Bear Stearns

Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street

by Kate Kelly  · 14 Apr 2009  · 258pp  · 71,880 words

copyrightable materials. Your support of the author’s rights is appreciated. http://us.penguingroup.com To the 14,000 people who worked at Bear Stearns CAST OF CHARACTERS At The Bear Stearns Companies Alan Schwartz, chief executive Sam Molinaro, chief financial officer Bob Upton, treasurer Tom Marano, head of mortgages Paul Friedman, chief operating

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Board Kevin Warsh, governor of the Federal Reserve Board At the U.S. Department of the Treasury Hank Paulson, secretary Bob Steel, undersecretary Advisers to Bear Stearns Gary Parr, deputy chairman of Lazard Ltd. Rodge Cohen, chairman of Sullivan & Cromwell LLP Dennis Block, senior partner, Cadwalader, Wickersham & Taft LLP At J.

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PREFACE This book was born of a three-part series I wrote for the Wall Street Journal in May 2008 about the demise of The Bear Stearns Companies. Published two and a half months after a devastating run on the investment bank, the articles detailed the battle for survival that had

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stories to read. “Then,” he told me, “they’ll understand what happened to Daddy’s career.” His words underscored the brutal impact that the Bear Stearns collapse—and the credit crisis that spurred it—has had on hundreds of thousands of workers in the U.S. economy. For Street Fighters, I

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February 2009 THURSDAY March 13, 2008 5:30 P.M. Early on the evening of Thursday, March 13, Sam Molinaro, chief financial officer of The Bear Stearns Companies, called the firm’s CEO, Alan Schwartz. “We have a serious problem,” Molinaro said. Up in his forty-second-floor office, Schwartz had

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cover of Barron’s from 2004, when the publication had run an admiring cover story on Bear. Under the teaser “Throughout the market slide, Bear Stearns had outperformed its brethren” was a cartoonlike drawing of a brown bear dipping its paw into a honey pot as saliva dripped from its chops

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soon took an interest as well. Meanwhile, trouble was brewing on another front. One of the hedge funds in Bear’s own money-management unit, Bear Stearns Asset Management, was struggling. Year to date, its performance had fallen 23 percent, and shocked investors were demanding their money back. But the fund’s

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when he got the call. “Chris, there’s an important opportunity here and things are moving very quickly,” Parr told him. “I’m working with Bear Stearns.” Parr briefly explained the situation, saying that an immediate investment or quick turnaround deal was going to be essential. “How quickly do you want to

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his birthday party and retreated to his Upper East Side apartment. The buyout executive explained his situation. He’d gotten a call that night from Bear Stearns, he said, and he understood Dimon had, too. It sounded like there could be an attractive opportunity there, but only for a fast-moving

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and was blasted all over computer news feeds and on CNBC. “JP Morgan Chase and Federal Reserve Board of New York to Provide Financing to Bear Stearns,” it read. The release went on to say that the bank and the government would together lend Bear “secured funding,” or money backed by

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collateral, for “an initial period of up to 28 days.” Its last sentence was the most intriguing: “JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company.” Then, at 9:21, a similarly worded release from Bear was issued. This one contained

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Gary Cohn wondered why it was so chaotic. When things finally settled down, Paulson was the first to speak. “I want you to deal with Bear Stearns as a responsible counterparty,” he told the group. “When you’re at a company, you think about protecting yourself at all times,” he added.

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in four or five hours—not forty-five minutes after the opening. Among investors, the crisis of confidence had returned in force. “People realized that Bear Stearns just came out the other day saying everything was fine,” Paul Nolte, director of investments at the small firm Hinsdale Associates, told the Dow Jones

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in Europe and Asia, where firms like Goldman Sachs had expanded rapidly in the 1990s and 2000s, was extremely weak, and its internal money manager, Bear Stearns Asset Management, was by far the smallest on Wall Street. Before the hedge fund blowups of 2007, BSAM had just $60 billion under management—far

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this horrible reaction.” “Perception is JP is going to cherry-pick a few divisions, and let the rest of BSC”—the stock-ticker abbreviation for Bear Stearns Companies—“go under,” the Barclay’s trader added. “It seems to be wrong, but the [market] is killing it.” “Killing it is an understatement.” “

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Schwartz stayed at such a lean and undistinguished investment bank, in which he was clearly the star player. “Alan is the finest boutique in the Bear Stearns mall,” Bear’s competitors would occasionally say. Many thought a man of Schwartz’s talents deserved a platform like Morgan Stanley or Goldman Sachs, where

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, Schwartz told the group that “all options [were] on the table.” But he didn’t want to be rash. If the time came when Bear Stearns appeared more vulnerable, he added, he would look more closely at possible deals. During the question-and-answer session that followed, David Schoenthal, the hard

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firm, Oliver Wyman, to suggest ways to streamline the risk-management process and bring the technology and oversight up to date. That winter one of Bear Stearns’s major clients and trading partners, the Newport Beach, California, money manager PIMCO, had admonished senior fixed-income managers about the need for a deeper

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over the weekend?” Schwartz recapped the conversation. Paulson had said that enough was enough. He wouldn’t stay up another night, all night, worrying about Bear Stearns. He had reminded Schwartz of their conversation early that morning in which he had asked the CEO if he really wanted to accept the government

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-mail at 12:26 A.M. Saturday morning that summed up how most of Bear’s senior traders and managers were feeling. “Plan to Save Bear Stearns—Important—Please Read” was addressed to Schwartz, Marano, Mayer, and other top players in the fixed-income division. Written on Bainlardi’s laptop at

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, served graciously by a waiter in formal attire. Cayne viewed himself as indisputably in charge. “I’m going to be the last CEO of Bear Stearns,” he would occasionally say, leaving companions to wonder what his plan was. Would he actually be willing to sell the company before passing it on

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leaving Lehman Brothers to swoop in instead. Ironically, Cayne would later hire Neuberger’s former head, Jeff Lane, to salvage his own flailing money manager, Bear Stearns Asset Management, after the two internal hedge funds blew up. Those who sought Cayne’s help with the more nitty-gritty aspects of Bear’s

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business was booming. At the same time, Bear was exploring new business arenas—albeit a bit later than many of its rivals. It was expanding Bear Stearns Asset Management, which had recruited top players from both within and outside the firm, was branching into the growing energy-trading business, and was building

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—all the important things in life. He so excels at these that you might think it would give deep inferiority complexes to his colleagues at Bear Stearns. But if you think that, you don’t know much about his colleagues.” Sitting in his Omaha office, Buffett picked up the phone, to

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Flowers’s surprise. “I’m calling about Bear Stearns,” Flowers began. “Should I go on?” Buffett almost had to chuckle. It was sort of like having a woman standing in front of you

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economy as we work our way through this situation, and again, the stability of our financial system. That’s—” Stephanopoulos interrupted. “What would happen if Bear Stearns didn’t get this loan?” “I’m not going to speculate, George,” Paulson replied. He defended the Fed’s decision. What the pundits would say

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could only imagine. “I think the big question on a lot of people’s minds is, are there other banks in a situation similar to Bear Stearns’s right now?” Stephanopoulos asked. “Is this just the beginning?” “Well, our financial institutions, our banks and investment banks, are very strong,” Paulson said. “

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wanted to know. At one point, Blitzer became confrontational. “Tell the taxpayers who are watching right now why you decided to bail out, in effect, Bear Stearns, the fifth-largest investment house in the United States, which, only a couple of days ago, seemed to be on the verge of collapse, primarily

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institutions.” After reiterating that, he added that “we’ve been going through turmoil in the capital markets for a while.” “Why did you bail out Bear Stearns?” Blitzer demanded. Paulson stammered. “There are ongoing discussions right now,” he said. “I’ve been on the phone for a couple of days straight,

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outcome of that situation is,” he finally said. After more circular discussion, Blitzer hit on the money question. “If you wouldn’t have bailed out Bear Stearns, what would have happened?” he asked. “Wolf, I’m not going to speculate about what-ifs,” Paulson said. “Our number-one priority,” he added, “

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. 7:00 P.M. At 7:05, the deal was announced to the world. “J.P. Morgan Chase & Co. announced it is acquiring The Bear Stearns Companies Inc.,” read a press release issued by both firms. “Directors of both companies have unanimously approved the transaction.” As part of the deal, the

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in funding for Bear’s “less liquid assets.” The release contained the requisite complimentary quotes from Dimon, who stated that his company would “stand behind Bear Stearns,” and from Schwartz, who called the deal “the best outcome” for “all constituencies” after what had been “an incredibly difficult time” for the company.

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readers cold came at the end of the second paragraph: The transaction “would have a value of approximately $2 per share.” That valued the mighty Bear Stearns, once Wall Street’s fifth-biggest investment bank with a market value of $25 billion, at a paltry $236 million—less than a quarter

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You’ve done a remarkable job in working this through.” Schwartz shook his head, trying to collect himself. “I feel terrible,” he finally said. EPILOGUE Bear Stearns, as it turned out, was only the first in a long string of financial firms to suffer mortal harm. Faced with the same toxic combination

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at the investment adviser Primerica, in January 2009 Bob Upton landed as treasurer of the brokerage firm Cantor Fitzgerald. Comparing Cantor to an old-school Bear Stearns, Upton has told associates that, after a difficult period of uncertainty in his career, he is fired up and ready to get to work

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office every day and still works with his longtime clients. NOTES Thursday 14 reducing their balance levels: Kate Kelly, “The Fall of Bear Stearns: Fear, Rumors Touched off Fatal Run on Bear Stearns,” Wall Street Journal, May 28, 2008. 17 Thursday morning brought another big blow: Kate Kelly and Serena Ng, “In Dealing with

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: The Wall Street Journal, Who’s Who and What’s What on Wall Street (Ballantine Books, 1998). 26 small stock-trading house: “A History of Bear Stearns,” graphic, New York Times, March 17, 2008. 27 distressed quasi-public investments: Charles Kaiser, “Salim L. Lewis, Wall St. Pioneer in Stock Block Trading,

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spoke out on behalf of Senator John Kerry: “Bids & Offers,” Wall Street Journal, August 6, 2004. 104 Bear’s Dallas office in 1976: Landon Thomas, “Bear Stearns Heir Apparent Tries to Restore Some Faith,” New York Times, August 7, 2007. 108 Cayne had been hospitalized: William D. Cohan, “The Trials of Jimmy

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CEO’s Handling of Crisis Raises Issues,” Wall Street Journal, November 1, 2007. 111 PIMCO, had admonished: Kate Kelly, “The Fall of Bear Stearns: Lost Opportunities Haunt Final Days of Bear Stearns,” Wall Street Journal, May 27, 2008. Saturday 134 site had already pointed out: Kate Kelly, “Where in the World Is Jimmy Cayne

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Rise and Fall of Jimmy Cayne,” Fortune, August 18, 2008. 136 His market-risk gatherings . . . “you’re out, O-U-T”: Michael Siconolfi, “Talented Outcasts: Bear Stearns Prospers Hiring Daring Traders That Rival Firms Shun,” Wall Street Journal, November 11, 1993. 137 He excoriated employees who left their desks: Alan C. Greenberg

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my side”: Cohan, “The Rise and Fall,” Fortune, August 18, 2008. 146 In 2003, Bear for the first time: U.S. Securities and Exchange Commission, Bear Stearns Co., Form 10-K, February 27, 2004. 146 richest chief executive: Susanne Craig, “The Biggest Fish on Wall Street? Probably Not Who You Think,” Wall

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Fair, August 1, 2008. 225 “how this happened”: Kate Kelly, “The Fall of Bear Stearns: Lost Opportunities Haunt Final Days of Bear Stearns,” Wall Street Journal, May 27, 2008. 225 an outraged Bear broker: Kate Kelly, “The Fall of Bear Stearns: Bear Stearns Neared Collapse Twice in Frenzied Last Days,” Wall Street Journal, May 29, 2008. 225-

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6 That Easter weekend . . . accepted the new terms: Ibid. 226 “I personally apologize”: Kate Kelly et al., “The Fall of Bear Stearns: Bear’s Final Moment,” Wall Street Journal, May 30, 2008. 227 “Barry Fox, a manager”: Kate Kelly, “Crisis on Wall Street: His Job at Bear

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grateful to have had access to the following works, which aided my research and writing: Bill Bamber and Andrew Spencer. Bear Trap: The Fall of Bear Stearns and the Panic of 2008. New York: Brick Tower Press, 2008. Bryan Burrough and John Helyar. Barbarians at the Gate: The Fall of RJR

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Bank One bankruptcy Bear’s consideration of Chapter Chapter debtor-in-possession financing and of Lehman opening for business and Barclays Bank Barron’s Bear Stearns Asset Management (BSAM) Bear Stearns Companies: annual media-industry conference of bankruptcy considered by bond-sales department of capital levels of corporate culture at crisis of confidence and

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debt load of downgrading of due diligence meetings at equities division of Bear Stearns Companies (cont.) executive committee of 15c3-3 money of fixed-income department of headquarters of hedge fund servicing and lending unit of investor conference

