Bear Stearns in Vanity Fair

The article in Vanity Fair regarding the collapse of Bear Stearns was fascinating. Particularly for an essentially anonymous trader who was able to profit (by shorting other financial stocks as Bear went down) from their collapse. The day that Bear did the final drop (I can't pull up the ticker on any of my normal methods so I can't be sure which day it was) it was up 10 dollars at about 9 o'clock only to get beaten down to flat by 9:30 and then got smoked (pretty sure it dropped at least 25%-50% the next half hour). My only insight is that most traders just see what is happening and react.

Though the entire article is worth a read, I found the following quote particularly enlightening.

It was then that Gary Parr and the bankruptcy attorneys patiently explained that bankruptcy was actually not an option, not for a major securities firm. Changes to the bankruptcy code in 2005 would force federal regulators to take over customer accounts. All its securities would be subject to immediate seizure by creditors.

The 2005 BAPCA bill was a giveaway to credit card companies, but it seems like this statement doesn't really make sense. First, it depends on if the securities are in margin account or traditional customer accounts. Margin accounts are held in the name of the brokerage, so it makes sense that those would be able to be taken in bankruptcy. Though I'm not an expert, by any means, I would assume that this hasn't changed. Within customer accounts, SIPC protects cash and securities less than numbers only lawyers remember. So based on the statement above, the 2005 BAPCA would allow the immediate seizure by creditors of the customer's cash and securities held at Bear Stearns. To me that just means that if Bear declares bankruptcy, it would be forced to liquidate. It couldn't go into bankruptcy protection and eventually hope to emerge. The equity would be worthless. In other words, senior management would never consider bankruptcy for Bear. I could be totally mistaken, but it appears that if it weren't for the BAPCPA bill, Bear could (big assumption) have tried bankruptcy and not purchase by J.P. Morgan. I'm not an expert enough to know if this is the case, but it would be interesting to look further at the influence of this bill and the collapse of the company.