Bear Stearns Buy-Out... 100% Fraud
By John Olagues Truth in Options

Apr/24/2008

This article is about how Bear Stearns stock was artificially  
collapsed so that illegal insider traders would make billions and  
J.P. Morgan would be paid $55 billion of US tax payer money to shore  
up themselves and buy Bear Stearns at bankruptsy prices.

Massive buying of puts and shorting stock in Bear Stearns

On March 10, 2008, the closing price of Bear Stearns was 70. The  
stock had traded at 70 eight weeks earlier. On or prior to March 10,  
2008 requests were made to the options exchanges to open new April  
series of puts with exercise prices of 20, and 22.5, and a new March  
series with an exercise price of 25.

Their requests were accommodated and new series were opened for  
trading March 11, 2008. Since there was very little subsequent  
trading in the call with exercise prices of 20, 22.5 or 25, it is  
certain that the requests were made with the intentions of buying  
substantial amounts of the puts. There was, in fact, massive volumes  
of puts purchased in those series which opened on March 11, 2008. For  
example: between March 11-14 inclusive, there  were 20,000 contracts  
traded in the April 20s, 3700 contracts traded in the April 22.5s,  
and 8000 contracts traded in the April 25s. In the March 25s, there  
were 79,000 contracts traded between March 11-14, 2008.

Question: Why did the options exchanges not open the far out of the  
money puts for trading the first time that Bear Stearns stock hit 70,  
when the April and March options had far more time to expiration?  
Certainly if the requesters were legitimate hedgers or speculators,  
their buying the March and April puts with 2 and 3 months to  
expiration was more reasonable.

Answer: The insiders were not ready to collapse the stock and did not  
request the exchanges to open the new series when Bear Stearns first  
hit 70.

Second Request and Accommodation

On or prior to March 13, 2008, an additional request was made of the  
options exchanges to open more March and April put series with very  
low exercise prices.

These new March put options would have just five days of trading to  
expiration. The exchanges accommodated their requests, knowing that  
the intentions of the requesters were to buy puts. They indeed bought  
massive amounts of puts. For example the March 20 puts traded nearly  
50,000 contracts (i.e. contracts to sell 5 million shares at 20). The  
March 15s traded 9600, the March 10s traded 13,000 and the March 5s  
traded 6300 all on March 14 (the first day of trading of the new  
March series).

The introduction of those far-out-of-the-money put series in the  
April and March months immediately before the crash provided a  
vehicle whereby extreme leverage was available to the insiders. In  
other words if an insider had $100,000 and he knew that Morgan would  
buy Bear Stearns at 2, he could make 5-10 times more on the $100,000  
by buying the newly introduced March puts. This is so because the  
soon to expire far out-of-the-money puts were far cheaper than the  
July or October out-of-the-money puts. And that is why the illegal  
inside traders requested the exchanges to introduce the far out-of-
the-moneys just days before the crash.

But this scenario has serious implications. This means that the deal  
was already arranged on March 10 or before. That contradicts the  
scenario that is promoted by SEC Chairman Cox, Fed Boss Bernanke,  
Bear CEO Schwartz, Jamie Dimon of J.P. Morgan (who sits on the board  
of directors for the New York Federal Reserve Bank) and others that  
false rumors undermined the confidence in Bear Stearns making the  
company crash, notwithstanding their adequate liquiduty days before.

I would say that the deal was arranged months before but the final  
terms and times were not determined until maybe March 7-8, 2008.

On March 14, 2008, the April 17.5s, the 15s, the 12.5s and the 10s  
traded 15,000 contracts combined. Each put gives the right to sell  
100 shares. So for example,  these 15,000 April puts gave the  
purchaser(s) the right to sell 1.5 million shares at prices between  
10 and 17.5. Those purchasers expected to make profits on 1.5 million  
shares because they knew the deal was coming at $2.00.

That is the only plausible explanation for anyone to buy puts with  
five days of life remaining with strike prices far below the maket  
price.

So there were requests, during the period of March 10-13, to the  
exchanges to open the March and April series for buying massive  
amounts of extremely out-of-the-money puts, which were accommodated  
by the options exchanges. Did the Exchanges aid and abet the insider  
trading scheme?

We do not able to have a strong opinion on that idea.

Media statements of adequate liquidity.

However, Reuters, on March 10, 2008 was citing Bear Stearns sources  
that there was no liquidity crisis and that there was no truth to the  
speculation of liquidity problems.

And none other than the Chairman of the Securities and Exchange  
Commission on March 11, 2008 was stating that "we have a good deal of  
comfort with the capital cushion that these firms have".

We even had the "mad" Jim Cramer proclaiming on March 11, 2008 that  
all is well with Bear Stearns and that the viewers should hold on to  
their Bear Stearns. And on March 12, 2008, Alan Schwartz CEO of Bear  
Stearns was telling David Faber of CNBC that there was no problem  
with liquidity and that "We don't see any pressure on our liquidity,  
let alone a liquidity crisis".

The fact that the requests were made on March 10 or earlier that  
those new series be opened and those requests were accomodated  
together wth the subsequent massive open positions in those newly  
opened series is conclusive proof that there were some who knew about  
the collapse in advance, while Reuters, Cox, Schwartz and Cramer were  
telling the public that there was no liquidity problem.

This was no case of a sudden developement on the 13 or 14th, where  
things changed dramatically making it such that they needed a bail-
out immediately. The collape was anticipated and prepared for, even  
while the CEO of Bear Stearns and the SEC Chairman of the SEC were  
making claims of stability.

