Two days ago, we ran a post based on a Fortune story by Roddy Boyd, in which Roddy argued that an email from Goldman Sachs (GS) to a hedge-fund client contributed to the run-on-the-bank that killed Bear Stearns (BSC). Goldman disputes Fortune’s characterization of the hedge-fund transaction and email and says that it never made a firm-wide decision to stop doing business with Bear Stearns.
Here’s Goldman’s version of the story, per our conversation with the firm this morning:
On the afternoon of Tuesday, March 11th, three days before the demise of Bear Stearns, a hedge-fund called Hayman Capital asked Goldman to assume a derivative trade that Hayman had made with Bear. Both sides agree that Goldman then sent Hayman an email response, which we have not yet seen (if you have, please feel free to send it to us).
Hayman and/or Fortune interpreted the email response to mean that Goldman “would no longer step in for [clients] on Bear derivatives deals”–in other words, that Goldman had made an institutional decision to stop assuming exposure to Bear Stearns. Thus, Fortune later concluded, Goldman became one of the first of many Bear trading partners who eventually ran for the hills (and, because of its prominence, scared a lot of Wall Street into running, too).
Goldman disputes this characterization of the email and the Hayman interaction and says that it followed normal procedures: Specifically, it says it elevated the request to senior decision-makers for consideration and then, the next morning, actually went forward with the trade. In other words, Goldman says, Fortune took one half of a normal negotiation process on a single trade–in which Goldman said, effectively, “let us think about it”–and presented it as a firm-wide mandate to stop doing business with Bear Stearns.
Goldman’s exact response:
- We certainly understood our responsibility to the market and how any actions we took could be interpreted.
- We conducted business as usual with Bear Stearns through Thursday 3/13 and have continued to do so following the announcement of 28-day emergency funding on 3/14.
- We are not aware of any email that went out from the firm to hedge fund clients saying that Goldman Sachs would not face Bear Stearns as a counterparty.
- Lastly, in terms of the specific trade mentioned in the Fortune story, we received a request to novate [accept] the trade late in the day on Tuesday 3/11, escalated it for a decision consistent with our normal procedures when an increase in credit exposure is requested, and agreed to the novation [accept the trade] the next morning.
- We made many of these points to Fortune when the reporter called us, but sadly he did not see fit to include them in the story.
Why does all of this matter? In part because some people have taken the Fortune story to mean that Goldman intentionally put Bear out of business. Worse, there have been suggestions that Goldman put Bear out of business only after its trading desk went short massive amounts of Bear Stearns stock.
We asked Michael DuVally, a Goldman spokesperson, whether anyone at Goldman had been short Bear Stearns stock during the period in question. He said he didn’t know. (Not surprising: This is a big firm).
We highly doubt the Goldman folks who sent the email to Hayman Capital were aware when they sent it that any division or desk at Goldman was short Bear Stearns stock, if any division or desk was. If the folks who sent the email were aware of any Goldman bets against Bear, we highly doubt they altered any normal procedures with respect to the Hayman trade to help those bets along.
But all this will no doubt be excellent fodder for another Ben Stein Goldman Sachs Conspiracy Theory column this weekend.
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