The acclaimed New York Times bestseller-updated for the second anniversary of the collapse of Bear Stearns The fall of Bear Stearns in March 2008 set off a wave of global financial turmoil that continues to ripple. How could one of the oldest, most resilient firms on Wall Street go so far astray that it had to be sold at a fire sale price? How could the street fighters who ran Bear so aggressively miscalculate so completely? Expanding with fresh detail from her acclaimed front-page series in The Wall Street Journal, Kate Kelly captures every sight, sound, and smell of Bears three final days. She also shows how Bears top executives descended into civil war as the mortgage crisis began to brew.
Early on the evening of Thursday, March 13, Sam Molinaro, chief financial officer of The Bear Stearns
Companies, called the firms CEO, Alan Schwartz. "We have a serious problem,"
Up in his forty–second–floor office, Schwartz had been hearing snippets of bad news all
afternoon. Bear traders, trying to do business with rival firms, were getting pointed questions about whether they
could make good on their financial obligations, and hedge funds had been yanking money out of their Bear accounts.
By the time he got the call from Molinaro, Bears cash supply appeared to be draining fast.
"This is looking pretty serious," Schwartz replied. "Ill be right down."
Schwartz took the elevator to the sixth floor, where executives were slowly congregating outside
Molinaros corner office. Though no one had sent out an e–mail, the word got around that the
firms top managers were meeting at 6:00.
Like many meetings led by Molinaro, however, the tone seemed to be one of hurry up and wait. Bears CFO
was hopelessly disorganized, and had a knack for making important people hang around outside his office while he
wrapped up a phone call or had an impromptu meeting. The delays sometimes lasted for hours. Molinaros
chaotic scheduling was so widely remarked on that Paul Friedman, the sardonic chief operating officer in the
fixed–income division, liked to sum it up with a joke: "What time is our six oclock meeting?
This time, Molinaro was tied up in his office with his former secretary, now a managing director in the
firms operations department, which handled Bears real estate dealings around the world. Knowing the
urgency of the meeting they awaited, managers rolled their eyes as they glanced from their watches to their
BlackBerrys outside Molinaros adjoining conference room.
Finally Molinaro walked in and took a seat. Schwartz, at fifty–seven a towering, impeccably dressed
former baseball star, sat near the door at the head of the table, legs crossed, silently leaning back in his chair. He
had not expected this when he was named CEO barely three months earlier.
He was surrounded by a wily group of fellow executives who over the years had supported one another,
challenged one another, and vied for one anothers jobs and pay. Bear was a dysfunctional family, driven by
greed and a complex code of internal politics. Far above the lower and middle ranks, where most of the firms
fourteen thousand employees worked, was an upper tier of some seven hundred senior managing directors, or SMDs,
who made fat bonuses and enjoyed perks like a private lunch room, special expense accounts for ordering meals
and flight upgrades, and unique access to key clients and public figures. Partly to justify their pay,
SMDs to give a small portion of their annual compensation to charitable causes, and tax returns were reviewed
to make sure people complied. ("Trust but verify" was the motto governing the philanthropic program.
Though many of Bears senior managers were civic–minded, enforcement was still in order.)
But the vast majority of Bears SMD pool was blissfully unaware of the firms inside workings. As at
most investment banks, its levers were pulled exclusively by a short list of managers who ran divisions like fixed
income, equities, and prime brokerage, which handled trading and lending to Bears most important hedge fund
clients. Managers in places like risk management and operations were considered less important to the firms
core franchise and therefore largely excluded from important decisions.
Tonights gathering, at which nearly all the power players were present, guaranteed a clash of opinions
and egos. For months Bear had been struggling with a choppy stock market, plummeting home values, and an
exodus of the lenders and clients that were its lifeblood. The developments had created deep fissures within
Bears sharp–elbowed ruling class. The trader who ran mortgages had nearly come to blows with the
cochief of equities the prior fall over whether the fixed–income department, which included the mortgage
unit, deserved bonuses after such a terrible year. Bears finance officers, who were advocating for safer ways to
manage the firms own cash, had been involved in screaming matches with their counterparts in equities who
argued for the status quo. Some of Bears top traders and executives had begged the mortgage team to divest
their portfolios of its shakiest assets, to little avail. Now all the bad blood from those tumultuous months was
coming to a boil.
