Fear, Rumors Touched Off
Fatal Run on Bear Stearns
From Hope to Despair
In the Space of a Week
By KATE KELLY
May 28, 2008
The 40 top Bear Stearns
Cos. executives listening to Alan Schwartz over lunch had spent the
morning of March 13 watching the firm's stock plunge. Rumor on Wall
Street had it Bear Stearns was strapped for cash.
The chief executive,
surrounded by the comforting luster of wood paneling in a 12th-floor
dining room, calmly assured his lieutenants that Bear Stearns would
weather the storm.
"This," he said, "is a
whole lot of noise."
Missed Opportunities.2 As the firm's fortunes
spiraled downward, executives squabbled over raising capital and
cutting its inventory of mortgages.
Run on the Bank.
Executives believed they were about to turn a corner, but rumors and
fear sent clients, trading partners and lenders fleeing.
Deal or No Deal? The Fed pressured Bear Stearns to sell itself,
but a misstep in the hastily drawn agreement nearly scuttled the
Out in the audience,
Michael Minikes wasn't so sure. The 65-year-old Bear Stearns veteran had
spent much of that week fielding calls from worried clients. Some had
yanked large sums from their Bear Stearns accounts. The worst news had
come when Renaissance Technologies Corp., a major hedge fund and trading
client, said it was shifting more than $5 billion to competitors.
"Do you have any idea what
is going on?" Mr. Minikes asked, cutting off his boss. "Our cash is
flying out the door. Our clients are leaving us."
It was the beginning of a
frantic 72 hours that would bring the Wall Street firm to its knees and
threaten the stability of the global financial system. Interviews with
more than two dozen current and former Bear Stearns executives,
directors, traders and others involved show how quickly a company that
took 85 years to build could unravel.
By the end of business
that Thursday, so many clients had pulled their money from Bear Stearns
that the firm had run through $15 billion in cash reserves. Lenders such
as Fidelity Investments were refusing to replenish the financing Bear
Stearns needed to open the next morning. Fellow brokerages Deutsche
Bank AG, Goldman Sachs Group Inc. and others were being
inundated by requests from clients who wanted to get out of trades with
By 7 p.m., things had
gotten so bad that Mr. Schwartz interrupted J.P. Morgan Chase &
Co. CEO James Dimon's 52nd birthday celebration to gauge his interest in
buying Bear Stearns.
The brokerage's sudden
fall was a stark reminder of the fragility and ferocity of a financial
system built to a remarkable degree on trust. Billions of dollars in
securities are traded each day with nothing more than an implicit
agreement that trading partners will pay up when asked. When investors
became concerned that Bear Stearns wouldn't be able to settle its trades
with clients, that confidence evaporated in a flash.
Trading partners, eager to
avoid losses, began to disappear almost as quickly. That further fueled
rumors of trouble. Some partners, spotting a chance to profit, made bets
against Bear Stearns, helping accelerate its demise. Regulators have
been investigating whether there was a coordinated effort to fan
negative rumors by those betting on Bear Stearns's downfall.
A Gathering Storm…
interrupt Alan Schwartz's meeting with Disney's Robert Iger.
March had begun on a quiet
note for Mr. Schwartz. He had spent months grappling with employees
angry about Bear Stearns's handling of the credit crisis. But he was
heartened by the way the firm's first-quarter earnings were shaping up:
Preliminary figures indicated that it had made profit of more than $1 a
Mr. Schwartz was convinced
that restive investors would calm down when the figures were released
later in the month. In the meantime, the career investment banker
advised clients such as Microsoft Corp. on its proposed $45
billion bid for Yahoo Inc.
On Thursday, March 6 -- as
Bear Stearns's shares, which had been as high as $131.58 in October,
fell below $70 -- Mr. Schwartz felt comfortable enough to proceed with
plans to speak that evening about the telecommunications industry to the
board of Verizon Communications Inc., one of his key clients, at
the luxurious Breakers hotel in Palm Beach, Fla. He planned to stay
through the weekend, preparing for Bear Stearns's annual media
conference, to be held at the same oceanfront resort starting Monday.
The opening day of the
conference brought with it a cascade of bad news. First, Moody's
Investors Service, a credit-rating firm, downgraded a number of
mortgage-backed securities issued by a Bear Stearns affiliate,
reflecting concerns that the home loans underlying them were at a
greater risk of default by borrowers. Bear Stearns's shares skidded,
ending the day at $62.30.
