Bear Stearns Conspiracy Watch: Bloomberg Piles On

The latest journalist to start waxing conspiratorial about the collapse of Bear Stearns is Gary Matsumoto of Bloomberg. He's looking at options trades which he reckons are very suspicious:

In a gambit with such low odds of success that traders question its legitimacy, someone wagered $1.7 million that Bear Stearns shares would suffer an unprecedented decline within days. Options specialists are convinced that the buyer, or buyers, made a concerted effort to drive the fifth-biggest U.S. securities firm out of business and, in the process, reap a profit of more than $270 million.

Wow, $1.7 million turned into $270 million? Nice trade! Except by the end of the article the cost of the trade has gone up substantially, while the pay-off hasn't:

Options bets that looked irrational on Friday proved brilliant on Monday, when the shares traded between $3 and $5. By Wollney's calculations, the traders who spent $35.8 million on the deep out-of-the-money puts reaped an estimated $274 million windfall from the plunge in Bear Stearns.

The thing which annoys me most about the article is that the people buying the puts are always described as speculators: there's no indication that there could have been any legitimate purpose to enter into these trades.

Of course, there are lots of reasons to buy short-dated out-of-the-money puts. The best reason would be if you'd been selling a lot of short-dated out-of-the-money puts at higher strike prices, and you wanted to protect your downside. And, guess what, it turns out that volume in Bear Stearns put options at $40 and $50 strikes had indeed been rising sharply.

More generally, there was good reason to believe that if Bear could make it through the week and start being able to tap the Federal Reserve's liquidity facility, then the worst was behind it and it would survive. In that case, a very sensible trade would be to go long Bear stock, and hedge with short-dated bankruptcy puts which would pay out in case Bear imploded over the course of the coming week.

But there's no indication of any of this in Matsumoto's feverish article. Instead, the piece is full of utterly baseless speculation that the people buying the puts were also spreading rumors which brought down the bank, and it's based entirely on the speculation of options traders who lost a lot of money in the Bear collapse and have an understandable desire to pin the blame elsewhere. This is one-sided journalism, and Bloomberg, of all media outlets, really ought to behave more responsibly.

(HT: Ritholtz)