What Really Killed Bear Stearns?
The New York Times
June 30, 2008
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.
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