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monitoring of secrecy at shutting down wire at top management of trading division of year-end management meetings at see also specific people and divisions “Bear Stearns Trades” Begleiter, Steve Bernanke, Ben Bienen, Henry Black, Debbie Black, Steve deal price range and at Saturday meetings Blankfein, Lloyd Blitzer, Wolf Block, Dennis

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s calls with at Goldman TV appearances of Paulson, John Paulson, Wendy Peloton Partners LLP Perelman, Ronald Peretié, Michel Petrie, Milton PIMCO “Plan to Save Bear Stearns—Important—Please Read” Portney, Emily Presidential Advisory Committee President’s Working Group on Financial Markets prime brokerage division, Bear attempted sale of Goldman group and

Our Dollar, Your Problem: An Insider’s View of Seven Turbulent Decades of Global Finance, and the Road Ahead

by Kenneth Rogoff  · 27 Feb 2025  · 330pp  · 127,791 words

system had been coming under enormous pressure since the summer of 2007, and things were reaching a crescendo. On March 11, the venerable investment house Bear Stearns collapsed and had to be bailed out by the Fed. At the time, only a few of us were suggesting that things were likely to

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let a large bank go given that they had made clear how distasteful they found it to bail out Bear Stearns debt holders back in March. (The troubles of the important investment house Bear Stearns were mentioned earlier in chapter 4.) My remarks made front-page headlines across Asia and Europe. Commenting on an

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, 197–98, 201–2 reserves of, 157–58, 257–58. See also central banks Banque de France, 55, 120–21 Barbarians at the Gate, 32 Bear Stearns, 55, 287 Belgium, 44, 50, 54, 58, 299 n.6 Bergson, Abram, 15 Bernanke, Ben (Chair, Federal Reserve Board), 162, 254, 267, 268, 306 n

The Dream of Europe: Travels in the Twenty-First Century

by Geert Mak  · 27 Oct 2021  · 722pp  · 223,701 words

British savings bank Northern Rock. Nothing like it had happened since 1929. Then in early 2008, the American government was forced to rescue the bank Bear Stearns. Every single American bank, with the exception of Goldman Sachs, made a loss that year, and American share prices and house prices plummeted. In the

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128, 130, 235–6, 239, 275 Baudet, Thierry 376, 377, 379, 414 BBC 130, 245–6, 247, 293, 339, 346, 356, 395, 404, 420, 427 Bear Stearns 165 Beatrix, Queen of the Netherlands 137 Behr, Winrich 18 Beirlant, Bart 123, 125–6 Belarus 269, 274 Belgium: Covid-19 and 495, 513, 525

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–88, 243, 258, 275, 327, 330, 370, 371, 390, 441, 480, 486, 494, 499, 511, 515, 516, 522, 534; austerity policies and see austerity policies; Bear Stearns rescue 165; burden of debt shifted onto taxpayers 241; capital ratios and 186; debate/discussion on nature of economy following, lack of 185–6; ECB

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal

by Ludwig B. Chincarini  · 29 Jul 2012  · 701pp  · 199,010 words

Market Collapse What Was the Quant Crisis? The Erratic Behavior of Quant Factors Causes of the Quant Crisis The Shed Show Chapter 9: The Bear Stearns Collapse A Brief History of the Bear Shadow Banking Window Dressing Repo Power The Unexpected Hibernation The Polar Spring Chapter 10: Money for Nothing and

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Strategies and Global Alpha hedge fund at Goldman Sachs. Jimmy Cayne: Chairman of the Board of Bear Stearns during the financial crisis. Former CEO of Bear Stearns. Ralph Cioffi: Managing Director of Bear Stearns Asset Management and head of two Bear Stearn hedge funds that collapsed in 2007. Jon Corzine: Former CEO of Goldman Sachs and Meriwether'

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Alberto Giovannini: Senior strategist at LTCM. Currently CEO and founder of Unifortune SGR. Ace Greenberg: Chairman of the Executive Committee of Bear Stearns during the financial crisis of 2008. CEO of Bear Stearns from 1978 to 1993. Alan Greenspan: Chairman of the Federal Reserve from 1987 to 2006. Joseph Gregory: President and Chief Operating

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David Modest: Principal at LTCM. Managing Director at Morgan Stanley and J.P. Morgan and currently at the Soros Fund. Samuel Molinaro: CFO of Bear Stearns during Bear Stearns collapse. Paul Mozer: Salomon Brothers trader who made illegal bids in the Treasury auction causing Meriwether and Gutfreund to resign from Salomon. Peter Muller: Former

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agreed to inject new capital into LTCM and mount a rescue if no one else took over the fund. The counterparties included Bankers Trust, Barclays, Bear Stearns, Chase, Deutsche Bank, Lehman Brothers, UBS, Paribas, Salomon Smith Barney, J.P. Morgan, Goldman Sachs, Merrill Lynch, Credit Suisse First Boston, Morgan Stanley

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First Boston, and Morgan Stanley Dean Witter each contributed $300 million. Societe Generale contributed $125 million; Paribas and Lehman Brothers each contributed $100 million. Bear Stearns contributed nothing.13 LTCM’s partners retained their jobs, but would be overseen by a steering committee made up of consortium members. The bailout used

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Sumitomo Bank (about $100 million); Credit Suisse (around $55 million); Merrill Lynch employees’ deferred payment program (around $22 million); Liechtenstein Global Trust (around $30 million); Bear Stearns executives, including Jimmy Cayne, Warren Spector, and Vinny Mattone (about $20 million total); PaineWebber chairman Donald Marron (about $10 million); McKinsey & Co. executives (about $10

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That’s when the world woke up. That could be the wake-up call. That margin call. —Jimmy Cayne, former CEO of Bear Stearns (Cohan 2010) Overcoming Cayne’s resistance, Bear Stearns took over counterparties’ repo positions on the less-levered fund, a move designed to relieve the stress the hedge funds felt from

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,” and had experienced “nonperformance of offsetting hedges.” Collateral markdowns had left the funds unable to meet margin calls, and Sowood needed help.8 The Bear Stearns and Sowood hedge fund failures alerted markets to the possibility of spillover effects from problems in the credit and housing markets, though most investors treated

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auditor, warned investors in the 2006 audited financial statements that the fund’s own managers had estimated the majority of the fund’s net assets. Bear Stearns did not release this report until May 2007 (FCIC Report 2010). 2. Subprime securities are collateralized mortgages or other securities that depend on the

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been very distressed by that fact. —Alan Greenspan, former Chairman of Federal Reserve, Congressional Testimony, October 28, 2008 A Brief History of the Bear Bear Stearns is widely considered one of the great small Wall Street firms (despite its location at 383 Madison Avenue in New York). The company was originally

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professional bridge player; finances eventually pushed him to find a real job. After interviews with Goldman Sachs, Lehman Brothers, and Bear Stearns, he took a position at Bear. In 1985, Bear Stearns became a public firm with ticker symbol BSC. It was a full-service investment firm with divisions in investment banking, institutional

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equities, fixed-income securities, individual investor services, and mortgage-related products. In 1997, Bear Stearns came under investigation by the SEC for its role as a clearing broker for a smaller brokerage named A.R. Baron, which had gone bankrupt

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was manipulating stock prices and conducting unauthorized trading while raiding customer accounts. The case was eventually settled in 1999, with Bear Stearns paying $51 million in fines and restitution.3 Bear Stearns grew rapidly and did well mainly due to its prime brokerage and clearance business. It offered a wide suite of services

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supply [to securitize], we decided we needed to get closer to the source of the collateral. —Tom Marano, January 10, 2005 (Sargent 2005) Many Bear Stearns senior executives were early LTCM investors, including Jimmy Cayne, Vinny Mattone, and firm co-president Warren Spector. When LTCM was on the brink of bankruptcy

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(Boyd 2008) Former CEO James Cayne testified to the Financial Crisis Query Commission: [The firm’s collapse] was due to overwhelming market forces that Bear Stearns…could not resist. The market’s loss of confidence, even though it was unjustified and irrational, become a self-fulfilling prophecy. The efforts we made

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weekends. It was a great company with great people. We were a special family. Bear was synonymous with my soul. I loved Bear Stearns. —Jimmy Cayne interview, former CEO of Bear Stearns, April 12, 2012 As spring rolled into summer, the mortgage markets were still unhealthy. Everyone had seemed to have forgotten how

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company ownership, giving the investor the advantage of surprise. This practice is against security regulation laws. The SEC and Justice Department filed several lawsuits against Bear Stearns for these practices; all were settled. 2. Cayne's bridge team won the Reisinger national bridge championship in the Fall of 2011, as well

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leverage. All the major investment banks operating in the United States at the end of 2007 were in the mortgage market: Goldman Sachs, Lehman Brothers, Bear Stearns, J.P. Morgan, Deutsche Bank, Citibank, UBS, Morgan Stanley, and Merrill Lynch. Many of these banks also enjoyed consistently high profits from 2000

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The Profits of Major Investment Banks and Federal Agencies Note: The other banks' average consists of Morgan Stanley, Citi, Merrill Lynch, UBS, Deutsche Bank, Bear Stearns, and J.P. Morgan. GSE Average is the average profits of Freddie Mac and Fannie Mae. Some investment banks, including Lehman Brothers, were big mortgage

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securitizers. Bear Stearns and Goldman Sachs issued lots of CMOs and other derivatives based on underlying mortgages. All the banks had high leverage ratios, though their ratios were

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markets, including the commercial real estate and credit markets, where Lehman was particularly active. These concerns escalated in June and July 2007, when two Bear Stearns hedge funds imploded, leading to panic in the credit markets and more general concerns that the subprime crisis would spill into the broader economy. On

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so that depositors would not worry about losing their savings to bank failures.46 Investment banks do not have this guarantee on their customer deposits. Bear Stearns and Lehman Brothers both failed after classic runs on the bank. But these weren’t ordinary people withdrawing their deposits. Institutions withdrew their credit,

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Scott Alvarez, General Counsel of the Federal Reserve, interview with the Washington Post (September 2, 2010) This is hardly plausible. First, they did something for Bear Stearns in March 2008. And within days of the Lehman collapse, authorities let Goldman Sachs and Morgan Stanley convert to bank holding companies, which Fuld had

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other participants aren’t willing to bear. In this respect, many of these hedge funds complement the dealers’ function.2 Dealers, including Lehman Brothers, Bear Stearns, Goldman Sachs, and Morgan Stanley, perform similar market functions. They stand ready to buy when the market is rushing to sell and stand ready to

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and high Sharpe ratios. Their assets under management, however, would shrink rapidly when the markets encountered the 2008 financial atomic bombs; the failures of Bear Stearns and Lehman Brothers; and big, fast asset withdrawals from customers desperate for cash. The year of 2008 didn’t just mark the death of the

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JWMP, partly because of burnout and partly to pursue other opportunities.1 Then came 2008’s financial crisis. The housing market collapse, the collapse of Bear Stearns, Lehman Brothers, many commercial banks, and Freddie and Fannie badly disrupted capital markets. Funds in the business of providing leveraged liquidity were in the

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end of February, JWMP began to unwind some of its risk. The Bear and the Gorilla Attack Then came the institutional bank run on Bear Stearns in March 2008. Bear Stearns, a major prime broker and liquidity provider for hedge funds, was heading for bankruptcy. Dimon and J.P. Morgan bought it at

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governmental organizations started behaving more like risky hedge funds during this period, all without telling anyone. That included AIG, Citibank, Goldman Sachs, Lehman Brothers, Bear Stearns, and most of all Freddie Mac and Fannie Mae. Some of these institutions used leverage that was as high as or higher than what LTCM

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of proprietary trading. Bibliography “A Guide to FRB/US. A Macroeconomic Model of the United States.” Macroeconomic and Quantitative Studies Federal Reserve Note, October 1996. “Bear Stearns’ Jimmy Cayne’s Profane Tirade Against Treasury’s Geithner.” Wall Street Journal, March 4, 2009. “Berkshire Hathaway Report 10-Q.” June 30, 2008. “Budget

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. “Financial Audit: Resolution Trust Corporation’s 1995 and 1994 Financial Statements.” United States General Accounting Office Report to the Congress, July 1996. “Former CEO Says Bear Stearns' Collapse Unavoidable.” Right Vision News, May 7, 2010. “Fuld of Experience.” The Economist, April 24, 2008. “German Landesbanks: Deep Impact. A Revealing Dispute over

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Risk Measurement, Standards and Monitoring.” BIS Publication, December 2010. Bebchuk, Lucian A., Alma Cohen, and Holder Spamann. “The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008.” Harvard Law Economics Discussion Paper, November 24, 2009. Becker, Bernie and Ben White. “Lehman’s Chief Defends His Actions as Prudent

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Sachs Asset Management Presentation, December 13, 2007. Goldman Sachs Asset Management. “The Quantity Liquidity Crunch.” Goldman Sachs Global Quantitative Equity Report, August 2007. Goldstein, Matthew. “Bear Stearns to the Rescue—Sort Of.” Bloomberg Businessweek, June 22, 2007. Goldstein, Matthew. “Bear’s Big Loss Arouses SEC Interest.” Bloomberg Businessweek, June 25, 2007.

