By Bryan Burrough
Vanity Fair special correspondent.
August 2008
On Monday, March 10, Wall Street was tense, as it had been for months. The mortgage market had crashed; major companies like Citigroup and Merrill Lynch had written off billions of dollars in bad loans. In what the economists called a “credit crisis,” the big banks were so spooked they had all but stopped lending money, a trend which, if it continued, would spell disaster on 21st-century Wall Street, where trading firms routinely borrow as much as 50 times the cash in their accounts to trade complex financial instruments such as derivatives.
Still,
as he drove in from his Connecticut home to the glass-sheathed Midtown Manhattan
headquarters of Bear Stearns, Sam Molinaro wasn’t expecting trouble. Molinaro, 50,
Bear’s popular chief financial officer, thought he could spot the first rays of
daylight at the end of nine solid months of nonstop crisis. The nation’s
fifth-largest investment bank, known for its notoriously freewheeling—some would say
maverick—culture, Bear had pledged to fork over more than $3 billion the previous
summer to bail out one of its two hedge funds that had bet heavily on subprime loans. At
the time, rumors flew it would go bankrupt. Bear’s swashbuckling C.E.O., 74-year-old
Jimmy Cayne, pilloried as a detached figure who played bridge and rounds of golf while his
firm was in crisis, had been ousted in January. His replacement, an easygoing 58-year-old
investment banker named Alan Schwartz, was down at the Breakers resort in Palm Beach that
morning, rubbing elbows with News Corp.’s Rupert Murdoch and Viacom’s Sumner
Redstone at Bear’s annual media conference.
It
was an uneventful morning—at first. Molinaro sat in his sixth-floor corner office,
overlooking Madison Avenue, catching up on paperwork after a week-long trip visiting
European investors. Then, around 11, something happened. Exactly what, no one knows to
this day. But Bear’s stock began to fall. It was then, questioning his trading desks
downstairs, that Molinaro first heard the rumor: Bear was having liquidity troubles, Wall
Street’s way of saying the firm was running out of money. Molinaro made a face. This
was crazy. There was no liquidity problem. Bear had about $18 billion in cash reserves.
Yet
the whiff of gossip Molinaro heard that morning was the first tiny ripple in what within
hours would grow into a tidal wave of rumor and speculation that would crash down upon
Bear Stearns and, in the span of one fateful week, destroy a firm that had thrived on Wall
Street since its founding, in 1923.
The
fall of Bear Stearns wasn’t just another financial collapse. There has never been
anything on Wall Street to compare to it: a “run” on a major investment bank,
caused in large part not by a criminal indictment or some mammoth quarterly loss but by
rumor and innuendo that, as best one can tell, had little basis in fact. Bear had endured
more than its share of self-inflicted wounds in the previous year, but there was no reason
it had to die that week in March.
What
happened? Was it death by natural causes, or was it, as some suspect, murder? More than a
few veteran Wall Streeters believe an investigation by the Securities and Exchange
Commission will uncover evidence that Bear was the victim of a gigantic “bear
raid”—that is, a malicious attack brought by so-called short-sellers, the
vultures of Wall Street, who make bets that a firm’s stock will go down. It’s a
surprisingly difficult theory to prove, and nothing short of government subpoenas is
likely to do it. Faced with a thicket of lawsuits and federal investigations, not a soul
in Bear’s boardroom will speak for the record, but on background, a few are finally
ready to name names.
“I
don’t know of any firm, no matter the capital, that could have withstood that kind of
bombardment by the shorts,” says a vice-chairman of another major investment bank.
“This was not about capital. It was about people losing confidence, spurred on by
rumors fueled by people who had an interest in the fall of Bear Stearns.”
He
pauses to let the idea sink in. “If I had to pick the biggest financial crime ever
perpetuated,” he concludes, “I would say, ‘Bear Stearns.’”
At
Phi Kappa Wall Street, most of the frat boys are instantly recognizable. There’s the
big, backslapping Irishman, Merrill Lynch, the humorless grind, Goldman Sachs, and the
straitlaced rich kid, Morgan Stanley. And then, off in the corner, wearing its beat-up
leather jacket and nursing a cigarette, was the tough-guy loner, scrawny Bear Stearns, who
disdained secret handshakes and towel snapping in favor of an extended middle finger
toward pretty much everyone. Bear was bridge-and-tunnel and proud of it. Since the days
when the Goldmans and Morgans cared mostly about hiring young men from the best families
and schools, “the Bear,” as old-timers still call it, cared about one thing and
one thing only: making money. Brooklyn, Queens, or Poughkeepsie; City College, Hofstra, or
Ohio State; Jew or Gentile—it didn’t matter where you came from; if you could
make money on the trading floor, Bear Stearns was the place for you. Its longtime chairman
Alan “Ace” Greenberg even coined a name for his motley hires: P.S.D.’s, for
poor, smart, and a deep desire to get rich.
Bear
Stearns was an investment bank, but the traditional banking roles, such as advising on
corporate mergers and trading stocks, were always an afterthought there. What the
P.S.D.’s at Bear Stearns did best was trade bonds. The firm’s executive history
was the story of three bond traders, each with his own outsize personality. From the
mid-1930s till the late 1970s, Bear was the province of Salim “Cy” Lewis, the
cantankerous Wall Street legend who forged a cutthroat culture run less as a modern
corporation than as a series of squabbling fiefdoms, each vying for his approval. Ace
Greenberg, an avuncular sort who kept his desk on the trading floor and answered his own
phone, took over after Lewis’s death, in 1978, and while his edges were softer, Bear
remained a Mametesque pressure cooker where top traders could pull down $10 million a year
while runners-up were tossed into the alley.
The
third man, the one who oversaw Bear’s demise after nudging Greenberg aside in 1993,
was his longtime protégé, Jimmy Cayne. Cayne was a cigar-chomping kid from
Chicago’s South Side, who in his early years sold scrap metal for his father-in-law.
After a divorce, he found himself driving a New York taxi while pursuing his beloved
pastime, playing bridge. It was at a bridge table, in fact, that Greenberg, himself an
ardent player, met Cayne and lured him to Bear Stearns. “If you can sell scrap
metal,” Bear lore quotes Greenberg telling Cayne, “you can sell bonds.”
Cayne found his life’s calling on the trading floor, earning his bones by moving huge
numbers of New York municipal bonds during the city’s financial crisis of the 1970s.
