Our friend Jimmy Cayne, last seen here blaming the shorts for the destruction of his firm, again ably demonstrates this NPL in further comments he made in front of the Financial Crisis Inquiry Commission about the collapse of his firm, Bear Stearns, which I recently came across in a CNBC video clip today. A brief transcript follows:
The market's loss of confidence, even though it was unjustified and irrational, became a self-fulfilling prophecy. Subsequent events show that Bear Stearns' collapse was not the result of any actions or any decisions unique to Bear Stearns. Instead, it was due to overwhelming market forces that Bear Stearns, as the smallest of the independent investment banks, could not resist. Only a few months after Bear Stearns collapse, the same market forces caused the collapse and near-collapse of much larger institutions such as Lehman Brothers.How does Cayne's testimony relate to the NPL?
In Cayne's view, Bear Stearns collapse was due to sudden, irrational and unfounded rumor-based short-selling against his company, not a flawed business model or careless leadership by himself and his associates. Up until the week of March 10th, 2008, Bear Stearns was just chugging along, investing in who-knows-what-kind of garbage MBS and other securities when suddenly, out of nowhere, the model broke as credit markets seized up (for no reason), sending BSC into the tank. Were it not for that temporary absurdity, BSC would've kept on chugging-- it was, essentially, a profit factory (or, as Anthony Scaramucci recently said of Goldman Sachs, "an American dream factory"). You put some MBS in one side, and out the other side pops fresh, hot profits.
To Cayne (as proxy for others employing the NPL), "market forces" are arbitrary, irrationally pessimistic and radical. "Market forces" are rumors, speculation and uncertainty, none of which have any basis in reality or deserve any credulity when they threaten the reign of divine elites such as himself.
The truth is, not surprisingly, just the opposite. The market forces that lead to massive losses and ultimately the insolvency and collapse of Jimmy Cayne's firm, had been suspended in time thanks to Federal Reserve policies leading up to the crisis. The profits that BSC had been making the whole time were illusory. They never actually existed, yet Fed money-printing and interventions in the loanable funds market made it appear as if they did. When market forces finally overcame these interventions, reality reasserted itself, the profits were inverted into losses and the entire previous period was essentially washed out. Bear Stearns, as led by Jimmy Cayne and Alan Schwartz, was revealed to be not a profit-making machine but fantasy-based anti-gravity machine and so when the fantasy lost its conviction amongst investors, it collapsed.
Nature abhors a vacuum.