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John M. and Dragon Yongjun Tang. “Did Credit Rating Agencies Make Unbiased Assumptions on CDOs?” American Economic Review: Papers & Proceedings, May 2011. Grynbaum, Michael M. “Bear Stearns Profit Plunges 61% on Subprime Woes.” New York Times, September 21, 2007. Guberman, Ross. “Balancing Act.” The Washingtonian, August 2002. Hagerty, James R. “Freddie

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Non-Crisis Risk in Financial Markets: A Unified Approach to Risk Management.” Available at SSRN: http://ssrn.com/abstract=1160273, July 15, 2008. Morgensen, Gretchen. “Bear Stearns Says Battered Hedge Funds Are Worth Little.” New York Times, July 18, 2007. Morgenson, Gretchen and Joshua Rosner. Reckless Endangerment. How Outsized Ambition, Greed,

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trust between trust in Barclays Barclays Global Investors (BGI) Basel Committee: Basel I document Basel II document financial crisis and guidelines of overview of Bear Stearns: bank run on collapse of failure of hedge funds of history and reputation of J.P. Morgan and leverage of LTCM and near-collapse of

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Clearinghouses Client services Clinton, Bill CMBS securities CMBX index CMOs (collateralized mortgage obligations) Collateral-backed bonds Collateralized debt obligations (CDOs): AIG and Basel Committee and Bear Stearns and overview of ratings agencies and Collateralized lending agreement (CLA) Collateralized mortgage obligations (CMOs) Commercial paper, trust in Commercial real estate Commodity Futures Modernization Act

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FDIC) Federal Home Loan Mortgage Association. See Freddie Mac Federal National Mortgage Association. See Fannie Mae Federal Reserve (Fed). See also Bernanke, Ben; Greenspan, Alan Bear Stearns and as coordinator of last resort Greece and interest rates and Lehman Brothers and Felder, Eric Fidelity Investments Financial crisis of 2008. See also Lessons

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bonds issued by business of mortgage market and Giovannini, Alberto Global distribution/sales GlobalOp Financial Services Gluckstern, Steven Goldman Sachs. See also GSAM AIG and Bear Stearns and CDOs of concerns about survival of Convergence Asset Management Global Equity Opportunities Fund hedge funds of LTCM and profits of real estate exposure stock

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Kenneth GSAM GSE. See Government-sponsored enterprise Gutfruend, John Haghani, Victor Haircuts Hausman, Jerry Hawkins, Gregory Hedge fund gate Hedge funds: average returns of of Bear Stearns function of of Goldman Sachs growth management by GSEs and housing market and lessons from financial crisis of 2008 relative-value High-frequency trader theory

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Italy, debt burden of Iwanowski, Ray Japanese box trade Japanese swap spread Japanese warrant trade Jittery markets Johnson, James Jones, Bob J.P. Morgan: Bear Stearns and Lehman Brothers and leverage of LTCM and Washington Mutual and JWM Partners, LLC: collapse of deleveraging of Hilibrand and losses at market insanity and

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as financial pioneer JWM Partners and letter by at LTCM on post-Lehman period at Salomon Brothers on 2008 Merrill Lynch: Bank of America and Bear Stearns and liquidity stress test results real estate exposure Merton, Robert Metallgesellschaft, collapse of Meyer, William MF Global Min, Euoo Sung Modest, David Molinaro, Samuel

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from financial crisis of 2008 lessons from LTCM crisis Relative-value hedge funds Relative value trades Renaissance Technologies Repo imbalance and Lehman bankruptcy Repo transactions: Bear Stearns and definition of Lehman Brothers and repo swaps of LTCM term repos Reserve Primary Fund (RFP) Reverse repo agreements Risk. See also Risk management

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Fannie, and liquidity risk market risk measuring of mortgages reduction of prior to quarterly reports systemic risk tail risk Risk arbitrage trades Risk management: at Bear Stearns at JWMP and PGAM at JWM Partners at Lehman Brothers lessons from financial crisis of 2008 Risk management at LTCM: broad outlines as cause of

The Big Short: Inside the Doomsday Machine

by Michael Lewis  · 1 Nov 2009  · 265pp  · 93,231 words

training class. At some point I couldn't contain myself: I called Meredith Whitney. This was back in March 2008, just before the failure of Bear Stearns, when the outcome still hung in the balance. I thought, If she's right, this really could be the moment when the financial world gets

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a great idea that they bought B&C mortgage. By early 2005 all the big Wall Street investment banks were deep into the subprime game. Bear Stearns, Merrill Lynch, Goldman Sachs, and Morgan Stanley all had what they termed "shelves" for their subprime wares, with strange names like HEAT and SAIL

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investment bank was effectively run by its bond departments. In most cases--Dick Fuld at Lehman Brothers, John Mack at Morgan Stanley, Jimmy Cayne at Bear Stearns--the CEO was a former bond guy. Ever since the 1980s, when the leading bond firm, Salomon Brothers, had made so much money that it

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was no point buying insurance from a bank that went out of business the minute the insurance became valuable. He didn't even bother calling Bear Stearns and Lehman Brothers, as they were more exposed to the mortgage bond market than the other firms. Goldman Sachs, Morgan Stanley, Deutsche Bank, Bank

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the models used to evaluate subprime mortgage bonds by the two major rating agencies, Moody's and Standard & Poor's. The big Wall Street firms--Bear Stearns, Lehman Brothers, Goldman Sachs, Citigroup, and others--had the same goal as any manufacturing business: to pay as little as possible for raw material (

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What most of these investors had in common was that they had heard, directly or indirectly, Greg Lippmann's argument. In Dallas, Texas, a former Bear Stearns bond salesman named Kyle Bass set up a hedge fund called Hayman Capital in mid-2006 and soon thereafter bought credit default swaps on subprime

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an office in Manhattan--a floor of the Greenwich Village studio of the artist Julian Schnabel. They'd also moved their account, from Schwab to Bear Stearns. They longed for a relationship with some big Wall Street trading firm and mentioned the desire to their accountant. "He said he knew Ace Greenberg

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and he could introduce us to him, and so we said great," said Charlie. The former chairman and CEO of Bear Stearns, and a Wall Street legend, Greenberg still kept an office at the firm and acted as a broker for a handful of presumably special investors

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. When Cornwall Capital moved their assets to Bear Stearns, sure enough, their brokerage statements soon came back with Ace Greenberg's name on top. Like most of what befell them in the financial

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deal directly with the source of what they viewed as the most underpriced options: the most sophisticated, quantitative trading desks at Goldman Sachs, Deutsche Bank, Bear Stearns, and the rest. The hunting license, they called it. The hunting license had a name: an ISDA. They were the same agreements, dreamed up

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daily. At the time, Charlie and Jamie and Ben didn't worry much about this provision, or similar provisions in the ISDA they landed with Bear Stearns. They were happy just to be allowed to buy credit default swaps from Greg Lippmann. Now what? They were young men in a hurry--they

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the subprime mortgage bond market. "A lot of people when we called them said, 'Hey, why don't you guys buy some stocks!'" said Charlie. Bear Stearns couldn't believe that these young guys with no money wanted to buy not just credit default swaps but a credit default swap so esoteric

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that no one else had bought it. "I remember laughing at them," said the Bear Stearns credit default swap salesman who took their first inquiry. At Deutsche Bank they were passed off to a twenty-three-year-old bond salesman who

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hence, in Las Vegas. Every big cheese in the subprime mortgage market would be there, with a name tag, and wandering around The Venetian hotel. Bear Stearns was planning a special outing for its customers, at a Vegas firing range, where they could learn to shoot everything from a Glock to an

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," said Charlie. "I wasn't even allowed to have, like, a toy gun." Off he flew, with Ben, to Las Vegas, to shoot with Bear Stearns, and to see if they could find anyone to explain to them why they were wrong to bet against the subprime mortgage market. CHAPTER SIX

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said Jamie, "they almost always let you in." The only people Charlie knew in Vegas were a few members of the subprime mortgage machine at Bear Stearns, and he'd never actually met them in person. Nevertheless, they had sent him an e-mail telling him, after he landed in Las Vegas

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zombie, various hooded al Qaeda terrorists, a young black kid attacking a pretty white woman, an Asian hoodlum waving a pistol. "They put down the Bear Stearns credit card and started buying rounds of ammunition," said Charlie. "And so I started picking my guns." It was the Uzi that made the biggest

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The Gun Store with both a lingering feeling of having broken some law of nature, and an unanswered question: Why had he been invited? The Bear Stearns guys had been great, but no one had uttered a word about subprime mortgages or CDOs. "It was totally weird, because I'd never

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trade on we had one week." The trouble, as ever, was finding Wall Street firms willing to deal with them. Their one source of supply, Bear Stearns, suddenly seemed more interested in shooting than in trading with them. Every other firm treated them as a joke. Cornhole Capital. But here, in Las

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unwilling to take was the risk of dealing directly with Cornwall Capital. It took a while, but Charlie arranged for his Uzi-shooting companions from Bear Stearns to sit in the middle between the two parties, for a fee. The details of a $45 million trade more or less agreed upon in

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if there were any credit default swaps on CDOs to buy, they were buying it for themselves," said Charlie. At the end of February a Bear Stearns analyst named Gyan Sinha published a long treatise arguing that the recent declines in subprime mortgage bonds had nothing to do with the quality of

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"market sentiment." Charlie read it thinking that the person who wrote it had no idea what was actually happening in the market. According to the Bear Stearns analyst, double-A CDOs were trading at 75 basis points above the risk-free rate--that is, Charlie should have been able to buy credit

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"I just needed to calm down from hearing Steve say the world is ending." And everyone laughed. Later that very day, investors in the collapsed Bear Stearns hedge funds were informed that their $1.6 billion in triple-A-rated subprime-backed CDOs had not merely lost some value, they were worthless

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though at first it was hard to see what it was. On June 14, the pair of subprime mortgage bond hedge funds effectively owned by Bear Stearns went belly-up. In the ensuing two weeks, the publicly traded index of triple-B-rated subprime mortgage bonds fell by nearly 20 percent. Just

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turned and made a big bet against the subprime market--further accelerating the balloon's fatal ascent.* When its subprime hedge funds crashed in June, Bear Stearns was forcibly severed from its line--and the balloon drifted farther from the ground. Not long before that, in April 2007, Howie Hubler, perhaps

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having misgivings about the size of his gamble, had struck a deal with the guy who ran the doomed Bear Stearns hedge funds, Ralph Cioffi. On April 2, the nation's largest subprime mortgage lender, New Century, was swamped by defaults and filed for bankruptcy.

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length the moment had come: The last buyer of subprime mortgage risk had stopped buying. On August 1, 2007, shareholders brought their first lawsuit against Bear Stearns in connection with the collapse of its subprime-backed hedge funds. Among its less visible effects was to alarm greatly the three young men at

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Cornwall Capital who sat on what was for them an enormous pile of credit default swaps purchased mostly from Bear Stearns. Ever since Las Vegas, Charlie Ledley had been unable to shake his sense of the enormity of the events they were living through. Ben

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were collapsing and all the people we'd dealt with were saying we'll give you two points," said Charlie. Right up through late July, Bear Stearns and Morgan Stanley were saying, in effect, that double-A CDOs were worth 98 cents on the dollar. The argument between Howie Hubler and Greg

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happened that caused the market to rebound--if, say, the U.S. government stepped in and guaranteed all the subprime mortgages. And of course if Bear Stearns went down, they'd lose it all. Oddly alert to the possibility of catastrophe, they now felt oddly exposed to one. They rushed to cover

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three Wall Street firms had proved willing to deal with Cornwall Capital and give them the ISDA agreements necessary for dealing in credit default swaps: Bear Stearns, Deutsche Bank, and Morgan Stanley. "Ben had always told us that it's possible to do a trade without an ISDA, but it was

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re seeing any prices that reflect anything close to like what they're really worth," said Charlie. "We had positions that were being valued by Bear Stearns at six hundred grand that went to six million the next day." By eleven o clock Thursday night Ben was finished. It was August 9

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off its hands, neither UBS nor any of their other Wall Street buyers expressed the faintest reservations that they were now assuming the risk that Bear Stearns might fail: That thought, inside big Wall Street firms, was still unthinkable. Cornwall Capital, started four and a half years earlier with $110,000,

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the Federal Reserve, Alan Greenspan, and be paired with a famous investor named Bill Miller--who also happened to own more than $200 million of Bear Stearns stock. Eisman obviously thought it insane that anyone would sink huge sums of money into any Wall Street firm. Greenspan he viewed as almost beneath

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had called afterward and complained. "Gyan is upset," he said. "Tell him not to be," said Eisman. "We enjoyed it!" At the end of 2007, Bear Stearns had nevertheless invited Eisman to a warm and fuzzy meet and greet with their new CEO, Alan Schwartz. Christmas with Bear, they called it. Schwartz

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Street banks, plus that of the illustrious former chairman of the Federal Reserve. It was a busy day in the markets--there were rumors that Bear Stearns might be having troubles--but, given a choice between watching the markets and watching Eisman, Danny Moses and Vincent Daniel and Porter Collins didn't

