The Rise and Fall of Bear Stearnsby Alan C. Greenberg
On March 16, 2008, Alan Greenberg, former CEO and current chairman of the executive committee of Bear Stearns, found himself in the company’s offices on a Sunday. More remarkable by far than the fact that he was in the office on a Sunday is what he was doing: participating in a meeting of the board of directors to discuss selling the company he had worked decades to build for a fraction of what it had been worth as little as ten days earlier. In less than a week the value of Bear Stearns had diminished by tens of billions of dollars. As Greenberg recalls, "our most unassailable assumption—that Bear Stearns, an independent investment firm with a proud eighty-five-year history, would be in business tomorrow—had been extinguished. . . . What was it, exactly, that had happened, and how, and why?" This book provides answers to those questions from one of Wall Street’s most respected figures, the man most closely identified with Bear Stearns’ decades of success.
The Rise and Fall of Bear Stearns is Alan Greenberg’s remarkable story of ascending to the top of one of Wall Street’s venerable powerhouse financial institutions. After joining Bear Stearns in 1949, Greenberg rose to become formally head of the firm in 1978. No one knows the history of Bear Stearns as he does; no one participated in more key decisions, right into the company’s final days. Greenberg offers an honest, clear-eyed assessment of how the collapse of the company surprised him and other top executives, and he explains who he thinks was responsible. This is a candid, fascinating account of a storied career and its stunning conclusion.
"Whoever coined the adage about hindsight being twenty-twenty didn’t make any allowance for astigmatism or myopia. Whose hindsight? And from what distance? A picture clarifies or blurs with the passage of time, and whatever image emanates at a given instant is colored by the biases of the observer. Knowing that my perceptions of the fall of Bear Stearns are inevitably somewhat subjective, I’ve tried to make sense of exactly what happened when and how this or that development along the way contributed to the ultimate outcome. I’ve wanted to get a fix on the moment when we ceased controlling our own destiny—not out of intramural curiosity but because that loss of control resonated and replicated globally. For those of us who across decades gave so much of ourselves to Bear Stearns, what took place during a single week in March 2008 was a watershed in our lives. With sufficient time and distance, as the context expanded, we could recognize it as the signal event of an enormous disruption that the world will be struggling to recover from for years to come."
—from THE RISE AND FALL OF BEAR STEARNS
The New York Times
—Norman Pearlstine, Businessweek
- Simon & Schuster
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The Rise and Fall of Bear Stearns
By Alan C. Greenberg
Simon & SchusterCopyright © 2010 Alan C. Greenberg
All right reserved.
ON MARCH 16, 2008, I WAS AT WORK AT Bear Stearns, but in a distinct departure from my usual routine. For one thing, it was a Sunday, and the last time I had worked weekends was during the 1950s, when the stock market had Saturday trading hours. This particular Sunday was drizzly and grayfitting weather (actually, a squall with golf-ball-size hail plus an earthquake would have been more like it) for confronting a calamity that even in my gloomiest risk calculations I hadn't seen coming. Shortly before noon, I went to our headquarters at 383 Madison Avenue for an emergency meeting of the corporate board of directors. The week just ended had been the most maddening, bizarre, and bewildering in our eighty-five-year history.
Occasional bad news is inevitable, but I've tried to order my life to avoid getting blindsided. Sixty-one years ago I moved to New York and found work as a clerk at Bear Stearns, an investment firm that had 125 employees. Before I turned forty, I was running the place. At its peak, Bear Stearns employed almost 15,000 people. Along the way, my formal titles included chief executive officer, chairman, and chairman of the executive committee; my principal occupation was and continues to be calculating and managing risks.
My workday typically started off like this: out the door by 8:00 a.m. and at my desk by 8:15, where my morning reading consisted of the Wall Street Journalat home I'd already digested the New York Times and the New York Postand printed reports that specified how various departments that handled the firm's capital had performed the previous day. If a trader had an especially good day, I'd probably call to congratulate him. If the opposite occurred, I'd want to find out what happened. Before the markets opened at 9:30, I'd usually handled more than a dozen phone calls. As the day progressed, I'd be easy to get hold of but hard to keep on the line. Most phone conversations that last longer than thirty seconds, I find, have reached a point of diminishing returns. I have many interests and hobbies, but making small talk isn't one of them.
