we probably could’ve come up with some more plausible lies about why.”

This just goes to show you that the nerve of some people can be truly astounding. It’s like, where does Merrill get off, trying to protect its own from drowning in a sinking ship. Who does Stanley O’Neal think he is, Jack Dawson? Stanley O’Neal could never be Jack Dawson (that homeless kid on Growing Pains maybe, Arnie Grape, definitely. Jim Carroll in The Basketball Diaries-- up for debate. How’s his layup? Don't answer that).

Bear Hedge Fund Sank as Merrill Protected Clients [Reuters via NYT]

This is probably of little import to James Cayne, who if he isn’t, should be focusing on how he can regain his title of “championship bridge player” after being upended by the No. 15 seed (he was No. 2) as his last tournament, but Bear Stearns was hit with a legal claim today that doesn’t put the bank in the best light. The arbitration was brought by—wait for it—someone who invested in the hedge funds that must not be named and lost money. The claim was filed with NASD by a 73-year old retired insurance salesman from Wisconsin, who gave Bear Stearns $500,000 and will probably get back something around zero. The investor states that BS misled him about its exposure to subprime mortgages. We try and stay away from 383 Madison because our tetanus shots aren’t in order but if we had stopped over there and pressed a water glass up to the door of Cayne’s office when he was given the news (presuming, of course, that he wasn’t out golfing), we imagine we would have heard something along the lines of “What’s taken them so long to figure us out? I practically used the phrase 'we’ve been lying to you for some time now' in the letter I sent investors a few weeks back.”

Bill Fitzpatrick, an analyst at Johnson Asset Management in Racine, Wisconsin went out on a limb and guessed that “there’s probably more [lawsuits] where that came from,” in his professional opinion. Claims for excess of $100 million in losses are expected to be filed. The likely flood of legal issues is expected to put added pressure on shares that are already at a 52-week low, and are no longer a candidate for WallStrip, which features stocks at a 52-week high. And that may be what stings the most.

Bear Stearns hedge fund investor files claim [Reuters]

Another day, another troubled Bear hedge fund. This time the fund in question has no subprime exposure, just $900 million in other, presumably happier mortgage-backed securities. Bear is not phased, and sticking to its failing fund playbook (right now they’re on step 2):

1. Freeze redemption requests
2. Deny that the fund will be shut down
3. Put your junk in that box, for lenders
4. Make the lenders open that box, only to realize they have a bunch of illiquid crap
5. Try to bail fund out
6. Shut fund down
7. Walk away, whistling "Sweet Georgia Brown"

Bear’s denial stage of fund grief, from the Wall Street Journal:

A spokesman for the firm disputes that, however. "There are no plans to shut down the fund," said Russell Sherman, a Bear spokesman. "We believe the fund portfolio is well positioned to wait out the market uncertainty. And we believe by suspending redemptions, we can ensure the best long-term results for our investors. We don't believe it's prudent or in the interest of our investors to sell assets in this current market environment."

Wall Street, Bear Stearns Hit Again By Investors Fleeing Mortgage Sector [Wall Street Journal]

Last, week, when Bear Stearns seized the assets of its own hedge funds, some people scoffed. It seemed a little unjust that while investors had been told there was a grand total of zero dollars (or zero-ish dollars, depending on whether or not they put their money in the gigantically failing fund or the essentially gigantically failing fund) available for them, B.S. managed to wring out some value for itself.

For those feeling bitter, today we offer some vindication: on the same day the bank was seeing just how long it could ride the Screw our Investors Express, CEO James Cayne—CHAMPIONSHIP BRIDGE PLAYER AND CIGAR SMOKER JAMES CAYNE, whose “ascent has been a result of a [bridge] player’s guile”—was getting his ass handed to him at the card table. Mr. Cayne, the No. 2 seed in the American Contract Bridge League’s Summer North American Bridge Championships in Nashville, Tennesse, lost to the No. 15 seed. The score was 119 imps to 93. Cayne was presumably not cheating at the time.

A First-Time Winner in Bridge Event [NYT]

There may be no money left for investors in the two troubled Bear Stearns hedge funds but last night Bear Stearns itself managed to squeeze some value out of one of the funds by seizing its assets. Last month, Bear Stearns assumed the debt of the less levered of its two structured debt hedge funds—said to be around $1.6 billion—after creditors started seizing assets of the more highly levered fund. Last night it announced it was seizing securities from the fund to control their sale as the fund unwinds.

Bloomberg makes it clear that while Bear Stearns may have made a show of “standing behind its hedge fund” (as one trader put it to us), it certainly isn’t planning on losing on money on those funds.

Bear Stearns told investors in the two hedge funds last week that they'll get little if any money after “unprecedented declines” in the value of securities used to bet on subprime mortgages, or loans to homebuyers with the weakest credit.

The firm has said it expects to lose no money from the debt it assumed from the High-Grade Structured Credit Strategies Fund.

``We don't anticipate any material change in financial exposure to Bear Stearns as a result of this action,'' Sherman said. He said the debt Bear Stearns took over from the fund last month is now valued at $1.3 billion.

Early reactions to the news that Bear was taking this action haven’t been entirely favorable. “This presumably protects Mama Bear from more pain, which for the most part has been limited to their reputation,” a writer at the 1440 Wall Street blog writes. “But this wound is self-inflicted, and the sellers are finally getting to brokerage stocks, and Bear's stock is the poorest performer by far over the past year. Ralph Cioffi will be out of a job soon, but walks with the bulk of his net worth intact. Scuttlebutt pegs him as having only 10% of his net worth in the game, he can comfortably live off the rest of his stash. Sounds familiar, no?”

To turn around an old Wall Street saying, “Where are the managers losses?”

Bear Stearns Seizes Assets From Failed Hedge Fund [Bloomberg]
Bear seizes collateral from Bear Fund [1440 Wall Street]

It would probably be more cost effective to just ask everyone not miffed with Bear Stearns to raise his/her hand but we can't fit that many people into an auditorium so we'll just continue to re-report it here. Barclays PLC is getting litigious over what may be a $400 million loss from investments in the little hedge fund that couldn't. BarNloungeclays played a few roles in the meltdown of the hedge fund doomed to fail the second it was christened with a 12-- TWELVE-- word (and one hyphen) name. The Nazi sympathizers lent the Bear Stearns Asset Management High-Grade Structured Credit Strategies Enhanced Leverage Fund $200 million, which was paid off, and offered an additional $250 million, which was never extended. At issue is 400 mill. invested in the fund separately from the loan. BarNloungeclays is considering a negotiated settlement or litigation.

Scott A. Meyers, who represents clients invested in the BS hedge funds, told the Journal, "I would be astounded if there weren't lawsuits, given the magnitude and speed of the collapse," and the tendency of human beings to get their panties in a bunch when they lose money. "The fundamental
issue will be what caused the collapse," Meyers said, "a general market event, something specific to the way these funds were managed"--like James Cayne golfing during business hours--"or some combination of the two."

Barclays may sue to recover losses at Bear Stearns [MarketWatch]
Barclays Spars Over Its Losses at Bear Stearns [WSJ]

Investors in Bear Stearns’s ‘We’ve basically got nothing’ and ‘We’ve got a nickel’ hedge funds (the High-Grade Structured Credit Strategies Enhanced Leverage Fund and the High-Grade Structured Credit Strategies Fund, respectively), taking issue with the lack of value, are exploring legal action. Ross Intelisano, of Rich & Intelisano, whose services have been retained by two investors in the funds said that his clients are “shocked and angered by the losses” and “were under the impression that at least for the fund [that they were invested in] that the losses were much milder," which was probably because up until Tuesday, Bear Stearns was pretending the funds still had value.

Bear Stearns declined to comment on the possible litigation, so here’s an imagined conversation from 383 Madison Avenue.

Richard Marin: Uh, Mr. Cayne, they’re threatening legal action.

James Cayne: Wah? My half-hearted, barely sincere, too little, too late apology wasn’t good enough?

Richard Marin: Apparently not.

James Cayne: Fuck it. Let’s go golfing.

Richard Marin: Okay, but no cheating this time.