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. Eisman sat at a long table with the legendary Bill Miller. Miller spoke for maybe three minutes, and explained the wisdom of his investment in Bear Stearns. "And now for our bear," said Mike Mayo. "Steve Eisman." "I got to stand up for this," said Eisman. Miller had given his little

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from J.P. Morgan. Nine minutes later, as Bill Miller explained why it was such a good idea to own stock in Bear Stearns, Alan Schwartz had issued a press release. "Bear Stearns has been the subject of a multitude of rumors concerning our liquidity," it began. Liquidity. When an executive said his bank

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trade of trivial size that totally contradicted everything they believed. Danny and Vinny both thought the problem in this case was Eisman's affinity for Bear Stearns. The most hated firm on Wall Street, famous mainly for its total indifference to the good opinion of its competitors, Eisman identified with the

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place! "He'd always say Bear Stearns could never be acquired by anyone because the culture of the firm could never be assimilated into anything else," said Vinny. "I think he saw

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at home with this totally bizarre long." Whatever the psychological origins of Eisman's sudden urge, the previous afternoon, to buy a few shares in Bear Stearns, Danny was just glad to be done with the matter. Eisman was now explaining why the world was going to blow up, but his partners

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he spoke a Wall Street investment bank was failing, for a reason other than fraud. And the obvious question was, Why? The collapse of Bear Stearns would later be classified as a run on the bank, and in a sense that was correct--other banks were refusing to do business with

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Why did the market suddenly distrust a giant Wall Street firm whose permanence it not so very long before took for granted? The demise of Bear Stearns had been so unthinkable in March of 2007 that Cornwall Capital had bought insurance against its collapse for less than three-tenths of 1 percent

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. They'd put down $300,000 to make $105 million. "Leverage" was Eisman's answer, on this day. To generate profits, Bear Stearns, like every other Wall Street firm, was perching more and more speculative bets on top of each dollar of its capital. But the problem was

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It had $40 in bets on its subprime mortgage bonds for every dollar of capital it held against those bets. The question wasn't how Bear Stearns could possibly fail but how it could possibly survive. Finishing his little speech and heading back to his chair, Steve Eisman passed Bill Miller and

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patted him on the back, almost sympathetically. In the brief question-and-answer session that followed, Miller pointed out how unlikely it was that Bear Stearns might fail, because thus far, big Wall Street investment banks had failed only after they were caught in criminal activities. Eisman blurted out, "It'

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was, like everyone else, punching on his BlackBerry the whole time Miller and Eisman spoke. "Mr. Miller," he said. "From the time you started talking, Bear Stearns stock has fallen more than twenty points. Would you buy more now?" Miller looked stunned. "He clearly had no idea what had happened," said Vinny

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Central to the north, where taxis appeared haphazardly and out of nowhere to meet them, like farm trout rising to corn kernels. The Lehman and Bear Stearns people used to head for the same exit as he did, but they were done. One reason why, on September 18, 2008, there weren

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frowning upon profanity, forcing their male employees to treat women almost as equals, and firing traders for so much as glancing at a lap dancer. Bear Stearns and Lehman Brothers in 2008 more closely resembled normal corporations with solid, Middle American values than did any Wall Street firm circa 1985. The changes

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Cruz. The version of events offered by people close to Zoe Cruz is that she was worried about the legal risk of doing business with Bear Stearns's troubled hedge funds, and that Hubler never completely explained the risk of triple-A-rated CDOs to her, and led her to believe

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case was weak, and turned on a couple of e-mails obviously ripped from context. A member of the jury that voted to acquit the Bear Stearns subprime bond traders told Bloomberg News afterward not only that she thought they were innocent as charged but that she would happily invest money with

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America

by Danielle Dimartino Booth  · 14 Feb 2017  · 479pp  · 113,510 words

banks on Wall Street were summoned to meet with William McDonough, then president of the New York Fed District Bank, to devise a bailout plan. Bear Stearns refused to pony up, but Lehman Brothers, Goldman Sachs, Merrill Lynch, Barclays, Bankers Trust, Chase Manhattan, even two French banks agreed to contribute millions

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I understand this issue . . . I don’t think the issue is contained. I do think there is enormous risk.” Fisher’s fears were realized. The Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund held $638 million of investor capital and gross long positions of $11.15 billion in the first

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Berkeley mafia) told the FOMC on August 7: “We’ve done quite a bit of work trying to identify some of the funding operations surrounding Bear Stearns, Countrywide, and some of the commercial paper programs.” Corporations issue commercial paper or debt to finance short-term liabilities. “There is some strain, but

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image of cluelessness, especially of the Fed. In early March, the price of CDSs for Wall Street banks skyrocketed, with the priciest policy attached to Bear Stearns, weakened by the hedge fund collapses of 2007. “The Bear” had always been the scrappiest, least highbrow of all the “bulge bracket” firms on

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winner-take-all philosophy, Cayne and his ferrets were true believers in Wall Street Darwinism. I had great affection for folks in the trenches at Bear Stearns; they’d proved to be valuable allies when I was at DLJ. In those days, I traded a lot of junk bonds. Eventually I

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its sizable commission at my clients’ expense. That brand of greed was one of my pet peeves about Wall Street. Dudley would later call the Bear Stearns debacle in March 2008 an old-fashioned bank run, just like that depicted in the 1946 movie It’s a Wonderful Life, played out in

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short sellers to be Wall Street’s checks and balances. They place bets that pay off only if the stock of a company goes down. Bear Stearns and other investment banks worked with short sellers all the time and also engaged in this tactic on their own behalf. While some people call

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betterment of the industry. Sometimes short sellers prey upon companies that are vulnerable due to poor management, risk intoxication, or plain bad luck. That described Bear Stearns to a tee. By mid-March, it was apparent that short-selling wolves were determined to cull Bear from the herd. Beginning on March 10

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reporter David Faber interviewed Bear CEO Alan Schwartz on camera. He asked him about reports that Goldman Sachs wouldn’t “accept the counterparty risk of Bear Stearns.” Schwartz denied it, but the bombshell allegation by Faber escalated the run. On March 13, Schwartz called the SEC and the Fed. Bear was

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’d seen in the building outside of Fisher’s office. Lenders’ trust in each other’s balance sheets eroded and it wasn’t contained to Bear Stearns. Overnight liquidity evaporated and counterparty risk exploded. The word “counterparty” refers to legal entities on opposite sides of a transaction. (The word became widely

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On March 14, I ran up to Fisher’s office with my own concerns. JPMC had the largest counterparty exposure to the struggling brokerage. “If Bear Stearns goes, it’s going to blow a huge hole in JPMorgan’s balance sheet,” I said. Because of JPMC’s immense size and importance, that

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the brokerage might not be able to play its role in the overnight repurchase or “repo” market because its cash reserves had dropped so precipitously. Bear Stearns was a major player in the repo market, the liquidity engine that banks and brokers use to lend cash to each other overnight. This mechanism

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that Fed officials feared this “would cause the broker to default on its related contracts, sparking a daisy chain of defaults across the banking sector.” Bear Stearns had revealed the disease infecting the financial system and was simply too interconnected to be allowed to fail. Over one harrowing March weekend, Bernanke, Geithner

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insider knowledge, and Paulson knew the egos and anxieties of Wall Street CEOs. When it became clear that a miracle was needed to deal with Bear Stearns, this eclectic trio, led by the aggressive Paulson, went to work on Jamie Dimon, the charismatic, pugnacious, and wily CEO of JPMC. Dimon had

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world. To top it off, in January 2007 Dimon began serving a three-year term on the New York Fed’s Board of Directors. Bear Stearns’s death rattles could have been a nightmare for Dimon. But his response became a triumph. The scene is now part of Wall Street legend

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to be talking to you and your team,” Parr said. “They’re in desperate shape. They need a lot of money.” Could JPMC make Bear Stearns an emergency loan before the opening of business the next morning? They had twelve hours. Walking out of the restaurant so he would not be

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by a street with that name.) The New York Fed loaned Maiden Lane about $28 billion to purchase approximately $30 billion in toxic assets from Bear Stearns. JPMC lent Maiden Lane about $1.15 billion for a ten-year term, accruing interest at the primary credit rate plus 450 basis points. Though

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to pay only two dollars per share for Bear’s stock, that price triggered howls from shareholders and threats of lawsuits. JPMC ended up acquiring Bear Stearns for about ten dollars per share, or $270 million, signing the merger agreement on Sunday, March 16. The fire sale included Bear’s brand-

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new midtown Manhattan headquarters, valued at $1 billion. The gallows humor on Wall Street held that karma had to wait a long time, but Bear Stearns got its just deserts. During the 1998 bailout of LTCM by sixteen financial institutions, one investment banker refused to write a check: Jimmy Cayne. A

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only of their jobs, but the value of stock held in the company, their retirement, their kids’ college tuition. And I was livid at Greenspan. Bear Stearns had gotten greedy, but the underlying conditions that allowed it to grow so spectacularly and fall so hard wouldn’t have existed if Greenspan had

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the Fed had bailed out some Wall Street fat cats. They demanded answers. Within a few weeks Congress paraded all the major participants in the Bear Stearns drama in front of hearings. Geithner insisted that the Fed had to act or risk “a greater probability of widespread insolvencies, severe and protracted damage

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use Bass’s name on the air. But Marano seemed to believe he did. Goldman had been inundated with so many requests for novations “facing” Bear Stearns that it stopped taking such requests to comply with its own risk management rules. Late on Tuesday, March 11, when Bass’s firm, Hayman Capital

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had refused a routine transaction with one of the other big five investment banks,” the government report later said. “The message: don’t rely on Bear Stearns.” Rumor, panic, and fear killed the victim—aided by a huge dollop of hubris. The best description of what happened to Bear was offered by

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Bernanke said. In a presidential election year, he faced intense political pressure as unemployment and foreclosures mounted. “With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence,” Bernanke said. “The damage caused by

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a default by Bear Stearns could have been severe and extremely difficult to contain.” Bernanke predicted that the economy would probably slow still further, maybe even slip into recession, but

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first and then worry about the fire code. —BEN BERNANKE, DECEMBER 1, 2008 Among the economists at the Dallas Fed, Bernanke’s optimism prevailed. The Bear Stearns rescue was the punctuation mark that ended the paragraph. Bernanke would trim the sails to right the foundering ship. I disagreed. The demise of the

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“the whole alphabet soup of levered up non-bank investment conduits, vehicles, and structures.” He described what had occurred in the summer of 2007 as Bear Stearns’s hedge funds cratered, the result of a “mighty gulf between the Fed’s liquidity cup and the shadow banking system’s parched liquidity lips

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that a “bank” can borrow ninety-five dollars for each hundred dollars in pledged collateral. In 2007, when the value of the pledged collateral for Bear Stearns’s MBSs began to collapse, panic set in. Other investment banks and hedge funds incited “runs” on their shadow bank counterparts at other financial institutions

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had equity capital of $28 billion, a Tier 1 capital ratio of 11 percent, and unencumbered collateral of $127 billion. Besides, the Fed had saved Bear Stearns. Why not Lehman Brothers? Bernanke, Geithner, and Paulson didn’t have long to pat themselves on the back for preventing moral hazard. Within hours of

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run an incredibly leveraged firm, for not having enough capital,” Rattner later said. “But he was also unlucky, because if Lehman had been first and Bear Stearns second, they would have saved Lehman and Jimmy Cayne would have become the poster boy of the crisis.” Tom Russo, former chief legal officer at

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, and a blinkered mind-set. The transcripts do not include meetings at which smaller groups of Fed and Treasury officials worked on the bailouts of Bear Stearns, Lehman, and AIG. Nor do they include the impromptu meetings like the one that Bernanke held at Jackson Hole in August 2007. As hedge

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back. As the crisis deepened, the Fed increasingly trespassed its mandated boundaries. The tenor of the March 18 meeting—held just after the rescue of Bear Stearns—was contentious. Bernanke wanted to cut rates again. Fisher was adamant that a rate cut wouldn’t help. “The root problem is a problem of

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Bernanke said. Yellen, not a voting member, offered her opinion that though the economy had slowed, she did not anticipate a long recession. To Yellen, Bear Stearns was an isolated event. She expected GDP growth of 1.5 percent during the second half of the year and opined “the likelihood of a

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not to be confused with the Term Securities Lending Facility [TSLF], which provided twenty-eight-day liquidity to primary dealers.) Maiden Lane LLC, to backstop Bear Stearns’s ABS warehouse. Maiden Lane II LLC, to backstop AIG’s various mortgage-backed securities. Maiden Lane III LLC, to backstop AIG’s toxic credit

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on to what appeared to be an out-of-body experience, criticizing his successors at the Fed and Treasury—Bernanke and Paulson—for bailing out Bear Stearns and AIG. “It’s going to be very difficult to repair their credibility on that because when push came to shove, they didn’t

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problematic operations: Sup & Reg at the New York Fed. If all was working the way the Fed intended, the bank examiners who supervised Lehman Brothers, Bear Stearns, Merrill Lynch, and others should have seen and sounded the alarm about the extraordinary risk that had built up in the system long before 2008

