As early as August 2004, Mr. Rosenberg, Chief Economist at Merrill Lynch for North America, published a detailed analysis regarding the precarious state of the American housing market. Rosenberg warned that there could serious problems ahead in an Economic Commentary entitled: “Housing: If not a Bubble Then an Oversized Sud.”

Former Bear Stearns Chief Equities Investment Strategist Francois Trahan first published a report that raised serious questions about housing and real estate investments in a May 2005 report called “REIT all About it.” Trahan and his team at Bear Stearns followed their 2005 report with publications in 2006 that explicitly warned about the difficult future facing the U.S. housing market and even raised the possibility of a global credit crisis. The 2006 Bear Stearns reports definitively described the housing market as an unsustainable “bubble” and further cautioned that the term bubble was not one the Bear team used lightly.

It was not until 2008 that overcommitments to mortgage-backed securities (a byproduct of the housing boom), CDO’s and related products tied to residential and commercial mortgages caused Merrill Lynch and Bear Stearns to suffer backbreaking losses so severe that Merrill sold itself to Bank of America and Bear Stearns narrowly avoided bankruptcy with a Fed-assisted fire sale to JP Morgan.

Significance of the Merrill Lynch and Bear Stearns reports

The reports at issue may show that senior management at Merrill Lynch and Bear Stearns should have foreseen the liklihood of a looming financial crisis with ample time to permit business model shifts that may have prevented crippling losses and, ultimately, the end of these former pillars of Wall Street as independent companies. While the ultimate import of the reports remains to be seen, there is no doubt that the documents are crucial to the touchstone litigation element of foreseeability. In a litigation sense, the question of foreseeability asks at what point in time senior management at these investment banks should have foreseen the possibility of the disasters that eventually befell them.

Likely Defenses and Response

When confronted with documents like the reports at issue, senior managers may respond that they cannot be expected to read the huge volumes of research produced by their companies. The significance of these reports is that they conclusively establish the views of top economic analysts at Merrill Lynch and Bear Stearns. Whether plaintiffs’ attorneys prove that senior management at the two investment banks actually read the reports ought to be immaterial.

These aren’t simply the comments of some junior level analysts. We’re talking about the Senior North American Economist of Merrill Lynch and the Chief Equities Strategist at Bear Stearns. Any claims by their CEOs and the other senior decision makers at these banks to the effect that they should not have been well-aware of the opinions and outlooks of the top economic and market experts at their companies are simply not credible.

Remember, from mid-2004 until the subprime crisis had clearly arrived, the Fed steadily raised interest rates. For lesser quality borrowers, most of whom had adjustable rate mortgages, higher interest rates meant higher default rates. To say the least, there was great uncertainty as rates were rising about where we were headed. Then, the housing market slowed. I’m talking about 2005 now, before home values really fell off the table. It strikes me as incredible that the kinds of warnings in these reports were out there for years, yet seem to have gone unheeded.

Adapted from press release by Wall Street litigator Brett Sherman of The Sherman Law Firm which represents individuals and institutions seeking to recover investment losses.

In the first reports, the Fed indicated it netted $2.7 Billion in the first quarter, largely on gains from Term Auction Facility (TAF) loans and on its Commercial Paper Funding Facility; earned $4.6 Billion from Treasury bonds which it started purchashing in March; and lost $5.3 Billion on Bear Stearns and AIG collateral.

Federal Reserve Credit and Liquidity Programs and the Balance Sheet

Link to Federal Reserve Credit and Liquidity Programs and the Balance Sheet reports.

RECESSIONWIRE May 14, 2009: “So… how big is your package?”

It’s a question that used to be taboo, something only discussed between intimates. But these days, virtually no one is too shy to ask about the dimensions of someone else’s severance deal. In fact many people can’t help but compare what they received against the packages of their friends, enemies and former coworkers.

It’s natural to want to know how you measure up. And information sharing in this regard can be valuable because as you’ve no doubt realized by now, severance packages come in all shapes and sizes—some generous, many decent, some completely non-existent. So what’s fair and what’s your legal due… and technically what is severance anyway?

Severance, as defined by the American Heritage Dictionary is: “The state or condition of being severed or separated, as in the ending of a relationship.” But you already suspected it was a parting gift for being dumped, didn’t you? Legally speaking, severance pay is what an employer gives an employee at the time of termination. It is sometimes given in lieu of notice (as in, “So sorry to let you go. But here’s two weeks of pay. Don’t let the door kick you in the ass on the way out.”) Sometimes a company provides severance based on how long you’ve been in your job; for example, one week of severance for every year of service. But depending on how poor the financials of the company at the time, sometimes the employer will offer a flat two weeks of pay regardless of your length of service. And sometimes, you’ll get bupkes—Yiddish for diddley squat.

What? No severance? Is that even legal? In fact, there is no law that requires a company to give any severance pay. Unless you have an employment contract or were party to a collective bargaining agreement that set terms of severance up front, you were an “employee at will.” (That means that you can be fired at any time with or without cause, just not for a discriminatory reason.) So regardless of how good your performance or how long you worked for a given employer, the company is not required to give you anything when you’re terminated.

