Bear Stearns' James Cayne Declares He Was Innocent

I didn't see all of yesterday's FCIC hearings, but I did hear/see the beginning of former Bear Stearns Chairman James Cayne's testimony.

This morning, I read the Wall Street Journal's recap of his remarks. It makes for rather sad reading, as the article noted that not one of the defunct investment bank's five former executives admitted responsibility for the firm's demise.

According to the Journal, Cayne said,

"Bear Stearns's collapse was not the result of any actions or decisions unique to Bear Stearns. Instead, it was due to overwhelming market forces that Bear Stearns, as the smallest of the independent investment banks, could not resist."

So, after admitting that Bear's 42:1 leverage was "too high," Cayne never the less avoided and evaded taking any blame for knowing that, and allowing it.

Instead, he and his crew of former high-fliers at the firm blamed the market.

It reminds me of a lesson I learned years ago at Chase Manhattan Bank.

We were investigating, at the direction of our CEO, the productivity and profitability of the bank's securities trading business. This necessitated a few meetings with the unit's manager, an SVP. At the time, this was a fairly lofty and unassailable position at the bank.

My partner and I asked what were evidently off-putting and potentially embarrassing questions of the SVP in question, who, for this post, shall remain nameless.

In particular, when we examined the relationship between the unit's trading volumes, bonuses, profits and operations costs and requirements, it became clear what was going on. The unit required expensive facilities capacity from its IT group, but felt it should pay the lowest estimated IT costs in the industry for that type of trading.

When comparing volumes and profits, it was clear that the unit's traders and managers enjoyed outsized bonuses, but didn't take any serious losses in calm or unprofitable markets.

The SVP's response was, laughably, that in good markets, he and his traders added a lot of value but, when markets were bearish, well, that was not something they could control, so losses weren't their fault.

Sound familiar? It's like all of these large bank trading execs read the same business management manual full of aphorisms designed to let them share in gains but always avoid 'market-related losses.'

This is neither a new, nor surprising contention. It's just that Cayne's and his fellow former Bear Stearns executives' explicit statement of it is particularly nauseating, in light of events.

After Bear Stearns, Is Lehman Next To Collapse?

This week's hot investment banking story is the vulnerability of one of the remaining weak sisters among publicly-owned investment bank/brokerages, Lehman Brothers. I last wrote about this issue here in April.

Nearby is a price chart of Lehman, Goldman Sachs, Morgan Stanley, Merrill Lynch and the S&P500 Index for the past five years.

Goldman is clearly the class of the class, especially distinguishing itself since late 2006- months before last summer's mortgage finance-fueled fixed income markets crisis.

Of the other three investment banks, Lehman has the relatively 'best' performance. Of course, that's not saying very much, since none of the three could give an investor a better return than the S&P500 did over the period.

As I read yesterday's Wall Street Journal piece about Lehman's new difficulties, I noticed the article making a really big deal about how Lehman's leverage has recently been lowered from 31.7 to 27.3. Today's Journal has a lead piece in the Money & Investing section about Lehman looking abroad for capital.

In my opinion, this completely misses the point. As I wrote here in late March,

"Looking beyond simply Bear Stearns, can anyone truly justify the existence of all four of Goldman Sachs, Merrill, Lehman and Morgan Stanley? Especially in the modern world of large private equity firms and hedge funds? The former provide additional underwriting, M&A advisory and asset management, while the latter focus on providing trading capacity and investment management.

Other than emotional reaction of former employees seeing their old firm's name vanish, what would be different if one or more of those names were bought by or merged with a commercial bank?

Contrary to Andy Kessler's view, in the Wall Street Journal this past January, about which I wrote here, it's unlikely now that an investment bank will do the buying. With their high leverage and dependence upon commercial banks for funding, I suspect the investment banks are the more vulnerable. Now having access to the Fed discount window, it's only a matter of time before the regulators get around to levying a new regulatory framework on the investment banks."

It's not whether Lehman reduces their leverage right now by a pithy 4 or 5 percentage points. That's going to be irrelevant if/when their big meltdown comes. Bear Stearns saw billions of dollars of client assets, and customer business, vanish in days.

Quite simply, as I wrote in that prior post, Lehman exists at the pleasure of its commercial bank Broker Loan divisions to fund them beyond the current maturity of outstanding liabilities. Whether the leverage is 30, or 25, 20, 15, won't matter when customers leave within two days.