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January 18, 2013. “I do think there is enormous risk”: Peterson et al., “Three Stages of Fed Grief: Key Quotes from 2007.” The Bear Stearns High-Grade: Reuters, “2 Bear Stearns Funds Are Almost Worthless,” New York Times, July 17, 2007. Bear injected money: FRBSL: “The Financial Crisis: Full Timeline,” www.stlouisfed.org/financial

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Brett Fromson, “Plunge Protection Team,” Washington Post, February 23, 1997. Since 1993, Bear had been headed: Daily Intelligencer, “Jimmy Cayne Almost Died Trying to Save Bear Stearns,” New York Magazine, August 4, 2008, nymag.com/dailyintelligencer/2008/08/jimmy_cayne_speaks.html. He’d been hired by Alan “Ace” Greenberg: William Cohan

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to Congress, July 21, 2009, oversight.house.gov/wp-content/uploads/2012/01/7-21-09-SIGTARP-Report.pdf. The fire sale included: Maria Godoy, “Bear Stearns Bought Out by JP Morgan Chase,” NPR.com, March 17, 2008, www.npr.org/templates/story/story.php?storyId=88405777. A decade after: William D

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.com/2008/07/31/magazines/fortune/rise_and_fall_Cayne_cohan.fortune/index.htm. Bear’s fourteen thousand employees: Kristina Cooke, “Tough Job Market Awaits Bear Stearns Staff Who Leave,” New York Times, March 18, 2008. “Gambling has been fed”: “The Financial System: What Went Wrong,” Economist, May 19, 2008. The

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Late on Tuesday: Ibid. “Our trading desk would prefer”: Ibid. “The news hit the Street”: Ibid. In retrospect, in hindsight: David Lawder and Rachelle Younglai, “Bear Stearns’ Cayne Concedes Leverage Was Too High,” Reuters.com, May 5, 2010. The Fed was “fighting against the wind”: “Excerpts from Bernanke’s Testimony,” Los Angeles

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Lou, 197 Barnes, Martin, 245 Barron’s, 49, 217 Bartiromo, Maria, 26, 79, 130 Basel I Accord, 123 Bass, Kyle, 114–15 Baum, Caroline, 214 Bear Stearns, 14, 89–90, 105–16 Beim, David, 255–57 Bent, Bruce II, 140 Bent, Bruce R. Sr., 140 Bernanke, Ben, 3, 6, 51, 66, 79

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–80, 83–84, 117, 171–72, 206, 223, 251–52 AIG bailout and, 138–39 Bear Stearns rescue and, 109–12, 114, 116 deflation, fighting, 150–51 on failure to save Lehman, 145–46 fed funds rate decisions and, 91, 102–3

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Healthy Housing Market, The” (DiMartino Booth), 205 Fannie Mae, 22, 120 Federal Open Market Committee (FOMC), 2, 42, 45, 81, 84, 152–63, 190, 234 Bear Stearns hedge fund concerns and, 89–90 blackout period for meetings of, 152–53 bond-buying program, 173–74, 227–30 dissenting opinions, historically, 152, 219

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63, 175, 176, 218–21 Feldstein, Martin, 82 Ferguson, Niall, 56, 198 financial crisis of 2008, 2–10 AIG bailout and, 138–39 Bear Stearns’ collapse and, 105–16 Bear Stearns hedge fund bankruptcies and, 89–90 discount window opened to bond dealers in, 118 fed funds rate decisions in response to, 102–3

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232 Galbraith, John Kenneth, 46 Geithner, Timothy, 51–55, 89–90, 113, 143–44, 147, 200 AIG bailout and, 138–39 appointed Treasury Secretary, 170 Bear Stearns rescue and, 109–12, 114 failure to see housing bubble, 55 Lehman collapse and, 135–36 money market fund’s breaking the buck and, 140

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of 2007, The” (Gorton), 125 Parr, Gary, 111 Paul, Rand, 253 Paul, Ron, 206 Paulson, Henry, 104, 145–46, 260 AIG bailout and, 138–39 Bear Stearns rescue and, 109–12, 114 Goldman alumni hired by, 147–48 Lehman collapse and, 134–36 money market fund’s breaking the buck and, 140

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inflation targeting and, 195 named president of San Francisco Fed, 86 nomination as Fed chair, 237 opposition to auditing of Fed, 254 outlook of, following Bear Stearns rescue, 157 raises fed funds rate, December 2015, 261 refusal to raise interest rates, 241, 251 testimony on living wills of, 246 on zero-interest

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again

by Nicholas Dunbar  · 11 Jul 2011  · 350pp  · 103,270 words

credit derivatives businesses on a sliver of capital. This attracted the attention of the traditional U.S. investment banks—Goldman, Morgan Stanley, Lehman, Merrill, and Bear Stearns. For New York firms that had found it difficult to trade derivatives under SEC rules that had not been updated since the 1970s, the new

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market risk language but leaned heavily on advice from Goldman regarding technical details. By 2004, the voluntary arrangement was formalized further. Other investment banks like Bear Stearns or Lehman Brothers had shown little inclination to follow in Goldman’s wake. Macchiaroli disliked what he called Basel’s “square roots and charts,” but

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stand up to the investment banks in the way that the Fed could do with Bank of America. Over the following years, Merrill, Lehman, and Bear Stearns aggressively exploited the SEC’s rules to fill their trading books with credit risk. Dogs Chasing Their Tails Assailed by arbitrage from all sides, the

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small—and safe. First there was the challenge of finding the mortgages. If Sparks wanted to compete with market-leading firms like Lehman Brothers and Bear Stearns that specialized in packaging newly originated mortgages into securitized bonds, he would need his own supply of product. The big suppliers at that time—such

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on the table, and $1 billion was there for the taking. Paulson had already done his first $100 million subprime trade in summer 2005 with Bear Stearns, but now he wanted to do more, and was now raising $1 billion to set up a credit fund specifically focused on shorting subprime. Deutsche

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Deutsche was able to issue very quickly on the Irish Stock Exchange, with names like Eirles, Ixion, Syrah, and Coriolanus. Other firms like Morgan Stanley, Bear Stearns, and Citigroup ran similar operations, but Deutsche was the biggest player. Along with the derivatives he was selling to Wall Street’s mainstream CDO factories

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with the simple ploy of replacing the letters CDO with student loans.16 Ralph Cioffi, portfolio manager of a CDO-buying hedge fund sponsored by Bear Stearns, summed up Wall Street’s desperate mood on the eve of Armageddon: “I think we need to go into outer space to find new buyers

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truth he would have blanched. Pop Goes the Bubble The day the triple-A subprime CDO bubble began to pop was June 22, 2007, when Bear Stearns closed a leveraged hedge fund it managed and liquidated the fund’s triple-A CDO assets. Two and a half weeks later, Moody’s and

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securities firms, had a good reason to get in as much cash as possible that August. None more so than the smallest of the bunch, Bear Stearns, which had spooked the market with its CDO hedge fund fiasco in June. On Friday, August 3, Mike Macchiaroli, associate director at the SEC’s

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. Using derivatives and securitization, these firms were competing directly with the traditional banks in the post–Glass-Steagall world. That Friday rumors were flying that Bear Stearns was concealing big problems, and that its management was in turmoil. Macchiaroli phoned a colleague, Matt Eichner, at home that evening. “What the heck is

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going on there?” he said. “I’m really worried about Bear Stearns. This is a disaster waiting to happen. Get those people in on Sunday!” A call from the SEC went out to

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Bear Stearns, as Macchiaroli and Eichner booked flights to New York. Bear Stearns had built up a $400 billion balance sheet with the help of repo, a $2 trillion market in short-term borrowing

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lenders such as Fidelity. But on that fateful Friday in August, these lenders were worried about the mortgage market, to which Bear Stearns was heavily exposed. Unlike a standard commercial bank, Bear Stearns had no central bank standing behind it, ready to take up the slack if repo lenders pulled out. As he greeted

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Macchiaroli and Eichner at Bear Stearns’s offices on Madison Avenue that Sunday afternoon, Bear Stearns’s CFO, Sam Molinaro, Jr., was not taken in by Macchiaroli’s attempts at levity. “This is a formal meeting,” he

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going on and we’ve got to respect their need to know.” That same morning, he had attended a board meeting in which Warren Spector, Bear Stearns’s co-president, was fired, taking the fall for the firm’s CDO hedge fund disaster. Reassuring his SEC visitors that the high-level management

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shakeup was not a sign of worse things to come, Molinaro fielded questions about Bear Stearns’s numbers. What’s your capital? How are earnings? What’s the liquidity situation? Then Macchiaroli and Eichner zeroed in on their big worry: a

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raise money? They knew that taking losses in a forced sale would force Bear to take a huge hit to its capital. At that point, Bear Stearns was balancing its $400 billion balance sheet on a capital sliver of just $12 billion—a leverage ratio of 33 times. From the outside

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, Bear Stearns looked like a powerful, thriving investment bank with 13,000 employees. But Macchiaroli felt uneasy. If shareholders lost confidence, and the likes of Fidelity pulled

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confident they’re going to weather the storm,” they reported. “But we’ll have to keep a close watch on them.” In the short term, Bear Stearns managed to quash the rumors and keep operating, and Molinaro was vindicated. But he noticed troubling signs all the same. In the absence of a

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central bank or the Federal Deposit Insurance Corporation (FDIC) protecting their interests, Bear Stearns’s repo lenders had to look after themselves. They started requesting bigger “haircuts,” or additional collateral covering their loans. And they drastically reduced the timescale

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had gotten into the securities business, sponsoring SIVs and conduits to hold the same mortgage and credit card bonds and CDOs that the likes of Bear Stearns manufactured. These financial androids issued IOUs to support their debt, closing the consumer finance loop by attracting money funds like Fidelity. After the near-meltdown

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, the SIV androids, sucked the Fed and ECB pipeline dry, the commercial banks were unwilling or unable to support the balance sheets of firms like Bear Stearns. Was it risk management or something more ruthless? According to a former senior SEC official, “I could sit here and tell a credible story that

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at a loss. Through its greed in squeezing out some additional “rent” from its policyholders, AIG had transformed its life insurance companies into something resembling Bear Stearns. Securities lending was similar to repo lending, which in turn was similar to money market funds accepting IOUs from SIV androids. That was a strange

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. “You don’t want to be the one making that call.” Too Much to Bear Ever since he and a fellow SEC examiner had visited Bear Stearns’s Madison Avenue office the previous August, Mike Macchiaroli had been haunted by the feeling that the Wall Street’s smallest, least-diversified securities firm

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, “I’m worried that this firm is going to fail on me!” He and Eichner immediately flew to New York to meet with Molinaro. The Bear Stearns CFO had become used to the SEC’s reviews and didn’t think the meeting was out of the ordinary. “Everything’s fine,” he told

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, are you?” Molinaro laughed it off as a wisecrack, say people who attended the meeting. “Ha ha,” he said. “That’s funny.” Six weeks later, Bear Stearns was dead. In mid-March, repo counterparties apologetically told Molinaro, “I know we’ve been lending you money against mortgage collateral for years, but we

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rolling today. We’re out.” Within days, the firm was taken over by J.P. Morgan, which used the Fed money pipeline to prop up Bear Stearns’s balance sheet. The real story was not so much how J.P. Morgan scooped up a consumer finance competitor, but rather how the New

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wait for bankruptcy proceedings. And just as Goldman did with AIG, they could buy default swaps as an extra failsafe against a collateral shortfall. Sure, Bear Stearns was troublesome because counterparty confidence evaporated suddenly, but in Lehman’s case, the market had had time to prepare. The aggressive free market self-interest

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already been plundered. By lending out their assets to Wall Street and reinvesting the cash collateral in mortgage bonds, AIG had turned itself into another Bear Stearns. Dinallo’s deputy, Mike Moriarty, had quietly been pushing AIG to reduce this exposure by $18 billion, but fear over a default swap–triggered bankruptcy

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bank UBS offered to accept a 2 percent haircut, but the offer was declined.) Continuing the sleight-of-hand strategy it had used to “save” Bear Stearns, the Fed quietly added billions more in mortgage bonds and CDOs to its balance sheet. That was one of the chilling, fundamental lessons of 2008

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a central derivatives counterparty would face its first solvency crisis. And what about the repo market, which, as much as OTC derivatives, allowed Lehman and Bear Stearns to gorge on leverage before turning themselves into ticking bombs? Dodd-Frank was silent on that, which was good news for hedge funds, but scary

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trading (June) Under Lippmann’s leadership, Wall Street firms agree on standardized subprime default swap (ABCDS) contract John Paulson enters first short subprime trade with Bear Stearns Cheyne SIV launched by Morgan Stanley (December) Lippmann initiates his own proprietary bet against subprime AIG Financial Products formally stops insuring super-senior subprime CDOs

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-1 deal closes and is bought by IKB (May) Goldman mortgage department makes second-quarter loss as the firm’s CDO warehouse written down (June) Bear Stearns freezes CDO hedge funds and begins liquidating them (July) Ratings agencies start mass downgrades of mortgage bonds and CDOs Sossidis and Partridge-Hicks warn ratings