James Cayne: You can trust me, Dick.

Angered Bear fund investors eye legal action [CNN Money]

Aside from the weather here in NYC (let's just say we're looking for the pack of screeching gargoyles encircling the office), the end is nigh for the two Bear Stearns’ Funds That Must Not Be Named (mostly because their names are so freaking long). Bear Stearns wrote a love letter to fund investors saying that there’s nothing left to lose, which would be inspirational if only it were halftime. The coup de grace, apparently, was the decline in the highest rated tranches of the ABX, which sunk to record lows on Monday. Here’s the key excerpt from the letter (link in the WSJ article):

Fund managers and account executives have been informing the Funds’ investors of the significant deterioration in performance for May and June [significantly after the deterioration has taken place]. The preliminary estimates [Dr. Spock: “There appears to be no life on this planet, sir”] show there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for investors in the High-Grade Fund [by “High-Grade” we mean D+] as of June 30, 2007. In light of these returns [always look on the bright side of liquidation, do do, do do do do do do], we will seek an orderly [think Bastille Day] wind-down of the Funds over time. This is a difficult development for investors in these Funds and is certainly uncharacteristic of BSAM’s overall strong record of performance [at BASM, we don’t make the highly leveraged hedge fund fail, we make the highly leveraged fund fail better].

The subtext of the letter is pretty much, “As many of you may know, we have been pretending that there’s still value left in these funds since we had to go public with our turmoil after the banks starting seizing our assets. We hope the market will be gentle to our share price, especially considering the fact that we gave institutional investors a little more time to bail out on at least the most highly rated CDOs before the things start getting marked to market and funds finally have to start booking losses. At least our marketing geniuses anticipated this and gave our two crappiest funds the most media unfriendly names possible.”

Some are still in denial (middle market institutions that are hanging on to some Bear shares, and those crazy Lutherans), from Bloomberg:

“For them to put up so much capital, just for reputational risk, wouldn't make sense unless they believe they won't lose money on it,'' said Erin Archer, an analyst at Minneapolis-based Thrivent Financial for Lutherans, which owns about 200,000 Bear Stearns shares.

Remember, at Bear Stearns, “Our highest priority is to continue to earn your trust and confidence each and every day, consistent with the Firm’s proud history of achievement. As always, please contact us if we can be of service. 1-800-HOWS-MY-HEDGE-FUND.”

Subprime Uncertainty Fans Out [Wall Street Journal]
Bear Stearns Tells Fund Investors `No Value Left' [Bloomberg]

Forget about the fact that Jimmy Cayne’s had some trouble re: Bear Stearns’s minor subprime hedge fund crisis. Don’t even think about the rise he got out of a few people when it was revealed that Cayne was hitting the links while Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund lit paper bags full of money on fire. None of that comes close to the JC awesomeness we’re about to throw your way: the Hollywood Country Club (Deal, NJ) is investigating allegations that the Bear CEO used some creative scoring techniques that allowed him to win the club’s July 4th tournament. Yes—James Cayne (possibly) cheats at golf.

CNBC’s Charlie Gasparino reports that a committee of three has been formed to look into the complaint. Harvey York, president of the club told Gasparino that “allegations of cheating occur all the time,” particularly among the senior-level executive members who are small and petty. Gasparino’s two cents are that Cayne is a “straight up guy” but “the long knives are coming out against him because of his troubles at Bear Stearns.”

Looking ahead: did foul play have a hand in James Cayne championship bridge career? The answer may surprise you.

Earlier: Golfing While Bear Stearns Burns?

Bear's Cayne Probed Over Golf Scores [CNBC]

There’s a singular recreational pleasure we’ve enjoyed for the last month or so and it should come as no shock to hear that it’s discussing the woes of Bear Stearns and two of its hedge funds. Specifically, the two that lost a few billion—shocking, considering that they were run by a movie critic. We’ve especially been able to kick the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage fund when it’s been down because first, anyone with a name like that deserves to be stuffed in a locker and secondly, because BSHGSCSEF’s personal struggles have never really hit home. Until now.

Today we put a name to the face of BSHGSCSEF and its losses and it is not pretty. Today we (via BusinessWeek) take the once mildly amusing at best if not extremely humorous pratfalls, face-plants, and phenomenal fuck-ups on the part of BSHGSCSEF and turn them into something we’re actually upset about. Us: the people who have no monetary stake in Golfer/Part-time Bear Stearns CEO Jimmy Cayne’s catastrophe. Us: the people who get off on stories involving CDOs. Us: the people who like it when the business world fails because we have a post quota. Right now, this second, we’re going to name a name that is going to make writing about everything BSHGSCSEF’s done and will inevitably continue to do wrong painful. Jeffrey Epstein.

Yes, massage enthusiast Jeffrey Epstein is one of the bigger investors in BSHGSCSEF, because, really, how could he not be. Matthew Goldstein reports that Epstein’s Financial Trust Company, his Virgin Islands-based money-management firm is listed in the SEC filing as a “beneficial owner” of the BSHGSCSEF.

A January filing with the Securities and Exchange Commission describes Epstein's firm as having "the power to vote or dispose of" 10% or more of the equity of the hedge fund, which raised $642 million from investors last summer. But the hedge fund's purchasing power was much bigger, given its ability to borrow billions of dollars from banks such as Barclays (BCS), Goldman Sachs (GS), Deutsche Bank (DB), Citigroup (C), and Bank of America (BAC).

Just how much Epstein lost/won’t get back will become clear in the next week or so, unless Bear gets sidetracked. It’s all fun and games until a bunch of 14 year-old girls have to take a wage cut, isn’t it?

Bear Stearns' Collateral Damage [BusinessWeek]

A few weeks ago we reported on the anti-golf sentiments of Carl Icahn and Hank Greenberg. For both men, golf seems to signal a kind of vice for executives. Someone who is really dedicated to their job shouldn’t have time for America’s most popular pasttime, both men said at the Wall Street Journal’s Deals and Dealmakers conference.

We wonder what they’d say in a candid moment about Bear Stearns chief executive Jimmy Cayne’s golfing. Yesterday New York Times reporter Patrick McGeehan revealed that at ciritical moments during Bear Stearns hedge fund crisis last month, Cayne again and again hit the links.

On June 14, the day when Bear Stearns reported a 10 percent drop in its operating earnings for the second quarter, Mr. Cayne played a round and shot a 96, his scores on the online database, GHIN.com, indicate. The next day, a Friday, he played again.

On Thursday, June 21, as several big banks pressured Bear Stearns to increase the collateral on loans they had made to its sinking fund, Mr. Cayne was back on the course. That day, he shot a 98.

The next day, in the biggest rescue of a hedge fund in almost a decade, Bear Stearns pledged to put up $3.2 billion to bail out its fund. (It later said that $1.6 billion would suffice.) Then the remarkably consistent Mr. Cayne played golf, shooting a 97.

No doubt the short item in the times will rankle some investors in the two troubled hedge funds, and perhaps Bear Stearns shareholders, who are inclined to read the story as demonstrating that Cayne is an out-of-touch executive. Brad Bissonnette at BloggingStocks has already sounded the expectedly annoyed note.

“Immersing yourself in a hobby, such as gardening or golf, can often be an excellent way to relieve stress and work-related anxiety,” Bissonnette writes. “But if you're a shareholder of Bear Stearns who has just witnessed the collapse of a hedge fund requiring that the company put up $1.6 billion to bail it out, you might prefer that the CEO would spend some extra time at the office.”

But the story also seems to be calling up the opposite reaction from some. For them it seems that the tale of Cayne golfing has had a humanizing effect, painting the executive as a normal person who ends the week the way many American men do. “Is it possible to help manage through a crisis and still get eighteen holes in after five p.m.? I don't think McGeehan wanted to know--it could have spoiled his clever story,” John Caddell writes on his blog. “I'm rooting for Cayne here. Maybe he's more than a big-shot prima donna who lands his helicopter on the practice range. Maybe he's figured out a way to get some balance in his life.”