At that point, anything above 1:1 spells dissolution. The mechanics of profitability, risk management and leverage have simply changed for long term survival of most publicly-held investment banks.

A plethora of hedge funds and private equity shops have trimmed profit margins in virtually every investment banking business except asset management. There, the best managers head for private firms ASAP anyway. Meaning the publicly-held investment banks, with the exception, still, for now, of Goldman, are largely the province of the lesser-skilled bankers at the mercy of commercial bank funding and the need to take ever-larger risks to offset declining profit margins.

A recipe for long term death of these firms? You bet.

As I wrote later in that March post,

"A natural consequence to this will probably be even more smart financial services people migrating back to the privately-financed arena. Just like consumer goods merchandising has the 'wheel of retailing,' whereby new entrants compete at the low-cost end of the market, as existing players migrate upwards in terms of quality, service, selection and price, so, too, it seems, will financial services now have its own version of this 'wheel.'

Only in financial services, the 'wheel' is between publicly- and privately-held concentrations of capital and risk management. Again, viewed from afar over decades, the story of commercial and investment banking for the past forty years has been a gradual selling of transactions, asset and risk management businesses at their 'tops,' as formerly-private banks of both stripes went public, followed by managerial ineptitude, decline in risk management, and excesses in pursuit of growth via more risk."

And, as I wrote in my recent post on Wachovia CEO Ken Thompson's demise,

"To me, the pecking order of smart management in financial services begins with the best private equity and hedge funds. After them would come Goldman Sachs. Then.....well..I don't know if there is anyone else thereafter."

So to me, this breathless watch over Lehman's viability is sort of misplaced. As soon as confidence begins to erode, it's 'game over.' Bear's situation proves this. As I wrote in the earlier linked post, why doesn't Fuld just take the opportunity to sell to a commercial bank and retire gracefully, while his image is still in good shape?

Bear Stearns' Management's Naivete

Earlier this week, I read the second part of the Wall Street Journal's retrospective series concerning the demise of Bear Stearns. The piece ended with the following passage,

"At about 6:45 a.m., Bear Stearns officials received an email from Stephen Cutler, J.P. Morgan's general counsel. It was the draft of a news release announcing that the bank had agreed to provide Bear Stearns with financing "as necessary" for up to 28 days.

The money underwriting the rescue was coming from the Fed, which was also bearing the risk of the loan. It was the first time since the Great Depression that the Fed had made a loan like this to an entity other than a bank. It would provide the bailout through J.P. Morgan, because as a commercial bank the firm already had access to the Fed's discount window and was under the central bank's supervision.

Inside the sixth-floor conference room where Messrs. Molinaro, Upton and others had huddled, executives cheered and exchanged high-fives. They thought they had four weeks to sort out their problems."

When I read that last paragraph, I just shook my head. Those guys must be idiots.

The bulk of the article described the steady drain of customer assets and counterparty business fleeing Bear Stearns that week. Anyone with as much experience in financial services as Cayne and Schwartz should have remembered how quickly Continental Illinois Bank went from healthy to shuttered.

Once customers and counterparties smell weakness in a leveraged financial institution, it's over. Nobody will risk their cash with a counterparty or custodian who might, on any day, suddenly become insolvent. It's more than just 'staying away until the dust settles,' as one institutional customer told their Bear contact.

With sufficient numbers of other trading houses in the sector, who needs to do business with a cripple what might collapse in the next day's market decline?

What were those guys thinking? Did they really believe that the 11th-hour loan, brokered by the Fed and run through Chase, would actually save them? They didn't have a month to 'sort out their problems.'

They never had more than that weekend, because as soon as Monday morning's market open, every remaining customer would flee the obviously-weakened firm, and counterparties would step back, too.

You don't have to be a rocket scientist to understand that the Thursday night loan simply got Bear through one last day before a weekend deal to arrange the transfer of positions to whomever became the new owner of what remained of Bear Stearns.

I haven't read part three of the series yet, but the end of part two just left me incredulous that the guys at the top of Bear Stearns could have been so naive and clueless. Truly, they did not deserve to continue their corporate existence.

The "Taking" of Bear Stearns

Was Bear Stearns improperly shut down and sold to Chase this past weekend?

Was there a more equitable process by which markets and counterparties could have been assured of the performance of Bear's book of positions, while providing for a competitive bidding environment on Bear's businesses and assets?