What was the reason that Cramer, Cox and Schwartz were all promoting  
Bear Stearns immediately before its collapse. That will be speculated  
upon for years to come.

Cramer has admitted that "truth" was not his friend and that he  
manipulated stocks to influence investors behavior. Was this one of  
his acts?

But no apologies from Cramer as he claims now that he was refering to  
keeping money in Bear Stearns Bank not in Bear Stears stock.

Proof of Insider Trading:

To prove the case of illegal insider trading, all the Feds have to do  
is ask a few questions of the persons who bought puts on Bear Stearns  
or shorted stock during the week before March 17, 2008 and before.

All the records are easily available. If they bought puts or shorted  
stock, just ask them why. What information did they have access to  
which the CEO and the SEC did not have? Where did they get the info?  
Why aren't Cramer and Cox, Dimon, Bernanke, Geithner, Paulson, Faber  
and Schwartz subject to a bit of prosecutorial pressure to get to the  
bottom of this.

Maybe the buyers of puts and short sellers of stock just didn't  
believe Reuters, Cox, Schwartz, Cramer and Faber and went massively  
short anyway, buying puts that required a 70% drop in a weeK. Maybe  
they had better information than Schwartz or Cox. If they did, then  
that's a felony, with the profits made subject to forfeiture.

April 4, 2008 Congressional Hearings on the Bear Stearns Bail-out.

I watched both sessions and drew the following conclusions:

In the first session there were the following witnesses.

Bernanke of the Federal Reserve Board, Cox from the SEC, Geithner  
representing the New York Reserve Bank and an incidental player Mr.  
Steel from the Treasury. The only Senators that seem to be willing to  
attack these bankers were Bunning, Tester, Menedez and Reed.

All the rest were useless and very respectful.

Absurdities

All witnesses did their best to keep their stories consistent but  
they did slip up a bit. They all agree that the bail-out was  
necessary without any proof that it was. They all agreed that what  
caused the cash liquidity to dry up within one day was the rumor  
mongers. Apparently it is claimed that some people have the ability  
to start false rumors about Bear Stearns's and other banks liquidity,  
which then starts a "run on the bank" . These rumor mongers allegedly  
were able to influence companies like Goldman Sachs to terminate  
doing business with Bear Stearns, notwithstanding that Goldman et al.  
believed that Bear Stearns balance sheet was in good shape. (Goldman  
between March 11-14 warned their average customers that Bear Stearns  
stock was "hard to borrow" for shorting due to the fact that other  
customers had used up all of the stock avaiable for borrowing for  
short sales) .

That idea that rumors caused a "run on the bank" at Bear Stearns is  
100% riduculous. Perhaps that's the reason why every witness were so  
guarded and hesitant and looked so strained in answering questions.

Loans to J.P. Morgan total $55 billion from FED

The Private New York FED lent $25 billion to Bear Stearns (described  
as the primary facility by James Dimon) and another $30 billion to  
J.P. Morgan (described as the secondary facility by James Dimon). So  
the bail-out cost was $55 billion not the $30 billion that is  
promoted. This was revealed at the second session of the Senate  
hearings in a James Dimon responce to a question from Senator Reed.  
Who gets the $55 billion? J.P. Morgan received the money on a loan  
pleadging Bear Stearns assets valued at $55 billion. $29 billion is  
non-recourse to Morgan.

Effectively the FED received collateral appraised by Bear Stearns at  
$55 billion for a loan to J.P. Morgan of $55 billion. That's a loan  
to value of 100%. If the value of the secondary facility of $30  
billion ($29 billion of which is non recourse) is worth only $15  
billion when all is said and done, then J.P. Morgan has to pay back  
only $1 billion of the $30 billion received and keeps the $14 billion  
the the Fed loses. If the $25 billion primary facility is worth only  
$15 billion when all is said and done, J.P. Morgan has to pay $10  
billion of the $25 billion received. If J.P Morgan can not pay, then  
the Fed loses the $10 billion.

If after all is said and done, the $25 billion primary assets or the  
$30 billion secondary assets are sold for more that $25 billion or  
the $30 billion respectively, the difference goes to J.P. No matter  
how you cut it, J.P. Morgan wins If the $55 billion assets turn out  
to be worth only $20 billion when all is said and done, J.P. Morgan  
owes $1 billion on the $30 billion and the difference between $25  
billion and the value received on the primary facility.

The best the FED can do is get their money back with interest and the  
worse they can do is lose about $25 -$40 billion. The FED would have  
been far better to just buy the assets at Bear's and J.P.Morgan's  
valuation.

The question arises:

Why didn't the FED just make the $55 billiom loan to Bear Stearns  
directly?

The FED received Bear Stearns assets valued by Bear Stearns as its  
only collateral for the 100% loan. I am sure that Bear Stearns would  
have guaranteed the full $55 billion and would have advanced more  
collateral and accepted a 90% loan to value. Everything would have  
been just fine for Bear Stearns and the FED would have had a better  
deal. But the Bear Stearns stock would have gone up and all short  
stock sellers and all put buyers would have massive losses instead of  
massive gains.

The bail-out is a great deal for J.P. Morgan, the illegal insider  
short sellers got a great deal.

Bear Stearns stock holders and employees got a very bad deal and the  
sellers of puts sustained large losses.

This shows, in my view, that J.P. Morgan and the FED were in  
collusion with the short sellers and put buyers.

John Olagues [Published March 23, 2008, link]

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