Perhaps the most interesting response came from Tom Kirkendell of Houston’s Real Clear Thinkers who wonders if maybe everyone involved shouldn’t be grateful that Cayne was playing golf instead of managing the hedge fund situation from his desk at Bear. “Cayne's handicap index is 15.9, so his scores during that stressful time certainly ballooned a bit higher than normal. But think how bad this could have gotten for Bear Stearns if Cayne had not been able to get his golf therapy,” says Kirkendell.
Meltdown Didn’t Hurt His Golf Game [New York Times]

With BSC’s stock price in the toilet and losses from two hedge funds that may be steep, if anyone ever gets around to calculating what they are, Bear Stearns could be sold, Charlie Gasparino reports. According to big G, “all sorts of rumors are swirling” around the Street about a possible sale, bolstered by the buzz that the stock will fall another $10. Cigar smoking bridge player James Cayne told the New York Times last week that any plans to put the firm on the block are “old talk” and “repetitive” and that Bear Stearns is “well Bear Stearns is well placed to survive as an independent entity.”

Bear Stearns Could Become Takeover Target [CNBC]

BStearnsGuy5: Hey pal
InvestorB: Hi.
BStearnsGuy5: what’s up with jew?
BStearnsGuy5: buddy?
BStearnsGuy5: you their man?
InvestorB: yeah I’m here, what can I do for you?
BStearnsGuy5: oh just wanted to see what was up, etc…got any plans for the 4th?
BStearnsGuy5: I’m taking Thursday/Friday off...
BStearnsGuy5: choosing between taking mon/tues off or thur/fri off you gotta go with thur/fri paradigm
BStearnsGuy5: cuz then you can get bent on the 4th
BStearnsGuy5: you know what I mean
InvestorB: Right.
BStearnsGuy5: so anyway I also wanted to tell you that those numbers you wanted on how much money we lost you ar
InvestorB: yes?
BStearnsGuy5: ent going to be avails for a bit
InvestorB: how long’s “a bit”
BStearnsGuy5: oh idk could be July 16, could be later, not really sure
BStearnsGuy5: allo
BStearnsGuy5: …
BStearnsGuy5: yeah this thing just turned out to be a lot more time-consuming than we thought…something about a lot of the mortgage-related securities being thinly traded and the market being volatile…whatevs…idk
BStearnsGuy5: so yeah
BStearnsGuy5: net asset values as of May 31—july 16ish
BStearnsGuy5: http://mfrost.typepad.com/cute_overload/cats_n_racks/index.html
BStearnsGuy5: ps we also screwed some stuff up for treasury investors
BStearnsGuy5: oh well
BStearnsGuy5: im not beating myself up over it

Bear Stearns Investors Await Tally on Losses [WSJ]
Bear Stearns Dismembers U.S. Treasury Bear Market [Bloomberg]

[via The Big Picture]

CNBC reports that the SEC has asked Bear Stearns to turn over its documents about the investments made by its two hedge funds that nearly collapsed. Bear representatives, Masters o’ PR, have pointed out that inquiry is “informal” rather than full-fledged. But the only reason the investigation is being called “informal” is because Bear Stearns is cooperating, says the SEC. If they were to put up a fight regarding turning over the documents, a subpoena would be requested and the investigation would become “formal.”

Related: Jeff Lane, the guy Bear recruited from Lehman Brothers to replace Richard Marin as asset management chief, is “not known as a fixer of failed things.”

SEC Heightens Scrutiny Of Bear Stearns' Hedge Funds [CNBC]

Movie critic and head of the Bear Stearns the asset-management division that ran the two nearly-collapsed hedge funds, Richard Marin, has been replaced by Jeffrey Lane of Lehman Brothers Holdings. Though Marin will remain an "adviser" to Bear Stearns, he will now have considerably more time to blog.

Rich, Rich, Rich. What can we say? We warned you about comparing yourself to the Spartans. Sounds like you basically just met the Wall Street equivalent of the fate of King Leonidas.

Lane To Head Bear Stearns Asset Management [CNBC]
Bear Stearns Hires Lehman's Lane as Head of Fund Unit [Bloomberg]

What do you do when you’re trying to take the heat off your firm for the near-collapse of two hedge funds, and your last attempt to do so, leaking the fact that the guy in charge of the unit that ran the funds has a blog (hey, look, a blog!) backfired after a few people wondered aloud, “Why is this guy writing movie reviews?”? Let’s see, how about we get a guy to produce some pictures of John Mack dressed in drag? No? Okay, say someone could arrange for a hedge fund to lose $6 billion in two weeks? Is that something anybody would be interested in? No…okay…what about a profile of James Cayne that has all of the clichés about James Cayne that every article ever written about him includes, plus some new stuff about how he’s cutting back on red meat? Yes, this is the way to go.

Make sure the lede has the word ‘bellyache’ in it. Q. Who wants to read the article in the Journal that actually names the funds when we’ve got an exposé on Jimmy Cayne’s gastrointestinal problems? A. NO ONE. It is of the utmost importance that you mention JC’s affinity for cigars. Write something like “[Yadda, yadda, yadda], he said as he took a deep puff on a freshly lit Montecristo cigar.” This serves two purposes—it a) reinforces something everyone already knows about Cayne and b) is a nod to Charlie Gasparino’s assertion that “James Cayne has smoked more cigars than any CEO on Wall Street.”

Next up is cards. Forget about the Bear Stearns High Grade Structured Credit Strategies Enhanced Leveraged Fund, forget about the SEC, forget about Bear Stearns being a sty. James Cayne is a “world class bridge player who did not finish college.” Losses? What losses? James Cayne’s ascent “has been a result of a card player’s guile.” What is this subprime mess you speak of? James Cayne “didn’t go to Harvard Business School—he was a bridge bum.”

Now talk about Cayne cutting out “red wine, bacon and salmon for breakfast.” His "tan" thanks to weekends down the Shore. His “youthful demeanor.” The fact that he likes the musical stylings of a Norwegian pop star named Sissel and “any movie that stars Halle Berry.” Basically, anything you can get off his MySpace page is fair game.

Finally, ctrl-V “bridge-cigar” several times. How many is something of a personal choice but thirty is too few, sixty is probably too many. But no fewer than thirty, because Richard Marin felt the need to tell us not to see “Evan Almighty.”

Salvaging a Prudent Name [New York Times]

You know that ‘private’ blog written by Rich Marin, the head of the Bear Stearns group that ran the two hedge funds that have been causing all the trouble lately? Well, thanks to Google’s cache function, it’s a little less private.

The cached blog post gives us a peak inside the mindset at the embattled bank. Marin describes it as a “dog fight” but seems to revel in the combat. He uses a picture from the recent film 300—in which a small band of Spartans fights against the army of the Persian empire—to illustrate the post.

“This pretty much sums up my last two weeks trying to defend Sparta against the Persians hordes of Wall Street,” Marin writes. “Nothing like a good dog fight 24X7 for a few weeks to remind you why you chose the life you chose. The good news is that after two embattled weeks both I and my loyal staff are still standing to fight another day. If youwant details....pick up any WSJ for the past week and we were in the top three stories every day. It's nice to know you can have an impact on the world....next time I'll try to make it a slightly more positive impact.”

Marin might want to rethink his analogy. Thebattle of Thermopylae depicted in the film ended with the deaths of all of the Spartan warriors. We're sure he hopes that the current crisis passes with fewer casualties.

Whim of Iron [Google Cache]

Paris Hilton analogy count with regard to subprime/Bear Stearns/CDOs: 83

Who Made The Big Bets In Subprime Lending? [CNN Money]
When CDOs Trump Paris Hilton, There's a Problem [Bloomberg]
Looking for Contagion in All the Wrong Places [PIMCO]

Things keep getting uglier with this Bear Stearns story. On Friday, shortly after Bear announced that it would bail-out the less levered of its two troubled hedge funds, veteran Merill Lynch analyst Guy Moszkowkski announced that the bank was a potential takeover target.

“If the firm is not able to resolve its position without a meaningful loss, we think likelihood of a sale rises materially,'' Moszkowski wrote.

Of course, a note of caution is probably in order. Despite the troubles at Bear, Moszkowski maintains a “buy” rating on its stock, which has recently taken a battering. When analysts have to justify a rating based on its takeover potential rather than its fundamentals, it’s a often a sign of desperation.