He became the embodiment of Bear Stearns, a go-it-alone maverick who hunkered down in his
smoke-filled sixth-floor office, not giving a rat’s ass what Wall Street thought so
long as Bear made money. When an early hedge fund, Long-Term Capital Management, collapsed
in 1998, losing $4.6 billion and triggering fears of a global financial meltdown, Cayne
famously refused to join the syndicate of Wall Street firms that bailed it out. Instead,
while much of the Street reaped billions trading stocks during the booming 1990s, Cayne
kept Bear focused on bonds and the grimier corners of Wall Street plumbing, clearing
trades for just about anyone, however notorious their reputation.
Through
it all, Bear remained proudly independent, refusing to sell out to larger firms. Cayne
listened to lots of offers, especially after his pal Don Marron sold rival PaineWebber to
U.B.S. for $12 billion, in 2000, but Cayne preferred life as it was. Senior managers had
wide autonomy, and in good years Bear all but ran itself, allowing Cayne to spend weeks
away from his desk at bridge tournaments or playing golf near his vacation home on the
Jersey Shore. In recent years much of the oversight fell to Cayne’s two
co-presidents, Alan Schwartz, a onetime pitcher at Duke University who specialized in
media mergers, and another bridge aficionado, a talented trader named Warren Spector. Bear
continued to thrive, piling up record profits all through the 2000s, and Bear’s stock
price rose nearly 600 percent during Cayne’s 14 years as C.E.O.
Eventually
Bear, like most on Wall Street, branched into asset management, forming a series of large
funds that put investor money to work in a variety of stocks, bonds, and derivatives.
Unlike some firms, however, Bear promoted its own traders rather than outsiders to run
these funds, and decided that each would specialize in a specific type of security, rather
than a diversified mix. As co-president, Alan Schwartz, for one, questioned the move,
thinking it was a bit risky, but deferred to the thinking of Spector and others.
Everything
went swimmingly, in fact, until poor Ralph Cioffi ran into trouble.
Cioffi,
52, was a Bear lifer, a wisecracking salesman who commuted to Midtown from Tenafly, New
Jersey, to oversee two hedge funds at Bear Stearns Asset Management, an affiliate known as
B.S.A.M. His main fund, the High-Grade Structured Credit Strategies fund, plowed investor
cash into complex derivatives backed by home mortgages. For years he was spectacularly
profitable, posting average monthly gains of one percent or more. But as the housing
market turned down in late 2006, his returns began to even out. Like many a Wall Street
gambler before him, Cioffi decided to double-down, creating a second fund. Whereas the
first borrowed, or “leveraged,” as much as 35 times its available money to
trade, the new fund would borrow an astounding 100 times its cash.
It
blew up in his face. As the housing market worsened during the winter of 2006–7,
Cioffi’s returns for both funds plummeted. He urged investors to stay put, promising
an imminent turnaround. (Cioffi and a colleague, Matthew Tannin, were indicted in June for
misleading investors.) When the market downturn accelerated last spring, leaving Cioffi
with billions of dollars in money-losing mortgage-backed securities no one would take off
his hands, he concocted an audacious way to rescue himself, planning an initial offering
for a new company called Everquest Financial that would sell its shares to the public.
Everquest’s main asset, it turned out, was billions of dollars of Cioffi’s
untradable securities, or, as Wall Street termed it, “toxic waste.”
Foisting
his garbage onto the public might have worked, but financial journalists at BusinessWeek
and The Wall Street Journal discovered the scheme in early June. Once the truth was
out, B.S.A.M. had no choice but to withdraw Everquest’s offering, at which point
Cioffi was all but doomed. Investors were beginning to flee. Worse, some of Cioffi’s
biggest lenders, firms like Merrill Lynch and J. P. Morgan Chase, were threatening to
seize his collateral, which was about $1.2 billion. In a panic, Cioffi and his aides
convened a meeting of creditors, where they asked for more time and more money. The
gathering turned angry when several in the audience urged Bear to pony up its own money to
save the funds, an alternative Bear executives dismissed out of hand.
Afterward,
Warren Spector got on the phone with a series of Cioffi’s lenders, including a group
of J. P. Morgan executives. “I’ll never forget this,” one recalls.
“Spector gets on and goes, ‘You guys don’t know what you’re talking
about—you don’t understand the business; only [Cioffi and colleagues] understand
the business; only we are standing in the way of them finishing this [rescue]
deal.’” It was a classic display of Bear-style arrogance, and it incensed the
Morgan men. Steve Black, Morgan’s head of investment banking, telephoned Alan
Schwartz and said, “This is bullshit. We’re defaulting you.”
Merrill
Lynch, in fact, did confiscate Bear’s collateral—an aggressive and highly
unusual move that forced Cayne into the unthinkable: using Bear’s own money, about
$1.6 billion, to bail out one of Cioffi’s two troubled funds, both of which
ultimately filed for bankruptcy. It was a massive blow not only to Bear’s capital
base but to its reputation on Wall Street. Inside the firm, much of the blame fell
squarely on Spector, who oversaw Cioffi and other B.S.A.M. managers. “Whenever
someone raised a question, Warren would always say, ‘Don’t worry about
Ralph—he’ll be fine,’” one top Bear executive recalls. “Everybody
assumed Warren knew what was going on. Well, later, after everything happened, Warren
would say, ‘Well, I never knew his actual positions.’ It was one of those things
where everyone thought someone else was paying attention.”
As
one of Bear’s lenders told me, “The B.S.A.M. situation confirmed to me my
impression, which was that [Bear’s] subsidiary businesses were run in
silos—basically the guys ran their sub-businesses as they saw fit. So long as they
were hitting their P&L targets, no one asked any real questions. To my mind, that
contributed in a very large part to what happened later.”
For
the rest of the summer of 2007, Bear was buffeted by rumors that the bailout might force
it into bankruptcy, or worse. For the most part, Cayne rode out the storm at the bridge
table and his golf club, though by late July he began to sour on Spector. “Warren
never showed any real remorse or contrition,” says another Bear executive. “That
just drove Jimmy mad.” For three solid hours Alan Schwartz sat down with Cayne and
argued against firing Spector, whom he genuinely liked, a conversation that ended when
Cayne said of Spector, “Do you know he’s never once said, ‘I’m
sorry’?” Schwartz replied, “That’s kind of shocking.”
Cayne
forced Spector to resign on August 5. Bear Stearns had survived what many came to call a
“near-death experience,” but its troubles were only just beginning.
As
summer turned to fall, mortgage-related losses hit scores of big banks just as they had
Bear, yet Bear, for reasons that eluded Cayne and others, seemed to remain the poster boy
for the credit crunch. Every story about other firms’ losses seemed to carry a
mention of Bear’s, dredging up memories Bear executives would just as soon have
buried. The perception of Bear’s weakness put Cayne and Alan Schwartz in a bind. The
bailout had blown a sizable hole in Bear’s bottom line, and while the firm was in no
immediate danger, everyone expected it would seek some kind of capital infusion.