My partner is of the opinion that whatever Paulson, Bernanke & Co. decided to do by the opening of European markets on Monday morning, the explanation of it had to

"fit on a bumper sticker."

With which I agree.

Still, was if fair to indemnify Chase to the tune of $30B for agreeing to buy Bear Stearns? Why weren't Wells Fargo or Wachovia invited to bid on the same terms, with the same $30B guarantee?

Or, for that matter, a consortium of private equity firms?

Could not the Fed and Treasury have acceded to Schwartz's call to declare Chapter 11 bankruptcy, immediately move to name an official in charge of the process, and hire Chase or some other firm with trading facilities to operate Bear's book with loans backed by Fed guarantees? Then take a month to auction the pieces of Bear Stearns?

It seems to me to be a somewhat unlawful taking for the Fed and Treasury to have forced Bear to sell itself in an uncompetitive bidding situation.

Rather than bundle the financing of the firm with its purchase, it seems to me that Fed and Treasury officials could more easily have foreseen this type of meltdown. It's hardly unique, in that LTCM suffered the same type of margin calls and liquidity crisis when it failed ten years ago.

Somehow, giving Chase and Jamie Dimon a sweetheart deal for far less than they were reported to have bid, with a $30B loan guarantee gift is out of character in a 'private sector' solution.

No doubt there will be litigation about this in ensuing months. I'm not arguing for the shareholders getting more for the wreck of their firm. As equity owners, they are last in line, and, sadly, especially the one-third of owners who were also employees deserve what they get for not diversifying their investments from the source of their livelihood.

Rather, I am concerned, as a taxpayer, that the Fed has used my money to guarantee the value of assets involved in the takeover, but only by offering the sweetener to just one firm. Why not to any potential bidder?

On Bear Stearns' Demise & Its Purchase By Chase- Part One

Just two weeks ago today, I wrote this post on commercial banking concentration. Little did I know that I would be so close to the truth, and by such a short amount of time.

Rather than the collapse of a commercial bank, it is an investment bank/brokerage- Bear Stearns- that has failed. But the thrust is the same, as has become clear from comments of many pundits in the last 24 hours. And from an analysis of the current condition of financial markets.

As I most recently wrote on the 'mark to market' issue here, a few days after the other linked post,

"As I began to suggest in my earlier post, businesses and companies in the business of trading and investing with the constant expectation of selling and buying securities should probably mark their assets to market daily. If that causes them to use less leverage or avoid exotic structured finance instruments, so be it.

Financial service businesses intending to hold assets, whether they be whole loans, exotics, or what have you, beyond a pre-determined duration, should probably be able to value those assets on the basis of performance, rather than immediate market value."

In essence, Bear Stearns got caught in the former situation, holding large amounts of exotic securities, for which there is no current 'market,' with borrowed money. Between increased demands for collateral and worries over its liquidity, its counterparty risk made it an unsustainable trading entity.

Goodbye Bear Stearns.

Because of the genesis of this current financial turmoil, exotic, somewhat opaque structured finance instruments, I wrote this post last September. In it, I opined,

"Now, with this latest credit market debacle, the first since really heavily asset securitization of mortgages and corporate loans have kicked in, we are learning that there are market conditions under which non-banks may not be viable for very long, if they originate and/or hold volatile fixed income assets.

It's an interesting phenomenon. Who would have guessed that there was life in the old commercial bank model, yet?

Back in my days at Chase Manhattan, our group's boss, Corporate Planning & Development SVP Gerry Weiss, attempted a number of efforts calculated to move Chase into some sort of arrangement with a US investment bank, in order to, as he put it, so to speak,

'get their management in charge of our assets, with the advantages of our regulatory structure.'

Therefore, it's ironic to me that something like this might happen. Sure, Sandy Weill agglomerated a bunch of different piece parts to form the now-unwieldy Citi bank. But Salomon and Smith Barney are now almost lost inside of it. And the bankers remained in power, as the investment banks they took over had been weakened by various events.

Now, it would be possible to see a Chase or BofA take Bear Stearns, for example.
An interesting development in the quest for a viable, efficient, profitable organizational structure with which to transact fixed income businesses."

So I guess I did sort of foresee this development. But, being no particular fan of Jamie Dimon, I wouldn't give him too much credit just yet.

For one, Chase is the only true money center bank left standing which can absorb Bear Stearns right now. Citigroup and BofA both damaged themselves with unwise capital markets activities last year.