But this morning the theory got a boost from a Wall Street Journal story with the clever title “Bear’s Stock Is Acting Like Its Name.” The Journal noted Bear’s shares fell 1.4% on Friday when the bailout of the hedge fund was announced. On Monday they dropped another 3.2%. Overall, Bear’s stock is down 14.5% for the year, trading now at just 139.10.

“Bolstering this theory is the firm's price-to-book value of 1.3, a level significantly lower than peers like Lehman Brothers Holdings Inc. and Merrill, which trade at 2.2 and 2, respectively. Firms with low multiples often make attractive takeover targets,” the Journal’s Kate Kelly and Greg Zuckerman wrote.

Mozkowski thinks a buyer would pay at least $185 a share—twice its book value.

Others are also backing Mozkowski’s buyout theory. “Their fancy headquarters in midtown are worth something. More than their formerly good name, which is now synonymous with subprime slime,” the blog Under the Counter writes.

Felix Salmon, who writes the Market Movers blog for Portfolio magazine’s website, is skeptical. “But color me unconvinced for the time being: if Bear has remained independent this long, I doubt a dodgy hedge fund or two will constitute its undoing,” he writes.

One person who has spoken to Bear Stearns chief James Cayne recently voiced skepticism at the talk of a takeover. "You have to be completely out to lunch to think Jimmy Cayne's going to sell the company in a distressed situation. This guy believes in Bear Stearns. He's not selling and you're not getting it without his say so."

Bear's Stock Is Acting Like Its Name [Wall Street Journal]
Merrill's Guy: Step Up Bear [UndertheCounter]
Bear Stearns: Takeover Speculation Returns [Market Movers]

The Securities & Exchange Commission has opened up a preliminary inquiry into the near collapse of a highly levered hedge fund it managed, Business Week's Matthew Goldstein is reporting. Apparently regulators would like to know how the investment firm went from telling investors that April’s losses were below 7% only to restate them at 18.97%.

This morning DealBreaker reported that the headline making troubles of two Bear Stearns funds were attracting the attention of two Capitol Hill lawmakers.

Bear's Big Loss Arouses SEC Interest [BusinessWeek]

In the largest hedge fund bailout since the ‘Fund that shall not be Named’ in 1998, Bear Stearns is providing $3.2bn in loans to rescue its High-Grade Structured Credit Strategies Fund, which has lost about 10% this year. The Bear loans will replace the loans extended by the major banks, some of which exceed $1bn per bank.

Bear will not be rescuing its High-Grade Structured Credit Strategies Enhanced Leverage Fund, which is significantly suckier than the fund that’s getting rescued, having lost 20%+ this year. As the name suggests, the HGSCSEL Fund is more leveraged (the buzzword is “enhanced”) than its Cioffi managed cohort. Creditors extended about $9bn to the Bear funds, which made $11bn worth of bets on CDOs. The amount extended to the Bear funds is far more than the $3.5bn extended to LTCM, although Bear’s bailout is a bit more organic and a lot less potentially apocalyptic, to say the least.

Major banks are taking heat over the amount of low-value or illiquid exposure to the Bear funds. One of the hardest hit banks could be Barclays. Several sources are reporting that Barclays committed $1.2bn linked to the highest risk “sludge” tier of subprime loans, which is way more than the $300mm or so in exposure originally reported. Barclays could lose almost $500mm in all, CNBC’s Charlie Gasparino reports. Merrill put $850mm up for auction in collateralized assets from its loans, but could only dump $100mm worth. Merrill doesn’t expect to be able to dump the remaining assets any time soon.

In other developments (another Gasparino report) Cantor Fitzgerald, according to itself, has been able to sell off its seized collateralized assts at face value, and not 10-20 cents on the dollar as earlier rumors suggested. There is still no outside verification of this, however.

So far the estimated extent of the recent subprime fallout is up to $25bn in CDO losses, according to analysts at Lehman.

Barclays Capital exposed to embattled Bear Stearns hedge funds [Forbes]
Bear Stearns Plans $3.2 Billion Hedge Fund Bailout [Bloomberg]
Bear Bailout [CNBC]

With the near collapse of its Sometime Secured High Fructose Professional Grade Financial Derivative Leveraged Fiscal Prudence Nomenclatural Triumph Fund (and sidekick – Crappy Subprime Fund II), Bear Stearns will not be engaging in an IPO of a riskier high yield slug of the aforementioned funds’ former securities.

The resulting fund, more elegantly named Everquest, had established a $200mm credit line from Citi and was ready to go public, having filed a preliminary S-1 on May 9.

How aligned is Everquest and Bear’s nearly failed funds? Very, according to the Everquest IPO filing. The two Bear subprime funds searching for a salvaging strategy owned 67% of Everquest’s ordinary shares at the end of last year, and certain transactions involving Everquest's managers must be approved by "disinterested" directors on the company's board, MarketWatch reports.

Bear Stearns to cancel Everquest IPO [Financial Times]
Everquest IPO tied to troubled Bear hedge fund [MarketWatch]

Business Week’s Matthew Goldstein reports that federal investigators are nearing the end of their 18-month probe into the “murky world of stock lending,” and it looks like it’ll be employees from Wall Streets stock-loan desks who’ll be going down.

The folks who’ve undergone the most scrutiny work for Bear Stearns, Janney Montgomery Scott, and Morgan Stanley. On June 18, Morgan Stanley vice-president Peter Sherlock, who’d been with the bank for 13 years, resigned after his name came up in the case. His lawyer, John Wallenstein, declined to say why his client had taken an early retirement, but did confess to “know[ing] there is an investigation by the Eastern District of New York” and “know[ing] the SEC is looking at it too."

Earlier: Trouble In Stock-Loan Scheme Town

Criminal Probe Snares Morgan Stanley VP [BusinessWeek]

The hauntingly empty lobby of Bear Stearns

Yesterday’s showdown over the fate of two big Bear Stearns hedge funds “marks an important test of the financial markets’ resiliency,” according to this morning’s Wall Street Journal. So the natural question is: how did the financial markets score? What does the report card look like on the day after several investment banks flinched from pushing these two funds over the edge?

If “Plays Well With Others” was one of the subjects being tested, several of the investment banks who were exposed to the losses at the hedge funds scored very well. JP Morgan Chase, Goldman Sachs and Bank of America all reached negotiated deals with Bear Stearns to limit their risk. Although the details are sketchy, it seems that these deals involve Bear Stearns buying back collateral assets the banks had seized, forestalling a need to auction them off.

Merrill Lynch didn’t score quite as highly in this category, and late yesterday afternoon proceeded with an auction of Bear Stearns assets it had seized. We’re told the auction met with mixed results. Some of the higher-quality assets with less exposure to the subprime market met fetched what the Journal calls “reasonably high prices.” Other assets—variously described as “sludge,” “junk in investment-grade clothing” and “immoveable objects” by traders we talked to—faired less well. The Naked Capitalism blog describes them as fetching “atrocious prices.” Deutsche Bank also seems to have opted to auction off its collateral rather than cut a deal with Bear Stearns.

But at a more fundamental level, the test may have revealed a foreboding weakness in the credit derivatives market. JP Morgan, Goldman and Bank of America are said to have pulled back from auctioning off the collateral because earlier feelers put out to potential buyers revealed that the assets they had seized would have “fetched so little in the market,” according the Journal. The idea is that if they had brought down the the Bear funds, the investment banks would have hurt themselves as well. As Alphaville puts it, "So the picture becomes clearer: eat, be eaten, eat each other, but stop before you accidentally eat yourself."

But something even more ominous also may have convinced the banks to reach a settlement a real market test for these assets—the CDOs rarely traded and are priced according to complex mathematical models—might have demonstrated that they were worth far less than they were valued at on the books of hedge funds and investment banks. This could cause a ripple effect, forcing re-valuations at many hedge funds that hold similar assets, and at the banks that lend to them.