Both
Cayne and Schwartz, however, were deeply ambivalent about accepting a big chunk of money
from another bank or private-equity fund. Cynics would later snipe that this was because
Cayne didn’t want to dilute his own substantial share of Bear’s stock. In fact,
it was more complicated. If they accepted outside help, Schwartz argued, they risked
looking as if they needed it, which would only worsen the whispers about their financial
health. In those early weeks of fall, Cayne and Schwartz engaged in a lengthy negotiation
with private-equity veteran Henry Kravis in which he considered buying 20 percent of
Bear’s stock. The deal died, however, when Schwartz pointed out that Bear’s own
private-equity clients might not be thrilled to see Kravis on the board.
In
the following months Cayne and Schwartz held a series of discussions with potential
investors, at one point hiring a top investment banker, Gary Parr, of Lazard, to help out.
There were discussions with private-equity investment company J. C. Flowers, a long set of
talks with Jamie Dimon, J. P. Morgan Chase’s C.E.O., who wasn’t interested, and
even a flirtation with legendary investor Warren Buffett that left Bear executives feeling
Buffett was averse to risk. “Warren Buffett will only take nickels from dead
people,” one snipes. In the end, Cayne managed to arrange one deal: a strategic
partnership with a leading Chinese securities firm, citic, which
agreed to invest $1 billion in Bear in return for Bear’s investing $1 billion with
it. The market yawned.
Then, in November, came back-to-back body blows. On November 1, The Wall Street Journal, in a widely read front-page story, excoriated Cayne for his relaxed management style, portraying him as a bridge-crazy, pot-smoking Nero who fiddled while Bear burned. A few weeks later the firm was forced to disclose it would write down another $1.2 billion (which ended up being $1.9 billion) in mortgage-related securities and post the first quarterly loss in its history. The stock went into a prolonged dive—down 40 percent for the year. By January many executives were openly calling for Cayne’s head. A few slipped into Schwartz’s 42nd-floor office with an ultimatum: if Cayne wasn’t gone by the time bonuses were paid in late January, they would leave. Schwartz was conflicted. He loved Cayne, but he couldn’t afford to lose a group of top people, not at this point. He canvassed Bear’s board, found them open to a change, then broke the news to Cayne himself. To Schwartz’s surprise, Cayne took the news peacefully. He resigned as C.E.O. on January 8, but remained chairman of the board.
Schwartz
was named the new C.E.O. His immediate priority was making sure Bear posted a profit in
its current quarter, which ended February 29. There were still whispers out there about
Bear’s financial health, many fanned by rumors of federal investigations into the
hedge-fund collapse, and Schwartz badly needed some good news to report. As
mortgage-related losses struck firm after firm that winter, Schwartz kept his fingers
crossed, watching the calendar tick off the days until February’s end. He sweated out
an entire extra day—leap day, February 29—but Bear made it. Preliminary figures
showed they would report a quarterly profit of $1.10 or so a share. With luck, Schwartz
said, that would end the whispers.
Nevertheless,
by Wednesday, March 5, Schwartz wasn’t breathing any easier. The rumors continued,
faint but insistent, now fueled by the troubles at a trio of hedge funds, Carlyle Capital,
Peloton Partners, and Thornburg Mortgage. At a weekly risk-assessment meeting that day,
Schwartz queried his people about Bear’s exposure to the three funds, all of which
were thought near collapse. Bear had lent to all three. Still, Bear’s risk, Schwartz
was told, was believed to be minimal.
The
next day, Thursday, Schwartz flew to Palm Beach, where the firm’s annual media
conference was poised to start the following Monday at the Breakers hotel. The conference,
one of Bear’s best-attended events, brought together a host of media titans, many of
them Schwartz’s longtime clients: Murdoch, Redstone, Viacom’s Philippe Dauman,
Time Warner’s Jeff Bewkes, Disney’s Robert Iger. On Friday, while checking in
with headquarters, Schwartz heard the rumors again, now a bit stronger: Bear was having
liquidity problems. He trained his eye on a key auction of municipal bonds that Friday
afternoon. Bear was providing $2 billion in liquidity to various buyers. “That was
the trip wire,” another Bear executive recalls. “If anyone refused to take our
name there, we knew we were in real trouble.” All through the afternoon and into the
evening, Schwartz monitored the note sales. To his relief, they went off without a hitch.
The
storm struck full force without warning on Monday. That morning, when Sam Molinaro
returned to his sixth-floor corner office from a week-long trip in Europe, he expected a
normal day, nothing special; they would release the new, positive earnings the following
week. After the trading day opened, at 9:30, one of the rating agencies, Moody’s,
downgraded another grouping of Bear’s bonds. It was to be expected; the agency had
been downgrading most of its offerings. Then, around 11, Bear’s stock suddenly began
to fall, gradually at first, then sharply. All the “financials”—Lehman,
Merrill, Citi—were falling. Molinaro shrugged. But as he checked with the trading
floor, he heard the rumors: Bear was having liquidity problems. Molinaro rolled his eyes.
Not again.
Bear’s
P.R. man, Russell Sherman, heard the rumors, too. As the stock continued to slide, Sherman
began calling reporters, trying in vain to pin down their source. As he did, Molinaro
checked to see what could be fueling the rumor. Bear itself had no liquidity
problem—he knew that. That morning the firm sat atop $18 billion in cash reserves.
Molinaro checked with his finance desk, the repo desk, his treasurer. Had anyone heard of
anything like a margin call (in which a lender was demanding a huge chunk of cash back)? A
trade gone bad? Was anything out of the ordinary? “Across the board, it was ‘No,
no, no, no—no problems,’” a Bear executive says.
At
one point, Schwartz called in from Palm Beach to assess the situation. “I’m
getting a little nervous,” he said. Molinaro assured him there was no substance to
the rumor.
At
that point the rumor went public—on CNBC, the cable network that serves as Wall
Street’s daily backdrop. On every trading floor dozens of TV sets, mounted high on
the walls, are perpetually tuned to the network, which runs nothing but shows about
finance and money—from Squawk Box to Closing Bell to Jim Cramer’s Mad
Money.
By
noon, when CNBC anchor Bill Griffeth opened Power Lunch, Bear’s stock was down
more than $7, to $63. “There are rumors out there that some unnamed Wall Street firm
might be having liquidity problems,” Griffeth noted. A correspondent on the show,
Dennis Kneale, a veteran of The Wall Street Journal, said, “The speculation at
this point is that it’s Bear Stearns. They’re down the most in the market today.
