House of Cards (8 page)

Faber encouraged Schwartz to try to prove to the world his firm was still worthy of credit, and reminded him of their conversation two months before when he'd become CEO of Bear and “you were fairly positive about
Bear having taken the marks”—marking securities to market—“that you thought were necessary, having treated its balance sheet conservatively.” How had things changed in two months?

“Well, the markets have certainly gotten worse,” Schwartz answered. “But our liquidity position has not changed at all. Our balance sheet has not weakened at all. So let me just talk about that for a few seconds. What I did say to you a few months ago is that we had spent last year moving away from any reliance on the unsecured markets into secured facilities, using our collateral to borrow against, and we finished the year and we reported that we had $17 billion in cash sitting at the parent company as a liquidity cushion. As the year has gone on, since year-end, that liquidity cushion has virtually been unchanged. So we still have many, many billions—$17 billion or so—in excess cash sitting on the balance sheet of the holding company as a liquidity cushion. That's in addition to billions of dollars of cash and unpledged collateral that are at our subsidiaries. So we don't see any pressure on our liquidity, let alone a liquidity crisis.” Schwartz made no mention of the fact that Bear's hedge fund clients had started to ask for their free-cash balances back and that fulfilling that obligation had begun to drain Bear's cash reserves.

The two men then had a conversation about the outlook for Bear Stearns's first-quarter 2008 performance—the earnings announcement that had been scheduled for March 20—and Faber asked Schwartz if he thought the Fed's action the day before would relieve the crisis. “I think there is still going to be a bunch of volatility,” he said. “I think the Fed's moves—as opposed to any one of them making the situation that much better—I think it shows that they are really on top of the situation. They understand that it's not just the level of interest rates but the technicals of the market that have been very difficult, and I think they're looking at a variety of ways to make sure that liquidity is available to all of us as dealers to be able to finance appropriately our customer activities. I think we'll continue to do that and I think the situation with time will stabilize.” Certainly that is what the Bear Stearns executives hoped would happen. “I think everybody hoped that things would subside” after Schwartz appeared on CNBC, explained Robert Upton.

But Schwartz's comments did not calm anyone down. “Mr. Schwartz's delivery made some experts wince,”
Wall Street Journal
columnist George Anders wrote. “He gazed upward before speaking. He pinched his lips tightly after several answers.” Anders then quoted a communications coach who said, “Such grimaces made Mr. Schwartz look uncomfortable.”

His own partners noticed, too. “Everybody on the trading floor, we must have had ten TV screens, they were all turned on,” Friedman recalled.
“Business came to a grinding halt while everybody watched it…. Then Alan finished and there was this ‘Oh. Back to work.' The hope was he was going to announce the earnings. He didn't. He gave that lame ‘It's well within the range of estimates,' or whatever it was. That didn't help. It was a nothing. It was terrible. It certainly didn't stop phone calls [from] people wanting to take cash out.”

Added a senior investment banker at the firm: “Alan is usually a very effective guy, but how bad was he on Wednesday morning? He was awful on TV. He looked like he was warmed-over death on Wednesday morning. That didn't provide any comfort to anyone…. The fact that he was where he was and that he wasn't here, that was bad enough. But he showed just terribly.”

What Schwartz may not have realized—or more likely was in no position to admit publicly—was that there were powerful forces aligned against Bear Stearns at that very moment, ones that stood to benefit from the firm's failure to “stabilize”: short sellers, buyers of put options and credit default swaps, and competitors who hoped to scoop up some of the $9.2 billion in net revenue Bear took in during 2006. By March 12, billions of dollars had been invested on this dour bet. Others—such as journalists and research analysts—also stood to benefit from enhanced reputations if they could cut through the rumor and innuendo and be able to quickly and definitively predict for their readers or clients that Bear's demise was imminent.

