Animal Rights (and Wrongs) on Wall Street

What is admiration worth?

No less than Forbes magazine used to rate Bear Stearns among the “most admired” businesses in the country.

How that most-admired status became worth only $2 per share is going to be made more clear in the future, and a good part of it is going to come out in the conflagration of lawsuits that are only now being ignited as angry shareholders howl and lick their wounds.

To say that Cayne (CEO) and his henchmen didn’t see this coming is ludicrous; yet apparently they didn’t take steps with their own holdings to avoid massive personal paper-wealth hits and the company didn’t have golden parachutes for major players.

But as one of the key enablers in subprime mortgage securities, and in owning one of the truly predatory mortgage servicers (EMC Mortgage), Cayne and the directors had to know their scheme could only run so long. Or did they?

We may eventually get answers to the classic: What did they know and when did they know it?

Let’s face it, in 2005, 2006 and 2007, EMC Mortgage’s management was reporting something up through the ranks to Bear’s management. There had to be either signals of impending doom or over-confident fluff moving up the food chain about how quickly the toxic waste dumps could be cleaned up through aggressive loss-mitigation (read: rapid foreclosure) practices. Clearly, while not all of Bear’s portfolios were serviced by EMC, being among the most predatory of special servicers, they should have provided Bear with insight into what could or couldn’t be accomplished by the handful of companies that do the highly-profitable waste-disposal servicing in the subprime arena.

And it may have had that insight. But it seems more likely that the board was getting the fluff version of the story from within the ranks. Either that or we would have seen a lot more action on Bear’s shares from the major players who were in the know.

And that version of the theory makes sense when you consider the culture that has been allowed to thrive at servicers like EMC: Never, ever admit a mistake.

The sudden and stunning collapse of Bear’s value may indeed reflect that culture was being rewarded right up until the bitter end.

The Honorable Judge Roy Bean