To Schwartzs left was Richie Metrick, his longtime friend and right arm in the investment–banking
business. Metrick was Schwartzs foil in nearly every respect. Short and impatient, the sexagenarian investment
banker often had a stain on his shirt or a sleeve unbuttoned. Colleagues considered him something of a ball buster,
a man more than willing to take them to task over disagreements. Friends praised a strong intellect that ran in his
family—his son, Andrew Metrick, was a professor at the Yale business school—but many of those
gathered in the conference room that evening had seen scant evidence of it since he joined Bear twenty years
earlier. Mainly they knew him as Schwartzs gruff number two.
Next to Metrick was Gary Parr, the respected financial services banker from Lazard Ltd. Parr, at fifty–one,
had seen his share of deals as cohead of the mergers–and–acquisitions practice at Morgan Stanley
and copresident of the boutique firm Wasserstein Perella before that. More than once he had worked with insurance
companies and banks on the verge of pennilessness.
The conference room they sat in had been ground zero for the internal battles of recent months, and, like much
of Bears headquarters, it was careworn from the many meetings it had hosted. The building, a
forty–five–story tower of stone and glass crowned by an octagonal fixture that could be illuminated at
night, was emblematic of the firms grand visions. Designed by the noted architect David Childs, 383 Madison
Avenue had been unveiled in 2001, with Bear occupying nearly every floor. It featured a square lobby with open
space on all sides and a sleek, black base, just steps from Grand Central Station. A third–floor gym provided
workouts and showers. The boardroom and private dining rooms were on the twelfth floor, where a private chef
prepared meals. Trading floors were below, and investment banking was high above. Departments like legal,
treasury, and research were on the levels in between.
Bears new abode had already been put to good use. The prior year, the firm had hosted an array of early
candidates for U.S. president, including senators Hillary Clinton and John McCain. (Barack Obama, then an Illinois
senator, was invited but never committed to a date.) The private dining rooms were used to entertain clients, Wall
Street analysts who watched Bears stock, and other notables. Chairman Jimmy Caynes office, which
included a private conference room, a tricked–out motorcycle from a Chinese client whose firm Bear had
taken public, and a stash of high–end imported cigars under the desk, was a particular draw.
But despite those trimmings, the inside of Bears building was not particularly fancy. Even the sixth floor,
where Molinaro, Cayne, a group of board members, and other heavy hitters resided, was essentially a warren of
cubicles ringed by offices with views—mostly of the other high–rise buildings that surrounded Bear.
Carl Glickman, one of Bears longest–serving directors, had furnished his own office, spending
thousands of dollars on ornate furniture, and Molinaro had a couple of nice chairs and a couch. But many executives
had little other than family snapshots to look at, and the tables and chairs that Bear provided were
On either end of a scratched–up wood conference table, the walls in Molinaros conference room
featured symbols of a more euphoric time. One displayed a lithograph of the cover of the Wall Street Journal
the day after the Dow Jones Industrial Average had closed at 10,000 in March 1999. If This Is a Bubble, It Sure Is
Hard to Pop, read the headline, which was covered by a transparent bubble magnifying the zeroes in the
indexs record level. On the opposite wall was a framed cover of Barrons from 2004, when the
publication had run an admiring cover story on Bear. Under the teaser "Throughout the market slide, Bear
Stearns had outperformed its brethren" was a cartoonlike drawing of a brown bear dipping its paw into a honey
pot as saliva dripped from its chops. The story inside called the firm "the Rodney Dangerfield" of the
brokerage industry, with shareprice growth that was finally generating the respect Bear had long deserved. Back
then, the stock was trading at $84 a share.
