Transcripts

"Reviving the Economy: What Should Business Do?"-The Demise of Bear Stearns

SUZANNE PRATT: Meanwhile, Wall Street is about to mark an unhappy anniversary of the financial crisis. It's been a year since the sudden and shocking demise of Bear Stearns. The 85-year-old firm had survived the great depression and the crash of '87, but the current crisis proved too much. As we continue our series "Reviving the Economy: What Should Business Do?" Scott Gurvey takes a look back at what happened at Bear and what could have been done differently.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Bear Stearns was not actually the first shoe to fall. The first shoe was the failure of some mortgage somewhere which should never have been made in the first place. Bear's problems with the Street began when it announced that two of its hedge funds, heavily invested in mortgage securities, were in trouble. Sanford Bernstein's Brad Hintz says that caused a loss of confidence in the nation's fifth largest investment bank.

BRAD HINTZ, BROKERAGE ANALYST, SANFORD C. BERNSTEIN: They had these frozen positions on their balance sheet and the market began to get worried about Bear Stearns. And when the market begins to worry, they say we don't want to lend you money. We don't want to buy your bonds. We don't want to buy your commercial paper. We don't want to do repo with you.

GURVEY: Bear's competitors not only stopped doing business with it, they also began to short Bear stock. In short order the Federal Reserve arranged a shotgun marriage with JPMorgan Chase. The final price was $10 a share. Bear had traded for more than $130 a year earlier. The Federal Reserve has come under criticism for making rescue plans up as developments unfolded. Historian Richard Sylla of NYU's Stern school of business says if government safety nets in place now were available then, Bear Stearns could have survived.

RICHARD SYLLA, PROFESSOR, NYU STERN SCHOOL OF BUSINESS: There's no doubt about it. And in fact what happened later in the year, especially after the Lehman failure is that Goldman Sachs and Morgan Stanley decided to become bank holding companies so that they would have access to the discount window. And of course Merrill Lynch sold itself to Bank of America and so that you have basically the whole -- since Bear Stearns the whole structure of investment banking has been fundamentally altered.

GURVEY: Leo Tilman, a former Bear Stearns strategist, has written a book titled "Financial Darwinism." He blames the financial crisis on market participants and regulators who failed to compensate for changes in the way bankers were doing business.

LEO TILMAN, PRESIDENT, L.M. TILMAN & CO.: The key element of that evolution is that risk became the centerpiece of how financial institutions create value and destroy value. Yet, accounting, earnings and credit ratings and financial disclosures are not capable of describing them. So we saw a great disconnect between the economic reality of what under lied business models of these institutions, how they create value and how they destroy value versus the external perceptions of things.

GURVEY: Tilman says he fears the crisis will result in new regulations banning certain activities. He prefers rules requiring increased transparency, so that risks can be known and priced by all market participants. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.