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What Really Killed Bear Stearns?June 30, 2008, 8:30 am

Did Bear Stearns melt down — or was it murdered?
That is one of the big questions that Bryan Burrough, who co-wrote the best-selling 1990 book “Barbarians at the Gate,” tries to answer in a lengthy article in the August Vanity Fair magazine.
Mr. Burrough spoke with many Bear executives and board members who described in vivid detail the events that unfolded that fateful week in March when Bear Stearns was ultimately forced to sell itself to JPMorgan Chase for a pittance.
According to Mr. Burrough’s account, Bear did not have a liquidity problem, at least at first. In fact, he said it had more than $18 billion in cash to cover its trades when the week began. There were no major withdrawals until late in the week, after rumors flew that the company was in trouble.
A top Bear executive told Mr. Burrough, “There was a reason [the rumor] was leaked, and the reason is simple: someone wanted us to go down, and go down hard.”
Bear executives frantically tried to find the source of the rumors, but failed to do so. They have their suspicions, and they have turned over the names to federal authorities that are investigating the matter.
Two possible sources named in the article — albeit with few supporting details — are hedge funds: Chicago-based Citadel, run by Ken Griffin, and SAC Capital Partners of Stamford, Conn., run by Steven Cohen. The third was one of Bear’s main competitors, Goldman Sachs.
All three firms denied any involvement in spreading the rumor, according to the article.
Several Bear executives also told Mr. Burroughs that an individual may have been spreading rumors about the firm that week — Jeff Dorman. Mr. Dorman briefly served as global co-head of Bear’s prime brokerage business until resigning to take a similar position at Deutsche Bank. One Bear executive said, “We heard Dorman was saying things last summer […] At the time we reached out to Deutsche Bank and told them he better stop it.”
But the rumors caused a run on the bank and depleted Bear’s capital base. Alan Schwartz, the firm’s chief executive, then reached out to his counterpart at JPMorgan, James Dimon, for help. Mr. Schwartz called Mr. Dimon, who was eating dinner with his family, celebrating his 52nd birthday.
Mr. Burrough described the call this way:
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.’
Mr. Dimon then called the New York Federal Reserve and worked out a deal where the government would lend the money to JPMorgan, which would then lend it to Bear Stearns. Bear would live another day — but just a few more. Bear executives thought they had 28 days to pay the money back. The article recounts a conversation that Mr. Schwartz had with federal officials informing him that he had far less time than he thought:
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.”
The news came as a shock to Bear executives.
When Bear’s chief financial officer, Sam Molinaro, heard the news from Mr. Schwartz he said, “You’ve got to be kidding me.” The firm was eventually forced to sell itself to JPMorgan to avoid a bankruptcy filing.
Go to Article from Vanity Fair »
20 comments so far...
1.
June 30th,20088:53 am
So a combination of former Goldman Sachs eexecutives and some very big hedge funds that do significant business with Goldman Sachs are coincidently at the center of the demise of a Goldman competitor. Rumors of how SAC Capital turns their profits [illegally] have been circulating for decades and yet somehow they are insulated from any enforcement risk. Must be that Goldman secret handshake and decoder ring they wear.
How is it the $30 Billion federally sponsored loan to Bear Stearns was good for a weekend but that same $30 Billion is a long term loan to JP Morgan?
— Posted by Dave
2.
June 30th,20089:02 am
Stop!….with these supposedly informed/insightful tidbits about Bear’s stellar liquidity and balance sheet. To say someone had $18 billion in cash presents a one-sided analysis. How much was out in repo against that $18 billion? Additionally, most execs pick a quote based on the day the balance sheet is gussied up.
When Bear’s liquidity crisis developed their repo book had expanded dramatically over the past year to the tune of 2x the previous year. During the same period Lehman’s repo book had declined by roughly 25%. Bear got a taste of their own medicine by virtue of committing the cardinal sin of overreliance on short term funding. For repo lenders perception in many instances is reality. The last man standing gains nothing, the first out gets his money back.
— Posted by former bear employee
3.
June 30th,20089:21 am
“The news came as a shock to Bear executives.”
So why did Mr. Burrough go to many Bear executives and board members to find the reason for Bear’s collapse?
It wasn’t murder; it was negligence and ignorance on behalf of Bear’s executives and board members. The outcome is that taxpayers and Bear stakeholders will pay, all while those executives blame others, demand everyone’s pity, and holdout to negotiate their next big contract.