Now it was at $57—a breathtaking drop from $172, where it had topped out in January 2007 during the
froth of the housing boom. Record issuances of new mortgages and skyrocketing home prices throughout the United
States were now collapsing under their own weight. Loans issued to "subprime" borrowers whose incomes
couldnt support the expense of high–interest mortgages had, in many cases, gone into default. The
defaults had prompted a wave of bank foreclosures on subprime borrower homes, forcing people to move out and
harming the safety and value of other homes in surrounding neighborhoods. Fast–growing areas of states
like Nevada, California, Arizona, and Florida had been especially hard hit.
In reaction to the disastrous lending practices of the housing boom, banks were providing credit to only the
wealthiest, most stable consumers, leaving many potential home buyers unable to make purchases. Many of the
countrys most active mortgage providers, including OwnIt Mortgage Solutions and New Century Financial
Corp., had gone into bankruptcy, saddled with the unwieldy costs of mortgages to subprime borrowers that had
ceased to be paid down. Increasingly now, the third parties that held bonds connected to subprime loans, once
those loans were "securitized" or bundled into new investments, were taking huge losses on those bonds.
In a catch–22 effect, the mortgage lenders that still had money to lend were becoming leery of issuing new
loans, since their ability to lay off the risk of those loans to other investors was diminishing, and the market overall
was slowing to a crawl. As an issuer of new mortgages as well as a trader and holder of mortgage–backed
securities, Bear was being hurt by the convulsions in the housing sector—and that was before the events of
the last few days.
The mood around the table was lousy. Bears old hands had seen more than a few competitors come and
go over the years, and now their firm was uncomfortably close to becoming a Wall Street casualty.
Fixed–income chief operating officer Friedman and others, who had been anxious about the firms
financing since at least last summer, were deeply frustrated. Their suggestions that the firm should sell itself or
raise capital had gone largely unheeded, now with disastrous results. Schwartz, Molinaro, and some others were
more shocked. They had been working their tails off for months, courting clients and shareholders and trying
desperately to return Bear to profitability after its recent November quarter loss. In recent days, theyd labored
to counteract the negative rumors in the market, with no success. Now, suddenly, their prized firm was on the brink
Dispensing with the introductions, Molinaro, who had taken a seat on the long side of the conference table not
far from Schwartz, began running through a laundry list of questions. "What collateral do we have that we could
repo?" he asked the group.
He was referring to repurchase agreements, otherwise known as "repo loans." Repo loans were
short–term, often overnight, funding pacts, usually struck between two Wall Street firms or one firm and one
investor, like a hedge fund. As the borrower, Bear would offer its counterparty—the other bank in the
transaction—a bundle of securities in exchange for immediate cash. Bear could then use the cash to help fund
its operations for some brief period of time, often the next twenty–four hours. Afterward, the counterparty
could then return the securities to Bear, which would repay the counterparty the cash.
Much of Wall Street relied on repo loans to help finance its day–to–day operations, but Bear was
more dependent on these short–term loans than its competitors were. With a leverage, or
debt–to–cash ratio, of 30 to 1—meaning that for every $1 it actually held in cash, Bear had
borrowed $30 from other parties—the firm had one of the heaviest debt loads of any firm on the Street. That
made it more vulnerable than other firms when repo lenders faced a crisis of confidence.
To streamline the daily lending process, Bear operated financing desks in the fixed–income and equities
units staffed by people whose job it was to "roll," or renew, expiring loan agreements on a nightly, weekly,
or monthly basis. Eyes turned now to Tim Greene, one of the two heads of Bears fixed–income
financing desk. Greene, a West Point graduate with a soldiers sense of loyalty, had been working at Bear for
twenty–four years, rising through the ranks to help run the bond units repo desk, which handled about
$160 billion of funding at any given point—about half of Bears entire balance sheet. He had met his
wife, Maryann, on that desk, and he loved the job.
Greene was used to operating under pressure. From the time he arrived at work from suburban Connecticut at
7:00 a.m. to the time he finalized the days funding agreements around 2:00 p.m., every day was a scramble to
renew the firms loans and keep the cash coming. Ironically, just as the stress was amping up, Greene had tried
to reverse years of unhealthy eating habits with a 1,100 calorie–per–day diet and had already lost
Up to now, borrowing $10 billion or $20 billion in a day generally wasnt a problem. But Friday was likely
to be no average day, and the firm needed $14 billion in new money to fund its operations. On top of that, Bear had
to replace, or roll, more than $10 billion.