More quietly, Dutch
financial-services firm Rabobank Group, one of Bear Stearns's European
lenders, told the brokerage at about 11:30 a.m. that it wouldn't renew a
$500 million loan coming due later that week. That meant Rabobank, which
was concerned about the overall market, was unlikely to renew an
additional $2 billion credit agreement set to expire the next week. Bear
Stearns, like other securities firms, depends on continuous loans to
fund its daily operations. Though Bear Stearns's overall financing from
other banks totaled $119 billion, the Rabobank decision signaled that
lenders were getting antsy.
A good measure of just how
pessimistic Wall Street had become about Bear Stearns that Monday was
the cost of certain private financial contracts known as credit-default
swaps -- a big, barely regulated market where one party, for a price,
assumes the risk that a bond or loan will go bad.
On Friday, March 7, the
annual cost of a five-year contract to protect against default on $10
million of Bear Stearns debt rose to $458,000 -- a sum far higher than
what investors were paying to insure against repayment failure by rivals
such as Lehman Brothers Holdings Inc. and Goldman.
By Monday, that contract's
cost jumped to $626,000. Funds and other financial players were betting
that Bear Stearns could run out of cash.
The growing gloom spurred
some of Bear Stearns's trading partners to try to get out of
transactions with the firm. Hedge-fund clients were calling the New York
securities branch of Deutsche Bank to ask if the German firm, in
exchange for a fee, would buy contracts the funds had signed with Bear
Stearns to buy or sell securities. Deutsche Bank agreed to many of these
so-called novation requests, but charged more than usual to do so.
biographical details of the major players in the Bear Stearns deal.
Inside Bear Stearns's
Madison Avenue headquarters, executives hurried to put out the fires.
Chief Financial Officer Samuel Molinaro Jr. and his team began phoning
trading partners to check out and quell rumors. The executives
emphasized that Bear Stearns had plenty of cash -- about $18 billion --
to work with, leaving no shortage of money to repay lenders or settle
Down in Palm Beach, Mr.
Schwartz was worried about the chaos back home. As he and Walt Disney
Co. CEO Robert Iger prepared for a session the next day, Mr. Schwartz
was interrupted repeatedly by visits from colleagues and phone calls
from Manhattan seeking advice on how to combat the mounting rumors. But
Mr. Schwartz was in a box: If he left the conference too hastily, it
would betray panic to important, powerful clients such as Mr. Iger and
CBS Corp. CEO Leslie Moonves. And, even if he flew back to New
York, Mr. Schwartz felt there was little he could do.
Late in the day, Bear
Stearns issued a news release, quoting Mr. Schwartz as saying that the
company's "balance sheet, liquidity, and capital remain strong."
It did little good. Before
Tuesday, March 11, dawned, ING Groep NV told Bear Stearns that it
was pulling about $500 million in financing. Staffers at the Dutch bank
said ING's management wanted to keep their distance until the dust
As the day progressed,
dire rumors kept Bear Stearns's traders distracted, worrying about both
their jobs and their savings. Some had a big chunk of their personal
wealth tied up in the firm's stock -- about half their annual bonus,
which comprised the bulk of their annual compensation and took several
years to vest.
In the middle of the
afternoon, Bruce Lisman, the usually taciturn 61-year-old co-head of
Bear Stearns's stock division, climbed atop a desk near his fourth-floor
office and demanded his traders' attention. "Let's stay focused," he
bellowed. "Keep working hard. Bear Stearns has been here a long time,
and we're staying here. If there's any news, I'll let you know, if and
when I know it."
Amid the turmoil, Alan
"Ace" Greenberg, Bear Stearns's 80-year-old former boss, attempted to
break the tension in a lighter way. Wearing his trademark bow tie, Mr.
Greenberg, who still trades, performed magic tricks to amuse colleagues.
At their request, he also reprised a scene from company lore: He
practiced a golf swing on the trading floor, just as he had on Black
Monday 1987, when world markets crashed. Mr. Greenberg, who doesn't play
the game, had famously pretended to swing a club and loudly announced he
was taking the next day off.
There was nothing that
could ease the anxiety of clients and trading partners worried about
what would happen if their money got locked up in a failing company.
Adage Capital Management pulled some of their money out of Bear
Stearns's prime-brokerage division, which lends money and processes
trades for large clients.
