Friday, September 28, 2007

More Ritholtz: The Chicanery on Wall Street

Another entry from this blog regarding the recent Bear Stearns (BSC) situation. A common thing individual investors do when they make bad trades or things go against them is blame "the Street". I think mostly this is just excuse making. That said, after you've been watching this for so many years you see so much stuff happen that you just have to say, "boy the game sure is tilted to the guys at the top". You know, stocks up 14% 2 hours before a buyout announcement, massive buy calling ahead of a buyout (which the SEC says they will "investigate" and then we never hear anything else about it since our attention span is that of a fruit fly), independent hedge funds working together to relentlessly drive down (or up) smaller float stocks, and then things like what happened with Bear Stearns this week. There are countless examples.... and the truth is we only see what is at the tip of the iceburg. I can only imagine on what really goes on.

The way I treat this is thinking I am walking into a casino. The odds are in favor of the house (the big boys). If you know that walking in, you accept the environment and just realize its part of the culture. I feel bad for those new to the market who don't see these things, and get whipsawed/defeated by it. I was (we all were) in their shoes once as market newbies.

Here is the latest adventure for those who were not following it - on a quiet old trading day Wednesday the New York Times came out in mid afternoon with a report that Warren Buffet was interested in a 20% stake... Bear Stearns, listless, suddenly jumped up 10%. Now who can doubt such a prestigious organization such as New York Times? (and as Barry points out do you notice that everytime a company is in trouble rumors get started that Buffet will buy - reminds me of the dotcom days when every new startup was going to be bought by either Yahoo, Amazon, Ebay or Cisco).

Anyhow, this was refuted by Buffet yesterday. Case closed right? Silly rumor, probably got some hedge funds some 10% of profit that they could take off the table and show their clients how great they are! Well it runs even deeper than that. Out of the blue comes a $1 BILLION bond offering.

"At Bear Stearns, timing is everything. The struggling brokerage house raised at least $1 billion this afternoon with a surprise sale of 10-year bonds. The sale, which was met by strong demand in the bond market, comes just a day after Bear shares surged nearly 8% on rumors that the Wall Street firm was near a deal to bring in a big outside investor. One report said Bear has been talking with billionaire value investor Warren Buffett."

"On Thursday, Bear Stearns took advantage of that momentum and some strong demand in the corporate bond market to raise some money. Sources say the deal drew more than $3 billion in orders for $1 billion worth of bonds, though it may be upsized."

Takeaway: Ugh.

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