We’ve heard many explanations for the collapse of Bear Stearns–from short sellers conspiring in a “bear hunt” to a run on the bank by customers to Goldman Sachs causing a panic to a rumour-mongering media scaring counter-parties to death.
But the proximate cause of the collapse is undoubtedly the reckless arrogance of the top management of Bear. They were massively long the real estate bubble and refused to take even the most basic precautions.
Now William Cohan’s new book, “House of Cards,” paints an even grimmer picture. Even while Bear teetered over the edge of the abyss, it’s chief executive was turning down money from wealthy Saudis who wanted to invest in the investment bank. From today’s Wall Street Journal:
According to Mr. Cohan, Bear rejected a significant investment just hours before it received its Federal Reserve bailout via JP Morgan Chase. Cash was flying out the door on Thursday, March 13, 2008, as large hedge-fund customers pulled money out of Bear’s prime brokerage and the firm struggled to line up the $75 billion in overnight loans it needed every day to stay in business.
That morning, a Bear Stearns managing director received an email from a colleague in Saudi Arabia saying that the Saudis were willing to make an immediate investment in the firm. The gist of the message, according to the Bear executive: “They want to give us a significant amount. We can set it up. They want to do it now. They can act quickly.” Struggling to get senior managers to focus on this potential lifeline, the banker decided to approach Bear Stearns’s chief executive, Alan Schwartz, after the regularly scheduled lunch with the firm’s top 50 executives.
Mr. Cohan quotes the banker: “I said, ‘Alan, I just want you to know, the Saudis want to give us money.’ He said, ‘We don’t need capital.’ ” That night, officials from the Fed and the SEC began arriving at Bear Stearns. SEC staff members determined that the firm’s cash balance had dwindled to $2 billion from $18 billion during the day. It was clear to all that the firm would be broke the next morning, barring a massive new source of liquidity.
Is this moral hazard at work? Were they confident the Treasury or the Fed would bail them out? Blind stupidity? Out of control arrogance? Financial negligence? Pure incompetence? Whatever it is, we probably shouldn’t shed many tears for the men who ran Bear Stearns into the graveyard of Wall Street. At every opportunity they chose the wrong path. This was as much a suicide as anything else.