“As its two credit focused hedge funds with about $20bn of highly leveraged assets are put on ventilators, there is real pressure in the market for the creditors not to sell the collateral for fear of undermining the value of the CDOs and other debt packages. As we all know, they are near impossible to price accurately, due to the nature of the underlying distressed assets, and if these CDO’s are valued downwards, then all hedge funds who own similar subprime assets will have to do the same and hey presto we have a falling market, more defaults and the house of cards comes tumbling down,” Finbar Taggit writes today.

In short, by flinching from auctioning off the CDOs, JP Morgan and the other banks that reached deals with Bear Stearns may have prevented what some feared would become the much heralded “systemic event” in which the collapse of one hedge fund brings down all the others. But the cost of doing so appears to be keeping the actual market values of many of these assets more or less financially illegible. And keeping markets and regulators illiterate when it comes to reading the risks of these products.

One trader we spoke to described the outcome as a “cartoon moment.”

“As long as Wiley Coyote doesn’t realize he’s run off the cliff, he won’t fall,” he said. “These guys don’t want to look down because they are afraid there may be no there there.”

Bear's Woes Test Markets' Mettle [Wall Street Journal]
Bear Stearns Staves Off Collapse of 2 Hedge Funds [New York Times]
Subprime sector hit by $1bn assets sale [Financial Times]
Bear feast - be sure not to eat yourself [FT Alphaville]

The last minute effort by Bear Stearns to rescue its High-Grade Structured Credit Strategies Enhanced Leverage Fund seems to have collapsed. Moments before midnight last night, the Wall Street Journal’s Kate Kelly reported that Merrill Lynch was going to push forward with its plan to sell at least $850 million of mortgage-related securities it seized from the hedge fund. This morning the New York Post's Roddy Boyd said that end had come for the fund. And now CNBC’s Charlie Gasparino is reporting that JP Morgan and Deutsche Bank have already begun selling collateral they seized from the hedge fund.

The securities were collateral assets for leverage the banks had extended to the debt-heavy fund. The fund has reportedly been battered by bad bets in collateral debt obligations and mortgage securities. The widely publicized trouble in the subprime sector helped make shorting subprime—which hedge funds did through a complex array of swaps and derivative products offered by investment banks—a popular and profitable bet late last year and earlier this year. But when banks reportedly began to ease credit terms on mortgage holders in a coordinated effort to stave off mass defaults and a meltdown in the market, many of these positions went bad for the fund.

[How leverage and bad directional betting crushed the fund, after the jump.]

Not sure if this had been made clear earlier but things aren’t looking so good over at the Bear Stearns High Grade Structured Credit Strategies Enhanced Leveraged Fund and not just because it’s awkward to fit all those characters on a letterhead when sending notes to investors saying “We’ve lost some money. Our b.” There is, however, a vague glimmer of hope. Yesterday Merrill Lynch was two seconds away from auctioning off $400 in fund assets but agree to delay the sale to hear a rescue mission drawn up by Blackstone, designed, presumably, to avoid the fund’s collapse through a combination of cash and a fatwa on margin calls.

We all know The Schwarz has magic hands (and spirit fingers), but if his plan turns out to be a bunch of notes written on a cocktail napkin last night, Wall Street bond executives worry “we are going to see billions of dollars worth of losses across hedge funds and dealers.” One hedge fund manager apparently shopping his screenplay about love and loss in the world of subprime offered: “The world [will] become very different, very fast for a lot of people."

Blackstone is Bear Fund's Last Hope [NYP]

Merrill has postponed the auction of $400mm in assets it seized from the High-Grade Structured Credit Strategies Enhanced Leverage Fund at Bear Stearns, Charlie Gasparino of CNBC is reporting. Merrill and other major lenders to the fund, including Citi and JPMorgan, are in a feel-good asset management "pow-wow" with Bear this afternoon. The fund is expected to make its case that it has a plan to recover from it recent catastrophe in the subprime market.

An announcement on what will really happen to the fund assets is expected later today or tomorrow.

Merrill Lynch Switches Gears [CNBC.com]

In case you missed it this weekend, Merrill seized $400mm in assets from a Bear Stearns hedge fund and is auctioning them off starting today. The Ralph Cioffi led fund scrambled to avoid liquidation late last week, auctioning off over $4bn worth of bonds Thursday morning alone, culminating a protracted struggle to sell assets to stay afloat. The fund has sold $7bn worth of bonds since May and frozen redemption requests.

After the late-week scramble, the fund presented a 30-day asset sale plan to lenders that would ease future margin call pressure. Merrill wasn't convinced, issued a list of collateral securities it was owed and seized the assets. The bidding for these starts at noon today, and could cause ripples across the Street, depending on how the market values less liquid mortgage-backed securities.

The Merrill seizure could signal (finally) the end of the High-Grade Structured Credit Strategies Enhanced Leverage Fund at Bear, following the other, less drawn out, subprime fund blowouts like Dillon Read at UBS. The Bear fund originally raised $600mm in investor capital and borrowed $6bn from banks to bet the wrong way on the ABX.

A 'Subprime' Fund Is on the Brink [Wall Street Journal]

We often take pleasure in the woes of Bear Stearns (because, take your pick, there are many), but how bad is this whole mess that they’ve late gotten themselves into actually and how bad is it for Wall Street? Yesterday the bank sold off $3.86 billion in their highest quality (AA and AAA) mortgage bonds. The auction was reportedly well-received by the market, despite fears by the Street that the market would be (and could still be) saturated with low-quality mortgage securities. And Merrill Lynch offered $1.6 billion of new securities backed by subprime loans, to much investor interest. Subprime Apcolypto or Subprime ApocolypNo?

Accrued Interest notes with noted calm that this is just how things are done. “Hang around while the product is hot, create as much in fees as you can, invent new structures or create your own investing vehicles if you have to, and cash your chips in at the first sign of trouble.”

People want to talk about how it’s Long Term Capital Management all over again, and what a nightmare that was, but is Bear’s hedge fund even big enough to cause the same kind of disaster? Probably not. AI does find some parallels between LTCM and the sub-prime market:

So are there any sub-prime funds large enough to cause a LTCM-type result? Maybe not. But its really not that hard to imagine a major contagion scenario:

1) A large number of investors in higher quality CDO tranches (A and AA) are burned by sub-prime defaults.

2) This causes a re-pricing of CDO spreads, and causes a drastic slow-down in deal flow.

3) In turn, this eliminates the "CDO Put" in the credit market. This is where any widening of credit spreads made forming new CDO's that much more attractive, thus creating a back-stop for spreads generally. If the CDO market disappears, even temporarily, this "put" is gone.

In that scenario, we finally see the widening of credit spreads everyone's been waiting for. And given that real money has been so reluctant to over-weight high-yield, the widening could be quite dramatic.

Subprime Woes Pinch Bear's Mortgage Star [WSJ]
So... you got your reward and you're just leaving then? [Accrued Interest]

While total net revenue for Q2 rose to a record $2.51 billion, earnings for Bear Stearns dropped 33%, the bank’s first quarterly drop in two years, Bear reported today. Net income fell to $361.7 million ($2.52/share), versus last year’s $539.3 million ($3.72/share). Without the Bear Wagner Specialists $277 million (88 cents/share) charge, earnings would have been at $3.40/share.

Avoiding words like “subprime” and “mortgage,” CEO James Cayne said: “The diversity of our franchise is clearly demonstrated in the record net revenues generated this quarter…The Global Clearing Services and Wealth Management segments reported record performance while results were also very strong from debt and equity underwriting, equity derivatives and leveraged finance. Internationally, we continue to grow aggressively, hiring talented people, broadening our product platform and reaching new clients in multiple geographies."

In other BS news, High-Grade Structured Credit Strategies Enhanced Leverage Fund, a fund managed by Bear, is rushing to sell $3.86 billion in mortgage-backed bonds to prospective buyers today, which many believe is an effort by Bear Stearns traders to help a big losing hedge fund in the mortgage market. Since April 30, HGSCSELF has lost 23% of its value, and Bear recently angered investors by barring them from taking their money out of the sinking ship.

Meanwhile, Breaking Views thinks everyone should stop freaking out over the whole “mortgage-market turmoil” thing and likes Bear’s $17.4 billion valuation, and attraction as a takeover target.