Second, it's not clear that Chase has really bought much of value. At $2/share, it would seem that the bank doesn't put more than notional value on the 'assets' it has purchased. Mostly, it seems this is a favor to the Fed and the US banking system, as a sort of quid pro quo for the status Chase enjoys as one of the largest US commercial and money center banks.

Now there are some who allege that Bear's CDO book will eventually become quite valuable, yielding a profit windfall to Chase, and, thus, making Dimon look like a prescient hero in a few years.

If that's true, though, again, it's not through any particular wisdom of Dimon's that this has occurred. If Citigroup had been healthier, there would have been a bidding war. And what is the fairness of making Bear Stearns mark such a book to a non-existent, zero-value market, force it to sell itself to Chase for a song, only to allow Chase to hold zero-value instruments in case they do, and, probably will rebound in value over time?

According to CNBC this morning, the Fed preferred Chase to J.C. Flowers as the rescuer of Bear Stearns.

Why? Perhaps Flowers correctly understood the longer-term value of Bear's exotics, and was willing to pay a bit more than $2/share to own them. In fact, it was reported that Chase had bid up to $15/share when competing with Flowers to buy Bear.

I'll add some more thoughts shortly in part two of this post topic.

Alan Schwartz' Big Challenge At Bear Stearns

Yesterday's Wall Street Journal's Money & Investing section featured Alan Schwartz and Bear Stearns in the article "Can New CEO Repair Bear?"

Coincidentally, I heard parts of Schwartz' interview on CNBC that morning, as well. In the interview, Schwartz was careful to avoid saying anything negative whatsoever about his longtime employer. The recent mortgage excesses are 'old news.' They are, according to the new CEO, well-balanced and focused on sustained growth businesses.

To hear Schwartz describe Bear Stearns, you'd think his ascendancy to the CEO position at Bear is business as usual.

However, the Journal asks,

"How would Mr. Schwartz turn around a company, which is now trading at a level below its stockholders' equity?"

How indeed? In a market already roiled by mortgage woes, partially of Bear's own making. Fueled by its chairman, Jim Cayne's, intemperate, self-serving comments last summer that it was the 'worst fixed-income market (he'd) ever seen,' or words to that effect.

Schwartz' initial comments on his plan to revive Bear, as reported in the Journal piece, include,

"exiting from unwanted positions in leverage loans and in mortgages; find new ways to make profits in the changing fixed-income business; and nurture Bear's healthier business units, like its growing international operations and energy unit."

Oh boy. Not one of these avenues out of Bear's mess involves unique strengths or any sort of competitive advantage for the ailing firm.

As I considered the article, the interview, and this post, it occurred to me to ask a simple question about the major, publicly-held US investment banks:

"What, if any, is the key source of competitive advantage for each one?"

What I came up with, off the top of my head, is:

Goldman Sachs: risk management and focused trading expertise

Merrill Lynch: ostensibly broad, valued retail distribution

Morgan Stanley: perhaps a one-time strength in old-line industrial investment banking contacts

Lehman: focused fixed income trading businesses

Bear Stearns: entrepreneurial zeal and nimbleness borne of small size

Given that Bear took mortal body blows to its capital and reputation in 2007, I think it no longer has a competitive advantage. Its prior strength has become its Achilles heel.

Too bad for Alan Schwartz. He seems to be a very competent M&A guy who has been handed an atrociously bad hand in a long-running card game, but without many chips.

Between the currently volatile financial markets, Bear's competitors, and its own badly damaged reputation, involving the two mutual funds from which Cayne tried to absolve any responsibility last year, I'd be disinclined to believe that Bear Stearns has any significant chance of earning consistently superior total returns for its shareholders for years.

It may get a temporary pop in its stock price at some point, if it simply survives for a while. But I don't see a long term basis for its ability to ever justify investment in it for total return performance.

Risk Week: Bear Stearns, Jim Cayne & Warren Spector

Last weekend's Wall Street Journal edition carried a rather detailed article on the people and actions that led brokerage firm Bear Stearns to its current, sub-prime mortgage fueled debacle. A debacle that has now claimed one casualty, board member and head of stock and bond trading, Warren Spector. And may yet claim another, Chairman James Cayne, contrary to his rather boastful statement that he intends to remain until 2011.

