House of Cards (10 page)

Although Schwartz did his best to reassure his elite troops, the lunch ended in a bit of a chaotic fashion, with Schwartz receiving increasingly alarming e-mail messages on his BlackBerry, as did the firm's other top executives. “Everybody went back to their work,” Fares Noujaim, a Bear vice chairman, recalled. “At the end of that meeting, Mike Minikes, who ran the clearance business, was getting e-mail messages saying there were issues. So when we disbanded, we weren't sure what those issues were. He was clearly getting messages that there were accounts that were beginning to withdraw their money, and then the meeting disbanded.”

Another banker at the meeting remembered seeing Minikes afterward, too. “Minikes was going crazy because he's looking at his Black-Berry, seeing the clearing accounts, just like pull, pull, pull, pull, pull. He said, ‘Alan, we've got to do something.’” Word spread quickly that hedge fund giant D. E. Shaw & Co. had pulled $5 billion of its cash and that Renaissance Technologies, the giant hedge fund run by James Simons, was following suit. In the previous two months, S3 Partners, headed by Robert Sloan, had moved $25 billion out of Bear's prime brokerage. The $18 billion in cash was leaving the building, and fast. “You had Mike Minikes interrupt Schwartz and say, ‘Do you have any idea what's going on? We're watching our entire franchise walk out the door. All our customers are pulling their money,’” recalled Friedman. “I've known Mike since the day I joined the firm, and he is one of my favorite people there— the greatest rah-rah company guy you'll ever meet. Terrific with customers. Always, sometimes painfully, upbeat and optimistic about things. For him to crack—and there was a crack in his voice and he was the color of that napkin—was really startling to me and to a lot of people, [who thought], ‘Well, if Mike thinks it's game over, we've really got issues.' The
meeting sort of dribbled to a close not long after that. I think that was the first [moment] that people really started to get the sense that it was over. That anybody was then surprised that we ran out of cash that night is still a mystery to me.”

As the lunch was winding down, around a quarter after one, David Schoenthal, the head of the foreign exchange desk, e-mailed Friedman with a comment about what they'd just heard: “Not a great voice of confidence.”

Friedman replied a few minutes later: “Nope. Not that much to say.” After Minikes's comments about clients pulling cash from the firm, Friedman e-mailed David Rawlings, the head of client relationship management: “Wow, that was a startling thing to say in a room full of people.”

Rawlings answered, “He's right.”

“One of the things we were trying to do,” Schwartz explained later, “was get facts out that discounted the rumors that were out there. The minute we got a fact out, more rumors started that were a different set of rumors. So you could never get facts out as fast as the rumors. I would just say that, as an observer of the markets, it looked like more than just fear. It looked like there were people that wanted to induce a panic.” But a longtime major client of Bear Stearns said he found it appalling that Schwartz chose not to deliver the truth to his most senior partners. “If this is your top thirty or so guys and there is a fucking crisis going on, you can't lie to your own people! It's fucking surreal.”

T
HE
R
UN ON THE
B
ANK

either Sam Molinaro nor Robert Upton went to the PAC lunch on Thursday. They were too busy trying to figure out whether the firm's repo lenders would roll the next day. They also had a scheduled meeting with senior executives from the Bank of New York, which was a lender to Bear Stearns, to discuss the overall relationship between the two firms. After that meeting, which ended around three o'clock, Upton went back with Molinaro to Molinaro's office. When they got there, Molinaro found a message from David Solomon, the co-head of investment banking at Goldman Sachs and a former senior managing director at Bear
Stearns, wanting to know if there was anything he or Goldman could do to help. If Goldman was calling to be “helpful,” Molinaro and Upton thought, that meant everyone on Wall Street knew that Bear Stearns was in serious trouble. “So that's taps,” Upton said. “That's the trumpet playing because all that means is they want to come in and see our positions so they can trade against us and make money. Sam said, ‘Bob, we're tapioca'— meaning we're done. He and I had been working like fucking crazy for nine months [to prevent just that sort of crisis]…. I believed right up until then. Everyone was squeezing our nuts, we were running out of cash, and customer money was flying out the door.”

