From Porter Stansberry in the S&A Digest:

Jimmy Cayne is a truly despicable liar. You might not be familiar with his name, but Cayne was, until late 2007, a titan of Wall Street. He was the CEO and chairman of Bear Stearns.

For a long time, he was also the single-richest banker in history. Over his long career, he amassed more than $1 billion in compensation from Bear, mostly in the form of stock. Today, Cayne testified before Congress that the collapse of Bear Stearns wasn't his fault. In fact, if you believe Cayne, the collapse of Bear was everyone else's fault:

The market's loss of confidence, even though it was unjustified and irrational, became a self-fulfilling prophecy. The efforts we made to strengthen the firm were reasonable and prudent, although in hindsight they proved inadequate. – Jimmy Cayne's written testimony to Congress, May 5, 2010

I know very well that when you look at the mortgage debacle, you won't find any saints. Nearly every market participant was guilty of irresponsible or illegal actions. Borrowers willingly lied about their incomes and assets. Mortgage brokers willingly underwrote loans they knew couldn't be repaid. Real estate agents deliberately sold homes to buyers they knew couldn't pay for them at prices they ought to have known were unsustainable. Bankers behaved with reckless stupidity, buying loans they knew (or ought to have known) were garbage and reselling them to investors, who were stunningly ignorant of the risks of the securities.

Having said that... few people have more personal responsibility for the crisis than Jimmy Cayne. And no one is more at fault for the company's collapse.

... As I explained to our subscribers on August 14, 2007, the downgrade of previously triple-A-rated securities would require all of Wall Street to raise enormous amounts of additional capital:

To hold AAA-rated paper, banks, and other financial institutions need only to maintain $0.56 in capital for each $100 of paper. But as the paper is downgraded, the amount of capital they're required to hold goes up, exponentially. At a BBB rating, financial institutions must hold $4.80 of capital. At BBB-, they must hold $8 of capital per $100 of asset-backed securities. Thus, as the crisis worsens, the demand for capital from these firms could grow substantially. – The S&A Digest, August 14, 2007

Here's a question I wish Congress would ask Jimmy Cayne. He continues to claim Bear Stearns sank due to a crisis no one could have anticipated or prevented. If that were true, then how did I [know]? In August 2007, I explained all of the core problems Bear Stearns faced. These facts led us to recommend shorting Lehman, Fannie, and Freddie. They led us to doubt (correctly) Goldman Sachs' accounting and to predict the collapse of Merrill Lynch.

So I wish someone would ask Jimmy and all of the other leaders of Wall Street: "How did you miss problems so obvious to everyone else?" For Pete's sake, even Fortune magazine pegged the housing bubble as early as 2004. Yet supposedly, none of Wall Street's most elite bankers saw it coming? I don't believe it. And neither should you.

The truth is, dear subscribers, these men – the top executives at all of the biggest institutions on Wall Street and most of the people in Washington who were supposed to be regulating them – took insane risks with enormous amounts of borrowed money. They did it because they thought, quite simply, that they'd get away with it... that, in some way, shape, or form, they could hedge their risks and still make a fortune.

They tried to pull it off by selling their mortgages to suckers from foreign countries and idiot hedge-fund managers. They believed they could hedge their risks by buying insurance from companies like AIG and MBIA, which were actually leveraged more than the investment banks themselves. In short, they willingly bought into the giant delusion that they could get rich at someone else's expense by selling toxic securities as being "triple A."

It was a lie. But it's a very powerful and seductive lie, and it fueled literally billions and billions of dollars worth of compensation. Keep this is mind: Wall Street banks routinely paid out 40% of revenues in employee compensation.

Keep this in mind too: Washington continues to take insane financial risks with a phony triple-A credit rating. That scheme won't last either.

Crux Note: Readers of Porter Stansberry's Investment Advisory were well prepared for the financial crisis... long before stocks began to fall. To stay one step ahead of the next crisis, click here.

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