Goldman Sachs (GS) taking the rest of Wall Street to the cleaners is nothing new, but now comes word that Goldman played a direct role in the destruction of Bear Stearns (BSC). According to Fortune’s Roddy Boyd, several days before the collapse, Goldman decided to stop backing up Bear Stearns derivatives deals–and it announced this decision to hedge-fund clients in an email that spooked an increasingly panicked Wall Street:
[On the morning of Tuesday, March 11], Goldman Sachs’s credit derivatives group sent its hedge fund clients an e-mail announcing another blow. In previous weeks, banks such as Goldman had done a brisk business (for a handsome fee, of course) agreeing to stand in for institutions nervous, say, that Bear wouldn’t be able to cough up its obligations on an interest rate swap. But on March 11, Goldman told clients it would no longer step in for them on Bear derivatives deals. (A Goldman spokesman asserts that the e-mail was not a categorical refusal.)
“I was astounded when I got the [Goldman] e-mail,” says Kyle Bass of Hayman Capital. He had a colleague call Goldman to see if it was a mistake. “It wasn’t,” says Bass, who is a former Bear salesman. “Goldman told Wall Street that they were done with Bear, that there was [effectively] too much risk. That was the end for them”…
When word of the Goldman e-mail leaked out, the floodgates opened. Hedge funds and other clients, eventually running into the hundreds, began yanking their funds.
The next afternoon, Bear CEO Alan Schwartz announced on CNBC that everything was hunky-dory (which, according to Boyd, it wasn’t). And two days later, Bear Stearns effectively went bankrupt.
Should Goldman be blamed for this? Absolutely not. Bear Stearns was under-capitalised, over-leveraged, and stuffed to the gills with crappy debt. Once again, Goldman seems to have outsmarted the rest of Wall Street, spotting a problem before everyone else did. Because “runs on the bank” are often started when smart players cut and run, however, Goldman’s decision appears to have at least contributed to the stampede.
Goldman Sachs: Giving new meaning to “crushing the competition.”
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