Supposedly, a couple of weeks ago, they started looking at a way to try to shop their
clearing operations.… [They] couldn’t find a buyer. At least that’s what
one guy says.”
At
Bear Stearns, 80-year-old Ace Greenberg was already pelting senior officials with phone
calls, demanding that someone go public to rebut the rumor. “Ace was kind of freaking
out that morning,” one senior Bear executive says with a sigh. “He just
couldn’t contain himself.”
A
few minutes past 12, another CNBC correspondent, Michelle Caruso-Cabrera, reached
Greenberg at Bear. He told her the rumor was “totally ridiculous.” CNBC reported
his comments within minutes, then incorporated them into a running headline—bear stearns’ ace greenberg tells cnbc liquidity rumors are “totally
ridiculous”—the rest of the hour. In his office, Molinaro saw the
headline and fumed. Addressing the rumor at this stage, he and others felt, merely
appeared to legitimize it.
From Palm Beach, Schwartz telephoned Greenberg in frustration. “Ace, you can’t just do that!” he said.
“Well,
I had to!” Greenberg replied.
Once
the CNBC headline began running, reporters began calling Russell Sherman’s office.
Sherman told the Bloomberg reporter the rumor was untrue, but Bear’s stock was going
crazy. The total volume was over 50 million shares; on a normal day it might trade 7
million.
At
a little after one CNBC correspondent Charlie Gasparino, an especially aggressive reporter
who for months had been suggesting Bear’s possible indictment on criminal charges in
the hedge-fund collapse, joined an on-air roundtable to discuss the rumor. Gasparino was
the bane of Bear Stearns; more than once he had predicted that the firm would go under.
“I don’t believe there is a liquidity problem at Bear Stearns,” Gasparino
said on-air. “Bear Stearns has a problem with whether they should exist or not in the
future in this sense.… What do they have left? A clearing business, a second-rate
investment bank?” If the credit crisis continued, Gasparino said a few moments later,
“I don’t see how they could survive independently. They don’t have enough
horses out there.”
Sitting
on a stool beside him, Bill Griffeth appeared startled at the strength of the statement.
“You’re
on record, then,” he remarked.
Gasparino
laughed. “Wouldn’t be the first time I was wrong,” he said.
At
Bear Stearns, no one was laughing. Publicly speculating on a firm’s liquidity is akin
to shouting “Fire!!!” in a crowded theater; in catastrophic cases it can trigger
panic selling. It risks, in other words, becoming a self-fulfilling prophecy.
For
the next hour the Bear Stearns rumor became a topic of conversation between CNBC
correspondents and various market traders and analysts. At 1:50, Matthew Cheslock
remarked, “The sentiment [on Bear] is pretty negative. The general consensus is
‘Where there’s smoke, there’s fire.’”
A
few minutes later, Griffeth, perhaps sensing the network might have gone a bit too far,
asked Dennis Kneale, “What about the jittery nature of this market right now? Are we
starting to believe some rumors that may or may not be true?” Kneale agreed.
“Someone,” he observed, “is always making money on the other side of that
bad news or that rumor.”
Yet
CNBC’s coverage remained anything but skeptical of the rumor. At two the
network’s new “money honey,” Erin Burnett, headlined the hour by announcing
“credit issues at Bear,” never mind that there was no such thing. She turned to
correspondent David Faber, who observed, “Of course, no firm’s ever going to say
that they are having trouble with liquidity, and, in fact, you’ve either got
liquidity or you don’t. So if you don’t have it, you’re done. Those are the
kinds of concerns in this market, concerns of confidence.… You can have crises of
confidence, causing meltdowns.”
At
2:07 came shocking news: the first mention that New York governor Eliot Spitzer had had
dealings with a prostitution ring. That news shoved Bear Stearns out of CNBC’s
headlines, much to the relief of the firm’s executives. At day’s end, Sherman
issued a formal statement denying any liquidity problems. On Monday night, Schwartz and
Molinaro held their breaths, hoping the worst was over.
In
fact, it had just started.
Tuesday
morning the Federal Reserve announced a novel new securities lending program for major
Wall Street firms to help them weather the credit crisis. Most financial stocks rebounded,
but not Bear. After lunch, Gasparino went on-air and said the Fed initiative was being
interpreted as an effort to save one firm—Bear. By early afternoon the rumors were
once again flying, now stronger than ever.
The first to pull their money from Bear were several major hedge funds. So Molinaro and his men canvassed the repo lenders, which give banks billions of dollars in overnight loans that have to be renewed each day. However, Molinaro found that all planned to “roll over” Bear’s loans the next morning. “Nobody was cutting us off,” says a Bear executive involved in the events. “There was a lot of chatter, though. The hedge funds were agitated. That was concerning, because they could influence the outcome by pulling out cash balances.”
That
same day Bear executives noticed a worrisome development whose potential significance they
would not appreciate for weeks. It involved an avalanche of what are called
“novation” requests. When a firm wants to rid itself of a contract that carries
credit risk with another firm, in this case Bear Stearns, it can either sell the contract
back to Bear or, in a novation request, to a third firm for a fee. By Tuesday afternoon,
three big Wall Street companies—Goldman Sachs, Credit Suisse, and Deutsche
Bank—were experiencing a torrent of novation requests for Bear instruments. Alan
Schwartz thought it strange that so many requests were being channeled to the same three
firms, but did his best to assure them all that Bear remained on sound footing.
“Deutsche Bank we talked to, and they said, ‘We’re getting
killed!’?” says a Bear executive. “We said, ‘We’ll take you out
of your positions,’ and we did. But it was too late.”
Too
late—because, before Bear could calm the waters, executives at both Goldman and
Credit Suisse told their traders to hold up all novation requests dealing with Bear
Stearns, pending approval by their credit departments. The Credit Suisse memo, a
“blast” e-mail to much of its trading staff, quickly became the subject of
widespread rumor and gossip. Both memos were essentially routine, a way to handle the
deluge of novation requests rather than comments on Bear’s viability, but they
nevertheless served as the first concrete sign that some of Wall Street’s biggest
firms were having concerns about doing business with Bear.
Sam
Molinaro felt it was time for another public assurance. CNBC’s Charlie Gasparino had
been peppering him with phone calls seeking comment. Molinaro talked to Russell Sherman,
who felt Gasparino could be played. “He’ll say something negative if you shut
him out. But if you talk to him, he’ll go positive,” one Bear executive told me.
Around
three, Molinaro spoke to Gasparino, telling him, “I’ve spent all day trying to
track down the source of the rumors, but they are false. There is no liquidity crisis. No
margin calls. It’s all nonsense.” Gasparino’s on-air comments were mild,
but for the first time he raised the specter of a nightmare scenario: “They are
really worried about this inside [Bear], that these rumors are taking a very nasty turn,
and they might cause a run on the bank.”