Roddy Boyd, at
Fortune,
knew in his gut that the firm was in serious trouble but was also acutely aware of his responsibility as a journalist not to fan the flames with his reporting. His March 6 call with Marano left him infinitely more curious but seriously worried. “I was thinking, ‘I'm going to poke around in this more,’” he said, “but then I was thinking, ‘This is strange.' This is like a situation where you can abuse your position as a reporter. When you're at
Fortune,
you have to do stuff right. When you're at the
New York Post,
you have to be there first and fastest. At
Fortune,
you write the first draft of history, and you have to get it right and you have to be consistently right. I'm thinking, ‘I don't really want to screw with this company'—I don't want to spread rumors. I don't want to become part of the story. I don't want to hurt people unnecessarily. I'm an aggressive guy and I'll pick fights with anyone or anything, but there's a right way of doing my job and there's a wrong way. I weighed my duty as an employee here versus the right thing to do.”

He decided to lie a bit low and went off on a long-delayed vacation. “One of the media's major problems in this is that you lose track of forests and woods, and if the swap spread is doing this”—widening out—“that
means what exactly? Just because X exists does not logically mandate Y occurring, let alone Z. So I said to myself, ‘Okay I am going to'—and discretion here is going to be the better part of valor for me—'I'm going to sit back and watch this,' and a couple things [could] happen. One is that nothing is going to happen. Yeah, whatever. He's just hearing some BS. It all works out, and in the morning it's all good. Life is okay. The second situation, which is more gripping, is there's going to be trouble in the repurchase market for them. So I did my best to quietly monitor that. I had some sources there, and they had heard roughly similar stuff. But they weren't being told by their credit officers, nor were they themselves demanding more money or more collateral from Bear Stearns to put on repurchase agreements. But everybody's hearing the same stuff. That's sort of more confirmation bias to me—and this is a problem for reporters—that you hear the same thing from five or six people you respect at the same time, so you know something's happening but you can't prove a damn thing. You can't prove it's happening. You're just aware of a current of thought. I called up repurchase desks and they're like, ‘Yeah, look what's going on. Bear Stearns, the swaps are getting killed. The stock is getting killed. We're hearing the same stuff. I have a billion with them right now, overnight. And it's clearing. We're not asking for anything special. We've had the same trade on.' Same old, same old.”

Like Boyd, Meredith Whitney, a well-respected thirty-eight-year-old research analyst at Oppenheimer who covered a number of Wall Street brokerages and banks, was also trying to comprehend what she was hearing about Bear Stearns that week. Whitney had become very well known around Wall Street during the fall of 2007 when she alone predicted that problems at Citigroup were worse than everyone thought, and she was right. On Saturday, March 8, Whitney was getting her hair colored at the fashionable Pierre Michel Salon on East 57th Street when she received a phone call telling her that Marcel Ospel, of UBS, was in New York trying to sell PaineWebber for around $9 billion to JPMorgan as a way to raise badly needed capital. Since Whitney knew that Ospel rarely left Zurich, hearing that he was in New York on a mission—which proved impossible—sent her scurrying on Monday morning to the investor relations department at JPMorgan. She concluded quickly that while JPMorgan would have liked to own PaineWebber and was one of the few banks around that appeared to be weathering the financial storm and thus would have been a serious potential buyer, even JPMorgan could not afford to pay the $9 billion all-cash purchase price that Ospel wanted.

When she finished speaking with JPMorgan, Whitney headed from
her office on 42nd and Madison to have sushi for lunch at Nobu 57, on West 57th. On the way, she began hearing rumors about Bear Stearns's and Lehman's solvency. She called people she knew at several of their competitors and discovered that these traders were very worried about having Bear Stearns as a counterparty on their trades. That night, she flew to London. By the time New York opened for business she had already had a meeting with an institutional client and had heard the news about the Fed making available its unprecedented lending facility to investment banks. Although she was a little concerned about the lack of specifics in the Fed's announcement, “My first reaction was, ‘Oh, this is going to be completely fine.’”

