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What if Bear Stearns...

The New Yorker's James Surowiecki

TEXT OF INTERVIEW

Kai Ryssdal: Even a year later it's not entirely clear what the near-death of Bear Stearns means. Washington saved Bear, but let Lehman go under six months later. And we are $700 billion into a bailout of the entire financial industry, with who knows how much more to come. James Suroweicki is a staff writer at The New Yorker. He writes the "Financial Page" for the magazine. Welcome to the program.

James Surowiecki: Thanks for having me on.

Ryssdal: Are you surprised at all about where Bear Stearns has left us come today?

Surowiecki: Well, I am surprised. I think what I would say is I actually don't really think that Bear, per se, left us where we are. But the reason I'm so surprised is, I actually had kind of thought the government had a handle on the situation. And so I really was fairly confident that the downside damage was going to be relatively contained, and you know, I could not have been more wrong.

Ryssdal: Well, let's play a little what if here. What if there had been more money available to Bear Stearns? What if the Fed had opened up its liquidity windows? What if Sec. Paulson had been a little bit more proactive at the time? Could Bear really have been saved instead of just being sucked up into JP Morgan?

Surowiecki: My suspicion is that if the window had been opened -- in other words, if investment banks had been able to borrow from the Fed as they were after Bear Stearns -- Bear probably could have stayed afloat. But, I do think that there were fundamental issues with the company. I mean, it was a relatively small investment bank, it was a big player in subprime, and you know, was notorious for its risk taking. And so while it's certainly possible that they could have stayed afloat, I think the lack of confidence that people had in Bear by late February, early March, would have made it hard for them to construct a really good business going forward.

Ryssdal: You wrote actually at some point in the magazine, in the piece about Bear Stearns, you said, you know it's a good thing that Bear survived. You also said it's also a good thing that it almost died. Explain that for us, would you?

Surowiecki: Well, what I meant by that was that I really thought that the Federal Reserve and the Treasury Department had to come to the rescue. If it had genuinely failed in the way that Lehman eventually did, that it would have reeked havoc. But what I thought at the time was that the fact that Bear Stearns' shareholders in particular were, you know, pretty severely punished -- the initial price that the deal was done at was $2 a share.

Ryssdal: Right.

Surowiecki: And I thought that was really important because, you know, that was going to make the Wall Street decision-makers more cautious going forward, it was going to make investors more skeptical. And so I thought all of that together meant that it was unlikely we were going to get another Bear Stearns. Lehman Brothers appears to have taken away the lesson in part that, you know, since the liquidity window was open and since they had come in some late form to the rescue of Bear, that it wasn't necessary to be as cautious as they should have been.

Ryssdal: As we try to make our way through what is left of the banking crisis in this country, whether it's almost over or has a ways to run yet, do the lessons of Bear apply?

Surowiecki: You know, for me, the lesson is systemic risk exists. And that if you don't act, then you know, the problems are going to get worse rather than better. But I think, you know, the original sin was committed much longer ago; it was when we allowed these institutions to get too big and too important to the system as a whole. And when we allowed companies like Bear Stearns to leverage themselves up 30 or 40 times. You know, when they were able to borrow so much money that even a small decline in the value of their assets basically could threaten the existence of the entire firm. So I think those are the two key lessons that I get from Bear Stearns.

Ryssdal: James Surowiecki. He's a staff writer for The New Yorker magazine. Thanks a lot.

Surowiecki: Thanks for having me on.

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