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For the other two installments of the three-part Wall Street Journal series, "The Fall of Bear Stearns," see


Wall Street Journal, May 28, 2008 feature (Part 2 of 3)


The Wall Street Journal

May 28, 2008


Fear, Rumors Touched Off
Fatal Run on Bear Stearns

Executives Swung
From Hope to Despair
In the Space of a Week
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."

[The Fall of Bear Stearns]1
Part One: Missed Opportunities.2 As the firm's fortunes spiraled downward, executives squabbled over raising capital and cutting its inventory of mortgages.
Today: Run on the Bank. Executives believed they were about to turn a corner, but rumors and fear sent clients, trading partners and lenders fleeing.
Part Three: Deal or No Deal? The Fed pressured Bear Stearns to sell itself, but a misstep in the hastily drawn agreement nearly scuttled the deal.

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 Bear Stearns.

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…


Troubles 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 share.

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.

[Go to interactive graphic.]4

Review 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 trading contracts.

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 settled.

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 are true."

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 Madison Avenue.

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 Fed.

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 partners.

"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 environment."

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 p.m.

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 help.

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 at kate.kelly@wsj.com5

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