Lost Opportunities Haunt Final Days of Bear Stearns （下）

Bear Stearns -- with its immense stockpile of mortgages and related securities -- was particularly vulnerable. Despite months of price declines, those holdings were valued at about $56 billion -- a large portfolio for a firm its size. Still, SEC staffers -- who now were phoning in for weekly Wednesday-evening conference calls with the firm -- appeared comfortable. By Thanksgiving, some senior regulators were calling in less frequently.
'We've Got to Cut!'


'Ace' Greenberg argues to dump mortgage inventory.
Inside Bear Stearns, though, skirmishes about its mortgage holdings at times grew heated. Some veteran traders insisted that Tom Marano, the head of mortgages, needed to trim his portfolio. Among them were Wendy de Monchaux, who as head of proprietary trading invested Bear Stearns's own money, and Steve Meyer, co-head of stock sales and trading.
"Cut the positions, and we'll live to play another day," Ms. de Monchaux said often, invoking one of the firm's venerable maxims. But Mr. Schwartz, still boning up on the details of the mortgage markets, urged caution.
For some of the assets, the market was frozen, Mr. Schwartz reasoned, so selling was out of the question. On others, he had mixed feelings. He didn't want to unload tens of billions of dollars worth of valuable mortgages and related bonds at distressed prices, creating steeper losses.
Mr. Schwartz believed the portfolio at least should be better protected from further price declines. