Posted on 03/07/2009 1:20:39 PM PST by unclebankster
The fall of Bear Stearns Bearing all
Mar 5th 2009 From The Economist print edition A new book analyses how the near-collapse of Bear Stearns, exactly a year ago, marked the moment when Wall Street was knocked to its senses
THE bankruptcy of Lehman Brothers in September 2008 will probably go down as the single most spectacular event in the humbling of Wall Street. But it was the near-collapse of Bear Stearns, six months earlier, that first exposed the fragility of America’s seemingly mighty investment banks, perched atop mountains of debt and dangerously reliant on short-term funding. And it was Bear that brought the first serious reminder, after years of excess, of Walter Bagehot’s dictum that if you have to prove you are worthy of credit, your credit is already gone.
The smallest of America’s top tier of independent investment banks was felled by a massive run on its liquidity, as clients and trading partners fled over just a few days, fearing Bear would be unable to meet its obligations. As one executive said, it was “24 hours from solvent to dead”.
For all the bank’s complaints that the hedge funds and others that it relied on to stay afloat were unable or unwilling to “parse fact from fiction”, there were good reasons to worry. Bear had put many of its eggs in one basket—mortgage-backed securities—and these were fast turning rotten, and impossible to sell, as house prices tumbled. In failing to diversify, Jimmy Cayne, Bear’s longtime boss, became “a Sophoclean tragic hero, ruined by his own terrible choices,” says William Cohan, who began work on “House of Cards” after “The Last Tycoons”, his prize-winning history of Lazard Frères.
Bear was pushed into the arms of JPMorgan Chase on March 16th 2008 after a chaotic weekend that left several sleep-deprived Bear executives in tears. In his new book, which coincides with the first anniversary of the Bear Stearns crisis, Mr Cohan, himself a former investment banker, provides a riveting, blow-by-blow account of the days leading up to the government-backed shotgun wedding, based on interviews with more than 120 of those who lived through it.
At the heart of this cautionary tale sits the cigar-chomping Mr Cayne, who revelled in his firm’s image as Wall Street’s scrappy outsider. Bear may have gone public in 1985, but it was run more as an insular, rough-and-tumble partnership than a listed company with global aspirations. Mr Cayne set the tone, branding colleagues who crossed him “cocks” and “bully pricks”—light criticism compared with the phrases he reserved for unsympathetic journalists.
Bear had been the only big firm that refused to help out Long-Term Capital Management, a hedge fund that came close to the brink in 1998. Some wondered if this was the reason Hank Paulson, then treasury secretary and a former boss of Goldman Sachs, insisted on Bear being sold for a mere $2 per share (though this was later quintupled after shareholders revolted). There were certainly many on Wall Street, including a fair few at the firm itself, who felt Bear had it coming.
To his discredit, Mr Cayne oversaw the ballooning of Bear’s balance-sheet to as much as 50 times its equity and an aggressive push into complex credit products that he never fully understood. He impetuously sacked the only senior executive who did, and at times displayed stunning financial indiscipline, for instance insisting on announcing a cross-investment with a Chinese bank before having vetted its books. A near-obsessive fear of looking weak did not help, either, making him reluctant to raise new capital even as rivals rushed to plump their cushions.
In his final weeks at the helm, before being shunted aside in a high-level mutiny, Mr Cayne cut a hapless figure, mingling awkwardly with his traders, trying half-heartedly to get a grip on the bank’s assets; he always had more time for bridge than bonds. On a crucial call with analysts, Mr Cayne reportedly clammed up “like a deer in the headlights”, forcing colleagues to pretend he had left the room.
Mr Cohan handles his material deftly, portraying Bear as symptomatic of an industry that had come to believe its own hype and had lost sight of how inherently unstable it really was. Bear’s crash marked the moment when a delirious Wall Street was knocked to its senses. As one executive put it at the time, in terms that Mr Cayne might appreciate: “You can’t fly like the eagles and poop like a canary.”
An “investment bank” actually CREATES investments.
Investment Banks create municipal bonds, corporate bonds, and initiate IPO’s or Initial Public Offerings of stock.
Investment banks must not be necessary to create municipal bonds, corporate bonds, and initiate IPO’s, because there are no investment banks left. Somebody else will fill the role.
Well, actually, the investment banks did not go away.
They just got taken over or merged with other firms.
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