But as the details emerged, she learned that the funds would not be available until March 27. She also learned that the supposed beneficiaries of the Fed's largesse were basically indifferent to it because access to the funds was weeks off. Whitney thought, “What the fuck is going on? This doesn't make any real sense. By Wednesday, I'm seeing accounts all day and a client calls me and I was like, ‘This is an orderly unwind, I just feel it. I just absolutely feel it.’” She worried that, given the increasing lack of liquidity in the overall financial system, “if the counterparties are an issue, meaning ‘I don't trust you and you don't trust me,' and there's no liquidity in the system and we're already careening towards a pretty significant recession, if this happens, then we go into a depression.”

She called back the traders she'd spoken to on Monday—the ones who'd voiced serious concern that day about having Bear Stearns as a counterparty—but now they clammed up and acted as though there was no problem at all. “When the brokers were saying, ‘Yeah, of course, we're still trading,' I'm like, ‘Fucking liars.' When people outright lie to you that you deal with all the time, then you know there's serious panic there.” She fired off an e-mail. “Bear's the next Drexel, isn't it?” she wrote to one of her sources. She concluded: “It's possible. Unfathomable. But possible.”

Whitney is perhaps one of Wall Street's most pessimistic research analysts, and she began to look at what was happening to Bear Stearms through that lens. She knew that many of Bear Stearns's businesses were contracting, and she knew that Goldman Sachs, Morgan Stanley, and Lehman Brothers had been telling her they had been taking market share from Bear Stearns's prime brokerage business as hedge funds withdrew their cash. “This is it—Bear's out,” she thought. “Because all of Bear's businesses are in runoff. So if people start pulling assets, they can't cover their debt service. Then they have debt covenant violations. And then it's over … it was so outside of the realm of possibility because it was too
simple.” Like Boyd, she knew what was happening, but after the firestorm she'd started with her Citigroup research the previous fall, she did not publish a report at that moment.

“By Thursday I knew it clear as day,” she said. “This has happened to me several times in the last year where I know things in my gut. But I can't believe I'm the only person who is putting it together.” She called a friend of hers, a Wall Street historian, and said, “This is insolvency, I know it. I know it. I know it clearly.” But he dismissed her concerns, which gave her pause. “You're paranoid that you're going to do something that's going to jeopardize your investors' money,” she said. “And that's what you're paid for. That's your responsibility.” Given what had happened with her call on Citi, she decided not to publish her report. “It was a conscious choice not to write anything,” she explained. “Because I thought it was such a tenuous situation that I was going to get in serious trouble…. I thought Bear failing was such a massive deal and the orderly unwind was more important than a disorderly” unwind that a published report from her might have caused.

A
T
B
EAR
S
TEARNS
, meantime, the senior management of the firm had failed to explain to its workforce internally at any point during the week what precisely was going on or what they should say to their customers and clients. Ace Greenberg's comments to CNBC on Monday that the liquidity concerns were “ridiculous” had left people baffled. “Why is he speaking for the firm, for starters?” asked one banker. Then came Molinaro's comments to Charlie Gasparino on Tuesday and Schwartz's on Wednesday. All were flat-out denials of a problem. But there was no internal communication. “Alan, or whomever, just sort of sitting down with the rest of the guys and saying, ‘Okay, these rumors are out there, these are true, these aren't true, and here's what we're doing' would have been nice,” said one senior Bear banker. “You've got a multi-hundred-person sales force out there getting phone calls saying, ‘I've heard this is happening and this is happening,' and then you're guessing or not knowing how to respond. Because they didn't. I had guys at Blackstone calling me saying, ‘I heard you guys DK'd on a trade, is it true?' And you either lie and say no, though that was true, or ‘I don't know,' which is a horrific answer, right? No communication. None. And the communication that was provided externally was poor at best. It was really amateur hour in a big way. It was really sad in hindsight.”