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SIV problems IKB loses access to credit and requires bailout by German government and banks Goldman sends AIGFP its first margin call (August) SEC visits Bear Stearns in response to rumors about liquidity problems European Central Bank (ECB) announces emergency liquidity for banks as ABCP markets freeze (September) U.S. Treasury announces

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” in its CDO valuations and reports $11 billion of super-senior writedowns SEC’s Macchiaroli makes a return visit to Bear Stearns UBS reports full-year CDO writedowns of $18.7 billion (March) Bear Stearns suffers a loss in counterparty confidence and is taken over by J.P. Morgan, with losses backstopped by the

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street

by William D. Cohan  · 15 Nov 2009  · 620pp  · 214,639 words

was that the perception of these mortgage-related assets in the market was deteriorating rapidly. That perception spelled potential doom for firms such as Thornburg, Bear Stearns, and Lehman Brothers, which financed their businesses in the overnight repo market using mortgage-related assets as collateral. For Thornburg the trouble began on

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into compulsory liquidation and eventually dissolved. FOR ANYONE WILLING to listen to Sedacca in early March, the price of the credit default swaps for both Bear Stearns and Lehman Brothers was broadcasting a potentially catastrophic liquidity problem similar to that faced by Thornburg, Peloton, and Carlyle: Both Bear and Lehman had,

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that “there is absolutely no truth to the rumors of liquidity problems that circulated today in the market.” The release included a quotation from Schwartz: “Bear Stearns' balance sheet, liquidity and capital remain strong.” CNBC Wall Street reporter David Faber described these public statements of denial as wholly “atypical” for Wall

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bank told me that he got a call, his CEO or president got a call, from the regulators, asking what their exposure was to Bear Stearns,” explained an incredulous Bear Stearns banker. “Not ‘What's your exposure to Bear, JPMorgan, Morgan Stanley, Lehman, UBS?' Just ‘What's your exposure to Bear?' He said

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the Securities and Exchange Commission—the regulator of securities firms such as Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns—added his imprimatur to the adequacy of Bear Stearns's capital, which he said was monitored on a “constant” basis, especially during the credit crisis. Asked March 11 by reporters

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net effect of these ongoing discussions with the overnight lenders was that the twenty largest firms became increasingly conservative about how they valued the collateral Bear Stearns had been offering them and were demanding more collateral to provide the same amount of financing. “You saw this widening disparity between what we

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expressed a desire to withdraw funds from, and certain counterparties expressed increased concern regarding their ordinary course exposure to, Bear Stearns, causing senior management of Bear Stearns to become concerned that if these circumstances accelerated Bear Stearns' liquidity could be negatively affected.” In other words, all the rumors were true. Now, on Wednesday night, the

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Lazard financial institutions banker, to help the firm explore potential joint ventures or other strategic combinations. Parr had had a small role in helping Bear Stearns's management evaluate the possible merger of Bear with Fortress Investment Group, a ten-year-old Manhattan-based hedge fund and private equity management company

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really went from Wednesday morning to Thursday afternoon, twenty-four hours from solvent to dead. It seems inconceivable.” Around six on Thursday night the senior Bear Stearns executives gathered in Sam Molinaro's sixth-floor office. In attendance were, among others, Schwartz, Molinaro, Friedman, Begleiter, Upton, and John Stacconi, the treasurer

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Treasury, and JPMorgan to try to fashion an overnight solution to the liquidity crisis. Schwartz and Molinaro walked the board through Bear Stearns's liquidity position, “including the possibility that Bear Stearns would not be able to meet its liquidity needs the next day” without new funding. The Bear board reluctantly authorized the

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Schwartz believed this advantage “created a situation that I thought was precarious for the whole financial system.” Although Schwartz's concern ignored the benefits that Bear Stearns and other investment banks received gladly from the arrangement—among them much less rigorous regulatory oversight and the ability to leverage their balance sheets with

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to waive all Section 23A requirements”—restrictions on transactions with affiliates—“otherwise applicable to JPMC in connection with this funding. JPMC is currently exploring with Bear Stearns the possibility of providing more permanent financing or purchasing the company.” After a long, delirious sleepless night for Schwartz and his top executives, with

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financing to JPMorgan Chase. Accordingly, JPMorgan Chase does not believe this transaction exposes its shareholders to any material risk. JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company.” Gone were the explicitly stated ideas that JPMorgan had “agreed to bear the counterparty, credit

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remain concerned about Bear's ability to generate sustainable revenues in an ongoing volatile market environment.” Moody's and Fitch also cut their ratings on Bear Stearns's debt. “What their rating is now is irrelevant,” Andrew Harding, chief fixed-income investment officer at Allegiant Asset Management, in Cleveland, told Bloomberg.

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the JPMorgan facility, market forces continued to drive and accelerate our precipitous liquidity decline. Also, that Friday afternoon, all three major rating agencies lowered Bear Stearns's long-term and short-term credit ratings. Finally, on Friday night, we learned that the JPMorgan credit facility would not be available beyond Sunday

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pennies for creditors, Sullivan & Cromwell's advice for the board was that its fiduciary duties had shifted from shareholders to all the other stakeholders of Bear Stearns, among them creditors, employees, and retirees. Dennis Block, at Cadwalader, walked the board through the material terms of the merger agreement, including that stunning

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the Bear board's approval. A press release announcing the deal soon hit the wires. “Effective immediately, JPMorgan Chase is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations,” it read. “Other than shareholder approval, the closing is not subject to any

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material conditions.” Dimon added, “JPMorgan Chase stands behind Bear Stearns. Bear Stearns' clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns' counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner

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always liked that business, which JPMorgan did not have). Cavanaugh also announced that JPMorgan would provide “management oversight” and “guarantee the trading obligations” of Bear Stearns immediately and that, in addition to the $290 million purchase price for the equity, JPMorgan also estimated that it would cost another $6 billion, pretax

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, to cover other related costs: Bear Stearns's litigation; consolidating people (including paying severance), technology, and facilities; selling off large chunks of the $350 billion of assets just acquired; and conforming

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previous week need be concerned no longer. “We're also, effective immediately, providing a JPMorgan guarantee to all trading obligations of Bear Stearns,” he said. “So all counterparties facing off against Bear Stearns should understand that they're dealing with JPMorgan Chase on that basis.” JPMorgan's agreement to guarantee immediately, before the deal

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was broken, and right away this led to confusion in the marketplace. The very first question on the conference call was about whether Bear Stearns would be open for business. “Bear Stearns is absolutely open for business,” Bill Winters answered. “That's the purpose of the guarantee that we've put in place. That

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of margin requirements and structure in these firms. These firms, with the exception of Salomon Brothers, never used their own capital, including Bear Stearns.” When he was hired at Bear Stearns, Lewis's mandate was to slowly and profitably dip the firm's toe into the water of making money judiciously using a tiny

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in 1969, at age thirty-five, he tapped into his bridge network and quickly arranged interviews at Goldman Sachs, Lehman Brothers, and Bear Stearns. He had never heard much about Bear Stearns since they rarely traded or underwrote municipal bonds. But he went ahead with the interview and got the job when Ace Greenberg

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on mergers and acquisitions. In two years, the advisory business had doubled to $73 million in revenues from $36 million. The prospectus also described how Bear Stearns began its “mortgage-related securities department” in 1981 and that it “makes markets and trades” in the securities of the government mortgage agencies, known

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“pools of whole mortgages”—mortgages originated by mortgage brokers that had not been securitized and that were not as easily traded as securitized mortgages. Since Bear Stearns did not originate the underlying mortgages, “a staff of mortgage underwriting specialists analyzes and performs procedures to verify the authenticity of the loans before they

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and liquidity.” Management monitored the “market risks” by reviewing many different reports on a daily basis as well as through the weekly meeting of the Bear Stearns Risk Committee, headed by Greenberg. The company further revealed that “in connection with its trading activities in United States government and agency securities, [it]

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chagrin and infuriation—influence a new generation of Journal reporters, such as Charlie Gasparino and Kate Kelly, in their highly critical coverage of Bear Stearns. In this article, Siconolfi compared Bear Stearns's opportunistic scrappiness to that of the Oakland Raiders, the bad boys of the NFL. Front and center was Howie Rubin, who

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of the first Clinton administration—and the amount of money Wall Street bankers, traders, and executives were making started to explode—Cayne's imprimatur on Bear Stearns slowly began to emerge. Unlike Greenberg, whose public persona of the gregarious showman was the antithesis of his ruthless, curt, and condescending private behavior,

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clearer about their lack of jeopardy. But I'm not doing that unless you announce who I am, what's your relationship with Bear Stearns, what's your feeling about Bear Stearns, what's your feeling about me. Because I don't want to walk in and sort of be like this whipping boy

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and no individual firms were pressured to participate.” Cayne obviously disagreed with Greenspan's definition of the word “pressured.” Understandably, given what happened to Bear Stearns, Cayne is hypersensitive to the suggestion that the collapse of his firm nearly ten years later was “payback” by his fellow Wall Streeters for his

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“facilitating unlawful late trading and deceptive market timing of mutual funds by its customers and customers of its introducing brokers” from 1999 through September 2003. “Bear Stearns provided technology, advice and deceptive devices that enabled its market timing customers and introducing brokers to late trade and to evade detection by mutual funds

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go see John Mack, then the president of Morgan Stanley Dean Witter, in order to learn more about potential deals for Bear Stearns. “I told him, ‘Bear Stearns is not hiring you,’” Cayne said. ‘“Bear Stearns is coming to you and saying, “Jimmy wants to know what's out there.” I'll go anywhere you want

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global product and sales manager for high-grade credit products. “He was involved in the creation of the structured credit effort at Bear Stearns and was a principal force behind Bear Stearns' position as a leading underwriter and secondary trader of structured finance securities, specifically collateralized debt obligations and esoteric asset-backed securities,” according

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broker-dealer. In its offering memoranda regarding the establishment of the hedge fund, BSAM assured its High-Grade Fund investors that when Cioffi traded with Bear Stearns, the “Fund's operating procedure required disclosure, consent, and approval before the deal could be settled,” according to an administrative complaint filed by the

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not survive the daily ordeals of trading and managing and leveraging. Investors who sought to take advantage of the inimitable risk management reputation of Bear Stearns found themselves in a highly complex hedge fund investment program that relied on overworked junior personnel to manage a conflict reporting process required by federal

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for junior assistants,” according to the Massachusetts complaint. From the official start of Cioffi's fund, in October 2003, Joanmarie Pusateri, who had been at Bear Stearns since June 1986, was responsible for administrative and operational tasks, including obtaining written approval for trades with affiliates that were rife with potential for conflict

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deal with getting the consents in a timely fashion, wrote Pusateri that the BSAM administrator had given the approval for a deal with Bear Stearns but then the head of Bear Stearns compliance “squashed it … until further notice, no trading with Bear again.” The moratorium on trading with Bear raised questions in the

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the dedication to risk evaluation and management that has given us the ability to expand carefully and conservatively.” The Annual Report pointed with pride to Bear Stearns's number one positions in the United States for underwriting mortgage-backed securities, mortgage-backed residential securities, whole loans, and adjustable-rate mortgages. In

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off as a committee member,” Mooney replied. In his September 2007 congressional testimony, Kyle Bass, the managing partner of Hayman Capital who once worked at Bear Stearns, accurately defined the problem. “Unfortunately the relationship between the bond issuers and the [ratings agencies] presents a fundamental conflict of interest because the [ratings

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the change, according to analyst Diane Hinton (Sprinzen's colleague), “reflects our concerns about recent developments and their potential to hurt Bear Stearns' performance for an extended period. We believe Bear Stearns' reputation has suffered from the widely publicized problems of its managed hedge funds, leaving the company a potential target of litigation from

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own”: Australian, May 29, 2008. Chapter 2: The Confidence Game 15. “Being denied such a loan”: Roddy Boyd, “The Last Days of Bear Stearns,” Fortune, March 31, 2008. 18. “Though Bear Stearns's overall financing”: WS], May 28, 2008. 18. “We are now pretending”: Michael Shedlock on Mish's Global Economic Trend Analysis blog

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correspondence referred to regarding Lehman Brothers was made public at Richard Fuld's October 6, 2008, testimony before the House Committee on Oversight. 442. “With Bear Stearns”: Cassidy, NY, December 1, 2008. ACKNOWLEDGMENTS This book would have been inconceivable—literally—without any number of dedicated professionals at Doubleday. At the very top

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, and Suzette Fasano. A special thanks— for his insights and generosity of spirit—goes to Jimmy Cayne, the longtime CEO and personification of Bear Stearns. Others, not affiliated with Bear Stearns, were extremely helpful, too, including Frank E. Schramm III, Sandy and Barbara Lewis, Roger Lewis, Tim Geithner, Calvin Mitchell, Susan McLaughlin, Gary

Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase

by Duff McDonald  · 5 Oct 2009  · 419pp  · 130,627 words

Paulson, offering Dimon Morgan Stanley for the bargain basement price of $0 per share. At the government’s urging, Dimon had agreed to take over Bear Stearns for $2 a share in March 2008, in a whirlwind 48-hour deal. (The price was ultimately raised to $10.) The transaction had catapulted JPMorgan

