Bear Stearns chairman Jimmy Cayne (JPM) personally apologized to the firm’s employees yesterday (and, as the NYT describes it, heard silence in return). He also implied that Bear Stearns failed because it ran into a “hurricane.”
This interpretation is convenient–because it makes it sounds as though Bear’s collapse was just an act of God. As Goldman Sachs (GS), Merrill Lynch (MER), Morgan Stanley (MS), and dozens of other Wall Street firms that are still standing prove, however, it’s possible to build companies that survive hurricanes. In fact, it’s wise to do so, given the mind-numbing regularity with which the financial markets are hit by them.
Yes, Bear Stearns got caught by a quick market reversal, but it wasn’t the only firm that did. And the reversal wasn’t even impossible to foresee. On the contrary: many analysts had been shouting from rooftops for years that the housing bubble was a disaster in the making. Bear Stearns, like many other Wall Street firms, chose to ignore this view and double down on the bet that was making it pots of money: staying long.
When business bets turn out badly, burned managers often invoke Cayne-ian-like excuses:
- “hundred-year flood”
- “perfect storm”
These excuses, of course, serve a purpose, which is to let managers off the hook: “It was just an act of God.”
But here’s a more accurate description of what happened at Bear Stearns.
“We took a lot more risk than we should have. In hindsight, in fact, we bet the firm. And we lost.”