Guest Post: What Really Happened To Bear Stearns, by Ted Butler
Uncle Ted may be onto something. By connecting the dots of the available data from March of 2008, Ted concludes that it wasn't Credit Default Swaps that led to the demise of Bear Stearns. It was, instead, a completely different set of derivatives that, heretofore, no one has even considered.
What Really Happened To Bear Stearns
by Ted Butler
Six years ago the well-known investment bank Bear Stearns imploded. In February 2008, Bear Stearns stock traded as high as $93; by mid-March the insolvent company agreed to be taken over by JPMorgan for $2 a share (later raised to $10 after class-action lawsuits). In the annals of Wall Street, there was hardly a more sudden demise than the fall of Bear Stearns. The cause was said to be a run on the bank as nervous investors pulled assets from the firm. Bear Stearns was said to be levered by 35 times, meaning it had equity of $11 billion and total assets of $395 billion. This is a very small cushion if something negative suddenly appears.
Something negative did hit Bear Stearns in the first quarter of 2008; although there are remarkably few details of what went wrong. Since Bear had a significant presence in sub-prime mortgages and that market was in distress, it is assumed the fall of the firm was mortgage related. That may be true, but there was no general stress in the stock market through mid-March 2008 reflecting a credit crisis. Was there instead some specific trigger behind the company’s sudden collapse?
I believe that sudden and massive losses and margin calls of more than $2.5 billion on tens of thousands of short COMEX gold and silver contracts were the specific triggers that killed Bear Stearns. Let’s face it – Bear was so leveraged that a sudden demand of more than $2.5 billion in immediate payment for any reason could have put them under. Bear Stearns’ excessive gold and silver shorts on the COMEX are the most plausible reason for the sudden demise. Bear Stearns did fail and due to a sudden cash crunch was acquired by JPMorgan for a fraction of what it was worth two months earlier. Bear Stearns was the largest short in COMEX gold and silver at the time. The day of Bear Stearns’ demise coincides precisely with the day of the historic high price points in gold and silver. That is also the same day the biggest COMEX gold and silver short would experience maximum loss and a cumulative demand for upwards of $2.5 billion in cash deposits for margin. It was no coincidence the music stopped for Bear Stearns that same day.
Gold prices rose from under $800 in mid-December 2007 to $1,000 in mid-March 2008, a gain of more than $200. Silver prices rose from under $14 in mid-December to $21 when Bear Stearns failed on March 17, 2008. That was a gain of $7. This was the highest price for silver and close to the highest price of gold since 1980. Obviously, a $200 rise in the price of gold and a $7 rise in the price of silver is not good if you are the biggest gold and silver short.
The concentrated short position of the 4 largest short traders in silver was at an extreme level of more than 300 million ounces. In contrast, the concentrated long position of the 4 largest long silver traders was a bit above 100 million ounces. In COMEX gold, the big shorts held two and half times what the biggest longs held. Since we know that Bear Stearns was the largest short in COMEX silver and we also know how much gold and silver prices rose in that time period, all that has to be established is how many short contracts Bear Stearns held. That would tell us how much money they had to come up with in margin money. All market participants on the COMEX, including the leading clearing member (which Bear Stearns was), must deposit additional funds daily to cover adverse price movements.
Thanks to historical Commitments of Traders report (COT) data from the CFTC, in the relevant time period (December 31, 2007 to March 17, 2008) the net short position of the 4 largest gold and silver shorts on the COMEX averaged 165,000 contracts and 60,000 contracts respectively. My analysis indicates Bear held 75,000 net gold contracts short and 35,000 net silver contracts short. Those are minimum numbers, as I think Bear’s position could have been higher.
A $200 adverse price move on 75,000 COMEX gold contracts would result in a mark to market loss and margin call of $1.5 billion. A $7 adverse price move on 35,000 COMEX silver contracts would result in a mark to market loss and margin call of $1.2 billion. Bear Stearns had to come up with $2.7 billion because gold and silver prices rose sharply in the first quarter of 2008 and the company bet the wrong way. That it couldn’t come up with all the margin money for the losses in gold and silver, is the most visible reason it went under.
What happened to Bear Stearns was exactly what I had warned the Commodity Futures Trading Commission (CFTC) about continuously for the twenty years before the event. Aside from the manipulative impact that a concentrated market corner would have on price, the biggest risk was what would happen if the largest short ran into trouble. The facts in the case of Bear Stearns indicate that the worst did occur. The biggest short did go under. During the relevant time period, I was in private email contact with CFTC Commissioner Bart Chilton who indicated that the Commission was considering silver matters closely and that there would be a finding published soon. The subsequent CFTC finding was released on May 13, 2008 and completely denied anything was wrong on the short side in COMEX silver due to large traders.
Here’s the problem – the report lied. It conveniently ignored the failure of the largest COMEX gold and silver short seller, by only considering events through Dec 31, 2007 and not through the March 17, 2008 date of Bear Stearns’ failure, a clear lie of omission. How could the CFTC issue a report on large traders on the short side of silver and overlook that the largest short trader of all went under because of that short position? It has taken me some time to see all this in the proper perspective. What I now see is deeply disturbing, but it answers many questions. Even though I petitioned the CFTC about the illegality of the concentrated short position in COMEX silver for decades, they disregarded those warnings. Then Bear Stearns went under for precisely the reasons I warned about. Subsequently, the CFTC kept it quiet and denied all allegations.
Any regulator worthy of the name should have known that a lopsided, large trader mismatch was dangerous on the short side. Having misjudged just how dangerous the situation was, the CFTC and the CME Group put in motion a scheme to save the shorts and punish gold and silver investors. By arranging, with the Federal Reserve Chairman and Treasury Secretary, to have JPMorgan take over Bear Stearns’ silver and gold short positions, the US Government embarked (or continued) on a journey of allowing price manipulation, in stark violation of commodity law.
Since Bear Stearns was a failure that threatened the financial system, it necessarily invited the involvement of the nation’s highest regulators, the Treasury Secretary and the chairman of the Federal Reserve, as the historical record indicates. Both had to be aware of the gold and silver margin problem at Bear Stearns. Additionally, since Bear Stearns was the leading clearing member of the exchange, you can be certain that the CME Group was more than aware. The CME was the one issuing the margin calls to Bear. Also, there is no way that JPMorgan wasn’t aware of Bear Stearns’ gold and silver predicament. Yet none of this was made public.
These facts indicate that everyone at the top had to be aware that excessive gold and silver shorting was at the center of the Bear Stearns fiasco. Since the Feds requested JPMorgan’s assistance, there can be no question that JPMorgan demanded (and received) permanent immunity from future gold and silver allegations. This explains how they have been able to establish market corners in gold and silver today that commodity law prohibits. Had not the U.S. Treasury Secretary, the Fed chairman, the CFTC, and the CME agreed to JPMorgan’s takeover of Bear Stearns’ gold and silver positions, the excessive market concentration and manipulation in these markets could not have continued.
The interference of the U.S. Government in the Bear Stearns affair explains what was previously inexplicable: why the CFTC couldn’t find anything after investigating a silver manipulation for five years, and why the CFTC and CME were deathly quiet in reaction to the giant price smashes in gold and silver, particularly the two 30% price smashes within days in silver in May and September of 2011.
What baffles me today is that no well-known journalist from outside the gold and silver world has yet picked up on what is an easy-to-document story of epic historical proportions. It’s the story of why Bear Stearns went under, and how the gold and silver price manipulation continued since the day JPMorgan took over Bear. I think the story has Pulitzer Prize written all over it.
For subscription info please go to http://www.butlerresearch.com