Greene, who was facing Molinaro on the opposite side of the room, tried to sound optimistic. His relationships
with lenders ran deep, and he didnt think theyd abandon Bear overnight. "Im confident I can
do it," he told the group.
"How?" asked Molinaro.
"I can do it without anybody knowing, on the screen," Greene told him, referring to a popular
computer–driven lending system in which participants could trade anonymously, without revealing their
identity to the other party in the transaction.
Next to him, Greenes boss, the fifty–two–year–old Friedman, doubted it. Ever since
the prior August, when two internal hedge funds had failed—giving the lie to Bears long–vaunted
prowess in careful risk management—Friedman had felt like the sky was falling. He joked to associates that he
spent his days on Bears seventh–floor mortgage–backed–securities trading hub either
hiding under his desk or puking into a trash can. He hated that the funds embarrassing failure had thrust his
insular company into the spotlight.
Now Friedman told the group he thought there was no way that at least half of the next days repo loans
were going to roll in order to help fund Fridays operations. Like any trading firm, Bear spent the day buying
and selling securities for itself and for clients, processes that required bundles of cash at the ready. More days than
not, the firm was profitable and not losing money, but it had to be prepared to refund loans or provide additional
collateral when asked. Now, with rumors sweeping Wall Street about Bears cash drain, Friedman worried that
Bears usual lenders might be too spooked to lend as they normally would, for fear that the firm would never
pay them back.
He suggested that Greene might try raising the $14 billion or so the firm had in bonds backed by Fannie Mae
and Freddie Mac, government–sponsored housing agencies that were considered safer than loans packaged
by other players. Those were the bonds tradable "on the screen," where no one would know it was Bear
making the transactions.
Molinaro turned to his treasurer, Bob Upton, who sat across from him next to Friedman. "Where are we
with cash?" he asked.
Upton studied the legal pad in front of him, on which he had jotted down his best estimates of the credits and
debits in Bears various accounts.
He felt beaten down. An unsmiling father of two, Upton had spent years toiling as an analyst of securities firms
and international banks for Fidelity Investments, hoping to someday actually manage the cash at a big Wall Street
firm. Since April 2006, when he had been named treasurer of Bear, the workload had been brutal. During a
three–year period his dark brown hair turned almost totally white. Though he was trim, didnt drink,
and watched his diet carefully, Upton now looked far older than his forty–seven years.
Like Greene, Friedman, and others, Upton and his team had suffered fallout from the hedge fund failures, as
funding the firm became more difficult. For much of the past year, Upton had been arriving at work from his
suburban home at 5:00 a.m., and not leaving until as late as 10:00 p.m. Many nights he got as little as four hours of
sleep. Im fucking killing myself, he often thought. Yet he, too, adored the place.
The firms troubles had been building throughout the week. On Monday, a batch of home loans it had
packaged and sold were found to be exceedingly high risk by a major rating agency, which meant that conservative
investors would have to sell any of the bonds they held that were backed by those loans. Based on the headlines,
some market watchers mistook the finding as a downgrade of Bear as a whole, seeing it as an indication that the
company was very likely to default on its debt. Its shares tumbled. Bear was now trading at about $65 on the New
York Stock Exchange.
Overnight, some of Bears lenders—the dozens of American and overseas banks that extended it
billions of dollars a day to conduct business—began tightening the reins. The Dutch bank ING refused to
refresh some of Bears credit, and others soon followed suit. Right away, Bears major clients heard the
message: The firm was no longer safe. Hedge funds like Renaissance Technologies Corp., the enormous trading firm
that had long been a top client, began reducing their balance levels immediately, worrying that if Bear went down,
their money would be stuck on a sinking ship. Bear shares fell further, even amid public denials by Molinaro and
others that any real trouble was afoot.