Hedge funds flooded
Credit Suisse Group's New York brokerage unit with requests to take
over trades opposite Bear Stearns. In a blast email sent out that
afternoon, Credit Suisse stock and bond traders were told that all such
novation requests involving Bear Stearns and any other "exceptions" to
normal business required the approval of credit-risk managers.
A distorted version of the
directive got around to traders at other firms, who began telling
associates that Credit Suisse's internal memo warned its traders not to
engage in any transactions with Bear Stearns.
Bear Stearns executives
believed another public statement was needed. Arrangements were made for
Mr. Schwartz to appear from Florida on business network CNBC.
Minutes after 9 a.m. on
Wednesday, Mr. Schwartz told the cable-TV audience, "Some people could
speculate that Bear Stearns might have some problems ... since we're a
significant player in the mortgage business. None of those speculations
But before he could get
through his talking points -- which included mentioning the firm's
strong cash reserves and indicating to investors that Bear Stearns would
have a profitable first quarter -- Mr. Schwartz was interrupted by
breaking news from New York: Gov. Eliot Spitzer, having been linked to
patronizing prostitutes, was resigning. Mr. Schwartz was dismayed, but
got a chance to make his points after the news break.
Afterward, Bear Stearns
shares wavered slightly before rising above $66, where they stayed until
midafternoon. But prime-brokerage clients continued to pull their money.
At midday, the CEO flew home as planned.
Back in New York, he
gathered senior executives to discuss how to save the firm. Gary Parr, a
Lazard Ltd. investment banker who had done some work for Bear Stearns,
was summoned from the Brooklyn theater where he was watching Patrick
Stewart play "Macbeth." At intermission, he hailed a cab and headed to
Mr. Schwartz also called
H. Rodgin Cohen, chairman of the law firm Sullivan & Cromwell, who was
home in Irvington, N.Y. Though Bear Stearns hadn't yet seen disastrous
outflows of money, Mr. Schwartz said he didn't know what the next day
would bring. "I should call the Fed," Mr. Cohen responded.
At about 10:45 p.m., Mr.
Cohen called Timothy Geithner, president of the Federal Reserve Bank of
New York. He urged the Fed to accelerate a special program for lending
to investment banks that was set to begin March 27, and to use its power
to lend cash directly to investment banks, which aren't regulated by the
The latter move would
allow Bear Stearns to use its inventory of mortgages and the securities
backed by them as collateral to borrow from the Fed's discount window,
which was usually reserved for short-term borrowing by commercial banks.
Access to that cash would assure it could pay off lenders and trading
"I think I've been around
long enough to sense a very serious problem, and this seems like one,"
Mr. Cohen told Mr. Geithner. The Fed governor replied, "If he's worried,
Alan needs to call me."
Early Thursday morning,
Mr. Schwartz called Mr. Geithner to brief him on the situation. But he
didn't ask for immediate help, saying he hoped to find longer-term
financing through other means.
Shortly before 12:30 that
day, Bear Stearns executives began to gather on the 12th floor for a
weekly lunch to discuss market issues. The group of about 20
up-and-coming managers, called the President's Advisory Council, had
been informed in an email that Mr. Schwartz would be there to discuss
The chief executive's
presence drew about 20 alumni from previous councils, too. Trays of
grilled chicken and sandwiches were laid out on one side of the room,
but all eyes were on Mr. Schwartz when he began speaking at about 12:45
But the air went out of
his reassurances after Mr. Minikes interrupted him to complain that the
firm was hemorrhaging cash and clients. Some of the executives drifted
out to help with the Renaissance Technologies defection from the firm;
others headed back to the trading floor. Word got around that D.E. Shaw
& Co. was pulling about $5 billion, joining a list of other hedge-fund
clients running for the exits. Many at Bear Stearns spent the afternoon
paralyzed as rumors spread.
Around 7 p.m., some of
Bear Stearns's top executives gathered in Mr. Molinaro's sixth-floor
conference room. The 50-year-old CFO -- as always, immaculately dressed,
with his salt-and-pepper hair just so -- had come to the firm in 1986 as
an accountant and, now, was confronting its demise.
"What are my options?" Mr.
Molinaro asked Robert Upton, Bear Stearns's treasurer.
