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Monday, March 17, 2008

Joseph Lewis: "I Lost $1 Billion in Bear Stearns"

Bear Stearns Building

The mortgage meltdown continues this week with JPMorgan buying arch rival Bear Stearns (BSC) for a 98% discount, about $236 million (i.e., next to nothing). In fact, the Bear Stearns building on Madison Avenue itself is worth more than the entire buyout. The biggest loser, other than the American people who are essentially putting up $30 billion to guarantee Bear's mortgage securities, may be Joseph Lewis, who lost $1.16 billion as a result of the deal, which values each share of Bear Stearns at $2.

As the second largest underwriter of mortgage-backed bonds, Bear Stearns was uniquely exposed to the subprime collapse. Last summer, two of its hedge funds failed, a precursor of the firm's eventual demise. What's makes it more surprising is that Bear had $1 billion worth of offsetting, short positions to hedge its exposure to subprime mortgages.

Joe Lewis's total wealth is estimated at $2.5 billion so this is a major blow to the former currency trader. Just last week, the billionaire was even planning to increase his stake in Bear, seeing the falling share price as an opportunity to snap up more at a bargain price. Bear was trading close to $63 that day. He had originally bought his 9.4% stake at $107.

His nickname is the Boxer, a reference to his success trading currencies as well as an homage to his names similarity to boxing champion Joe Louis. He initially set up a computerized trading operation in the Bahamas where he speculated on the movements of foreign currencies. Like George Soros, Lewis is thought to have made hundreds of millions by betting against the British pound. He also made a killing during the Mexican peso crisis.

His previous investments would have painted a much different picture of a well-diversified investor:

Since then Lewis has shrewdly invested his profits through the Tavistock Group, which has interests in 75 companies in areas including property, financial services, life sciences, energy, industry and consumer goods. Among his property holdings are 3,600 acres in the Bahamas and 8,000 acres in Florida. In Britain he was recently involved with a group of investors who sold their stake in housebuilder Countryside Properties for a profit of about £10m. Other assets include property and a stake in Tottenham Hotspur football club.

Joseph Lewis

Joe Lewis on his yacht

Empty Lobby at Bear Stearns

Empty lobby at Bear Stearns

Image Credit 2

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Reader Comments:

Bear Stearns had hired Blackstone as an advisor prior to the bargain basement sale. This provided insider information to Blackstone. Peter Peterson of Blackstone is chair of the nY Fed Res. Board, and hired Tiim Geithner to run the NY Fed as Pres. Previously, Geithner worked for Kissinger, at Kissinger Assoc., and at the Treasury for Robert Rubin of Citigroup., also of the Council on Foreign Relations where he too worked for Peterson. It appears that the Bear Stearns intervention provided an open window to Citigroup which swapped its mortgage debt to the Fed in exchange for new financing (it used the mortgages as collateral). The dump of the BS and Citi portfolios would naturally depress these assets value.so prior to the collapse it appears that Blackstone used its arms length affiliate, Blackkrock to begin setting up a company to buy the mortgage linked securities at a deep discount. Geithner employed Petersons affiliate Blackrock as an advisor, but we know Blackstone itself preceded the use of Blackrock. The obvious conflict of interest of the NY Fed chairman made this necessary. However it may be that Blackstone is an investor in Blackrock given its amicable spinoff from Blackstone.

Enter Jp Morgan, default of Bear Stearns would most likely result in billions of losses on its Mark to market derivative profits with the counterparty BS. Its not clear that a bankruptcy court would allow set off given the higher priority of other lenders in front of JP in the credit queue. Thus an asymetrical default of the BS profits, and held obligations to BS by JP, would result in huge losses to the bank via the enormous notional value of its derivativ4e portfolio. Hence it accepted the first 1 billion in losses as part of the deal, with a cap on further losses, in other words, it traded tens of billions of loss exposure for a certain one billion loss via the Fed deal.
The losses exceeding the 1 B would either be printed by the Fed, or as suggested by Steel of Treasury, passed on to taxpaers. JP Morgan of course is a major funding source like Citi of the Council on Foreign Relations, Petersons Saudi China lobbying group.

Thus Citi *Rubin boss of Geithner) and JP were bailed out on their derivative losses, as were the creditors of Bear Stearns. JP like in the case of Long Term Capital will also profit from the movement of the BS portfolio into its own books at a mark of 2$ a share. Blackstone-Blackrock earns a fee and buys the sold off junk at a deep discount, profiting when "stability" returns to the markets.

Yet it may be that foreign governments were also part of this negogiation. Both the Saudis and Chi-Coms are major financing suppliers to the Fed, Chinese speaking Geithner may be their man at the Fed, his loyalty proven at Kissinger Assoc,. and at Treasury. Blackstone itself has a 3 B stake from China, to which we know of. Kissinger Assoc, created the China manufacturing powerhouse through its joint ventures initiations while Geithner worked there. Rubin a senior exec. at Citi of course would be the contact to Saudi Arabia, wheras Citi's largest investor is Saudi Kingdom Holding Corp or affiliates.

Incidently,at about or overlapping with Geitner's tenure at Kissinger Assoc., ( a Saudi-China lobbying group well known to Peterson via his other chairmanship of the Council on Foreign Relations); the company was investigated-(subpoena) by the US Congress as part of the BCCI money laundering scandal and bankruptcy. Geithner is a East Asia economics specialist so presumably he worked on the China Joint Venture but could have been involved in the Kissinger-BCCI influence peddling in Brazil investigated by the Congress.BCCI was of course a criminal enterprise with its management and financial locus in the Gulf States.

Where there is somke theres usually fire, but this is entirely speculative at this point, but easily verified by inspection of wire, and email data prior to the scam. Helicopter Ben is already cracking, could hardly speak at the Senate Banking comm. Geithner was aloo very circumspect in his answers especially to Shumer.

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