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Marketplace Morning Report

Betting against Bear, winning big

Ashley Milne-Tyte Mar 20, 2008
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KAI RYSSDAL: For a lot of Bear Stearns shareholders, the company’s collapse wasn’t much short of disaster. Many employees saw their retirement funds evaporate, along with the share price.

But it’s not doom-and-gloom for everyone. Some investors have done very well out of Bear’s fall — the ones who, even before the events of last weekend, were betting the stock wouldn’t last.

From New York, Ashley Milne-Tyte reports.


Ashley Milne-Tyte: Most investors are optimists — they bet a stock will go up in value. But the hedge funds who’ve made millions on Bear Stearns’ collapse were pessimistic about the company’s prospects. Charles Jones teaches finance at Columbia Business School. He says taking the negative view is just a different way of playing the stock market.

Charles Jones: They’re looking to see whether these companies are going to be able to make any profits, whether they’re going to have further write-downs that the market hasn’t taken into account yet. They have an inkling or some information that suggests that things are worse than the market is putting into the price.

Occasionally, Jones says, they’ll have insider information. The Securities and Exchange Commission is worried that might have happened last week. A lot of investors made bets ahead of Bear’s collapse that the share price would tumble. The Wall Street Journal says the SEC has launched an investigation.

Jones: They were the kind of bets that would only pay off if something dire happened to Bear Stearns.

One of the ways investors made money on Bear Stearns was by selling short. That’s when an investor borrows shares, then sells them. He buys the shares back later when the price has dropped, and makes a profit on the difference. Veteran NYSE trader Ted Weisberg says it’s risky, but potentially lucrative.

Ted Weisberg: For whatever reason, stocks always seem to go down a lot faster than they can go up. And so therefore, if you are a short player and you are right on the short side, the opportunity to make a lot of money very quickly is very compelling.

He says plenty of investors accentuate the negative in the hope of getting positive results.

In New York, I’m Ashley Milne-Tyte for Marketplace.

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