Bear Stearns Press Release [Business Wire]
Earnings at Bear, Goldman Suffer Due to Subprime Mess [WSJ]
Bear Stearns Profit Drops 10 Percent as Mortgage Bonds Slump [Bloomberg]
Is Bear Stearns Cutting Its Losses? [BusinessWeek]
Bear Stearns' Subprime Bath [BusinessWeek]
Bear's Fund Is Facing Mortgage Losses [WSJ]
Bullish on Bear [Breaking Views]

Up for some good James E. Cayne trivia? No? Then get the hell out of here, because Charlie Gasparino’s got a dossier of slow-news-Monday-interesting facts about Jimmy C. and we’re about to give them to you. They come from the latest issue of Trader Monthly, in which the Bear Stearns CEO is bestowed with the dubious honor of being inducted into the “Trader Monthly Hall of Fame,” a group who counts such luminaries as Matt Feshback (Feshback Brothers), Artie Reinhardt (Reinhardt & Merz) and Jeff Daniels (John Carney’s fluffer), among many (13) others.

Big Jim—Gasparino says he’s big but how big is Gasparino? Let us know—is about to be seventy-four, which might’ve been impressive had it not just been Kirk Kerkorian’s 90th birthday, and everything being relative. The spring chicken is giving no thought to retirement and claims to “feel great” and be “eternal.” Profits at Bear have tripled under his watch over the last decade and in the last five years BS stock has outperformed everyone except Goldman Sachs because no one outperforms Goldman Sachs at anything (unless we’re talking about their hedge fund and Chinese Checkers). Cayne is a (Purdue) college drop-out who was given his job at Bear Stearns by Alan “Ace” Greenberg who was apparently “impressed” with Cayne’s bridge skills, which he backed up by going on to become a 12-time national champ at the “sport,” to say nothing of his Canasta skills. Cayne also apparently smokes like a chimney (“No Wall Street CEO has smoked more cigars”: a. how does one quantify something like that b. big whoop—James Simons puts away three packs of cigarettes a day and wins this Cancer Contest hands down). He played a role in the Long Term Capital Management fiasco and saved New York when it nearly went it nearly went bankrupt in the 70's with a coconut, a Gillette Fusion razor and stick of Carefree gum. Now that we’re all caught up, let’s do what we do and click some mice:

Earlier: You Are A Dirty, Dirty Bank
Bear Stearns Accused of Swap Market Manipulation

Hedge funds are accusing Bear Stearns of manipulating the credit default swap market, according to the Wall Street Journal. Basically, Bear Stearns stands accused of bailing out trouble subprime loans in order to avoid having to pay out on credit default swaps it sold to hedge funds. For its part, Bear Stearns denies that it is making decisions about loans based on its swap positions.

The credit default swap market is a relatively young one that has been plagued by suspicions of insider trading and market manipulation. As we discussed here in April, anti-fraud rules familiar from the stock market apply to the credit default swap market but there appears to be no government agency charged with policing the market. In this case, it appears that the matter has fallen to the International Swaps and Derivatives Association, an industry group that represents the various players in the swap market.

It's not clear if anything Bear Stearns is accused of doing violates any rules. The hedge fund accusations of market manipulation appear to be on the order of claims of unsportsmanlike conduct.

The Sure Bet Turns Bad [Wall Street Journal]

A top Bear Stearns prime brokerage executive has left the firm, according to a source who spoke with DealBreaker on the condition of anonymity. The source identified the departing executive as one of the heads of prime brokerage at Bear Stearns. DealBreaker has not been able to independently confirm or corroborate this story, however, so we regard it as unsubstantiated rumor at this point. Bear Stearns did not return calls seeking confirmation or clarification.

Since March, the prime brokerage business at Bear Stearns has been led by Leonard Feder and Louis Lebedin. Feder was brought over from the structured trading desk to replace Jeff Dorman who had left for Deutche bank. DealBreaker placed several calls to Bear Stearns seeking confirmation. At one point a Bear Stearns employee said "Everyone here knows what DealBreaker is. No one is going to answer your questions or call you back."

A woman identifying herself as “Breeda” answered the phone at Feder’s desk. Breeda said he was traveling in England and would not return for more than a week. She would not comment when asked about the rumored resignations.

Lebedin’s phone was answered by a woman calling herself Gladys. She said that Lebedin was in a meeting but declined to comment about the rumored resignations.

Bear Stearns prime brokerage unit has been a center of controversy for some time. Earlier this year a federal bankruptcy judge ordered Bear Stearns to pay almost $160 million to investors in a hedge fund that was a prime brokerage client. The judge said Bear Stearns bore responsibility for inadequately monitoring its client and failing to detect that the hedge fund was a fraud.

Last year Ron Suber, who was responsible for overseeing Bear Stearns’ prime brokerage hedge fund business, left the firm. He had been implicated by federal authorities in a scandal involving mutual funds and abusive hedge fund traders. In 2006, Bear Stearns paid $250 million in penalties to settle allegations that it had facilitated abusive trading practices by hedge fund clients.

Try to keep in mind that this is only unsubstantiated rumor at this time.

We heard a rumor yesterday that our feathered friend "Andrew" may have been let go from what was allegedly his position (on the 38th floor?) at Bear Stearns. Obviously, we have no idea if this is true (we only have moles in the top three and at SAC, Citadel, Renaissance, and Third Point). If it's not, well, good. We like it when people are able to pay their rent. If it is, we think Bear should stop focusing on its image and start focusing on hiring a new cleaning staff. Besides not realizing that if you drink two Red Bulls a day for two weeks, you'll need more than a twelve pack to get by, what is Andy really guilty of (other than being incredibly fashionable)?

Nothing. He didn't name his firm, give any stock tips, or release a sex tape with the CEO's wife (presumably). But if Big A was shown the door, it wouldn't be the first time Bear Stearns got its knickers in a twit over one of its employees talking to the press. With that in mind, we give you Lee Munson. The man, the myth, the legend. The guy who got fired from (what people believe was) Bear Stearns for discussing a lot more than his choice of collars and shoe-shining techniques.

You cannot make this stuff up (obviously, we’ve tried and failed):

Munson on theology:

"If I ripped my skin out, you know what would flow out?" he asked. "Bloody cash, baby. Money! Rip it out, it's gold!" Mr. Munson held his arms up higher, crucifixion-style. "I want to be like Jesus," he said. "You know why? 'Cause I'm rich with blood and I want to bleed on you, because you'll be wealthy if I bleed on you. Or maybe if you're a bitch, I'll fucking squirt you with a little bit of silver."

The results of yesterday’s “Which bank has the dirtiest working conditions” poll are in. Some of the results may surprise you, some may not. If you actually read what we wrote about Bear Stearns’s in-house cafeteria and its 42 health-code points violations, for instance, you won’t (or shouldn’t) be surprised to learn that it landed in the top three (and if you read the part about contaminated food and inadequate levels of personal cleanliness and are still stunned, don’t invite us over to your home any time soon). If you didn’t know, though, that the 85 Broad is basically one step away from a gas station restroom on the Garden State Parkway (going South), you might be a bit caught off guard to learn that the Kingdom also landed at the top of the list of shame (all that glitters is not gold, indeed). Let’s examine the cold hard (dirty, disgusting, scatological) facts now.

Last time we checked, the varying levels of cleanliness in any given bank had no direct effect on its earnings potential. But we were thinking along the lines of an overflowing wastebasket here, a dusty LCD screen there—not all-out filth so disgusting and repulsive that it could put any one of the city’s most unsanitary restaurants to shame. In other words, we weren’t thinking about Bear Stearns. Sick and tired of being just a tier-two institution, an after thought, a whatshisname? bank, Bear proudly made a name for itself last week when its in-house cafeteria failed a health code test, reports New York. The BS eatery racked up 42 points in violations; 28 is the number at which a restaurant will be shut down.

Among this year’s violations: milk or milk product undated, improperly dated, or expired; food not protected from potential source of contamination during storage; personal cleanliness inadequate (clean garments and effective hair restraint not worn). “We take all inspections very seriously, are proud of our track record, and made every effort to immediately address any concerns,” says a Bear spokeswoman. Bankers seem unfazed.