Solomon had called Molinaro at the request of David Viniar, the Goldman CFO, because Viniar thought that Solomon, as the most senior Goldman banker who had also worked at Bear Stearns, could get through to Molinaro. Solomon had also placed a call to Alan Schwartz, but only Molinaro phoned him back. “I said, ‘I'm really sorry that you're going through this,’” Solomon recalled telling Molinaro. “‘I'm calling on behalf of the firm. David Viniar didn't know you, so he wanted me to call. If there's anything we can do, if there are any positions you want us to look at, if there's anything we can do to help, we want to be as helpful and supportive as possible. That is a message from the senior leadership of the firm.' Sam said, ‘Thank you, I really appreciate it. We're working through it.’”

From Upton's perspective as the treasurer of the firm, from that moment on everything else was “wholly irrelevant.” He grabbed a cigar and went outside and had a smoke. “I was fucking mortified,” he said. Upton, who described himself as “a dirt farmer from New Mexico,” had had the single ambition of becoming the treasurer of a major Wall Street firm. He had achieved that goal in April 2006 after years of working for a variety of firms, including Fidelity Investments, the huge money manager, and Fitch, one of the second tier of ratings firms. Now, on Thursday afternoon, his dream lay before him in tatters. “When this thing was over, I was just shell-shocked,” he said. “It just crushed me…. I tried to pull my shit together, but it just didn't feel the same. I called Martha”—his wife—“and I said, ‘It's done,' and I closed my door and I cried.” At one point, Begleiter came into his office and asked if he was all right. He yelled at Begleiter, “‘Well, no, I'm not fucking all right, you asshole! What kind of stupid question is that?' I was just livid because I had been fighting so hard all the silo mentality and the inability to spend money to get systems right and to clean up the shit show that had been built over the years that I always felt was a contributing factor to our downfall. But at the end of the day, it was a crisis of confidence.”

A Bear senior managing director went to see Schwartz that afternoon and told him he had started getting calls from his hedge fund clients who were telling him that both Goldman Sachs and Deutsche Bank had stopped accepting Bear Stearns as a counterparty on trades. “I had two hedge funds call me and say, ‘The run on the bank is happening. We think that there is collusion,’” he said. “They said, ‘Ever since the beginning of the week, Goldman and Deutsche have been relentlessly calling us. Goldman has been telling us they're going to stop accepting Bear as a counterparty credit.' Well, once that happens, it's game, set, match.” He believed that Lloyd Blankfein, Goldman's CEO, was “playing” Alan Schwartz. “I think Schwartz is convinced Lloyd wasn't involved in anything,” he said. “I'm amazed, and I think the SEC is going to continue to investigate this. For a major securities firm to start calling people and saying, ‘We're about to dust another major securities firm's position as a counterparty,' when it's Goldman, I mean, you're basically precipitating a run on the bank. How are you not? What hedge fund prime brokerage client in the world is going to take a chance when it costs nothing to remove their cash balances?” (For his part, Cohn, at Goldman Sachs, said that Goldman tried everything it could to help Bear Stearns improve the look of its house. “I don't even know how to react,” he said of the conspiracy suggestion, “any other way but to say it's preposterous and laughable to say that we're involved in a conspiracy theory with certain select groups of clients to try and take down a firm on Wall Street that we actively did business with every day of the week, that we had huge exposures to every day of the week, that we were simultaneously, we thought, trying to be very supportive of in Congress, at Treasury, at the Fed, where we're having active conversations with the company itself, trying to be helpful.”)

To drive home his growing concern, the senior managing director put Schwartz on the phone with James Chanos, the legendary short seller and founder of Kynikos Associates. Schwartz asked Chanos, a longtime Bear client who was then short Bear Stearns stock, if he would agree to appear on CNBC and explain that the firm was fine. “Is it?” Chanos asked Schwartz. Schwartz responded that the firm was poised to announce positive first-quarter earnings. But Chanos declined Schwartz's request. “They were the ones trafficking in false information,” Chanos told the
Times
four months later.

