A recent Wall Street Journal article disclosed the inside story of why in March 2008 David Faber, a reporter for CNBC, asked Alan Schwartz of Bear Stearns about reports Goldman Sachs would not accept its counterparty risk. Up until that point, the financial crisis was termed the subprime mortgage crisis and, though it certainly was having a wide impact on the real estate and financial services industry, it was not dramatic.
Before long, one of the great old investment banks of Wall Street was being sold to JPMorgan Chase for a highly discounted price. Its exposure to “toxic” subprime mortgage securities was no doubt the root cause of its demise, but that one question by a reporter was the trigger.
That made Bear Stearns the first Wall Street institutional victim of the crisis, but not the last. The most dramatic period came in September when Lehman Brothers, Fannie Mae, Freddie Mac, American International Group and Merrill Lynch went down like a line of dominoes.
According to the Wall Street Journal and just released government Financial Crisis Inquiry Commission records, Faber’s source for the information about Goldman Sachs not accepting the risk of dealing with Bear Stearns came from Kyle Bass, owner of the Hayman Capital Management hedge fund. He is also a former Bear Stearns executive.
Bass became famous for making a large fortune during the subprime mortgage crisis. He was one of the few financial managers who shorted mortgage securities, and therefore became famous as a commentator. However, his record since 2009 is not so admirable. Along with Erich Spanganberg, he has been working as a patent troll. The two of them pick out a large pharmaceutical firm, short its stock, then use their front organization the Coalition for Affordable Drugs to make bogus challenges to the company’s drug patents. The news of those challenges drives the company’s stock down, making the short trade profitable. Never mind that such patent challenges drive up the cost of pharmaceutical drugs that sick people need to get well. Therefore, everybody in society pays the cost of higher medical insurance premiums. Despite this, his hedge fund continues to lose money. Perhaps because every year since 2010 he’s predicted Japan’s economy will crash, and it hasn’t happened yet. UsefulStooges has more information on Kyle Bass, and the shady dealings he’s had in the past.