Anyone who invests money and neglects to calculate the risks at hand with a cold eye has no business being in our business. Contrary to common belief, securities markets are not casinos, and the last thing I ever want to depend upon is getting lucky. The best risk managers instinctively anticipate the fullest range of plausible outcomes. Maintaining that discipline, I understood early on, was indispensable to long-term success.
It would be disingenuous to suggest that making money is not a reasonable way of keeping score. For any financial institution, it's obviously the essential priority. But I never regarded making money, either when Bear Stearns was a private partnership or after it became a public company, as an end in itself. The more Bear Stearns flourished, the greater the variety of products and services we offered our clients, the more our capital grew, the more people we employed, and thus the more families that depended upon the well-being of the enterprise, the deeper was my conviction that we existed, above all, for the purpose of existing. On any given day, my ultimatepriority was that we conduct ourselves so that Bear Stearns would still be in business tomorrow.
THE PREVIOUS Monday morning our stock price had begun dropping, and by noon it was off 10 percent, from $70 to $63 a share. Part of this decline was attributable to Moody's, the bond-rating agency, having just downgraded some of our corporate debt. But most of the damage was being inflicted by a much more insidious factor, a groundless rumor. (Do rumors come from the same neighborhood where the notorious they hold their conspiratorial get-togethers?) This one surfaced first in feedback picked up by some of our traders: Bear Stearns, so it was being said on the Street, had liquidity problems. In other words, we might not have enough capital or credit to fund our daily operationsthe billions of dollars of trades that we processed and settled for our biggest clients, including banks, mutual funds, hedge funds, pension funds, and insurance companies.
The interdependent relationships between banks and brokerages and institutional investors strike most laymen as impenetrably complex, but a simple ingredient lubricates the engine: trust. Without reciprocal trust between the parties to any securities transaction, the money stops. Doubt fills the vacuum, and credit and liquidity are the chief casualties. Bad news, whether it derives from false rumor or verifiable fact, then has an alarming capacity to become contagious and selfperpetuating. No problem is an isolated problem.
The sharp decline in our stock price was plenty disturbinga billion dollars of market capitalization had evaporated, like that. But no one that I was aware of at Bear Stearns had begun to panic, largely because for several months disappointment had been a staple of our diet. In the summer of 2007, two of our real estate hedge funds failed, a fiasco that cost us $1 billion and did not exactly enhance the firm's reputation. This part of our business in recent years had accounted for a large percentage of our trading volume and an equally large percentage of profits, but as the real estate bubble deflated our inventory of distressed assets inflateda highly leveraged portfolio of mortgage-backed securities that was a drag on our balance sheet and our morale. In the fourth quarter, we recorded our first loss since becoming a publicly owned company in 1985. Still, in the quarter just ended, though the results hadn't yet been officially announced, we had turned a small profitnot great, but better than a minus sign. And as far as liquidity was concerned, we had a cash reserve of $18 billion.
What we didn't have was any ability to stifle the rumors, which were no longer being whispered but broadcast on the financial-news cable channels. When a reporter from CNBC called to ask about alleged liquidity problems, I told her that the notion was “totally ridiculous.” That comment got broadcast, too, but evidently didn't do much good. The next day a number of hedge funds closed their accounts and by the following afternoon our cash reserve was more than $3 billion lighter. By Thursday enough lenders had cut off our access to overnight credit that we confronted an excruciating choiceeither a shotgun marriage with another firm that would assume our liabilities while swallowing what remained of Bear Stearns's equity, or a bankruptcy filing. When the market closed for the weekend, our stock was trading in the low thirtiesfourteen months earlier, it had peaked at $172.69and we knew that come Monday we would have been bought or we would be no more. Without a doubt, we would never again control our own destiny.
Throughout the weekend swarms of bankers and investment bankers and mergers-and-acquisition lawyers and bankruptcy lawyers and tax and securities specialists, as well as officials from the Federal Reserve Bank and the Department of the Treasury, worked round the clock. Two potential buyers scrutinized our books and both were handicapped by an inability to judge the magnitude of risk. For starters, which of our assets were genuine assets? How do you ascribe values to unmarketable securities? By Sunday morning only JPMorgan Chase remained. When I left home for the directors' meeting, I anticipated that I was on my way to contemplate whatever offer Morgan had placed on the table. By the time I arrived, the offer had been withdrawn, and I was advised that I might as well go home. Which is where I was a half-hour later when I got another call, urging me to come back.