Tom Flexner, another vice chairman of the firm and a longtime real estate investment banker, said his boss remained calm throughout the afternoon. “I think he was a little numb,” he said. “He just seemed a little bit shell-shocked. You could see that he had a huge amount on his mind.
He was dealing with some very difficult issues, and you could just see that. But he does not become emotive.”

After the call with Chanos, Schwartz went off to a series of internal meetings in order to monitor the rapidly depleting funds and to analyze the firm's options. “Over the course of the day,” the firm later explained in a May 2008 SEC filing, “and at an increasing rate in the afternoon, an unusual number of customers withdrew funds from Bear Stearns and a significant number of counterparties and lenders were unwilling to make secured funding available to Bear Stearns on customary terms, which resulted in a sharp deterioration in Bear Stearns' liquidity position.”

Also at 4
P.M.
, the SEC, which had been monitoring the firm during the course of the day, had a conference call with Tim Geithner, at the New York Fed. “We had a bunch of conversations with the SEC over the course of the day,” Geithner explained. “They were trying to catch up and figure out if things were as bad as they seemed, and Thursday afternoon we had our one call and they said, ‘We need to wait till the end-of-the-day numbers and see what our numbers are. We'll call you after the numbers.’” Geithner went home for the day. “I don't want to say we passed the point of no return” that afternoon, he said, “but things were bleeding at such a rate that their options were very limited.”

Various constituencies that interacted with Bear Stearns during the normal course of business—hedge funds that would normally have been happy to leave their free credit balances at the firm; counterparties that would normally have been willing to have Bear Stearns on the other side of a trade or a derivative; providers of the firm's overnight financing, either in the repo market or in the commercial paper market; brokerage customers who rarely worried about a thing and were pleased to be clients of Bear Stearns—all more or less simultaneously lost confidence in the firm. A Bear Stearns senior executive described what happened that afternoon as “akin to trying to force an apple through a straw. The straw is not getting any bigger and the apple is not getting any smaller. It was as if someone yelled ‘Fire’ in a crowded theater and then noticed that there was only one exit door and it was only eight feet wide.” All of them wanted their money back and all of them wanted it at the same time.

“I had spent the first part of the week—Monday, Tuesday, [up until] Wednesday noon, almost every waking minute—talking to customers and lenders,” Paul Friedman explained. “I had the speech down pretty good. I could take them through our whole liquidity profile. Do the dance around the earnings thing. Take questions. In and out in an hour. Through Wednesday morning, I still felt pretty good that I could conclude with, ‘We've still got $18 billion in cash, and yes, we've lost some lenders, but
we picked up some new ones. Yes, some customers have taken their money out, but it's not a big deal. Yes, we've got some people who won't take our name in the credit default swaps markets, but it's not a big deal' By Wednesday, I couldn't do it with a straight face and feel I wasn't breaking the law, and so I had a series of conference calls set up for Wednesday afternoon [and] I just canceled them all. I just said to the salespeople who had set them up, ‘I'm really busy. I can't do it,' because I couldn't come up with anything to say. I couldn't tell them the truth, and I couldn't lie to them. It seemed easier just not to deal with that. I spent a lot of time at the repo desk. I spent a lot of time with Bob Upton and Treasury trying to figure out, ‘Where do we stand?' I had a lot of meetings to figure out, ‘What's our plan?' We're into Plan C at this point…. I was not in any of the meetings with JPMorgan or Barclays or whoever else it was that we talked to about trying to do something strategic.” Was his role something like keeping a finger in the dike? “Yes, but I was running out of fingers. It was an eerie thing. I gave a presentation to the sales force Tuesday night, basically the same speech. Took them through our balance sheet in liquidity and where we stood, and Tuesday night felt really good that hundreds of people at the firm are listening and I'm telling them the truth—I'm not making this stuff up, I'm not just trying to make them feel better. Twenty-four to thirty-six hours later, I was unable to speak. In terms of how quickly did it happen, and could it possibly happen that quickly, it really did. It really went from Wednesday morning to Thursday afternoon, twenty-four hours from solvent to dead. It seems inconceivable.”