Still,
by day’s end, there was no rush among Bear’s lenders to withdraw cash from the
firm. At that point, this executive says, “the notion of a liquidity crisis seemed
silly.”
That
night Schwartz, Molinaro, and others discussed what to do. The talks centered on whether
Schwartz should go public in an interview with CNBC. “We debated putting Alan on the
air a long time,” says one board member. “Yes, it might draw attention to the
rumors. But it would definitely answer the questions. Our view was: we had to get him
out.”
Schwartz,
though, wanted some assurances first. From experience, he knew he faced a risk in picking
the wrong CNBC correspondent for the interview. All the network’s
talent—Gasparino, Maria Bartiromo, Faber, Larry Kudlow—had requested the
interview, and whoever didn’t get it, Schwartz feared, might retaliate on the air.
“Each of these correspondents has his own producer, and they all seem to hate each
other,” one Bear executive told me. “If you choose Faber, you know Bartiromo
will bash you the next day.” Schwartz directed Russell Sherman to identify the CNBC
executive who supervised the correspondents, explain the situation, and ask that the
correspondents who didn’t get the interview refrain from attacks. Sherman, however,
couldn’t identify a single CNBC executive who seemed to have control over the
correspondents. “Everyone on Wall Street knows the joke,” says another Bear
executive involved in the discussions. “At CNBC, there is simply no adult
supervision.”
In
the end they chose the safest of the lot, Faber. Wednesday morning, all across Manhattan,
Wall Street traders crowded around their monitors to see what Schwartz had to say. More
than a few shook their heads that the Bear C.E.O. was not in his office, grappling with
the emerging crisis, but in, of all places, Palm Beach! As a senior executive of one
competing firm put it, “To come on CNBC from Palm Beach and, you know, tell everyone
everything was going to be O.K., they had to be crazy.” (Schwartz was worried that an
abrupt departure from his conference might raise even more questions.)
Faber’s
first question was a bombshell. He told Schwartz he had direct knowledge of a
trader—a single trader—whose credit department had held up a trade with Bear
Stearns, citing concerns about its health. At Bear, many executives gasped. It was a
killer statement: Faber was saying, in essence, that Bear’s status as a trader, the
basis of its business, was in question. Schwartz answered as best he could, saying
everything was fine; only later did Faber say on-air the trade in question had finally
gone through. But the damage had been done.
“You
knew right at that moment that Bear Stearns was dead, right at the moment he asked that
question,” a Wall Street trader of 40 years told me. “Once you raise that idea,
that the firm can’t follow through on a trade, it’s over. Faber killed him. He
just killed him.”
At
Bear Stearns, however, the sentiment on the sixth floor was that Schwartz had done a good
job. The interview did nothing, however, to stop the rumors. When Schwartz returned to his
office that afternoon, he tried calling customers, but nothing he did could stem the tide.
By the end of the trading day, the first repo lenders had warned Molinaro they would not
renew their loans the next morning.
“The
tone of Wednesday afternoon was not positive—three days of rumors were starting to
take their toll,” says a senior Bear executive. Mostly because of hedge-fund
withdrawals, the firm’s reserves had shrunk to less than $15 billion. That evening,
meeting in Molinaro’s conference room, the chief financial officer told Schwartz they
could probably replace those reserves the following day. If the repo lenders began backing
out, though, they were in serious trouble. Schwartz had a long-standing emergency plan in
place, involving the sale of Bear assets, and for the first time Molinaro pulled it out
and began studying it in earnest. Schwartz, meanwhile, got on the phone to Gary Parr at
Lazard. They agreed to meet the next day. Late that night a Bear lawyer telephoned Tim
Geithner, president of the New York Federal Reserve. He briefed him on Bear’s plight
and urged him to have the Fed accelerate its plan to provide liquidity to the market.
The
next morning, on his drive in from Connecticut, Molinaro began calling the repo and
finance desks to check the tone of their early calls. The Journal had a story
suggesting that any number of Bear’s lenders, including the all-important repo
lenders, were growing nervous. Still, those first calls went as well as could be hoped.
Other firms were still trading with Bear. Few of the repo lenders were talking about
refusing to roll over their daily loans. “Thursday morning, things looked good,”
says one Bear executive.
Then,
just as they had the day before, the rumors began to multiply—and with them the
withdrawals. By midafternoon the dam was breaking. One by one, repo lenders began to jump
ship. As word spread of the withdrawals, still more repo lenders turned tail. The
hedge-fund cash was almost all gone. “A lot of people were pulling out,” one
Bear executive remembers. “The nail in the coffin was the repo capacity.”
Molinaro
and Robert Upton, Bear’s treasurer, ended the day toting up the withdrawals. By five,
Molinaro could see his worst fears had been realized. He picked up the phone and called
Schwartz in his 42nd-floor office. “You need to get down here,” he said.
The
numbers, scribbled out on a yellow legal pad, told the story. Standing in Molinaro’s
conference room, Schwartz listened as Robert Upton guided them through the wreckage. A
full $30 billion or so of repo loans would not be rolled over the next morning. They might
be able to replace maybe half that in the next day’s market, but that would still
leave Bear $15 billion short of what it needed to make it through the day. By seven it was
obvious they had only two options: an emergency cash infusion or a bankruptcy filing the
next day. The one thing everyone agreed upon was the need for secrecy. “If word gets
out, it might be the end,” one participant recalls saying.
Schwartz
was stricken. He had genuinely thought they would make it. By early evening, realizing
that Bear’s life expectancy might now be numbered not in days but hours, he hit the
phones. The regulators—the S.E.C., Treasury, the Fed—had been watching the
situation all day and were waiting when he called to brief them. Gary Parr, the Lazard
banker, had already touched base with J. P. Morgan’s C.E.O., Jamie Dimon, that
afternoon, letting him know where Bear stood. J. P. Morgan was the obvious candidate for
overnight cash. The two firms had long-standing ties. Their headquarters faced each other
across 47th Street.
That
day was Dimon’s 52nd birthday, and he was celebrating with a quiet family dinner at
Avra, a Greek restaurant on East 48th Street. He was irked when his private cell phone
rang; it was to be used only in emergencies. On the line was Parr, who put Schwartz on as
Dimon stepped outside onto the sidewalk. Schwartz quickly explained the depth of
Bear’s plight and said, “We really need help.”
Still
irked, Dimon said, “How much?”
“As
much as 30 billion,” Schwartz said.
“Alan,
I can’t do that,” Dimon said. “It’s too much.”
