Gill Grisholm and Haratio Kane are the solemn stars of the hit TV series CSI, Las Vegas and Miami. In Switzerland the series is known as ‘Les Experts’ and it looks like there are a number of experts looking over the body of Bear Stearns and crying foul.
The official line is that BS was killed by rumours which caused major lenders and clients to run for the hills leaving the bank in no position to continue with its business. Despite several calls from the CEO that the company was ’strong’ the markets deserted BS and left it to traders to perform the coup de grace.
Knowing that the bank was going down and betting that way may not have been a trade needing to be put together by a rocket scientist, but what would be extremely important was to known when. This has become the focus of an investigation into insider trading.
Traders have questioned one big trade with odds of success so low it has been called the ‘equivalent of buying a lottery ticket’. The deal is that someone bet $1.7mn that Bear Stearns would suffer a massive decline within days. Whoever placed the bet used so-called put options that gave purchasers the right to sell 5.7 million Bear Stearns shares for $30 each and 165,000 shares for $25 a piece just nine days later, data compiled by Bloomberg show. That was less than half the $62.97 closing price in New York Stock Exchange composite trading on March 11. The buyers were confident the stock would crash.
“Even if I were the most bearish man on earth, I can’t imagine buying puts 50 percent below the price with just over a week to expiration,” said Thomas Haugh, general partner of Chicago-based options trading firm PTI Securities and Futures LP. “It’s not even on the page of rational behavior, unless you know something.”
The 5.7 million puts that traded March 11 at the $30 strike price and the 1,649 that traded at $25 were collectively worth about $1.7 million, Bloomberg data show. Each put is equal to 100 shares of stock.
The following four days saw BS collapse in the fastest investing banking failure in history. Bear Stearns’s stock sank 47 percent to $30 on Friday, March 14. That’s when the Fed moved to stave off a panic by helping the U.S. Treasury arrange JPMorgan Chase & Co.’s purchase of the company for $2 a share.
Then, on March 14, the CBOE listed a series of put options with less than five days to expiration. The lowest strike price, $5, was more than 90 percent out-of-the-money in what options traders refer to as a “bankruptcy put.”
The $25 Bear Stearns puts, and others obtained March 14 involving the right to purchase 630,000 shares at a strike price of $5 by March 22, were “bizarre,” according to Haugh, the PTI partner who spent 18 years as a CBOE options-market maker.
Three days later the BS price was $3. It made a crazy trade look like genius. The SEC is suspicious and believes that whoever placed these trades was dealing from the bottom of the deck.
Following the money, which is often the mantra of fraud investigators, should not be too difficult these trades are estimated to have made someone over $270mn.
Bear Stearns has forwarded options data to the Senate Banking Committee and the SEC, said a person close to the firm, who declined to be identified.
“Nobody in their right mind would buy that put unless you knew what was going down,” said Ray Wollney, Olagues’s partner at Truth in Options.
I would suggest that whoever placed these trades start putting together the evidence that they did it on a massive hunch or ‘fess-up’ as soon as they can.
As Gill Grisholm says in CSI ‘The answer is in the evidence’ and it appears that there is a weight of evidence that needs to be explained by someone.
I think the regulators will be polishing their hand-cuffs again soon.
CSI Picks Over Bear Stearns Body
On August - 11 - 2008
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