For the past few years, Jamie Dimon, the chief executive of JPMorgan, and
James Cayne, his former counterpart at Bear Stearns, could see each other
from their executive offices on opposite sides of 47th Street at Madison
Avenue in Midtown Manhattan.
On Thursday, Mr Dimon was given a much better view of his rival as he and Mr
Cayne’s successor, Alan Schwartz, faced each other across the executive’s
desk. What Mr Dimon saw was a bank facing the possibility of collapse — a
topic of Wall Street speculation all week. He also saw a chief executive
eager to secure an emergency 28-day loan from JPMorgan and the New York
Federal Reserve Bank.
Gossip about the bank’s funding position became so intense at the start of the
week that Bear Stearns was forced to issue a statement denying that it was
experiencing liquidity problems. That may have been true then, but by
Thursday afternoon conditions had become critical. As traders gossiped,
conversations at Bear Stearns’s headquarters on Madison Avenue became far
more serious.
Some bankers outside Bear are convinced that the collapse on Thursday of
Carlyle Capital Corporation (CCC), the investment fund owned by Carlyle, the
private equity giant, was the final straw.
Bear, heavily involved in lending to hedge funds, had advanced about $1.6
billion to CCC and is believed to have been forced to take mortgage-backed
securities in lieu of some of its cash when the fund went bust.
The value of the securities plunged, however, fuelling existing fears that
Bear Stearns was running out of money. As a result, the bank’s own lenders
started to call in their loans.
According to Mr Schwartz, “the concerns on the part of our counterparts
[banks] and customers got to the point where a lot of people wanted to get
their cash out. We were meeting those needs, but it accelerated late in the
day. The pace things were going, liquidity demands were outdoing our
liquidity resources.”
As banks in New York began to demand bigger margin payments — effectively an
insurance deposit on the loans and trading positions that Bear Stearns has
outstanding — Mr Schwartz consulted the bank’s adviser, Lazard Brothers, the
investment bank. Lazard had already been appointed to look at strategic
options for the bank. The firm told Mr Schwartz to contact the New York
Federal Reserve and also his neighbour JPMorgan about two emergency loans.
By the end of Wall Street trading on Thursday, new rumours began to surface
that Bear, founded in 1923, was facing severe difficulties. In after-hours
dealing, the stock fell 8 per cent, leaving the stock down by a quarter for
the week.
Mr Dimon immediately called in Tim Main, the financier who heads JPMorgan’s
Financial Institutions and Government department in New York, to lead a
rescue.
They agreed on the terms of the loan, which is secured, and to work with
Lazard and Mr Schwartz to find long-term alternatives for funding.
As the day wore on, the US Treasury, the Federal Reserve Bank in Washington
and the US Securities and Exchange Commission were all contacted. Part of
the conversations included the decision by the New York Federal Reserve
about whether to invoke an emergency provision in the Federal Reserve Act —
called 10b5 — to provide an emergency loan to Bear Stearns. The predicament
of Bear was so serious that the Fed invoked the measure for the first time
in more than 50 years. Bear Stearns is one of the world’s biggest custodian
banks, effectively a clearing and warehouse of international financial
instruments, and its collapse would wreak havoc in capital markets.
As the conversations continued, dealers in Tokyo — waking up for Friday’s
trading — also began to hear the rumours, which sent the Nikkei down nearly
200 points to a three-year low. Brokers on foreign exchange and derivatives
floors said dealers at some American and European banks had refused to take
trades from Bear Stearns, fearing its imminent collapse.
The options facing Mr Main and his associates are not straightforward. Bear
Stearns could try to launch an emergency rights issue and raise new funds,
but it would have to do so at a punitive discount because of the increased
risk that the bank now presents. Bear’s position is so serious, even with
the weight of JPMorgan behind it, that existing shareholders may not be
persuaded to pay up. Rivals believe that the bank has exposure to many other
troubled hedge funds, which could make it difficult to find long-term
funding or a white-knight buyer. One banker said: “It’s a Wall Street
securities house so strategic it’s a valuable asset to people who don’t have
a position on the street. At most times in the cycle, people would have
bitten Bear’s hands off to buy it. But I’d be surprised if JPMorgan wants
it. It’s not the right time for buyers.” Another option for JPMorgan, which
would require a good deal of optimism, is that the Fed continues to support
Bear, buying it time to cut jobs, shrink and restructure itself.
