What went on when Bear Stearns fell
TEXT OF INTERVIEW
Kai Ryssdal: Historians are going to be trying to figure out what happened to the U.S banking industry for years to come. But this much we know right now. That over the course of 72 hours on a weekend in March of last year, the credit crisis went from abstract to very, very real as the investment bank Bear Stearns crumbled.
Kate Kelly covered the final days of Bear for The Wall Street Journal. She’s turned it into a book called “Streetfighters,” an hour by hour account of how it happened and who was there. Men like Jimmy Cayne, the longtime CEO ’til he was replaced by Alan Schwartz for the company’s last three months. Also chief financial officer Sam Molinaro. Kelly says all three of them made mistakes, but Bear’s problems were more systemic, as became clear two years ago this coming summer.
KATE KELLY: There were two internal hedge funds. And one important thing they were tied to was sub-prime or very risky mortgages. So these hedge funds basically fell apart, ran out of cash. Their lenders wanted cash back. Their clients also wanted their money back. And essentially they filed for bankruptcy in late July of 2007.
Ryssdal: And then through that fall the credit crisis gets worse into the spring of 2008. And then one Thursday, Alan Schwartz and Sam Molinaro wake up to discover that Bear’s basically out of money.
KELLY: Essentially that is what happened. It was phenomenal. They started out on the Monday of that week with about $18 billion bucks in cash, which was the biggest amount of cash on hand they had ever had. But as matter of fact, cash was flying out their doors day to day as worried clients said, “You know what, we’re not sure Bear is going to be around any longer. We want our money back while we can still get it.” And Bear was very vulnerable to that because they were overly dependent on an overnight mechanism for funding. Essentially Bear had to refresh its funding every single morning through loans that it got on a short-term basis from other banks and financial players, which meant they were very, very much exposed to the vicissitudes of the market. And if the market had doubts, they were in trouble.
Ryssdal: What’s your take on whether they were really surprised, or if they knew in their heart of hearts that something wasn’t right.
KELLY: I think they were absolutely shocked. When they got together for a meeting on Thursday evening and realized they had gone from $18 billion bucks on Monday to about $3 billion bucks at the end of that day, they were absolutely gobsmacked.
Ryssdal: As we know now, though, the whole financial structure in this country is in some series trouble. All the Wall Street banks have gone through huge losses, they’ve transformed themselves. Why was Bear Stearns the first one to be hit so hard?
KELLY: Part of it is that they were small. I mean of the major half-dozen investment banks they were the smallest. They were also one of the most levered, and by that I mean they borrowed the most money against the cash that they had on hand. They were not diversified in terms of the businesses that they did. So, for example, if they took a huge hit on mortgages, or in their bond department, they didn’t necessarily have business in Europe that would sort of offset what was going on in the U.S. So they had a number of points of vulnerability. But the other issue was they had real huge PR problem. And that PR problem started when the hedge funds collapsed. And that failure was just viewed as a colossal management snafu.
Ryssdal: It really sounds from all you’ve written in the book that the top layer of management in this company was completely disengaged long before things starting going south.
KELLY: That’s generally true, I think. The way the firm was set up, you had Jimmy Kane at the top. Jimmy Kane was not a micro-manager, I think by his own admission. He was often gone, literally out of the office, doing various things, playing bridge, playing golf. He was very much of a delegator. He sort of liked to look at the big picture, and the big picture was good for a long time. I mean, Bear Stearns was very much of a if it ain’t broke don’t fix it mentality.
Ryssdal: Are there any heroes in this story?
KELLY: I think there were people at Bear Stearns who worked their tails off and really did what they could do that weekend and previously to have the best possible outcome. And I’ve dedicated the book to the 14,000 people who worked there. Many of them were hard-working people who absolutely loved their jobs, invested their own money in company stock and got hurt. The streetfighters that I describe in my title, did a yeoman’s job that weekend of just taking a horrendous situation and trying to pull together the data that suitors needed like J.P. Morgan or Chris Flowers who was also in there looking, so they could help sell their company. And it had to be an incredibly painful thing to do, but they did it.
Ryssdal: Kate Kelly from the Wall Street Journal. Her book about Bear Stearns is called “Streetfighters: The Last 72 hours of Bear Stearns, the Toughest Firm on Wall Street.” Kate, thanks a lot.
KELLY: My pleasure. Thanks for having me.
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