When Bear Stearns nearly failed, made to merge, in March 2008 it wasn’t really a surprise. Yes, markets were shocked by the demise of the ancient firm, one of the bulge bracket cartel which suggested surprise over the severity of it more than that things were going bad. For more than a year, starting in early 2007, Bear had been steadily in the news for a few of its hedge funds.
These were investment vehicles not owned but sponsored by Bear Stearns, which meant they had no legal obligation to stand behind them. Yet, they did, sensing that to leave them hung out to dry and their investors holding the bag would be more than bad for business. Subprime was contained according to Ben Bernanke, but for these two “high grade†funds people started to realize that wasn’t true.
It wasn’t Bear’s products that ultimately started the crisis, however. Perhaps I am being too semantically rigid, as I classify those hedge funds as a warning of what was coming. Instead, it was a French bank that was to American ears as foreign as possible which truly triggered the end.
Reuters filed a single report at 2:44 am ET on August 9, 2007, detailing the relatively non-specific plans of BNP Paribas to halt NAV calculations for three of its funds. The world hasn’t been the same since.
The title of each of those vehicles doesn’t do justice to their gravity, though you can begin to appreciate why these were different in all the ways Ben Bernanke and his band of empty suits never really did. They were: BNP Paribas ABS Euribor, BNP Paribas ABS Eonia, and Parvest ABS Dynamic.
Underscoring the dangerous nature of what BNP attempted to accomplish, it has often been recounted incorrectly in the years since. Many articles and blog posts erroneously claim that the bank’s announcement was made on August 7. That date instead applied to the point at which BNP stopped calculating the three funds’ NAV’s, meaning that by the time the public was informed by press release early on August 9 they were already intended to go a third day without figuring the values of the assets within them as required.
And what were those assets? Again, the names provide scant clues, entirely for a reason. All you get from them is “ABS†and “Eonia†or “Euribor.†Thus, they are shadow and European?