“Well,
could you guys buy us overnight?”
“I
can’t—that’s impossible,” Dimon replied. “There’s no time to
do the homework. We don’t know the issues. I’ve got a board.”
The
people he should call, Dimon said, were at the Fed and the Treasury—the only place
Bear could get $30 billion overnight. Still, Dimon promised to see what he could do to
help. He hung up and dialed Tim Geithner at the New York Fed downtown.
Twenty-first-century
Wall Street is a highly interconnected world, with just about everyone lending billions of
dollars to everyone else, and Geithner worried that Bear’s collapse might trigger a
domino effect, taking down scores of other firms around the world; he urged Dimon in the
strongest terms to think about somehow helping Bear. “Tim, look, we can’t do it
alone,” Dimon said. “Just do something to get them to the weekend. Then
you’ll have some time.”
Dimon
hung up, reluctantly realizing Morgan was in this, like it or not. He knew everyone
involved would push Morgan to consider buying Bear, but while there were certain of its
businesses he coveted—prime brokerage, energy, correspondent banking—he
wasn’t thrilled at the prospect of taking aboard its massive mortgage-related
problems. Still, in short order, he dispatched a credit team of a half-dozen traders to
Bear to begin looking at its books. Then he realized he had a problem.
It
was Steve Black, his investment-banking chief. The Morgan man who probably knew Bear best,
Black was on a family vacation on the Caribbean island of Anguilla. That evening, in fact,
Black was looking forward to three days of peace and quiet with his wife, Debbie. At her
insistence, he had left his cell phone at the hotel when they went for a late dinner at a
beachside restaurant. Midway through their meal, Black looked up and saw a man marching
toward the table.
“Oh,
shit,” Black said under his breath.
“Are
you Mr. Black?” the man asked. When Black nodded, the man said, “I have an
emergency call from your hotel.”
Black
told the hotel to have Dimon call him at the restaurant. He was waiting in its bustling
kitchen when the phone rang. “It’s for me,” he told a cook. By nine Black
was back in his hotel, orchestrating the teams beginning to study Bear’s situation. A
Morgan jet would arrive in the morning to ferry him back to New York.
The
first team of Morgan executives reached Bear’s sixth-floor executive suite around 11
that night. It didn’t take long for them to realize the danger in what they were
being asked to do. If Dimon lent Bear $15 billion or so and the firm imploded the next
day, they could lose it all. A little after midnight Dimon told Schwartz in a phone call,
“We’ve got to get the Fed in on this.”
Downtown,
Tim Geithner was waiting when Dimon telephoned. Any bailout, Dimon reiterated, was too
big, too risky, for Morgan to handle alone. Both men knew that meant only one thing:
somehow Bear had to be given access to the Fed “window,” that is, the spigot of
cash that was available to the nation’s commercial banks, but not its investment
banks. The only way for the Fed to help, to give Bear access to the “window,”
was to lend Morgan the money, allowing the bank to act as a bridge across which the Fed
cash could stream into Bear’s vaults.
Geithner,
quickly grasping the wisdom of the move, got on the phone with Washington, going through
the details with the Fed’s chairman, Ben Bernanke, and the Treasury secretary, Hank
Paulson, and his counterparts at the S.E.C. If they could just get Bear through the next
day, perhaps a bigger and better deal could be forged over the weekend. By two a.m. teams
from the Fed and the S.E.C. had joined the Morgan bankers at Bear, poring over the
numbers. In Molinaro’s conference room, Schwartz and Molinaro paced, occasionally
taking bites of cold pizza; their fate, they now realized, was largely out of their hands.
By
four a.m. the outlines of a deal were taking shape. Morgan would give Bear a credit line;
the money would come from the Fed. It took three more hours for the details to be pounded
out. At the last minute Morgan’s general counsel, Stephen Cutler, inserted a line
into the press release stating the credit line would be good for up to 28 days.
At
Bear, Schwartz and Molinaro allowed themselves a few nervous smiles. They were
saved—for 28 days. “We all thought this was a huge win,” remembers one Bear
executive. “We were all pretty pleased, thinking we had averted our potential
deaths.”
They
wouldn’t be so sanguine for long.
When
the markets opened Friday morning, traders greeted the news from Bear with surprise but
not, at least initially, with panic. For the first hour or so of trading, the stock
remained where it had been the day before, in the low 60s. In Anguilla, Steve Black
furrowed his brow. “This is nuts,” he remarked to his wife as they headed for
the airport. “No one understands what happened here. This stock should be half
that.” By the time the Blacks arrived at the airport, it was.
By
four o’clock the firm’s capital reserves, which had been $18 billion that
Monday, had dwindled to almost nothing. “The balances leaving was a flood,”
remembers one Bear executive. “By Friday afternoon we couldn’t even keep track
of the money going out. Friday afternoon, I have to say, caught everyone by surprise.
Because Friday morning we thought we had bought some ‘stop, look, and listen’
time.”
Gary
Parr, meanwhile, was already on the phones, canvassing every prospective rescuer he could
think of. Just about anything was on the table: a merger, a sale of prime brokerage or
other valuable assets, even an outright sale of Bear itself. The only way to stop the run,
everyone knew, was to find what Parr kept calling a “validating investor”—a
big name, hopefully with big money, who would send a message that Bear was still solid.
Warren Buffett, with his unmatched reputation for identifying value, was the ideal
solution. “If Buffett had put in a hundred dollars, that would’ve been
enough,” says one person involved that day. “That would have sent the
message.” But there was no rush, at least not at first.
Around
six Schwartz slipped into the back of a black town car for the drive home to Greenwich.
Somehow Bear was still alive, if barely. Thanks to the Morgan credit line, they could
probably open on Monday. Now he had 28 days—28 days to raise new capital, find a
merger partner, or sell Bear outright. It wouldn’t be easy, he knew, but it was
doable. Then, as the car cruised northeast, Schwartz’s phone rang. It was Tim
Geithner of the Fed, with the Treasury secretary, Hank Paulson.
Paulson
came right to the point. “You’ll recall I told you when we cut this facility
[that] your fate was no longer in your hands,” he told Schwartz. “Well, we
don’t plan on being here on Sunday night like we were last night. You’ve got the
weekend to do a deal with J. P. Morgan or anyone else you can find. But if you’re not
done by Monday, we’re pulling the plug.” And, like that, Bear’s 28-day
cushion evaporated. The Fed’s credit line was good only till Sunday night.
Schwartz hung up the phone, stunned. He telephoned Molinaro, who was also on his way home, at that moment buying a cup of coffee at a rest stop on the Merritt Parkway. “You’ve got to be kidding me,” Molinaro said.