So: bankers have low standards when it comes to the sanitation of their surroundings. There’s a metaphor in there somewhere. Which brings us to our next question:

Bear vs. Germs: Inspections Hit Wall St. [NYM]

Last night we made a brief appearance on one of our favorite CNBC shows, On The Money, and spent a bit of time talking about the Big Idea of spinning off Goldman's trading and hedge fund business.

In the first part of the segment host Melissa Francis asked CNBC's Charlie Gasparino about possible big bank deals in light of the stellar performance of JP Morgan Chase. You know how these things work. A company reports numbers like the one's the JP Morgan Chase did this week and the investment bankers come out of the woodwork with pitchbooks at the ready. There will be pressure to do deals, to start making acquisitions. The question is whether chief executive Jamie Dimon will give in to the seduction of the dealmakers or whether he'll continue to abstain.

Gasparino's convinced that Dimon won't start building JP Morgan Chase into an empire of acquisitions. The most talked about deal on the street, an acquisition of Bear Stearns, would be too expensive, Gasparino says. We agreed, mostly because we think will be hard for the bank to find a bank or financial services company that is beating JP Morgan Chase in an area that the bank is interested in growing. (Although we're ready to hear from you if you've got likely targets. Leave a comment or send an email to tips@dealbreaker.com.)

At the end of the segment we turned to the Big Idea. Since we first published the Big Idea, we've talked to investment bankers who think that spinning off the hedge fund and trading business might be a good way for Goldman Sachs to realize the value of the business it built up. Goldman doesn't seem to get full credit on Wall Street for its hedge fund and trading operations, in part because Goldman's disclosures about these groups is somewhat opaque. A serious danger faced by Goldman is that its top traders might look elsewhere for a big payday.

And that's where the Vikram Pandit factor comes in. When he was at Morgan Stanley, Vikram made decent coin but nothing that would make headlines or build multi-generational empires of wealth. He left to found his own hedge fund, and one year later sold it to Citigroup for a rumored $600 million. That has to have a lot of people, not just at Goldman Sachs, scratching their heads and doing some quick math about the risks and rewards of striking out on their own. We're hearing from investment bankers who have talked to people insider the firm that Goldman could face pressure to spin-off its trading and hedge fund business in order to realize the value of the business before its guys start to defect or strike out on their own.

Perhaps the strongest case against this idea rests on four factors. First, breaking-up and spinning-off runs contrary to the current orthodoxy on Wall Street, where the banks have been acquiring hedge funds and building private equity businesses. There's the value of the Goldman Sachs name, which communicates an undiminished elite status. There's the knowledge within Goldman that the larger firms needs its trading business, and it will be loathe to let it go under any circumstances. And, perhaps most importantly, there's Goldman's share price, which is now trading at its 52-week high. Everyone with equity has been getting a raise for the past several weeks. That's no doubt dampening the urge to split.

Banking on Big [CNBC]

Gretchen Morgenson may have a new punching bag and her name is Merrill Lynch. Bloomberg reports that subprime losses could make Merrill bonds riskier than debt issued by Bear Stearns.

Merrill may have the most potential for losses from so-called collateralized debt obligations, or CDOs, that repackage bonds backed by mortgages, analysts led by Jeffrey Rosenberg wrote in a research note this week. "The relative exposure to Merrill is likely understated," Rosenberg said. Underwriting data "suggest Merrill Lynch has the most exposure of the brokers to subprime through the origination of CDOs," his team wrote.

Merrill arranged $46 billion in structured-finance CDOs last year, according to data in the BofA report. Citigroup was second, with $21.3 billion, and Bear was 10th, packaging $9.4 billion of the deals.

We can only imagine that the response from Bear Stearns, who was taken to task by Morgenson a few weeks ago for what she regarded as "dubious industry practices and even fraud," must be something along the lines of an off-color two-word phrase that we're too Victorian to print here. This news couldn't come at a better time—we hear Gretzky’s been looking to sink her claws into some fresh meat.

Earlier: Regards' Just Seemed So Impersonal

SUBPRIME RISK HIGH [Bloomberg via NYP]

That’s the not so subtle message of the Bloomberg story on the $40 million payday for Bear Stearns chief executive James Cayne. It compares Cayne’s compensation to similarly sized comps of Morgan Stanley CEO John Mack and Lehman Brothers CEO Richard Fuld, then notes that Morgan Stanley and Lehman brothers are considerably larger than Bear Stearns.

It goes on to quote an executive search firm executive who says something that you have to read in opposite language to decipher.

“You think there ought to be some consistency in CEO pay across similar firms, based on their size, but there isn't,'' said John Challenger, CEO of Challenger, Gray & Christmas Inc., an executive search firm in Chicago. “It has a lot to do with history, how long the executives have been around, what they negotiated at the beginning.''

What he means is something like: “You’d think that the CEO of a smaller firm like Bear Stearns would get paid less than the CEO of a bigger firms but he isn’t.”

So why is Cayne paid so much? We’re tempted to answer: well, that’s what it takes to get Jimmy Cayne out of bed in the morning. The man is Wall Street’s wealthiest CEO, worth a reported $1.3 billion. Do you really think he’s coming into the office for half of what Rich Fuld makes?

Bear Stearns Paid Chief Cayne $40 Million Last Year[Bloomberg]

Dear Gret-Gret,

Bear here, just going to get right to it—what gives, sista? We thought we were buds, amigos, pals, in it through thick and thin. Why did you force us to get those matching tattoos last year in South Beach that say “Thick as a Brick” across our lower backs if you didn’t mean it? What happened to our pact: We take the good, we take the bad, we take them both and there you have: G-Bear. Apparently it got flushed down the toilet, along with, and we don’t want to say journalistic ethics, because that’s not the right word, but how about, YOUR FREAKING MIND?

So we had some losses—so what? “Like worms that surface after a torrential rain, revelations that emerge when an asset bubble bursts are often unattractive, involving dubious industry practices and even fraud.”? Excuse me? No, excuse you, Gret-Gret! No one else is going to tell you this because no one else knows you like we do but, damn, G, that was way harsh. And it’s so like you to pull this kind of shit. You get up there on your high horse and that tee-shirt you had made on Café Press that you guilted all of us into getting so you could get the minimum number of buys, you know, the one that says, “’No Shirt, No Shoes, No Pulitzer, No Service” and you just railllllll against everyone and rake us over the freaking coals like it’s your god damn duty. Well let us remind you of something, Miss Thang—we knew you when. We knew you when you were just Gretchy-Sue Molinsky, when you wore Candies and would sneak out of the house to visit your boyfriend at PSU, the one who you told you were a senior in high school. Senior in high school my ass, toots.

So let's end this charade, missy and call a spade a spade. You don't like us and we don't like you. Maybe it's time we just end this relationship before one of us does or says something we really regret-- oh wait, you already did that. We hope that glorified piece of Hanukah gelt was worth trading our friendship for. Have a nice life.

-Bear

'STEARN' RESPONSE TO TIMES ARTICLE [NYP]

Is it too early to start talking about bonuses for 2007? Bear Stearns doesn't think so. It has already set up a bonus pool for its top executives, according to a recent SEC filing.

From Reuters:

A maximum bonus pool of $165 million has been established for a group of five senior executives that includes Bear Stearns Chief Executive James Cayne, the company said. Payout will be pegged to the company's return on equity. No executive can get more than 30 percent of the total pool, which can be as little as zero.

Bear Stearns' compensation committee also approved the performance goals for a second bonus pool for seven other top executives. The maximum amount will be $140 million, with awards based on pretax return on equity, departmental income and expense controls.

These numbers include cash and non-cash bonuses. So if you do the math, the maximum bonus for, say, James Cayne for 2007 will be $49.5 million, or about $3 million dollars less than the co-presidents of Goldman Sachs got for last year.

We can't help thinking that this suggests a new recruiting slogan for Bear Stearns: "Bear Stearns: It's like working for Goldman in 2005. Wall Street The Old Fashioned Way."

