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July 16, 2008
Where is Elliot Spitzer when you
need him? This could be the major scandal of 2008,
and one for the recordbooks.
Almost everyone in the financial
world understands what took place in the days leading up
to the Bear Stearns (BSC) demise. Bear Stearns
handled money for the top mutual funds, money managers,
and hedge funds in the world, and these big money
clients suddenly, all at once, began to pull their money
out of the firm. This caused a run on the bank,
and this caused BSC to collapse.
Almost everyone in the financial
world also assumed that something else was going on
behind the scenes, but at the time that was only
speculation. These major hedge funds were not only
clients of BSC, but they were also heavily short BSC
stock due to the financial turmoil that existed at the
time. Their own struggling portfolios
notwithstanding, these hedge funds would benefit greatly
from a collapse in BSC as a result, so a motive indeed
was present. But there's more to the story...
In addition to the financial gain
set to be realized, the major hedge funds in the world
also believed that BSC 'owed them one.' In 1998
Long Term Capital failed; it was one of the most severe
losses the hedge fund industry ever experienced.
The Bailout was lead by Goldman Sachs (GS), and a host
of other firms including JP Morgan (JPM). However,
BSC did not play a role, though they had the opportunity
to do so. The hedge fund world, which is dominated
by Goldman Sachs (GS), felt ostracized by a firm who
specialized in handling their assets. A run on BSC
was not only a potential windfall for the hedge funds
who were their clients, but there was an underlying
incentive which almost justified a run on the bank.
Obviously another integral
component needed to take place to complete this scandal,
and this is where Elliott Spitzer's work would come in
handy. Somehow all of the hedge funds needed to
get together, plan their exercise, and execute their
plan in order for this to work. Who better to
coordinate a move such as this than the leader in the
hedge fund industry, the powerhouse of the financial
world, and the firm who lead the bailout of Long Term
Capital in the first place, Goldman Sachs (GS)?
Unfortunately this is human
nature. We all remember this from childhood, when
the popular kids got everyone together and told them to
stop playing with the nerds. Other than the
Billions of Dollars that were lost at the expense of BSC
shareholders, this is exactly the same.
Further, if indeed these meetings
took place, and if indeed a run on the bank was planned,
what would stop these hedge funds from doing it again?
That's where Lehman Brothers (LEH) comes in.
Although LEH actually played an important role in the
Long Term Capital Bailout, they are a sitting duck in
today's Market. Could the hedge funds do it again
with LEH? They have already proved that they could
do it once, and the returns were massive, so why not
twice? Why not three times? It's easy money!
Fortunately, greed may have got
the best of these 'Hedge Runners' because the world is
now watching with a close eye. A heavy hand is
looming.
Thomas H. Kee Jr.
Thomas H. Kee Jr.
President and CEO
Stock Traders Daily
http://www.stocktradersdaily.com
1.866.213.2067
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