Back in March this year when Bear Stearns went bust, economists and finance journalists, not to mention investors, were justifiably shocked. This was an 85-year-old company, a leading global investment bank and major character in the shifting drama of Wall Street, and it had just been routed. JPMorgan snapped up the remnants for around $10 a share, $120 less than what they were trading for a year earlier.
So what happened? How in a matter of days could a company with $US18 billion in cash reserves be stripped of almost its entire value?
There are answers of course, the most obvious — and yet also the least adequate — being the plunging price of US houses and, consequently, the suddenly worthless mortgage backed securities that Bearn Stearns had tipped huge amounts into. But that’s not so much an explanation as the context.
Another answer is that now, seven months later, we still don’t know the answer.
In the August issue of Vanity Fair, contributor Bryan Burrough spent 10,000 words trying to locate who or what killed the Bear, but to no avail. It’s a riveting read, if only because the culprit is invisible and unknowable. A ghost. Maybe you could call it sentiment, that mysterious, intangible force that drives markets up and down, and in this case took out a giant. Burrough writes:
There has never been anything on Wall Street to compare to it: a “run” on a major investment bank, caused in large part not by a criminal indictment or some mammoth quarterly loss but by rumor and innuendo that, as best one can tell, had little basis in fact. Bear had endured more than its share of self-inflicted wounds in the previous year, but there was no reason it had to die that week in March.
A few paragraphs later, the “vice-chairman of another major investment bank” adds:
This was not about capital. It was about people losing confidence, spurred on by rumours fueled by people who had an interest in the fall of Bear Stearns.
To put that loss of confidence into context, Ben Macintyre offers the following in today’s Time of London:
Confidence is the soul and fuel of finance. Too much results in speculative mania, bubbles, gluttony and swindling, in “prestidigitation, double-shuffling, honey-fuggling, hornswoggling and skulduggery,” as one US economist put it in the 1929 Wall Street Crash. Too little destroys credit, and the gears of finance seize up. None at all leads to panic, then pile-up, a fear as unjustified and uncontrollable as the greed in boom times.
In an environment where doubts can kill, the power of a rumour can’t be underestimated. Two days into the crisis, on the Wednesday morning, Bear’s new CEO Alan Schwarz fronted the financial press on CNBC in a bid to short-circuit the rumours. He chose his interlocutor carefully – David Faber, the “safest of the lot.” But he was ambushed.
Faber’s first question was a bombshell. He told Schwartz he had direct knowledge of a trader-a single trader-whose credit department had held up a trade with Bear Stearns, citing concerns about its health. At Bear, many executives gasped. It was a killer statement: Faber was saying, in essence, that Bear’s status as a trader, the basis of its business, was in question. Schwartz answered as best he could, saying everything was fine; only later did Faber say on-air the trade in question had finally gone through. But the damage had been done.
“You knew right at that moment that Bear Stearns was dead, right at the moment he asked that question,” a Wall Street trader of 40 years told me. “Once you raise that idea, that the firm can’t follow through on a trade, it’s over. Faber killed him. He just killed him.”
The fate of the Wall Street icon is now history. When the Bear fell, even though the whiff of death was intensifying around the US banking sector, we couldn’t have known that so many others would suffer the same fate. If you’re at all interested in what happened to Bear and so many of its pals or want some insights into the vaguely ludicrous world of investment banking, Burrough’s article is well worth your time.