Many companies give severance as a penance for knowing they’ve just put your kid’s college fund— and your mortgage payment— on the line. But very few offer it with no strings attached. Any company with a right-thinking lawyer will require that before the company hands you a dime to which you’d otherwise not be entitled by law, they are going to get you to give up certain rights in exchange for that cash. So along with the promise of a severance payment, they send you off with a document called a “Severance Agreement.” What if your company does offer you a package–and a pen to sign off on it with–mere moments after they’ve told you your “relationship” is over? There are some things you must consider.

First, look for the waiver of all claims. That means that if you accept the money, you agree not to sue them for any reason related to your employment or the termination of your employment. If you don’t believe you have any claims against the company anyway, this is not a problem. But if you happen to notice that every one of the members of your protected class have been laid off (say, workers over 40) then you may wish to speak to an attorney before deciding whether or not to accept the trade.

Second, look for other obligations like an agreement not to compete. If by taking the severance pay you have to agree not to work in your former company’s industry for a set period of time, consider whether that’s a wise move before signing.

Third, check how long you’ve been given to accept the severance. If you are a worker over 40 and have been terminated individually, you should be given at least 21 days to consider the offer (which gives you time to consult with a lawyer) and even once you’ve signed the agreement, another seven days to revoke your signature. If you’re given the severance as an incentive for early retirement or other reason that affects a class of older workers at your company, you should be given 45 days to consider the offer. That doesn’t mean you must wait, it just means you have a bit of time to clear your head and make a good decision on whether or not to accept severance.

Finally, even though your employer isn’t legally obliged to offer you severance, it doesn’t mean that it wouldn’t. It also doesn’t mean that they won’t negotiate. Particularly where you are a member of a protected class who MIGHT have a legal claim to make, or where you are going to be forced not to work in your industry for a set period of time, you may have some room to negotiate. So ask the person who gave you the agreement if this is the best offer the company can make given what you’ll be giving up. Or you can try to explain that you’ll have trouble making your rent to see if the company would be willing to give you more. Though it’s impossible to know if this request will be honored, the only guarantee you have is that nothing will change unless you ask for it. In other words, we encourage you to be your own best advocate.

By Amy Epstein Feldman & Robin Epstein and originally published by RecessionWire.

In Cayne’s words, “You can count on us.”  Less than seven months later, Bear was purchased by JP Morgan for $10 per share.

A year later, Cayne sang a completely different tune in an interview with Fortune Magazine titled “The Rise and Fall of Jimmy Cayne.” The ex-Bear Stearns CEO revealed that the strength he projected in the summer of 2007 was in fact false strength. Fortune reported that Cayne “did not know how to deal with the devaluation of the firm’s mortgage-backed securities and other illiquid assets.  Nor did he know what to do… when two hedge funds that contained those same toxic assets collapsed and further poisoned the company’s balance sheet.”

The truth according to Jimmy Cayne himself is that Bear’s all-powerful dictator was paralyzed by indecision in the wake of Bear’s hedge fund troubles. Cayne had absolutely no idea how to cope with the company’s financial troubles.

In the CEO’s own words: “It was not knowing what to do. It’s not being able to make a definitive decision one way or the other, because I just couldn’t tell you what was going to happen.”

“I didn’t stop it. I didn’t reign in the leverage,” Cayne also admitted to Fortune.  Clearly, Mr. Cayne understood that Bear was overleveraged and blames himself for  doing  nothing about it.

Conspiracy Theories…

The last widely known conspiracy theory that proved to have any merit was the 1916 poisoning, shooting, and– at last– drowning of mad Russian monk Rasputin.

Still, conspiracy theorists have little to do without a conspiracy of the moment.  The fall of Bear Stearns has been embraced by some as their plot du jour.  Jimmy Cayne has joined the hunt for a gunman on the grassy knoll.

Fortune discredits Cayne’s delusions with simple common sense:

What Cayne’s conspiracy theory overlooks is the fragility of Bear’s balance sheet. Regardless of whether hedge funds and short-sellers exploited the firm’s weakness, it was Cayne and his colleagues who made the firm financially vulnerable. They sealed the firm’s fate by choosing to finance the vast majority of the firm’s daily needs - about $50 billion a day - in the overnight repurchase agreement(or “repo”) market, using some 71% of its mortgage book as the collateral.

Bear’s reliance on overnight repo effectively gave the overnight lenders - such as Fidelity and Federated Investors - a vote on the firm’s viability every night. And during that fateful week in mid-March, those overnight lenders voted a collective no.

Breakingviews.com made this insightful comment about the Fortune Article:

Cayne’s admission that he didn’t know what to do, even last summer, is extraordinary. If that was the case, [Cayne] should have handed the reins to someone else with more ideas – or been forced to do so by Bear’s board. But no-one seems to have challenged his leadership until too late.

The Fortune article is remarkable.

Jimmy Cayne was still the all powerful Oz at Bear Stearns in the summer of 2007.  Yet, the former CEO admitted that he was a deer in the headlights following the collapse of Bear’s subprime hedge funds.