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are coming to Washington to help.” Considered in a historical light, a takeover of Morgan Stanley would have been much more profound than that of Bear Stearns. Dimon was already being compared to John Pierpont Morgan, the legendary banker who was his company’s founder, and this deal would have meant a

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second-largest securities firm in the country after Merrill Lynch by 1980, and there were plenty of successful Jewish firms on the Street (Goldman Sachs, Bear Stearns, and Lehman Brothers, to name three), anti-Semitism still loomed large in other quarters. A broker from the start, Weill never lost the habits of

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a definitive refusal. (Eighteen years later, when Jamie Dimon insisted that the Fed actually get some skin in the game if he was to save Bear Stearns from bankruptcy, New York Fed chief Tim Geithner was more accommodating.) Corrigan’s decision wasn’t exactly surprising. Drexel had alienated almost every major firm

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Bank, Goldman Sachs, Merrill Lynch, J.P. Morgan, Morgan Stanley, Salomon Smith Barney, UBS, Société Générale, Lehman Brothers, and Paribas—save for one glaring exception: Bear Stearns. Phil Purcell, then head of Morgan Stanley, is said to have blurted out, “It is not acceptable that a major Wall Street firm isn’t

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participating.” Merrill Lynch’s chief, Herb Allison, agreed with this sentiment, asking Jimmy Cayne, the macho head of Bear Stearns, “What the fuck are you doing?” Cayne responded bluntly, “When did we become partners?” The Federal Reserve was second-guessed for intervening in the capital

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’s executives, including its copresidents, Alan Schwartz and Warren Spector; and its chief financial officer, Sam Molinaro. The problem: James Cayne, the egomaniacal head of Bear Stearns, told his board that he would take nothing short of a significant premium to Bear’s share price to accept an offer from Dimon. No

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acquisition, and they’re still on the ground putting together the mergers we’ve already done.” Despite repeated denials, the chatter continued. Rumors centered on Bear Stearns and Morgan Stanley, either of which would plug gaps in JPMorgan Chase’s portfolio—both had substantial brokerage units as well as prominent prime brokerage

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shit for our fixed income revenues.” In 2006, the company was ranked nineteenth in asset-backed CDO issuance, well behind Citigroup, Merrill Lynch, Lehman Brothers, Bear Stearns, and UBS. Instead of wondering whether those other firms were being lazy with their own capital, chasing the so-called “carry trade” on CDOs, critics

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baked Alaska and drink 2004 Louis Jadot Chassagne-Montrachet. Along with Dimon were Goldman Sachs’s CEO Lloyd Blankfein, Merrill Lynch’s Stan O’Neal, Bear Stearns’ Jimmy Cayne, and Lazard’s Bruce Wasserstein. Sandy Weill retired as chairman of Citigroup in 2006. A retirement party was held in the Egyptian Room

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alongside Lewis, happy to see their portfolios gaining. Investment bankers continued to book fees and mark huge gains from their mortgage-related underwriting and investments. Bear Stearns, the smallest of Wall Street’s major players, had turned in a record fourth quarter in 2006, the result of a decision to focus on

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JPMorgan Chase, were threatening to pull the plug and send both funds into default. In an attempt to head off the crisis, the copresident of Bear Stearns, Warren Spector, convened a meeting of the firm’s lenders, including Merrill Lynch, JPMorgan Chase, Goldman Sachs, and Bank of America, at the company’s

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. On Friday, August 1, the firm held a conference call, trying to calm investors’ nerves about the collapsed funds. On August 5, the CEO of Bear Stearns, James Cayne, forced Spector to resign. (It later emerged that Spector had unilaterally authorized a late-game $25 million injection into Cioffi’s funds, without

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his book to The Two Trillion Dollar Meltdown. (It may well have to be revised further.) Although they were not desperate for capital, executives at Bear Stearns concluded that a vote of confidence from a prominent outside investor might quiet the critics. Over the next few months, they held discussions with the

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.7 times, versus 19.2 times for Citigroup, 26.2 times for Goldman Sachs, 31.9 times for Merrill Lynch, and 33.5 times for Bear Stearns. The new year brought two milestones for Dimon. The first was professional. On January 16, JPMorgan Chase eclipsed Citigroup in market capitalization. The event was

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, the company’s sole president since the firing of Warren Spector in August, replaced him. The market was becoming increasingly skittish regarding the viability of Bear Stearns. By mid-January, the price on credit insurance for $10 million of Bear’s debt had risen to 2.3 percent annually: $230,000—double

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the financial crisis was knocking on his door, begging for help. • • • The first week of March seemed quiet on the surface, but chaos reigned inside Bear Stearns. Even though the company was on track to report solid earnings in its first quarter, trading partners were increasingly skeptical that it was a reliable

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there, including Ken Griffin of Citadel Investment Group, Bruce Kovner of Caxton Associates, and Steve Schwarzman of the Blackstone Group. There was no one representing Bear Stearns in the room; Schwartz had not even been invited. On the morning of Wednesday, March 12, Schwartz appeared on CNBC in an effort to deflect

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growing concerns about the company. “Some people could speculate that Bear Stearns might have problems, since we’re a significant player in the mortgage business,” he said to the anchor, David Faber. “None of those concerns are

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Zames. The discussion was still theoretical at that point, as the men speculated blow-by-blow on the events that would occur if Bear Stearns couldn’t open for business. Bear Stearns, after all, had trading positions with 5,000 firms and billions of dollars at risk. “It was a scary description of events

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secured funding would be good for “an initial period of up to 28 days,” followed by the statement that “JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company.” When Alan Schwartz and Bear’s chief financial officer, Sam Molinaro, received the release in

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aggravation. “We could have taken five years and spent $3 billion to build a new building, or just said, ‘Who cares about the rest of Bear Stearns, let’s just get the freaking building,’” recalls one JPMorgan Chase executive. “I kept saying, ‘Guys, we have to get that building.’” The Bear building

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board members agreed to continue pursuing both. They knew that Christopher Flowers was unlikely to be able to line up $20 billion of financing overnight. Bear Stearns, after all, had been unable to do the very same. At 6:00 P.M., the JPMorgan Chase executives held another roundtable discussion to get

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Sunday morning. He arrived to find that Cavanagh was not the only one souring on the deal. The first issue was Bear’s assets. Although Bear Stearns had told JPMorgan Chase that about $120 billion was “at risk” of further deterioration, the JPMorgan Chase team had concluded that the number was likely

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by the influential columnist Gretchen Morgenson added another dimension to the deal. In this article, “Rescue Me: A Fed Bailout Crosses a Line,” she called Bear Stearns “this decade’s version of Drexel Burnham Lambert, the anything-goes, 1980s junk-bond shop.” Morgenson wondered what the merit was in saving a firm

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conference call with investors, Mike Cavanagh walked through a six-page presentation. As part of the contract, JPMorgan Chase retained the right to buy the Bear Stearns building even if the merger failed. This was as important to some executives at JPMorgan Chase as anything else about the deal. “During the negotiations

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,” “the most powerful banker in the world,” and “a senior financial statesman,” and he was compared in numerous instances to J.P. Morgan himself. (Former Bear Stearns employees were not among those praising Dimon. One had sardonically taped a $2 bill to the front window of the bank. Others were busy selling

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. The third page of the presentation Cavanagh had made to investors on Sunday night included the following line: “[JPMorgan] will guarantee the trading obligations of [Bear Stearns] and its subsidiaries effective immediately.” The purpose of the guarantee had been to head off another run on the bank by assuring the market that

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disrespectful. By Wednesday, March 19, he had waited as long as he was prepared to wait, and scheduled a meeting with 400 managing directors of Bear Stearns in their second-floor auditorium. Standing with him on the dais were Steve Black and Bill Winters. Dimon tried a peacemaking approach—a wise move

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have made that guarantee shorter.” Mike Cavanagh is also philosophical about having had to go back to the negotiating table. “We’d latched ourselves to Bear Stearns at that stage with the guarantee,” he recalls. “So it was worth it to us the subsequent weekend to get more certainty around the outcome

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business owners, and our parents and children—are now invested in the financial system through pensions, 401(k)s, mutual funds, and the like. A Bear Stearns bankruptcy could well have touched off a chain reaction of defaults at other major financial institutions. That would have shaken confidence in credit markets that

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knew, albeit refined to the nth degree.” Wall Street and the financial media focused on who had been the chief beneficiary of the government intervention—Bear Stearns or JPMorgan Chase itself. JPMorgan Chase was a huge lender to Bear and was also its clearing bank. A default by the investment bank would

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he made almost none at all. Of Bear’s leveraged lending group, for example, only three of 100 people received offers. In asset management, when Bear Stearns brokers demanded the same kind of revenue split they had negotiated with the previous management, they were told in no uncertain terms what they could

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over to JPMorgan Chase as a nonexecutive vice chairman, Dimon had done nothing of the sort. Dimon took only six people from senior management at Bear Stearns—the former CEO Ace Greenberg, as well as Peter Cherasia, Jeff Mayer, Mike Nierenberg, Craig Overlander, and Jeff Urwin. And three of those six have

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.” Despite job-saving offers, many Bear employees chafed at the notion of working for JPMorgan Chase. Those with other options walked right out the door. Bear Stearns was an entrepreneurial place, and that fact ultimately caused its downfall. JPMorgan Chase was viewed as a widget factory, where everything fit into its own

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“de-risk” the balance sheet, by November 2008 the total was closer to $15 billion. (Remarkably, one source of significant loss was a “macro” hedge Bear Stearns had against most of the deteriorating positions on its books. When the deal was announced, most markets rallied—equities, fixed income, mortgages—sending the value

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dining rooms on the fiftieth floor of the company’s headquarters paying homage to predecessor companies such at Manufacturers Trust and the Bank of Manhattan. Bear Stearns executives didn’t seem to care much about history in any event. When JPMorgan Chase’s archivist Jean Elliott went to seek out Bear-related

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all looked fairly smart at the time. All three were later roundly condemned for seemingly haphazard responses to the more dramatic events that came later. Bear Stearns was neither the greatest deal of all time nor even Dimon’s greatest deal. Merging Bank One and JPMorgan Chase was a far more important

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time this concept was tested, it did not work. Both cycles seem to be declining in tandem with each other. Moreover, by buying the failing Bear Stearns, J.P. Morgan may have accentuated the negative impact of the capital market downturn.” (In the midst of all those challenges, however, Dimon’s softer

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was the beginning of the end.” The next day, credit default swaps on the company’s debt went for $800,000, higher than those of Bear Stearns right before its demise. On Friday, September 12, Jane Buyers-Russo, head of JPMorgan Chase’s investment banking team that covered financial institutions, called Lehman

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criticism from Lehman was unfair. After Morgan Stanley’s CEO John Mack called Dimon to complain that some of JPMorgan Chase’s new hires from Bear Stearns were telling his clients that Morgan Stanley was on the verge of collapse, Black and Winters sent a memo to employees instructing them that they

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administrative officer Frank Bisignano, and the head of strategy Jay Mandelbaum to head out to Seattle for further discussions on Sunday, March 16. When the Bear Stearns deal came out of nowhere, that team shrank to just Scharf and Mandelbaum, as Cavanagh and Bisignano were tied up. Scharf eventually decided he was

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careful observers of the ways and whims of the stock market, there was an unusual wrinkle to the plan. Usually—as was the case with Bear Stearns and on countless other occasions—regulators unveil their dramatic actions after the close on Friday so that the representative players will have the weekend to

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the bankruptcy was not replaced, and no executive was paid a change-in-control provision—a marked departure from the generous retention payments made to Bear Stearns executives in April. On December 1, JPMorgan Chase announced it was laying off 9,200 WaMu employees, about 21 percent of the total. (In February

…

’s reputation as a master negotiator. Whereas he paid pennies on the dollar for WaMu, Wells Fargo paid real money for Wachovia. And Dimon bought Bear Stearns for a song—with a government backstop—compared with Bank of America’s ill-considered and unsupported grab of Merrill. The notion of Dimon as

…

is close to Secretary of Education Arne Duncan through her work in the Chicago school system. (At one point, Dimon referred to the acquisition of Bear Stearns as a “mission not accomplished,” an unsubtle dig at then-president George Bush and his premature declaration of victory in Iraq.) After Obama’s victory

…

. Unlike Weill, Jamie Dimon wasn’t pursuing opportunities. He was taking advantage of them. The U.S. government had practically insisted that Dimon take over Bear Stearns. The last time the government had talked to Weill about acquisitions, in 2005, it was to say that his company, Citigroup, should lay off for

…

. Steve Black, Winters’s counterpart, in Anguilla just before the dinner during which Dimon called to alert him to the impending sale of Bear Stearns. JPMorgan Chase obtained Bear Stearns’s headquarters at 383 Madison Avenue as part of the purchase of the investment bank in March 2008. Some JPMorgan Chase executives urged Dimon

