Bear bet that netted £141m throws fresh suspicion on collapse

By Stephen Foley in New York

Suspicion over the collapse of Bear Stearns is centring on a massive options trade, less than two weeks before the historic investment bank went under in March, by which a single investor made a profit of more than $270m (£141m) on a bet against the company's share price.

In a "whodunnit" that has gripped Wall Street for months, many traders and senior executives at Bear Stearns have become convinced the firm was brought down by a conspiracy of rivals and hedge funds, who spread malicious rumours and ultimately triggered a collapse in confidence among its trading partners.

These conspiracy theorists received new evidence yesterday, with news of an extraordinary bet placed in the derivatives market on 11 March, near the start of the week when rumours of Bear's financial problems snowballed. By 14 March, the Federal Reserve was having to extend emergency funding as Bear's customers deserted. On 16 March it was sold at a fraction of the previous share price to JPMorgan Chase.

The derivatives trade involved put options that gave purchasers the right to sell 5.7 million Bear Stearns shares for $30 each on 20 March, and 165,000 shares for $25 each also on 20 March, according to Bloomberg data. The options cost the anonymous investor $1.7m.

That was less than half the $62.97 price at which Bear Stearns shares were trading on 11 March, suggesting the investor was confident the stock was going to crash. Many traders said yesterday such a big, short-term bet would be highly unusual, even for a hedge fund. Others, though, pointed to the 158 per cent return to suggest it was a bet with a reasonable risk-reward ratio.

Bear Stearns executives first heard rumours on 10 March which were suggesting the company faced a liquidity crisis, and business television began reporting the company's denials that day.

The Securities and Exchange Commission has subpoenaed trading records and email archives at dozens of Wall Street banks and hedge funds to see if people with a financial interest in Bear's demise were spreading rumours they knew to be false.

At the shareholder meeting that agreed the firesale to JPMorgan, Jimmy Cayne, Bear's chairman, told shareholders he believed a "conspiracy" was behind its collapse and said he hoped the authorities would "nail the guys who did it".

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Foreclosure fallout: Houses go for a $1

Ron French / The Detroit News

DETROIT -- One dollar can get you a large soda at McDonald's, a used VHS movie at 7-Eleven or a house in Detroit.

The fact that a home on the city's east side was listed for $1 recently shows how depressed the real estate market has become in one of America's poorest big cities.

And it still took 19 days to find a buyer.

The sale price of the home may be an anomaly, but illustrates both the depths of the foreclosure crisis in Detroit and the rapid scuttling of vacant homes in some of the city's impoverished neighborhoods.

The home, at 8111 Traverse Street, a few blocks from Detroit City Airport, was the nicest house on the block when it sold for $65,000 in November 2006, said neighbor Carl Upshaw. But the home was foreclosed last summer, and it wasn't long until "the vultures closed in," Upshaw said. "The siding was the first to go. Then they took the fence. Then they broke in and took everything else."

The company hired to manage the home and sell it, the Bearing Group, boarded up the home only to find the boards stolen and used to board up another abandoned home nearby.

Scrappers tore out the copper plumbing, the furnace and the light fixtures, taking everything of value, including the kitchen sink.

"It about doesn't make sense to put the family out," Upshaw said. "Once people are gone, you're gonna lose the house in this neighborhood."

Tuesday, the home was wide open. Doors leading into the kitchen and the basement were missing, and the front windows had been smashed. Weeds grew chest-high, and charred remains marked a spot where the garage recently burned.

Put on the market in January for $1,100, the house had no lookers other than the squatters who sometimes stayed there at night. Facing $4,000 in back taxes and a large unpaid water bill, the bank that owned the property lowered the price to $1.

$1 sale to cost bank $10,000

While it's not unusual for $1 to be exchanged when property is transferred for legal reasons, listing a home in the Multiple Listing Service for $1 was surprising and unsettling to Kent Colpaert, the listing real estate agent for the property.

"I've never seen a home listed for $1," Colpaert said.

"But it's been hit hard: It's just a shell."

On Tuesday, Realtor.com listed one other single-family home, one duplex and one empty lot at $1 in Detroit.

Dollar property sales are the financial hangover from the foreclosure crisis, said Anthony Viola of Realty Corp. of America in Cleveland.

Lenders that made loans to unqualified buyers during the height of the subprime market now find themselves the owners of whole neighborhoods of vacant, deteriorating homes.

"No one has much sympathy for these banks that made subprime loans," Viola said. "And in some cities like Cleveland, judges aren't letting them sit on the properties -- they're ordering them to tear them down or sell them."

So desperate was the bank owner of 8111 Traverse Street to unload the property that it agreed to pay $2,500 in sales commission and another $1,000 bonus for closing the $1 sale; the bank also will pay $500 of the buyer's closing costs. Throw in back taxes and a water bill, and unloading the house will cost the bank about $10,000.

"It doesn't make sense in some neighborhoods to keep paying costs and costs," Colpaert said. "It can make more financial sense to give it away."

Buyer calls it an investment

Colpaert declined to provide the name of the prospective purchaser, because the deal had not been through closing. The agent did say that the buyer agreed to pay the full list price of $1, and planned to pay cash.

The buyer, a local woman, considers the home to be an investment property and will not live there, Colpaert said, though exactly how soon the buyer can expect to recoup her four-quarter investment is questionable. Replacing the guts of the house will costs tens of thousands of dollars, and the owner will have trouble keeping scrappers from stealing the improvements as quickly as they're installed. Home demolition costs about $5,000, Colpaert said.