Our board of directors convened at 1:00 p.m., six hours before the Monday morning opening of the markets in Australiathe absolute deadline for making a deal. If Bear Stearns went under, the Fed and Treasury had insisted, the falling dominoes could lead to global economic chaos. Only after the Treasury had agreed to lend $30 billion, using as collateral the highest-quality mortgage-backed securities in Bear Stearns's portfolio, did Morgan's leadership find that line of argument persuasive. (Quid pro quo, the Fedthat is, American taxpayersstood to make a profit if those securities could later be sold at a premium, and Morgan agreed to absorb the first billion dollars of potential losses.) The biggest losers, obviously, would be Bear Stearns's stockholders. The previous day, we'd been led to expect that Morgan would bid in the range of $8 to $12 a share, but that was yesterday. Now Alan Schwartz, our chief executive officer, told us to brace ourselves for a price closer to $4.
His predecessor, James E. (Jimmy) Cayne, who was still the chairman of the boardbut who would have been in Detroit playing in a bridge tournament if Alan hadn't convinced him to return to New Yorkwas furious. At $4 a share, he argued, why not just file for bankruptcy? A few other people in the room shared Jimmy's sense of frustration, but he was by far the most vehement. On the face of it, his reaction was understandable: he owned 5.66 million shares, a stake that had once been worth more than a billion dollars. But did his outrage reflect primarily a concern for his own well-beingI felt confident that Jimmy himself would still be able to pay the grocery and electric and rent billsor that of our employees?
What I knew for certain was that bankruptcy would mean liquidation, an outcome to be avoided at virtually any cost. A very high proportion of Bear Stearns's personnel had invested the bulk of their life savings in Bear Stearns stock. Liquidation would render the stock worthless and put more than 14,000 people on the street.
The mood in the boardroom didn't improve when the formal, final bid from Morgan materialized. They were offering two dollars, not four. That offer put the total value of the company, with enormous contingent liabilities built into the price, at $263 million, or roughly one-quarter of the market value of our most valuable illiquid asset, our forty-two-story corporate headquarters.
“I am not taking $2,” Jimmy said.
“Jimmy, if we don't take $2 we'll get zero,” I told him. “If they're only offering fifty cents we should take it because it means we're still alive. When you're dead nothing can happen to you except you'll go to heaven or hell, maybe. You want us to declare bankruptcy this evening?”
He didn't say anything else that I recall; not that there was much else to be said at that moment. Though we barely beat the 7:00 deadline, we did, in fact, make a deal. You could argue that we'd undergone a multiple organ transplant and were on life support. Or that, one-upping Dr. Frankenstein, several of our healthy organs had been grafted to another body. Either way, parts of us were still alive. A half hour after the vote, I got into a taxi and went home, feeling both heartsick and relieved. In the morning, I'd be back at my desk.
Nothing that had occurred that day or that week undermined my belief in the management principles and investing discipline I'd lived by throughout my career. But there was no escaping that what qualified in my world as a cataclysmic event had taken place, and none of us could confidently predict the particulars of what would come next. Our most unassailable assumptionthat Bear Stearns, an independent investment firm with a proud eighty-five-year history, would be in business tomorrowhad been extinguished. How were we to envision the future? What was it, exactly, that had happened, and how, and why?
© 2010 Alan C. Greenberg
Excerpted from The Rise and Fall of Bear Stearns by Alan C. Greenberg Copyright © 2010 by Alan C. Greenberg. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Meet the Author
Alan C. Greenberg is the former CEO and Chairman of the Board of Bear Stearns. He is currently vice chairman emeritus of JP Morgan Chase. He is the author of Memos from the Chairman.
Mark Singer is a staff writer for The New Yorker . He is the author of several books, among them Funny Money and Character Studies.
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This book was a great depiction of Ace and Bear Stearns I worked at Bear for 25 years in their LA office. Alan Greenberg was an amazing leader. He was very gracious and accessible. If you asked, he met with your clients. He always wanted to hear input if you had a great idea. He created a very entrepreneurial environment. He would visit the office and tell us don't trade on margin and sell if your down 30%, always return phone callls the same day...He did magic tricks for our kids , he fostered an environment where if you needed help you could always pick up the phone and call him. We are who we are today because of him. After 2008 and the fall of Bear I ran out and read many of the books out there as I experienced the "fall" first hand. We all lost a lifetime of options and stock which was our retirement and kids college funds This was the book that resonated the most with me, knowing Alan Greenberg and having first hand experiences with some of the other characters. I feel very fortunate to have grown up under his reign. His principals and work ethic are my core today and I attribute them to my success