Saturday, May 31, 2008

The day Bear Stearns died

A great three-part story in Wall Street Journal of the death spiral of Bear Stearns: part one, part two, part three.

I'm reminded of LTCM's death spiral, the story of which is best told in Nicholas Dunbar's book. In both cases, a firm holding large positions got hit by something like a speculative attack where every counterparty in the world had an incentive to bet against it.

No credit rating agency could have possibly comprehended with the complexity of information, and the pace of events, that unfolded in the endgame. Bear Stearns was a publicly listed firm, so the stock price generated a daily estimate of the default probability (as did the CDS). Both these market-based indicators of distress worked very well. A curious little difference between Bear Stearns and LTCM: Neither of these two realtime indicators existed for LTCM.

For older material on the death of Bear Stearns, do see this blog post. While we dodged a bullet here, the world bounced back quite nicely.

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