Meanwhile, the new owner will owe $3,900 in property taxes in 2009 on her dollar purchase unless she challenges the tax assessment.

While selling a home for the amount of change most people could find between their couch cushions is unusual, some abandoned homes in Detroit sell for $100; vacant lots can be purchased for $300.

"My 14-year-old son could buy a block of Detroit property," said Ann Laciura, senior servicing specialist for the Bearing Group.

You can reach Ron French at (313) 222-2175 or rfrench@detnews.com.

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Interest in new rules boils over

By Ruth Mantell, MarketWatch

In public comments on proposed credit-card rules, consumers complained about "loan sharks," "crooks," "leeches" and "usury." Many said rates seemed to be raised arbitrarily and punitively, adding that they should have a fair amount of time to pay bills

As the economic slowdown squeezes families across the nation, wheels are turning in Washington to curb perceived credit-card abuses that can keep borrowers mired in debt. The public comment period recently closed for credit-card rules proposed by U.S. agencies, and with tens of thousands of responses from consumers the issue's importance is clear.

Less clear, however, is which strategies regulators should take to curb abuses while maintaining consumers' access to credit.

Consumers who didn't have opinions about precise actions that should be taken were still sure that something needs to be done.

Barbara Conley, of Akron, Ohio, commented: "Help protect the unsuspecting credit-card user. Too many people have gotten themselves deeply in debt from credit-card company practices. Please help the uninformed from getting themselves in trouble and unable to recover from their debts."

Lindsey Baccus, from Clarksville, Tenn., said: "Now is the time to reign in these 'white collar, criminal like' practices of the credit-card companies! Banks and card companies blatantly display a ... predatory personality when it comes to their ability to think of new ways to financially rape the public. In fact, they should be required to repay or pay penalties for their 'dark side' practices. Sincere thanks for making them toe the line!"

Individuals also acknowledged consumer responsibility:

"I agree that 30 days late is late -- one day is not late! I support the 21 day period that you are proposing for issuers to mail deliver the bill to me. It gives me a chance to avoid expensive late fees and maybe even a penalty interest rate," wrote Mary Kleiss, Port Charlotte, Fla.

Tightening controls

Regulators are looking to complete final credit-card rules this year. Proposals from the Federal Reserve, Office of Thrift Supervision, and National Credit Union Administration would take steps such as:

• Prohibiting a rate increase on an outstanding balance, except under limited circumstances, such as when a minimum payment has not been received within 30 days after the due date
• Prohibiting institutions from applying payments over the minimum in ways that maximize interest charges
• Requiring a reasonable amount of time for consumers to make payments
• Prohibiting interest charges using the "two-cycle" method that computes interest on balances on days in billing cycles before the most recent billing cycle
• For deposit accounts, requiring institutions to provide consumers with notice and the opportunity to opt out of automatic overdraft payments, before any overdraft fees or charges may be imposed

Problems in the housing market, as well as general economic weakness, have been contributing to delinquency rates for credit cards, according to the American Bankers Association. Delinquencies in the first quarter for credit cards provided by banks rose more than one-tenth of a percentage point to 4.51%, compared with the five-year average delinquency rate of 4.4%, ABA reported last month.

Advocacy group Consumers Union told the agencies that the proposals are a "strong beginning," and supported steps such as restricting rate increases on existing balances for consumers who haven't been more than 30 days late.

"Penalty interest rates are unfair when applied retroactively," according to Consumers Union. "The restriction on penalty rates as applied to existing balances is the heart of the proposed rule. This protection will do more than any other to return some balance and fairness to the credit-card marketplace."

The group added that agencies should go further than the current proposals, with moves such as:

• Ending all retroactive interest-rate increases, including for consumers who have had a 30-day late payment
• Limiting how high credit-card issuers can set "penalty" interest rates, and how long issuers can keep consumers at these rates
• Prohibiting fees to pay a credit card by phone or Internet

Card issuers balk

Credit-card firms say restricting their ability to raise interest rates on existing balances would prevent them from adjusting the rate to reflect the higher risk of a consumer defaulting. According to public notes of a May meeting with Fed officials and representatives from the ABA, Capital One, Bank of America and Citibank, the industry believes allowing issuers to raise rates only on new transactions is insufficient because the "greatest risk is on funds already extended."

Further, industry groups said the proposal would lead issuers to raise rates and reduce the availability of credit for all consumers, rather than only for those who present the greatest default risk.

"Rather than prohibiting rate increases on existing balances, the final rule should permit such increases if consumers also have the ability to opt out of the increase by closing the account," according to the public notes. "If a rate increase accurately reflects the available market rates for that consumer, it is rational for a consumer to accept the increase and not opt out because, if they close that account, the consumer may not be able to get a lower rate with another card issuer."

There are also proposals on credit cards in Congress, including a Credit Cardholders' Bill of Rights from Rep. Carolyn Maloney, D-N.Y., that has been approved in committee. That legislation aims to protect consumers against arbitrary interest-rate increases.

Echoing concerns about the agencies' proposals, industry participants have said Maloney's bill could be overly restrictive and force rate increases across the board by limiting the ability of lenders to adjust interest for customers who become riskier.

While proposals from agencies are helpful, some consumer advocates say it's more important for Congress to enact legislation, which would be tougher to alter once the nation's attention turns away from credit-card issues.

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