Basically, Cayne and Spector screwed up and lost significant amounts of shareholder value, owing to their failure to properly oversee risk management among Bear's positions in various esoteric debt instruments.

Bear Stearns deserves to be in trouble. From just the cursory details in the Journal piece, you can see Spector's rise as a fast gun trader. The type of swaggering trader who demands ever more lush and powerful packages, in order not to bolt to a larger firm, like Goldman, or some hedge fund. In his case, Spector happened to share an interest with the current Chairman. They both play bridge, and Spector was a phenom as a youth. Cayne recognized his name.

As my partner mentioned at lunch today, wasps like Cayne, at Wall Street firms like Bear, are more clubby and parochial than people might imagine. Having passed muster as a bridge maven, it appears that Cayne essentially gave Spector a pass on any more supervision.

Thus, Spector was given a board seat at Bear at age 30. Shortly thereafter, apparently after elbowing a rival off the path upward, the command of Bear's equity and fixed income trading functions. Last year, Spector was paid some $33MM by Bear.

It's important to note how such large compensation packages affect the behavior of management at such a firm. Neither Cayne, nor Spector, was going to go homeless if whatever their equity interest in the firm became worthless. Even the lack of many more years of such compensation isn't exactly becoming poor.

So, if anyone thinks that financial consequences would ever figure in supplying some sense of risk awareness and prudence to either Cayne or Spector, think again. Folks at that level are motivated more by power and prestige than by money. The former are provided by others, as a function of staying in power, while the latter becomes a non-motivator pretty quickly at those sums.

Thus, we find both Cayne and Spector, laughably, attending a bridge tournament during a key week in July, when the fortunes of their firm were souring. You cannot make this stuff up.

It's debatable whether Spector, or anyone else, can do much about Bear's position. Let me make some conjectures.

First, the problems stem from rather exotic debt instruments which are not always traded. See this post , from yesterday, for some more details on how this works. Perhaps some forms of credit derivatives are also involved.

How do you price instruments which are either seldom traded, individually tailored, over the counter, and/or based upon exotics? Well, without much confidence is the answer.

As a one-time partner of mine, B, who built a well-known Street mortgage business, used to tell me,

"A model can tell me what something was worth yesterday, or may be worth tomorrow. But the only way I know what it is worth today is to take a piece and offer it, and see what the bid is."

Just so. And very scary, since if the bid is much lower than the carried value by the firm, the difference in value must be marked down.

Now, if these instruments were hedged, with credible counterparties, then one reasons that the damage would be contained, right? For limiting upside profit, a downside loss could be minimized.

What do you want to bet very few of Bear's positions were hedged? Because, after all, limiting profits limits bonus pools and, therefore bonuses. And who wants that? The firm pays out bonuses from those profits. It never allocates the losses to the traders.

With such a handsome asymmetric payoff matrix, why would the traders or their managers hedge much of the risk? Besides, the models probably assumed they could simply sell problem instruments when needed, per my earlier post.

So, it's not hard to imagine Bear having held, unknown to the senior managers who didn't really want to, or know how to, ask many piercing questions, that, in mutual funds and/or on proprietary trading desks, there has been substantial, unhedged exposure to some thinly-traded, esoteric debt.

That Cayne would so callously and dangerously declare the current debt markets to be the 'worst in 20 years,' is a measure of the depth of Bear's desperation and situation. By attempting to make the system and market the problem, he hopes to deflect observers from the truth- that Bear got into this mess on its own.

Fortunately, quite a few pundits, and Ben Bernanke, have vocally disagreed with Cayne's view, since his over the top comments in last week's conference call.

As Herb Greenberg, of Marketwatch, noted, this is one case where the retail investor dodged the bullet, because the class of instrument which has disintegrated is too complex and inaccessible for most of them. The institutions which have been brought down or damaged- mortgage companies, fund managers, brokerages- all knew what they were doing.

Typically, every decade has its financial debacle. It usually features young, inexperienced traders and risk managers who believe they have everything under control. More senior managers, with prior experience during financial market meltdowns or major problems, are typically further from detailed knowledge of the risk management and positions, and better insulated, financially, from damage, should the firm go under.

Bear's senior executives, Cayne and Spector, deserve to lose their jobs. Bear, as a firm, probably deserves to be bought or acquired by a better firm. In the final analysis, the company finally seems to have run afoul of its buccaneering attitude and less-than-adequate risk management, losing

As the nearby, Yahoo-sourced chart displays, Bear has lost considerable value this year. More than two-thirds of its returns for the prior two years.