Too big to fail: the inside story of how Wall Street and Washington fought to save the financial system from crisis--and themselves

by Andrew Ross Sorkin  · 15 Oct 2009  · 351pp  · 102,379 words

before Congress’s Joint Economic Committee in March 2007. By August 2007, however, the $2 trillion subprime market had collapsed, unleashing a global contagion. Two Bear Stearns hedge funds that made major subprime bets failed, losing $1.6 billion of their investors’ money. BNP Paribas, France’s largest listed bank, briefly suspended

…

out exactly what these assets are worth.) Without a price the market was paralyzed. And without access to capital, Wall Street simply could not function. Bear Stearns, the weakest and most highly leveraged of the Big Five, was the first to fall. But everyone knew that even the strongest of banks could

…

the handful of people who controlled the economy’s fate—during the critical months after Monday, March 17, 2008, when JP Morgan agreed to absorb Bear Stearns and when United States government officials eventually determined that it was necessary to undertake the largest public intervention in the nation’s economic history. For

…

flight back, Fuld had thought about buying Bear himself. Should he? Could he? No, the situation was far too surreal. JP Morgan’s deal for Bear Stearns was, he recognized, a lifesaver for the banking industry—and himself. Washington, he thought, was smart to have played matchmaker; the market couldn’t have

…

paper, and the market hadn’t even opened. On CNBC, Joe Kernen was interviewing Anton Schutz of Burnham Asset Management about the fallout from the Bear Stearns deal and what it meant for Lehman. “We’ve been characterizing Lehman Brothers as the front, or ground zero, for what’s happening today,”

…

Group Holdings, the largest bank in Southeast Asia, had circulated an internal memo late the previous week ordering its traders to avoid new transactions involving Bear Stearns and Lehman. Paulson was concerned that Lehman might be losing trading partners, which would be the beginning of the end. “We’re going to

…

the latest rumor swirling around the trading floor: A bunch of “hedgies,” Wall Street’s disparaging nickname for hedge fund managers, had systematically taken down Bear Stearns by pulling their brokerage accounts, buying insurance against the bank—an instrument called a credit default swap, or CDS—and then shorting its stock. According

…

New York, told Bloomberg Television. Richard Bernstein, the respected chief investment strategist for Merrill Lynch, had sent out an alarming note to clients that morning: “Bear Stearns’s demise should probably be viewed as the first of many,” he wrote, tactfully not mentioning Lehman. “Sentiment is just beginning to catch on as

…

market fears, a great deal was still riding on her performance. Surely everyone listening in would ask the same questions: How was Lehman different from Bear Stearns? How strong was its liquidity position? How was it valuing its real estate portfolio? Could investors really believe Lehman’s “marks” (the way the

…

“I’m getting it from all sides,” he confided. To make matters worse, it was a presidential election year. On Monday, a day after the Bear Stearns deal was announced, Democratic candidate Senator Hillary Clinton, who at the time had a slight lead in national polls, criticized the bailout, going so far

…

it clear that the administration would have to confront at least one serious problem: the subprime mortgage mess, which had already begun to have repercussions. Bear Stearns and others were deeply involved in this business, and he needed to find a way to obtain “wind down authorities” over these troubled broker-dealers

…

failing banks safely into receivership and auction them off. But the FDIC had no authority over investment banks like Goldman Sachs, Morgan Stanley, Merrill Lynch, Bear Stearns, and Lehman Brothers, and unless Paulson was given comparable power over these institutions, he said during the meeting, there could be chaos in the market

…

its resident policy-making brain. A Republican and free-market champion, Nason had been warning at these meetings for months about the possibility of another Bear Stearns–like run on one or more banks. He and other Treasury officials had come to recognize that Wall Street’s broker-dealer model—in which

…

Persian Gulf. But it clearly wasn’t enough, and the banks had already been forced to tap the investors with the deepest pockets. With the Bear Stearns situation seemingly behind them, Paulson focused his attention this morning on what he thought would be the next trouble spot: Lehman Brothers. Investors may have

…

an isolated problem, as everyone seemed to be suggesting. As unpopular as it might be to state aloud, he intended to stress the fact that Bear Stearns—with its high leverage, virtually daily reliance on funding from others simply to stay in business, and interlocking trades with hundreds of other institutions—was

…

. “Shelby’s going to be difficult,” Nason warned. That was an understatement. Shelby was deeply unhappy with Paulson’s performance, not only because of the Bear Stearns bailout, but in response to another recent Paulson project: a provision in Bush’s economic stimulus package, introduced just days after the bailout, that raised

…

, and the Treasury Department, from any last-minute surprises. Staffers carefully checked that morning’s newspapers to make certain there was no new revelation about Bear Stearns or some harsh opinion from a columnist that a senator might quote that morning. Happily, there was nothing. Steel made the short trip from Treasury

…

with activity, as camera crews set up their equipment and photographers tested the light. As Steel took his seat, he noticed that Alan Schwartz of Bear Stearns had already arrived, even though he was not scheduled to testify until that afternoon, and greeted him. To Steel’s immediate left was Geithner; to

…

fireworks started almost immediately. Committee members were sharply critical of the regulators’ oversight of financial firms. More important, they questioned whether funding a takeover of Bear Stearns had created a dangerous precedent that would only encourage other firms to make risky bets, secure in the knowledge that the downside would be borne

…

almost giddy at the prospect of speaking at today’s hearing. While most CEOs dread being hauled in front of Congress—Alan D. Schwartz of Bear Stearns had spent days reviewing his testimony with his high-powered Washington lawyer, Robert S. Bennett—Dimon considered his first chance to testify in front of

…

began to stumble severely after the market for subprime mortgages imploded, JP Morgan stayed strong and steady. Indeed, a month before the panic erupted over Bear Stearns, Dimon boasted of his firm’s “fortress balance sheet” at an investors’ conference. “A fortress balance sheet is [sic] also a lot of liquidity

…

in the value of their toxic assets. The Federal Reserve issues non-recourse loans to banks, as it did in the JP Morgan takeover of Bear Stearns. The Federal Housing Authority refinances loans individually. Treasury directly invests in the banks. As he listened, Bernanke stroked his beard and occasionally offered a knowing

…

from us?” Diamond was momentarily speechless; Treasury, he realized, was clearly trying to formulate strategic solutions in the event that Lehman found itself in a Bear Stearns-like situation. From long acquaintance he knew Steel to be a no-nonsense pragmatist, not someone who idly floated trial balloons. “I’m going to

…

problem, interjected on behalf of Fuld. “What are you trying to accomplish, Jim?” he asked. “The shorts are destroying great companies,” Cramer replied. “They destroyed Bear Stearns, and they’re trying to destroy Lehman,” he said, perhaps trying to play to Fuld’s ego. “I want to stop that.” “If you’re

…

headlines that day struck him as very odd. All that summer, the implosion in subprime mortgages had been reverberating through the credit markets, and two Bear Stearns hedge funds that had large positions of mortgage-backed securities had already collapsed. Now BNP Paribas, the major French bank, had announced that it was

…

saw at Lehman, suggesting during a presentation to investors that “from a balance sheet and business mix perspective, Lehman is not that materially different from Bear Stearns.” That comment had gone largely unnoticed in the market, but it did raise the ire of Lehman and led to an hour-long phone call

…

its stock plummeting. He recounted how he had listened intently to Callan’s performance during her by now famous earnings call the day after the Bear Stearns fire sale. “On the conference call that day, Lehman CFO Erin Callan used the word ‘great’ fourteen times; ‘challenging’ six times; ‘strong’ twenty-four

…

a candidate to buy Lehman Brothers; Fink had only encouraged the speculation by appearing on CNBC earlier that day and declaring: “Lehman is not a Bear Stearns situation. Lehman Brothers is adequately structured in terms of avoiding a liquidity crisis.” The two executives were close—Fink, a fifty-five-year-old financier

…

of both companies were ousted. Fannie and Freddie were still reeling from the accounting scandals when in March 2008, just days after the rescue of Bear Stearns, the Bush administration lowered the amount of capital the two companies were required to have as a cushion against losses. In exchange, the companies pledged

…

market really was. An assured speaker, Parr launched into his regular skeptical boardroom speech. “It’s tough out there,” he said forebodingly. “Having been through Bear Stearns and MBIA”—two former clients—“there are some lessons we’ve learned.” Trying to make certain that Lehman’s directors understood the gravity of the

…

situation they were facing, he told them, “Liquidity can change faster than you can imagine,” suggesting they should not think Bear Stearns was a once-in-a-lifetime event. “Rating agencies are dangerous,” he went on. “Wherever you think you stand with the rating agencies, it’

…

Willumstad’s argument. “I can appreciate that,” Willumstad replied. “You never did it for brokers before either, but obviously there’s some room here.” After Bear Stearns’ near-death experience, the Fed had decided to open the discount window to brokerage firms like Goldman Sachs, Morgan Stanley, Merrill Lynch, and Lehman. “Yes

…

entire financial system, the Fed might indeed have broader obligations that might require intervention. It was precisely this view that influenced his thinking in protecting Bear Stearns. By this year’s conference the Bernanke Doctrine had come under attack. As Bernanke, looking exhausted, sat slumped at a long table in the lodge

…

in some of the biggest takeover battles in corporate America. Earlier in the year he had helped advise JP Morgan Chase in its acquisition of Bear Stearns. His firm—Wachtell, Lipton, Rosen & Katz—was synonymous with corporate warfare. One of its founding partners, Martin Lipton, had devised among the most famous

…

sector codified. He said that he wanted AIG to be anointed a primary dealer, which would give it access to the emergency provision enacted after Bear Stearns’ sale, and thus enable it to tap the same extremely low rates for loans available only to the government and other primary dealers. Geithner stared

…

.” Perhaps most important, Paulson stressed, was that they couldn’t afford the political liability of putting up government money for Lehman as they had for Bear Stearns. “I can’t be Mr. Bailout,” he insisted, and given that everyone on the conference call had already lived through the backlash of that

…

-dealers did: by regularly rolling over short-term commercial paper contracts that had become subject to the same erosion of confidence that had brought down Bear Stearns—and now Lehman Brothers. To them the waning trust only suggested the nefarious handiwork of short-sellers. At one point, John Mack questioned the

…

that federal officials—including Paulson, Bernanke, and Geithner—contributed to the market turmoil through a series of inconsistent decisions. They offered a safety net to Bear Stearns and backstopped Fannie Mae and Freddie Mac but allowed Lehman to fall into Chapter 11, only to rescue AIG soon after. What was the pattern

…

the firm.” Once the Barclays deal failed, it appears that the United States government truly did lack the regulatory tools to save Lehman. Unlike the Bear Stearns situation, in which JP Morgan was used as a vehicle to funnel emergency loans to Bear, there was no financial institution available to act as

…

.gov/products/GGD-94–133. “The impact on the broader economy”: “Chairman Bernanke Testifies Before Joint Economic Committee,” U.S. Fed News, March 28, 2007. Bear Stearns’ hedge funds failing: In July 2007, the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund caved in

…

to vomit!”: A version of this story was previously reported by Kelly, Street Fighters, 204. raise the price to $10: Kate Kelly, “The Fall of Bear Stearns: Bear Stearns Neared Collapse Twice in Frenzied Last Days,” Wall Street Journal, May 29, 2008. “I could see something nominal, like one or two dollars per share

…

25, 2008. Bear’s shareholders and employees had practically revolted: Ibid. “This isn’t a shotgun marriage”: Moldaver, as reported by Kelly, “The Fall of Bear Stearns,” Wall Street Journal. “All these years of deregulation by the Republicans”: Maura Reynolds and Janet Hook, “Critics Say Bush Is Out of Touch on the

…

a Hearing of the Senate Banking, Housing and Urban Affairs Committee,” Federal News Service, April 3, 2008. “I am very troubled by the failure of Bear Stearns”: “Panel I of a Hearing of the Senate Banking, Housing and Urban Affairs Committee,” Federal News Service, April 3, 2008. CHAPTER FOUR private dinner to

…

Holdings Inc. Earnings Conference Call,” September 18, 2007. “This is crazy accounting”: Lindgren, “The Confidence Man,” New York. “Lehman is not that materially different from Bear Stearns”: David Einhorn, “Private Profits and Socialized Risk,” Grant’s Spring Investment Conference, April 8, 2008. “I can only feel that you set me up”: Einhorn

…

.php. “Our credibility has eroded”: Yalman Onaran, “Lehman Drops Callan, Gregory; McDade Named President,” Bloomberg News, June 12, 2008. CHAPTER SEVEN “Lehman is not a Bear Stearns situation”: “BlackRock’s Fink Says Lehman Not Another Bear—CNBC,” Reuters, June 11, 2008. Fleming had helped broker a 2006 deal to merge Merrill’s

…

26, 2009. the headline “King Henry”: Newsweek, September 29, 2008. a quote from Governor Jon Corzine: “There hasn’t been a consistent pattern…. We save Bear Stearns but not Lehman. The market is going to have a hard time sorting through what the underlying principle is.” Daniel Gross, “The Captain of the

…

Greenspan, Alan. The Age of Turbulence: Adventures in a New World. New York: Penguin Press, 2007. Kelly, Kate. Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street. New York: Portfolio, 2009. Langley, Monica. Tearing Down the Walls: How Sandy Weill Fought His Way to the Top

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