The Fall of Bear Stearns: A Quickie Guide

Bogue
Photo: Photo Illustration: Everett Bogue; Photos: Getty Images, Corbis (Cayne), Landov (Schwartz)

So,
the Wall Street Journal today has a big story walking us through the events leading up to the collapse of Bear Stearns this past week. But perhaps you haven't gotten to it yet. It's so large and inky, and you've been busy, going to meetings and calculating your annual income should you become a high-class hooker. Still, you don't want to look like an idiot, should someone, somewhere, bring up What Happened at Bear Stearns. You will want to nod knowledgably and pontificate on how it Might Affect the Economy. Which is why, using handy bullet points, we've summarized how the bank's dalliance with subprime lending, coupled with a dope-smoking CEO, finally caught up with them in a stunning week-or-so period. To keep things in perspective, we started at the beginning. The very beginning.

1923: Bear Stearns is founded as an equity trading house by Joseph Bear, Robert Stearns, and Harold Mayer with $500,000 in capital. According to the inflation calculator, that's about $6.1 billion dollars today.
1969: At a New York bridge tournament, future Bear Stearns CEO Alan "Ace" Greenberg meets a 35-year-old Jimmy Cayne, then a professional card player. Impressed by Cayne's stage presence, pluck, and no doubt, bridge skills, Greenberg offers him a job as a Bear stockbroker on the spot.
1985: The bank becomes a publicly traded company.
1998: Bear Stearns, now under the watchful eye of Jimmy Cayne, is the one investment-bank holdout in the Wall Street–led rescue of collapsed hedge fund Long Term Capital Management. This move (along with Cayne's comment that they ought to "let them fail," as recorded in Roger Lowenstein's When Genius Failed) will prove ironic later.
March 2002: The New York Sun announces that Bear Stearns CEO James Cayne will be writing a bridge column for the paper.
June 2007: Bear Stearns ponies up $3.2 billion to bail out two hedge funds created to invest in subprime mortgages: the High Grade Structured Credit Strategies Fund and the High Grade Structured Credit Strategies Enhanced Leverage Fund.
July 2007: Bear Stearns writes to inform clients that the two hedge funds now contain "very little" or "effectively no value" for investors. By August, both funds file for bankruptcy.
October 2007: Cayne reassures investors: "Most of our businesses are beginning to rebound." Later that month, state-owned Chinese lender Citic pays $1 billion for a 6 percent stake in Bear, giving the firm an approximately $20 billion valuation.
December 2007: Bear Stearns posts fourth-quarter loss of $854 million on massive mortgage-related write-downs, the first quarterly loss in its 85-year history.
January 2008: Cayne is more or less forced to resign as CEO in the wake of a Wall Street Journal article detailing his recreational pot use, monthlong vacations to play cards, and other high jinks at 383 Madison Avenue. The board kept Cayne on as chairman, and Alan D. Schwartz takes over as CEO.
March 10–13, 2008: Amid rumors that Bear is teetering and has liquidity problems — and the small matter of $46 billion in mortgages and other questionable "assets" on its books — new CEO Schwartz goes on the public-relations offensive, appearing on CNBC on Monday (via live feed from the Breakers Resort at Palm Beach). "We don't see any pressure on our liquidity, let alone a liquidity crisis," he says. As if to prove it, ex-CEO Cayne closes on a $28 million pad at the Plaza. But to little avail: The perception of trouble quickly becomes a reality as hedge funds and other financial parties engaged with the firm take their money and get out. Enough people decide, all at the same time, that they don't want to be within 200 feet of Bear, and by the evening of Thursday, March 13, Bear finds itself, unquestionably, in the midst of a liquidity crisis. It was kind of like the "run on the bank" at the Bailey Brothers Savings and Loan in It's a Wonderful Life, only no one was wearing fedoras.
Friday night, March 13–14, 2008: In a desperate scramble to avoid having no funds to operate its businesses, Bear executives pull an all-nighter trying to figure out how "fix this thing." At 5 a.m., they wake Federal Reserve chairman Ben Bernanke and a bunch of other dudes to discuss the matter, and ultimately decide to secure an emergency agreement with JPMorgan and the Federal Reserve Bank of New York in the largest-ever bailout of a U.S. securities firm. The Fed had to invoke a little-used securities law to lend funds through JPMorgan, in order to avoid having Bear Stearns disintegrate and threaten the (remaining) stability of the U.S. financial system. Bear Stearns shares tumbled 47 percent to close at $30. Jimmy Cayne, showing courage in the face of great difficulty and the potential collapse of the 85-year-old firm, takes part in a bridge tournament in Detroit. Using humor as a coping mechanism, Bear employees joke nervously about not bothering to come in on Monday, since the firm will probably be bought over the weekend. They are a prescient bunch.
March 16–17, 2008: On late Sunday, after forcing a bunch of bankers to work over the weekend, JPMorgan decides it will buy Bear Stearns so that BSC can avoid bankruptcy, but only with the Fed's backing. The going price? $2 a share, which puts the valuation of the once giant firm at $236 million. Remember that $6 billion estimate at the beginning of this timeline? Ouch. JPMorgan, meanwhile, gets the Federal Reserve's protection for some of Bear's potential (and manifold) liabilities, plus a $1.2 billion building. Morgan also gets the firm's viable businesses, like its prime brokerage, for practically nothing. CEO Jamie Dimon looks like a genius (also he's quite handsome, we'd never noticed!), and the Fed looks like a hero.
Moving forward: Divisions like Bear's investment bank, etc., are probably on their way out, including the employees manning the desks. Conservative estimates regarding the carnage range from a third to half of all of Bear Stearns's 14,000 employees. Everything that just went down is what's known in the business as "not good" for anyone working for Bear right this second, i.e. the people holding 33 percent of the now-devalued stock. The market is placing odds that Lehman Brothers, also a big mortgage player, is next to be taken out and shot. Like Bear did last week, Lehman puts the word out on Monday that they are awash with liquidity, though it doesn't stop the stock from falling to a six-year low. The Fed, in basically backing JPMorgan's rescue of Bear, is setting a dangerous precedent for itself in saving Wall Street's tuchis. There's also the question of who would be willing to play JPMorgan to Lehman's Bear Stearns, should it come to that. —Bess Levin, editor, DealBreaker.com