Jimmy Cayne, the former chairman of Bear Stearns, the first investment bank to collapse during the credit market turmoil of 2008, admitted last night that it contributed to its demise by taking on too much risk. But testifying before a commission of inquiry investigating the credit crisis, he also expressed his continuing bewilderment and anger at the speculators and rumour-mongers who ultimately brought the firm down in a just a few fraught days. In March 2008, Bear Stearns was "a big fat goose walking down the lane that was about to get eaten alive", he said.
Yesterday, the Financial Crisis Inquiry Commission took evidence from Mr Cayne and the former Bear Stearns chief executive, Alan Schwartz, in an attempt to draw lessons from the collapse of what was then the smallest of America's five major investment banks – an event that became a harbinger of things to come for Lehman Brothers and other Wall Street firms.
Phil Angelides, the commission chairman, said Bear Stearns was in effect playing "Russian roulette" by holding large amounts of illiquid assets, such as mortgage derivatives, while maintaining only a small capital cushion and funding its business through overnight lending markets, where it had to roll over its loans every day. The bank's leverage ratio often topped 40 times, meaning its liabilities were 40 times its assets.
"That was the business," Mr Cayne explained. "That was industry practice. In hindsight, I would say leverage was too high."
Yesterday's hearing had the flavour of a coroner's inquest, and commissioners appeared to pull their punches, in comparison to the treatment meted out to the executives from Goldman Sachs and other banks who have testified in recent months. Both Mr Cayne and Mr Schwartz described the demise of Bear as a classic "run on the bank", which they said was fuelled not by real evidence that the company's finances were in disarray but rather by rumours that were not true. Both said they did not know what they could have done to save the 85-year-old firm.
Bear Stearns had appeared weak since July 2007, when it lost $1.6bn trying to prop up two internal hedge funds whose investments in subprime mortgages had turned to disaster. Its high leverage ratio, and the fact it had a higher proportion of its earnings from the mortgage derivatives business than its rivals, meant speculation over its future gathered as the housing and credit markets worsened.
Beginning on 10 March 2008, Bear Stearns' shares began to plunge and clients began to stop doing business with the firm to protect themselves. By the Friday of that week, the bank needed an emergency loan from the US Federal Reserve to survive, and on the Sunday it was sold to JPMorgan Chase in a deal brokered by the US Treasury at a fraction of Bear's previous value.
Mr Cayne said he was delighted that the Securities and Exchange Commission said it would look in to whether hedge funds or other banks had conspired to bring down Bear Stearns, but not surprised that the regulator never found evidence of wrongdoing. The chances of the SEC finding a conspiracy "would be a miracle", he said.
Speculators "gather together and they gang up," he added. "We were a big fat goose walking down the lane that was about to get eaten alive. Regardless of whether or not it was a conspiracy, the bottom line is the firm came under attack.
"The market's loss of confidence, even though it was unjustified and irrational, became a self-fulfilling prophecy. The efforts we made to strengthen the firm were reasonable and prudent, although in hindsight they proved inadequate."
Mr Cayne, who spent almost 40 years at Bear Stearns, had been forced to give up the chief executive job in January 2008 and remain only as non-executive chairman, amid shareholder anger at the company's first quarterly loss. His reputation came under fire as he was revealed to have been on the golf course or at bridge tournaments at key moments of the bank's fight for survival.
His laconic performance yesterday included blunt answers to questions such as whether Bear Stearns should have been seen as "too big to fail". He responded only, "no". He also hinted at bitterness that the Federal Reserve only finally allowed investment banks to access emergency loans from its so-called "discount window" after Bear's failure. It was, he said, "45 minutes too late".
The sale to JPMorgan saw the value of Mr Cayne's stake in the company slashed by about $1bn, reducing his personal fortune to $600m. Mr Schwartz now runs a boutique investment banking firm, Guggenheim & Co. Asked if he would have done anything differently, with hindsight, he said: "I don't have an answer."
Mr Schwartz said: "I ask myself that every day, and I can't think of anything we could have done within the context of our business model. The year 2007 turned out to be one where you had to get bearish on the overall mortgage market, which is a big thing to do as business, as opposed to an investor. We could have taken down our inventory [of mortgage-backed securities] significantly, even though we were a dealer, and put on shorts. It's rare you have to make one decision like that and get it right in timing and magnitude."
Modelled on the bipartisan 9/11 Commission, the FCIC has been asked to report on 22 factors in the onset of the crisis, from fraud and due diligence failings to monetary policy and regulation. Its conclusions are due on the President's desk by 15 December. Its hearing into Bear Stearns is part of an examination into the "shadow banking system", the market for loans by which many companies now access funding without having to go via traditional banks. Bear funded itself in the overnight repo market, whose players turned against it in its final days.Reuse content