What Led to the Grizzly Demise of Bear Stearns
Thursday, April 03, 2008SUSIE GHARIB: The saga of Bear Stearns was spelled out in detail on Capitol Hill today and if the financial fallout hadn't been so serious, it would have sounded like a soap opera. Rumors flying, markets possibly manipulated and a rapid fall from grace. But as the CEO's of Bear and JPMorgan told lawmakers, it was real and it was grim. Now there are two big questions. Why did the Fed engineer the bailout? And was it the right thing to do. Stephanie Dhue reports.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: What happened at Bear Stearns is best explained as a modern-day run on the bank. A crisis of confidence in its finances left the investment bank short of cash. CEO Alan Schwartz blames unfounded rumors and speculation of a liquidity crisis for the bank's near-failure.
ALAN SCHWARTZ, PRESIDENT & CEO, BEAR STEARNS: I did worry that there was an environment that could happen that if we didn't have, if the market couldn't see that we had some place to go and borrow against that collateral, then the fears could start. I just never frankly understood or dreamed that it could happen as rapidly as it did.
DHUE: Rapidly, as in overnight March 13. The Securities and Exchange Commission says Bear Stearns met its regulatory standards for capital and liquidity until it lost $10 billion that one day. SEC Chairman Christopher Cox says given the unusual circumstances, his agency is investigating.
CHRISTOPHER COX, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION: The SEC very aggressively pursues insider trading, market manipulation and the kinds of illegal naked short selling that have been very publicly alleged in this case.
DHUE: Bear CEO Schwartz says his firm may have stayed independent if the Fed stepped in sooner to lend money, as it does with traditional banks through its discount window. But New York Fed President Timothy Geithner says that may not have been the case.
TIMOTHY GEITHNER, PRESIDENT, FEDERAL RESERVE BANK OF NEW YORK: We only allow sound institutions to borrow against collateral in that context and I can only speak personally for this, but I would have been very uncomfortable lending to Bear, given what we knew at that time.
DHUE: Fed Chairman Ben Bernanke took issue with calling the deal a bail out, noting that Bear Stearns didn't fair well.
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: The shareholders took very severe losses. The company lost its independence. Many employees obviously are concerned about their jobs. I don't think it's a situation that any firm would willingly choose to endure. What we had in mind here was the protection of the financial system and the protection of the American economy.
DHUE: JPMorgan CEO Jamie Dimon dismissed criticism that his firm dumped its risk on the American taxpayer.
JAMES DIMON, CHAIRMAN AND CEO, JPMORGAN CHASE: The notion that Bear Stearns riskiest assets have been placed in the $30 billion Fed facility is simply not true and if there is ever a loss in the assets placed to the Fed, the first $1 billion of that loss will be born by JPMorgan alone.
DHUE: The Fed says the Bear Stearns assets it now owns are all investment grade, which may be little comfort at a time when investment grade securities can become junk overnight. Still, the Fed expects over time taxpayers will be paid back in full with interest. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