To
this day, top Bear officials aren’t sure whether they misread the “28-day”
language or whether Paulson simply had a change of heart after the events of Friday
afternoon. “Everyone thought we had 28 days,” says one senior Bear executive.
“Do we think they thought that? We think so. But, look, when this was done, we just
got a piece of paper that said, ‘If you agree to this, you’ll be O.K.’ We
signed. No one spent a lot of time going over all the little details.”
In
fact, no one—not even Federal Reserve officials—had been sure what the credit
line or the “28-day” mention actually meant. “They took hope in that
language,” says a Fed official. “I don’t know why they did. We made it very
clear at the time, ‘This is not the be-all end-all.’ Then again, this whole
thing was done so fast. We didn’t think through all the details of what would happen
next.”
When
Schwartz returned to his office Saturday morning, one of his first calls was to Geithner.
He appealed for more time, explaining that Bear thought it had 28 days. Geithner held
firm. Sunday night, he repeated. By that point, representatives of prospective suitors
were already streaming through Bear’s hallways, poring over financial documents.
Their efforts switched into overdrive as word spread of the Sunday deadline. A team from
Flowers was there, a team representing Henry Kravis, plus another half-dozen or so groups
from major banks. J. P. Morgan alone had 16 different teams meeting with all of
Schwartz’s top people.
It
was a sobering process: as the day wore on, the bidders began dropping out, one by one.
Everyone had an excuse: they didn’t have the time or the money or the balls to do
such a risky deal in so short a time. The two best possibilities, it appeared, were Morgan
and Flowers. The latter told Parr on Saturday afternoon it was prepared to buy 90 percent
of Bear for about $30 billion, or $28 a share—that is, if it could scrape up $20
billion from a bank consortium by the next day. No one thought Flowers could possibly get
such a deal done in time.
From
the outset, Schwartz assumed Morgan was the bridegroom. Across the street, in
Morgan’s eighth-floor executive suite, Jamie Dimon and Steve Black fielded nonstop
reports from their due-diligence teams, now numbering more than 300 people. The key,
everyone knew, was Bear’s mortgage “book,” that is, its inventory of
mortgage-backed securities. Much of it was illiquid—it couldn’t be sold. How to
value these Rube Goldberg devices was anyone’s guess. The more Black studied
Bear’s book, the more worried he grew. He and another Morgan executive, Doug
Braunstein, got on the phone with Schwartz and Parr that night and told them that, if
Morgan did bid, it wouldn’t be much.
Bear’s
stock had closed Friday at $32. “The fact you’re at 32 doesn’t mean much at
this point,” Black said. He suggested that a Morgan bid might be in the range of $8
to $12 a share. “We said, ‘That’s all there is, and that’s with a lack
of due diligence and a lot of other issues,’” says a person involved in the
call. “Alan asked, ‘Will you do it come hell or high water?’ That was their
key issue.”
At
nightfall everyone hunkered down for long hours studying Bear’s numbers, especially
its mortgage book. By dawn, however, many Morgan executives were having second thoughts.
The more they studied the securities Bear owned, the worse it looked. Bear, for instance,
had initially estimated it had $120 billion in so-called risk-weighted assets, those that
might go bad. By Sunday morning, Morgan executives felt the actual number was closer to
$220 billion.
“We
all kind of slept on it,” says one executive involved in the talks, “or not
slept on it, kind of closed our eyes for a half-hour, and realized that if you take a step
back and remove yourself from the enormity of it, what we were being asked to take over,
from a risk factor, was gargantuan.” And it wasn’t just the financial risk. The
morning’s New York Times carried a piece on Bear, by veteran reporter Gretchen
Morgenson, that dredged through all the seamiest aspects of Bear’s recent history.
Steve Black walked around the eighth floor making sure everyone read it. “That
article certainly had an impact on my thinking,” remembers one Morgan executive.
“Just the reputational aspects of it, getting into bed with these people.” He
shudders.
Dimon
had to agree. It was just too much. Steve Black broke the news to Schwartz. “Whatever
other things you are working on, you should actively pursue them,” he said. Downtown,
at the Fed, Tim Geithner stepped out of his conference room to hear the news from Dimon.
“I remember he came back in a minute later, with this look on his face that said,
‘Huh?’?” recalls a member of the Fed team.
“They’re
not going to do it,” Geithner said.
Geithner
believed he couldn’t let Bear die. The repercussions were unthinkable. “For the
first time in history the entire world was looking at the failure of a major financial
institution that could lead to a run on the entire world financial system,” a Fed
official recalls. “It was clear we couldn’t let that happen.”
Within
minutes Geithner was back on the phone with Dimon. There ensued a series of conversations
where, in one Fed official’s words, “they kept saying, ‘We’re not
going to do it,’ and we kept saying, ‘We really think you should do it.’
This went on for hours. Finally, [the conversation] shifted to ‘Well, maybe if.’
They kept saying, ‘We can’t do this on our own.’?” All through these
talks, Geithner kept a nervous eye on the clock. The Australian markets opened at six on
Sunday evening, New York time. They had to have some kind of deal by then or risk chaos.
Geithner
had several long conversations with Ben Bernanke and Hank Paulson. There was never any
serious question whether the Fed would help out. Even though it had never attempted
anything like this before, there was ample precedent for the move; both the German and
British central banks had stepped up to rescue institutions laid low by the mortgage
crisis in just the last year. Still, the details took hours to unspool. At one point,
Paulson had to sign a document confirming that, yes, in the event Bear defaulted on its
securities, the American taxpayer would pay the tab.
Meanwhile,
at Bear, Alan Schwartz, now merely a spectator at his firm’s funeral, watched the
clock. By one, Bear’s board was in session, many of its members, including Jimmy
Cayne, present by phone; Cayne was in Detroit at a bridge tournament. At one point,
Schwartz took a call from Morgan executives, who told him that any bid was likely to be
less than the $8-to-$12 range mentioned the night before. In fact, they suggested the
likely number was $4.
When
Schwartz relayed the $4 idea to his board, several, including Cayne, grew apoplectic.
Cayne argued strenuously that Bear simply file for bankruptcy. “There were a lot of
people at that point who were just saying, ‘Fuck ’em—let’s go
11,’?” remembers one person in the boardroom. 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.
Slowly,
the humiliating inevitability of a $4-a-share buyout—for a firm whose shares had
traded as high as $170 the year before—sank in. It was at that point, midafternoon,
that Treasury secretary Paulson twisted the knife. As the ranking politician involved in
the deal, he was concerned with appearances—both how it would look that the federal
government was bailing out a well-heeled investment bank at a time when normal Americans
were losing their homes, and the appearance of something lawyers call “moral
hazard,” that is, the idea that a Bear deal, by appearing to “save” a bank
whose poor judgment had pushed it to the brink of bankruptcy, might actually encourage
risky behavior by other financial institutions. This deal, Paulson judged, had to hurt
Bear. And it had to hurt badly.