Mr. Upton recited the
damage from numbers scratched on a yellow legal pad: Since the previous
Friday, the firm had nearly exhausted its $18.3 billion in cash
reserves, leaving it with $5.9 billion. But it still owed Citigroup
Inc. $2.4 billion. Mr. Molinaro buried his head in his hands. Mr.
Schwartz looked ashen and left abruptly.
Just a few blocks away on
East 48th Street, Mr. Dimon, the J.P. Morgan CEO, was celebrating his
birthday with his family at the Greek restaurant Avra. The banker, who
could be painfully blunt, was annoyed when his cellphone rang. It was
reserved only for immediate family and business emergencies.
Reluctantly, he picked up.
It was Mr. Parr, the
Lazard banker representing Bear Stearns. He asked if Mr. Dimon could
speak with Mr. Schwartz. Moments later, Mr. Schwartz called. "Let's do
something," he told Mr. Dimon, who was now on the sidewalk outside. Mr.
Dimon couldn't fathom making a deal that night, but he agreed to try to
Bear Stearns's offices
were then filling up with lawyers. The firm's usual corporate counsel,
Cadwalader, Wickersham & Taft LLP, sent over a large team, and dozens of
bankruptcy specialists were also called in. The attorneys fanned out
over a suite of rooms on the sixth floor: One large group prepared a
bankruptcy filing; the other worked on various rescue scenarios
involving cash infusions from other parties.
Mr. Schwartz arranged an
emergency board meeting to brief directors that Thursday night. It was
late, so most phoned in. James Cayne, who'd remained as chairman after
stepping down as CEO Jan. 8, missed part of the discussion because he
was playing in a bridge tournament at a Detroit hotel.
Directors authorized an
emergency bankruptcy filing, but Mr. Schwartz still held out hope that a
rescue could be arranged. A bankruptcy filing for Bear Stearns -- with
its nearly 400 different subsidiaries -- would be immensely complicated.
If the firm could make it through Friday, executives believed, they
could come up with a more tenable fix to their problems.
Around midnight, Matt
Zames, a senior J.P. Morgan trader, arrived with a team to look over
Bear Stearns's books. The group appeared stunned by its financial
position. "We need to talk to the Fed," said Mr. Zames. "Where are
they?" Bear Stearns officials directed them down the hall to the firm's
legal library, where officials from the New York Fed had been gathered
for several hours.
Back in Mr. Molinaro's
sixth-floor conference room, he and Mr. Schwartz, who hadn't had time
for dinner, ate slices of cold pizza out of the box under a picture
recalling flush times: A lithograph of The Wall Street Journal marked
the day in 1999 that the Dow Jones Industrial Average hit 10000 with the
headline, "If This Is a Bubble, It Sure Is Hard to Pop."
By early Friday morning
March 14, Bear Stearns's managers were running out of steam. No clear
solution had yet emerged. It appeared to some that the firm might go
under that day. Bear Stearns's financing team -- whose job it was to
replenish the firm's operational funding by making new lending
agreements each morning -- began dutifully dialing creditors. On the
sixth floor, there was talk of ordering breakfast from Dunkin' Donuts.
At 5 a.m., Federal Reserve
Chairman Ben Bernanke convened a conference call with top government
officials, including Mr. Geithner and Treasury Secretary Henry Paulson
Jr., to discuss the fallout from allowing the brokerage to collapse.
They saw ripples spreading to thousands of firms world-wide that would
involve trillions of dollars and take days to sort out. As the meeting
wore on past the hour mark, Mr. Geithner warned that time was running
out. Certain important credit markets were about to open. "What's it
going to be?" he demanded.
At about 6:45 a.m., Bear
Stearns officials received an email from Stephen Cutler, J.P. Morgan's
general counsel. It was the draft of a news release announcing that the
bank had agreed to provide Bear Stearns with financing "as necessary"
for up to 28 days.
The money underwriting the
rescue was coming from the Fed, which was also bearing the risk of the
loan. It was the first time since the Great Depression that the Fed had
made a loan like this to an entity other than a bank. It would provide
the bailout through J.P. Morgan, because as a commercial bank the firm
already had access to the Fed's discount window and was under the
central bank's supervision.
Inside the sixth-floor
conference room where Messrs. Molinaro, Upton and others had huddled,
the executives cheered and exchanged high-fives. They thought they had
four weeks to sort out their problems.
--Greg Ip contributed to this article.
Write to Kate Kelly