— Posted by Perseus
4.
June 30th,20089:57 am
Barbarians at the Gate is one of my all-time favorite books, but honestly, hasn’t this story been told already? Didn’t the WSJ do a three-day expose on how Bear Stearns collapsed? The next article I read about Bear Stearns better be in Playboy, is all I’m saying.
— Posted by Dan Daoust
5.
June 30th,200810:36 am
The Vanity Fair piece blames everyone from shorts to CNBC to Charlie Gasparino and David Faber.
Yet bottom line remains: If your financial condition is so precarious that rumors can bring you down, then its the finances, and not the rumors, that are to blame . . .
— Posted by Barry Ritholtz
6.
June 30th,200811:02 am
Exactly. That’s what happens when you try to run with 30 to one leverage. All it takes is one rumor and…you are screwed. Not even commercial banks are allowed that kind of leverage.
— Posted by oldgeezerpilot
7.
June 30th,200811:04 am
Am I suppose to feel sorry for Bear Stearns or its employees?? When the going was good, did Bear Stearns care how it was making its money, its profits, the bonuses? Whether the death of Bear was by murder or otherwise, the executives made their money by murdering the consumers. Bears Stearns lobbyists in Washington made it so consumers couldn’t breath with so many hidden caveats to contracts. Chickens are coming home to roost. This article is blaming others for demise of Bear Stearns instead of the decisions made by the executives of the firm. The firm has to be pretty shaky if rumors takes it down. Greed, malfeasance, unscrupulous deals. Now if any other firms hire these executives from Bear Stearns, I would question those firms judgement and avoid those firms. If these executives of Bear Stearns were so good, smart, cunning , they couldn’t save Bear, how they going to help another firm. Think folks
— Posted by seedyrum
8.
June 30th,200811:12 am
In 1965, Bill Kaufamn, Joe Osorio then of Citibank,a Bear Sterns executive and I formed a Hedge Fund with a certain Jerru Tsai, guru. In those days the spector of Hedging as an institution frightened the SEC as well as the street.In view of the recent liquidity problems surrounding mortgage backed securities fiasco and the death of BearSterns, the Street and the SEC were right then and wrong in the recent past and now.Rumur mills that profit from false or true rumors should not co-exist in an orderly mnarket.John Wright
— Posted by John Wright
9.
June 30th,200811:27 am
I knew since the beginning that BSC was taken down on purpose; the book will be written by my guy Lowenstien, and will be out in a year or so detailing the ugly truth.
— Posted by Steve Raznick D.M.
10.
June 30th,200811:29 am
Hey Barry, listen sport you have a lot to learn about gearing; if you were to use your assertion(s) as de-facto governance, there is not a single firm that would survive!
— Posted by Steve Raznick D.M.
11.
June 30th,200811:37 am
Barry, ANY company can be destroyed by false rumors and a Bear Raid. A financial services company is at greater risk because unlike other businesses, financial services is susceptible to that run on the bank that a GE, IBM, Microsoft, etc… would not be.
— Posted by Dave
12.
June 30th,200812:04 pm
Spreading rumors on Wall Street to effect stocks is an old time ruse, everyone on a trading desk has been through this at one time or another.
Some geek decides he wants to sell or short an equity,so puts a rumor out there. The desks are so nervous, they react vs. responding and the originators use that opportunity to buy or sell.
We also have frontrunning by every major firm. They buy a position then lay it off on their unsuspecting clients. Many are still trying to get their money out of the Auction Rate Preferreds that the major houses sold to their clients knowing full well that the firms would never step up to the plate to support the auctions as they had been.
Where the hell are our regulators and legislators? That’s what I want to know.
— Posted by Kate
13.
June 30th,200812:21 pm
Funny thing is, the SEC went out and solicited the opinions of “seasoned economists” for their insight on the tick test removal. The panelists were a who’s who of short sale apologists including the most vocal apologist and Jim Chanos friend and Associate - Owen Lamont.
In the roundtable meeting every economist on the panel denied that a bear raid could exist in this marketplace because of the regulatory structrure we have. It goes to show how blind our so-called experts have become to the tricks of the trade in todays market abuse network.
Not only do bear raids exist, they are actually quite prevelant. They just don’t last as long as they did in the past because of all the potential for liquidity. Today market abusers can raid a stock and cover for profit before our regulators have even opened their eyes to the abuse.
— Posted by Dave
14.