Management like this deserves to be replaced. But in a firm with a culture like Bear's, that may not be sufficient. The whole firm may need to go down.

Bear Stearns' Miscalulations

The Wall Street Journal has, understandably, featured several recent articles regarding the Bear Stearns hedge-fund debacles. A piece in the Weekend Journal focused on whether or not Bear would stand behind its one failing fund. Another, yesterday, discussed the mechanics of marking sub-prime-backed CDOs to market. Today's Journal returned its focus to Bear Stearns' corporate situation, as it manages the two hedge funds which have racked up such appalling losses so suddenly

I've spoken with several friends about the developing situation at Bear Stearns. We all agree that this is yet another instance of financial service CEOs on the non-commercial bank side of the sector seemingly ignoring obvious signs of public discontent with their behavior.

To understand some of what is occurring with Bear Stearns, you need to recall that James Cayne, the company's CEO, refused to join the rest of Wall Street in bailing out Long Term Capital Management in 1998. I have been told that he personally rebuffed Merrill Lynch's then-CEO, David Komansky's request that Bear join the party in working out a rescue.

Instead, Bear stood on its legal claims, and refused to reset terms of its loans to LTCM.

Now, of course, the shoe is on the other foot. This probably explains, in large part, why Merrill recently moved quickly to seize and auction collateral it held for margin loans to Bear's troubled hedge fund.

Yes, what goes around, comes around. Even if it takes a decade or so to do so.

This weekend's piece in the Journal was eye-opening, as Bear's fund manager, Ralph Cioffi gathered his fund's creditors in a meeting and demanded, among other concessions, a 12-month moratorium on margin calls against the fund by its lenders. While doing so, however, he acknowledged, to an inquiring creditor, that the fund's notional parent, Bear Stearns, did not anticipate providing any capital to shore up the fund's losses during this period.

This is the sort of attitude that not only irks other Wall Street firms, but is seen by the less-well informed public as simply walking away from responsibility.

It's likely that, as with most funds, the two troubled Bear Stearns funds are technically separate corporations, 'owned' by their shareholders, with a separate 'board,' and a contract given to Bear Stearns to manage the fund. Thus, Cayne's attitude that Bear has no technical obligation to assume, or make good on, or even simply provide capital for, the egregious losses in these funds.

Let's be clear on the sort of funds these are. They were developed within the past year or so, explicitly to bottom-fish the sub-prime loan market. They constitute organized efforts to take advantage of the sector's problems, buying low and, so the funds' managers hoped, holding and selling as the sector turned around. Only it hasn't turned around.

Basically, Cioffi and his colleagues made a naked bet on the direction of yields and prices of sub-prime mortgage loans, and got it wrong. By leveraging something like 10:1, they blew through the equity behind their fund with recent losses.

If the two funds were actually just standalone entities, that would be the end of the story. Their creditors would seize the collateral, organize asset sales, satisfy what obligations they could, and the funds would be closed.

However, since the notional parent is a large, stable, well-capitalized Wall Street investment bank, the picture looks somewhat different. Even though the funds' customers are 'sophisticated investors,' the public and, perhaps more importantly, the Democratically-controlled House of Representatives, will view the situation as a wealthy investment bank sticking its customers with losses, while it reaps management fees from the funds, and declines to share the losses.

Sometimes, businesses hurt themselves by ignoring the effect of their actions on the larger society in which they operate. I suspect this is one of those times. I think James Cayne is making a serious mistake vis a vis his company's troubled sub-prime mortgage hedge funds. After shuffling his feet and first refusing to help the funds with loans, to allow them to make margin calls without selling assets, he has already sent a message to the markets, other Wall Street firms, Congress, and the public. His reversal on this issue, and decision to lend to the funds, now comes a day late, if not a dollar short.

Who would now want to invest in a Bear hedge fund? What other firms will extend loans to Bear funds now, without extra protection for the value of those loans? Perhaps they will restrict the leverage that a Bear Stearns-backed fund may use.

And surely, Barney Frank will be using this example to drive new hedge fund regulation through Congress.

It's a shame that James Cayne is repeating such callous, ill-considered and naive behavior in this matter. By attempting to take refuge in the legalities of the situation, he may win the battle, but will almost certainly help lose the war for all of the capital markets, and other Wall Street firms.