Mauled

By David Ott

For 85 years, Bear Stearns was one of the most storied, venerable investment banks on Wall Street.

In 2008, Bear found itself at the center of an old-fashioned bank run and was forced to sell itself to J.P. Morgan in a nearly overnight deal engineered by the Federal Reserve. Many financial institutions were already under stress during this early phase of the crisis, but Bear was the first major domino to fall.

The final days of Bear are told in a riveting narrative by Kate Kelly in Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street. This is her first and it reads with the pace and excitement of a John Grisham legal thriller, but with the facts and authenticity of a Wall Street Journal article, where Ms. Kelly works as a journalist.

Bear was as a tough-guy’s firm, always on the hunt for employees who were poor, smart and a deep desire to be rich; known simply as PSDs. Unlike many white shoe firms, Bear was less interested in pedigree and more focused on profits.

The old regime run by Alan ‘Ace’ Greenberg had a reputation for strong risk management along with those profits, believing it was better to serve as a casino and let the customers do the betting.

This attention to risk deteriorated under CEO Jimmy Cayne, who seemed less interested in managing the day-to-day management of the firm and more concerned about playing bridge or golf and smoking pot. The book paints a portrait of an out-of-touch manager who maintained power by installing weak lieutenants and an even weaker board of directors.

While the actual demise was swift, it was a long time in the making. The origins of Bears problems begin with policy changes from Congress and the SEC.

In 2000, Congress passed legislation that allowed financial derivatives like credit default swaps (CDS) to escape oversight by the SEC, the Federal Reserve, and state regulators, leaving the Commodity Futures Trading Commission (CFTC) with very limited supervision.

Then in 2004, the SEC waived its leverage rules for the top five investment banks. Goldman, Morgan, Merrill, Lehman and Bear could go from a maximum 12:1 debt-to-net capital ratio to whatever the market would allow. By the end of 2007, Bear was leveraged 35.5:1.

These policy changes along with record low interest rates and the associated housing bubble, paved the way for Bear to maintain a highly leveraged balance sheet with illiquid and low quality assets as collateral.

This strategy can be a very profitable mechanism, but any disruptions can derail the profits and lead to disaster. In the summer of 2007, Bear hit a major speed bump when two of its hedge funds that invested in subprime mortgage related derivatives lost nearly all of their value.

Although Bear pumped $3.2 billion of its own capital into the fund and persuaded high profile investors like Eli Broad to invest, confidence in Bear was shaken. These hedge funds invested in the same securities that Bear had bought the same securities with its own capital.

With the fire sale going on in the funds to meet investor redemptions, Wall Street realized that Bear would have to mark down the value of their own collateral taking the leverage even higher. These concerns were solidified when Standard & Poor’s cut their rating from AA to A. Over the next few months, the investment banks and hedge funds that did business with Bear started pulling their cash out in droves.

Perhaps Goldman’s decision to stop trading with Bear because of the counterparty risk was the final blow. That same day, newly installed CEO Alan Schwartz seemed caught off guard on the Goldman issue during an interview with CNBC, further eroding confidence.

When it became clear that Bear might not be able to open their doors and execute trades with their clients, everyone realized that it was over.

That weekend, with the aid of the Federal Reserve, J.P. Morgan bought Bear for $2 per share. Little more than one year before, the stock had traded at $172 per share. At $2 per share, Bears market value was less than the value of their headquarters.

One of the more visually stunning images of the entire financial crisis is the photo showing a $2 dollar bill taped to Bears front door.

Ms. Kelly does an excellent job filling out the central characters and giving details about the chaotic final days. Sometimes it feels over dramatic and the steadfast adherence to chronology instead of storyline can be unnecessarily confusing, but the inside story combined with the broader implications makes Street Fighters thoroughly interesting and enjoyable.

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Recommendation: Buy

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

Penguin Group (USA) Inc. New York, New York 2009

ISBN: 978-1-59184-273-6