Cayne misled the public by writing letters, issuing press releases, and participating in conference calls designed to sure up the shaken confidence of investors, banks, and journalists in Bear Stearns.

Cayne’s concession that he did nothing to right the foundering ship his company had become means that he was in no position to assure the public that things would be fine when he, himself, was so worried about the future that he was frozen by his own doubts.  Cayne could not make decisions, and he could not take actions (aside from firing people, which he always did during crises).

Jimmy Cayne withheld material information regarding his own fears that Bear Stearns was on thin ice.   He misled shareholders and the public many times in the late summer and fall.  Cayne’s material misrepresentations and omissions are securities fraud.

The CEO was not doing a thing to fix the numerous problems at Bear Stearns following the collapse of the subprime hedge funds (nor, apparently, was anyone else).  Jimmy Cayne did not even bother to address the only real issue - how to restore Bear’s health for the long-term. Cayne, in his own words, “didn’t reign in the leverage.”  He could have.

Bear’s 2007 fund disaster demonstrated in bright neon lights the extreme danger of over-reliance on leverage.  By not taking affirmative steps to reduce leverage throughout the company, and by continuing to rely on short-term financing for the bulk of Bear Stearns operating costs, Cayne and the rest of Bear Stearns senior management (including soon to be CEO Alan Schwartz) were continuing a grossly irresponsible, and probably fraudulent, course of conduct that began at Bear Stearns far earlier than the summer of 2007.  It was a pattern characterized by a laser-sharp focus on short-term profitability, an inexcusable overconcentration of (what became) toxic (illiquid) mortgage-backed-securities (MBS) in Bear’s own portfolio, maintenance of startling debt to equity ratios, dangerous reliance on overnight repo financing, a desperate need for a cash infusion, and a truly mind-boggling disregard for risk management.

By March of 2008, Jimmy Cayne had been deposed.  Bear Stearns, however, still was on a road to likely destruction.  In March, the company was probably even more highly leveraged than it had been the preceding summer. Huge sums of overnight repo lending still were absolutely required to fund Bear’s daily operations.  There had been little if any thinning out of the huge positions Bear held in toxic MBS.  Despite some false starts and a deal with Chinese bank Citic, the needed substantial cash infusion had not materialized.  Risk management appeared no better.  The same problems that plagued Bear for so many months were the primary factors in the destruction of the once-respected investment bank.

When Bear’s MBS portfolio was no longer acceptable to secure financing from short-term lenders, Bear Stearns found itself without sufficient funds to operate the company.  Combined with a run on the bank, Bear Stearns simply ran out of money and time. The rest is history.

Wall Street litigator Brett Sherman represents individuals and institutions seeking to recover investment losses.  Oringially published in his Wall Street Law blog.

Are federal bailout programs like a roulette wheel? From the makers of South Park.

These insider loans, generally made to high net worth individuals, most of whom have suffered significant declines in their net worth due to investment portfolio losses, could very conceiveably become bad loans given the likelihood the loan criteria used in making these loans was favored.  And to think public, tax payer money has been used to support parts of these insider loans.  Seven of the 10 banks with the largest insider loans received a total of more than $50 billion in the banking bailout late last year.

Add these perks to the outrageous bonuses and you see the public outrage has only just begun.

(Photo: Texas Agricultural and Mechanical College. Boar.  Arthur Rothstein, January 1942.  Depression era photograph captions by financial professional Cathleen Rittereiser.)

Does it take 73 millionaires to wind-down a toxic investment portfolio?

What about the bonuses paid to other Wall Street firms?  Last week Merill  Lynch was in the crosshairs for shotgunning year-end bonuses just prior to the Bank of America takeover.  Is AIG merely the culprits of the week or was the firm’s bonus behavior more egregious than that of other TARP recipients?

Typically, investment banks pay out as much salary as they net in income.  That’s nearly $10,000,000 for banks like Goldman Sachs and Morgan Stanley.  That would buy AIG’s Financial Products staff many tmes over.  On a per employee basis, the investment bank average bonuses are far higher than AIG’s for many job categories.

AIG is no exception to the conduct of other bailout recipients.  It’s employees, however, may be the victim of a slow news cycle.  News of Merril’s bonuses hit while the Madoff scandal was receiving full press news coverage.  Misuse of bailout dollars was indeed in need of a poster child.  That the message turned out to be delivered on a Most Wanted poster is testimony to the growing public outrage.

(Comic captions of Depress-era photos by financial professional Cathleen Ritterreiser.)

On the same day the federal government announced an additional $30 Billion of aid for insurance giant AIG, the Fed Chariman and Treasury Secretary had this to say about the company in seperate Congressional hearings:

“AIG exploited a huge gap in the regulatory system, there was no oversight of the financial- products division, this was a hedge fund basically that was attached to a large and stable insurance company.”
- Federal Reserve Chairman Ben Bernanke

“AIG is a huge, complex, global insurance company attached to a very complicated investment bank, hedge fund that was allowed to build up without any adult supervision.”
- U.S. Treasury Secretary Timothy Geithner

(Bailout captions of Library of Congress Prints and Photographs by financial professional Cathleen Rittereiser.)