Paulson
and Tim Geithner telephoned Dimon at Morgan. He put them on speaker. Dimon said he was
considering a price in the $4-to-$5 range. “That sounds high to me,” Paulson
said. “I think this should be done at a very low price.” A little later,
Morgan’s Doug Braunstein reached Gary Parr at Bear. A formal offer would be
forthcoming, Braunstein said. “The number’s $2,” he said.
Parr
nearly choked. “You can’t mean that,” he said.
He
did. Schwartz took the news quietly, which was more than one could say about some of his
board members. Jimmy Cayne—whose 5.66 million shares, once worth nearly a billion,
would now be worth less than $12 million—swore he would never accept such a
humiliating offer. “The people around the table, some of them, their net worth was
being wiped out,” says one person who was in the room. “There was every emotion
you can think of: sadness, anger. They saw the tragedy. But the bottom line was, you know,
when they got in a pickle, Bear Stearns didn’t have many friends.”
Schwartz
took a half-hour explaining that the board really had no choice. It was Morgan or
bankruptcy, which would mean liquidation, putting 14,000 employees out of work by noon the
next day. “What can I say?” he said at one point. “It’s better than
nothing.”
And
like that, with the signatures on an unprecedented merger agreement, a major American
investment bank vanished, along with $29 billion in shareholder value and the secure
futures of 14,000 employees. In the following days the hallways of Bear Stearns & Co.
erupted in rage. Longtime friends fumed and even screamed in Schwartz’s face—at
a town-hall meeting he chaired, where one man hollered, “This is rape!”; in the
hallway outside his office; even in the Bear gym. Shareholders were so angry that everyone
was forced back to the negotiating table the next weekend, when Morgan and the Fed, in a
second set of manic around-the-clock meetings, agreed to boost the price to $10 a share.
Yet, for all the anger, all the frustration, no one could answer the one question on
everyone’s mind: How on earth had this happened?
Even
among the circle of top executives who lived through that frantic week, no two people see
the crisis at Bear the same way. Many, though, agree with some version of the scenario
Alan Schwartz has come to believe. Yes, Schwartz tells friends, mistakes were made. Yes,
the firm was financially weakened. But the more he learned about what had happened behind
the scenes that week, the more Schwartz came to believe that Bear’s collapse was a
pre-meditated attack orchestrated by market speculators who stood to profit from its
demise. According to those Schwartz has briefed, these unnamed speculators—several
now being investigated by the S.E.C.—employed a complex scheme to force a handful of
major Wall Street firms to hold up trades with Bear, then leaked the news to the media,
creating an artificial panic.
“Something
happened Monday that triggered this mess,” says one Bear executive who has spoken to
the S.E.C. “It was as though a computer virus had been launched. Where the hell was
this coming from? Who started it? We tried, believe me, but we could not track it down. We
know lots of big hedge funds were spreading rumors, but how can you pursue that? Only the
S.E.C. can, and they’re all over this.”
At
the heart of this theory are the “novation” requests that began to pick up steam
that Tuesday and Wednesday. As Bear executives later analyzed these trades, they
discovered the overwhelming majority had been made with just three firms: Goldman Sachs,
Credit Suisse, and Deutsche Bank. Schwartz came to believe this was no accident. In his
mind, the flood of novation requests was designed to force at least one of the three firms
to put a temporary halt to accepting them, which is what happened: Goldman and Credit
Suisse did. News of that halt not only swept Wall Street trading floors, it appeared to
gain credence the next day when David Faber asked Schwartz about it on CNBC. “I like
Faber, he’s a good guy, but I wonder if he ever asked himself, ‘Why is someone
telling me this?’?” a top Bear executive asks. “There was a reason this was
leaked, and the reason is simple: someone wanted us to go down, and go down hard.”
(Faber says his reporting was accurate, and arose from talks with a source he has known
for 20 years.)
But
who? According to one vague tale, initially picked up at Lehman Brothers, a group of
hedge-fund managers actually celebrated Bear’s collapse at a breakfast that following
Sunday morning and planned a similar assault on Lehman the next week. True or not, Bear
executives repeated the story to the S.E.C., along with the names of the three firms it
suspects were behind its demise. Two are hedge funds, Chicago-based Citadel, run by a
trader named Ken Griffin, and SAC Capital Partners of Stamford, Connecticut, run by Steven
Cohen. (A spokesman for SAC Capital said the firm “vehemently denies” any
suggestion that it played a role in Bear’s demise. A Citadel spokeswoman said,
“These claims have no merit.”) The third suspect, at least in Bear
executives’ minds, is one of its main competitors, Goldman Sachs. (“Goldman
Sachs was supportive of Bear Stearns,” says a Goldman Sachs spokeswoman. “There
is no foundation to rumors that we behaved otherwise.”)
Several
Bear executives also named an individual they believed was spreading rumors about them
that week, Jeff Dorman, who briefly served as global co-head of Bear’s prime
brokerage business until resigning to take a similar position at Deutsche Bank last
summer. “We heard Dorman was saying things last summer,” says a Bear executive.
“At the time we reached out to Deutsche Bank and told them he better stop it.”
(Asked about the allegation, a Deutsche Bank spokeswoman acknowledged that Bear had sent
its executives a letter last August asking Dorman not to solicit its clients, as he had
agreed upon leaving Bear. Deutsche Bank replied that he wasn’t. The exchange
didn’t explicitly address what Dorman might have been saying about the firm, nor
would the spokeswoman.)
Today,
many of Bear Stearns’s former employees are out of work. The firm has effectively
disappeared into the maw of J. P. Morgan along with a number of key executives, including
Ace Greenberg, who became a Morgan vice-chairman, and Alan Schwartz, who will probably
take a position in the investment-banking department.
Maybe
the S.E.C. will figure out whether Bear was murdered. But maybe it won’t. Even those
who believe the firm was the victim of a predatory raid have their doubts it can ever be
proved.
“Even with subpoena power, I’m not sure the S.E.C. will get to the bottom of this, because the standard of proof is just so difficult,” says a vice-chairman at another major investment firm. “But I hope they do. Because you can look at this as just another run on a bank or as a seminal point in the financial history of this country that could bring about a change, perhaps a drastic change, in the way we govern financial markets. If there is a solution to this kind of thing, it must be found in the roots of what happened at Bear Stearns. Because otherwise, I can guarantee you, it will happen again somewhere else.”