Bear Stearns Companies Inc 8-K [SEC]

Bear Stearns sets up $305 mln executive bonus pool [Reuters]

It’s widely known that Jamie Dimon’s been jonesing for a big acquisition for some time and, according to our semi-credible sources’ quasi-credible sources, Bear Stearns might just be the fix. While there’s been some whispering on the Street that Dimon could be eyeing Washington Mutual Inc., we’re told that Bear’s issued a firm-wide hiring freeze as a result of Dimon’s imminent shopping spree and Bear’s overtures. Know something we don’t? You can find us in our usual haunts. On a related note, Carney and I watched Heathers three times this weekend. (His idea).

Only hours ago we were complimenting a commenter for bringing to our attention one reason investment banks were pushing for hedge fund regulation: the fear that the prime brokerages will be the fall guys for hedge fund failure. Because hedge funds are not as regulated as broker/dealers, the argument goes, regulators will be tempted to go after the brokerages for failing to police the activities of hedge funds.

And, as if to prove the point, a federal bankruptcy judge just ordered Bear Stearns Cos. to return at least $125.1 million to a failed hedge fund now in bankruptcy.

"This is going to send shock waves through many prime brokers, because they've been very careful to limit their responsibility for their customers' actions,'' Michael Missal, a former SEC lawyer and head of the regulatory practice at Kirkpatrick & Lockhart Preston Gates Ellis LLP in Washington, said before today's hearing.''

Earlier: I can think of nothing more fitting than for the four of you to spend a year removed from society so that you can contemplate the manner in which you have conducted yourselves. I know I will.

Bear Stearns Told to Repay Hedge Fund $125.1 Million [Bloomberg]

Bear Stearns may set a precedent for the mandatory hand-holding and belly-rubbing of trading clients, if it’s forced to pay up to $180 million (9% of its 2006 earnings) for neglecting to keep a watchful eye on Manhattan Investment Fund Ltd. The hedge fund, founded in 1996, went bankrupt in 2000, in “one of the most egregious and costly frauds in the history of the securities markets,” according to the SEC. U.S. judge Burton Lifland believes Bear is to blame.

``Bear Stearns failed to act diligently in a timely manner,'' Lifland said in a Jan. 9 opinion, finding that the New York-based company, the fifth-largest U.S. securities firm, learned as early as December 1998 that fund manager Michael Berger may have been deceiving investors about returns. A hearing in the case is scheduled for today in Manhattan.

A ruling against Bear Stearsn is not likely to receive a warm welcome on Wall Street, as brokers would rather not “be seen as insurers for their clients.” On a related note, Jerry, George, Elaine and Cosmo are up for parole in 15 months for failing to abide by the Good Samaritan Act.

Bear Stearns May Have to Repay Failed Hedge Fund $180 Million [Bloomberg]

It might be hard to remember, but there was a time when James Cayne, the chief executive of Bear Stearns, enjoyed one of the biggest compensation packages on Wall Street. These days he barely qualifies for the finalist round, coming in with barely $34 million in total compensation. It's a wonder the man can make ends meet.

Bear Stearns Chief Gets $14.8 Million Stock Bonus [New York Times]

We like to go a little heavy on the videos on Friday. It's usually a slow news day, and the last thing anyone wants to do is spend lunch reading about Sarbanes-Oxley.

So here's an entertaining interview with Alan Greenberg, chairman of the executive committee at Bear Stearns. We're not sure when this is from. It looks more than a little dated. Watch as the interviewer keeps asking him whether being good at anything else has anything to do with being a good businessman. Sports? No. Bridge? Nope. Magic? Not by a longshot. Luck? Not that either.

There is one sweet moment, however, when Greenberg is asked what his greatest achievement in ilfe is. "Having married the right woman," he says.

Altogether now: awwww.

Keep in mind that these stories are based on analysts estimates. We’re hoping to see some real (or at least rumored) numbers soon, and we’ll start updating the numbers as soon as possible. (Email your tips to us here with the subject line “Bonus Watch. The identities of all tipsters are kept anonymous, unless you are retiring or something and want some credit for your work.)

The New York Daily News has the short version of the Bloomberg story:

Never in the history of Wall Street have so many earned so much in so little time.

Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Bros. and Bear Stearns are about to reward their 173,000 employees with $36 billion of bonuses.

That's a 30% increase from last year's record, and it doesn't include the billions more that will be paid by Citigroup, Bank of America and J.P. Morgan Chase, the three largest U.S. banks, as well as the hundreds of hedge funds and private-equity firms that constitute the financial industry.

The longer version gives estimates for individual firms.

Average compensation/average bonus (U.S. dollars):

Goldman $658,946 / $397,707

Morgan $257,594 / $154,556

Merrill $291,139 / $174,683

Lehman $351,160 / $210,696

Bear $338,462 / $203,077

And DealBook says that traders will once again reap the largest rewards.

On Wall Street, it will again be the traders, who make investment bets for their firms, and those who operate in the complex world of structured products and derivatives, who take home the biggest checks this year, with top-end estimates in the range of $40 million to $50 million, according to The New York Times.

“Traders are making more than bankers and that will probably continue for one more year,” Alan Johnson, the managing director of Alan Johnson Associates, told the Times. “Then it will be a horse race.”

36B seen in bonuses at top firms [Bloomberg in Daily News]

Wall Streeters to reap record bonuses [Bloomberg in Globe & Mail]

Wall Street Set for Bountiful Bonuses [New York Times]

Merrill Lynch and Bear Stearns have each committed to provide the family that controls Cablevision with one-half of the $12.4 billion of debt financing the acquisition of the cable company, according to a letter filed with the SEC yesterday.

Of course, it’s not quite accurate to say that the money is being provided to the Dolan family. The actual borrowers are Cablevision and a series of shell holding companies who secure the loans with Cablevision stock and assets. That’s leveraged buyout magic—buying a company with money you don’t have and collateralizing the loans with the company you don’t own.

The competition to be the lead lenders on the deal was most likely intense, with at least a handful of banks submitting letters to the Dolans. The Cablevision assets are very valuable as collateral and the fees attached to loans of this size most likely quite large. One surprising aspect of the winning Merrill-Bear Stearns letter, however, is that it retains a full-throated due diligence “out”—a provision allowing the banks to refuse to lend money if their due diligence investigation turns up serious problems with the company. In heavily sought after deals, this language is often watered down.

Unfortunately, the real red-meat of the deal is not disclosed. We’re talking, of course, about the bank fees and interest rates. These don’t get disclosed because they are not considered relevant to public investors in a going private transaction. Since the public shareholders are being bought out, they don’t have any economic interest in knowing what fees and interest rates the private company will be paying. So the fee letter gets kept under wraps.

Project Central Park Credit Facilities Commitment Letter [SEC]

Dolans Obtain $12.4 Billion for Cablevision Buyout [Bloomberg]

Monday Lehman. Tuesday Goldman. Today was Bear Stearns' turn to release its second-quarter earnings report. So how’re they doing? Pretty effing good. Profits up 81 percent from gains in bond trading, equity trading and investment banking fees.

Since Bear Stearns depends heavily on revenues from underwriting mortgage-backed bonds and bond trading, some had thought the firm would be hurt by rising interest rates this spring. It seems they dealt with this hedge fund style: balancing the interest rate risk by purchasing derivatives linked to loan defaults. If you can't make a buck going in, you've got to make it going out.

Bear Stearns 2nd-Qtr Earnings Rise 81% on Trading [Bloomberg]

Registered Rep mag profiles Mark Theirman, a class action lawyer (it's Class Action Day at DealBreaker) and ginormous Star Wars fan who is bringing suit against several large financial services firms for failing to compensate brokers for overtime work:

Thierman is now bringing his legal campaign east, with about 35 more class-action lawsuits, including some in New York, New Jersey and Pennsylvania. The list includes nearly every firm you'd expect, and then some: A.G. Edwards, Bear Stearns, Merrill Lynch, Morgan Stanley, Smith Barney, Edward Jones, Wachovia Securities and Raymond James & Associates. Thierman estimates that the suits represent about 100,000 brokers, past and present.

Wall Street Wage Fight [RegisteredRep.com]