June 30th,200812:53 pm
Could the short volumes taken on by Citadel, SAC, and GS be gathered from the records and plotted for the takedown week?
— Posted by dave
15.
June 30th,20081:24 pm
A sound institution cannot be undone by rumors.
— Posted by wendell tripp
16.
June 30th,20082:13 pm
No matter whether Goldman Sachs, Citadel, JP Morgan, SAC et al deepsixed Bear-Stearns or if B-Stearns oeverreached and pulled the plug themselves. The fact is that none of these money flows in either direction were productive investments, merely attempts to game ineffeciencies in the market with the vampires raking off every time money changes hands. No value created here; too bad they all didn’t go down together.
If this money had been used, say, to invest in fuel cell technology development, perhaps GM or Ford, instead of Honda, would have put the first pre-production hydrogen feul cell vehicules on the road.
This ghoulish posturing can be stopped by revisiting US fiscal history. Under Truman and Eisenhower the highest marginal income tax was 92%. All annual income over $100,000 was imposed at this rate. Allowing for inflation today the figure would be $400,000. If all net income (including wages, salaries, fees, investment gains, capital gains, realized stock options, partnership payouts…) exceeding this amount were imposed at 92%, these conflict of interest specialists wouldn’t have our money to play with.
400,000 dollars/yr is about 10 times US median household income.
Bill P
— Posted by Bill P
17.
June 30th,20082:19 pm
Bear Stearns demise was much like a baseball game. A team doesn’t lose a game because the last game strikeouts. There are 26 other outs where the team could have generated runs and 27 other outs they could have struck out the opponent.
BSC had opportunities to raise capital, it had opportunities to reduce expenses, it had opportunities to sell assets; but the incompetent senior executives stood by as the house was burning down. After years at the top of the mountain they forgot they could roll off the hill easily. And the trek downhill would be much faster than the slog uphill. Name calling, gamesmanship, and rivalry are part of the business and there is nothing illegal about it. BSC was like a patient that ate and smoke themselves to death. At many times they could have healed themselves if they only followed prudent business practices. Instead the king and prince spent their time playing bridge and gold. And the newly appointed prince was too inept to understand complex treasury management. The culprits may have had a hand in BSCs demise, but the management was the group that set the company for a fall.
— Posted by hammer
18.
June 30th,20082:27 pm
The analysis to be gathered would require effort by the regulators as it requires trade ticket information but to answer your question yes regulators can do exactly that. They can also analyze the trade settlement failures to determine who it was that was creating such volume. On teh Wednesday before the collapse the fails accumulated from 200K to 1.4 Million on a $60 stock marking over $60 Million in failed trades. Trading the Monday of the collapse generated over 10 Million additional failed trades at net settlement.
None of this accounts for day trading activity where a failed trade is closed net out on the same day. A raid can easily consist of selling out huge fails in early market trading and then covering most in the panic that ensues.
— Posted by Dave
19.
June 30th,20082:43 pm
Sir,
I you are right, then every bank or financial group can be murdered the way you describe. The financial system is therefore much more fragile than I could imagine.
It holds together by the strength of the belief of the people working in it.
I used to name it religion.
— Posted by Didier
20.
June 30th,20082:53 pm
What really brought down Bear Stearns was a dysfunctional bankruptcy system.
As trustees, receivers, etc. have become more aggressive about pursuing fraudulent-conveyance claims, financial entities have become increasingly nervous about the possibility of ending up as the defendant in such an action.
How can an entity avoid being the target of an avoidance claim? By not doing business with any who might soon declare bankruptcy, that’s how. But this means severing relations with counter-parties on mere rumor (because often there isn’t a lot more than rumor to go on before the actual filing).
This leave-on-the-rumor mentality is self-reinforcing. If some funds stop doing business because of a rumor, that fact itself looks like confirmation of the rumor to others, and a classic run-on-the-bank mentality develops, until somebody gives a Jimmy Stewart type speech about how we can’t let the old Bailey bank close down, that’s what the Mr. Potter (read: sovereign wealth funds?) wants of us!
Think of the rumor, however it started, as the butterfly in a classic chaos-theory thought experiment.
The butterfly couldn’t cause a tornado unless atmospheric conditions were already such as to allow that. And the crucial atmospheric condition in this case is the changing nature of corporate bankruptcy.
What can we do about it? That’s a tricky question. Anyone have any ideas?
— Posted by NotNasser