A break-up of the bank would not be straightforward, either. It is not very
diversified, its investment banking business is not big, its equity
underwriting business is modest and the bulk of its business is derived from
mortgages and fixed income — the very securities that Wall Street does not
want to touch, let alone buy.
Lazard and JPMorgan undoubtedly will look at whether they could find a buyer.
The appointment of JPMorgan as an adviser and its willingness to lend Bear
emergency funds fuelled speculation that it might consider buying Bear
itself. However, Mr Dimon said this year that he was not interested in
buying an institution, a large component of which was an investment bank.
Sovereign funds may well be Bear Stearns’s saviour. With the weakness of the
dollar and the fact that Bear is now perceived as a distressed asset, a
Middle Eastern or Far East Asian fund could buy the bank on the cheap. It
has signed a share-swap deal with CITIC Securities, of China, but that deal
must now be in doubt.
Joe Lewis, the billionaire investor, is a potential buyer, having taken a 7
per cent stake in the bank last year and slowly boosting his holding.
Key players thrust into the spotlight as bank fights for its survival
— Alan Schwartz, 57, became chief executive of Bear Stearns in January 2008.
In taking on the role, the well-respected, smooth-talking dealmaker said that
he was “honoured to have the opportunity to lead one of Wall Street’s great
franchises”.
Mr Schwartz, who was born in Brooklyn, is a graduate of Duke University,
where he was a star pitcher for the baseball team. He was drafted by the
Cincinnati Reds but never played an inning because of an injury to his elbow.
Mr Schwartz joined Bear Stearns at its Dallas office in 1976 as head of
institutional equity sales.
He became head of research and investment strategy in 1979 and went on to
become head of investment banking in 1985, when he was charged with running
the firm’s fledgeling investment-banking division. He was promoted to
co-president with Warren Spector in 2001. Mr Schwartz was co-chief operating
officer from June 2001 until August 2007.
He has served as an adviser in a number of high-profile corporate battles.
In 1993 he advised Viacom in its bidding war with QVC Network for Paramount
Communications.
In the past few years, he advised Richard Parsons, the chairman of Time
Warner, when the media company was under pressure from the billionaire
activist shareholder Carl Icahn to split itself up.
He is also understood to have been a close adviser of Michael Eisner, the
former chief executive of the entertainment group Walt Disney. Mr Schwartz
holds slightly less than 1 per cent of the shares in Bear Stearns.
He serves on other boards including Young & Rubicam and The American
Foundation for Aids Research.
— James Cayne, known for his aloof management style, stepped down as chief
executive of Bear Stearns at the beginning of the year.
Mr Cayne, who had been chief executive since 1993, was forced to resign after
the sub-prime mortgage crisis led to the company suffering record losses.
A world-class bridge player, Mr Cayne, 74, was heavily criticised for the
time he spent playing bridge and golf last year while the bank was engulfed
in sub-prime turmoil. He also found himself embroiled in controversy after
The Wall Street Journal alleged that he had smoked marijuana at a 2004
bridge tournament. This was a claim that he strenuously denied in an e-mail
to the group’s 15,000 employees.
The cigar-smoking former scrap metal salesman, who still holds a stake of
about 5 per cent in Bear Stearns, remains as chairman of the board. He has
served as a director since 1985.
Until this year, he had held the twin mantles of chief executive and chairman
since 2001.
Mr Cayne, who joined the bank in 1969, was known for his ability to forge
valuable relationships with affluent individual investors.
He has also served as vice-chairman of NYSE Euronext, formerly the NYSE
Group.
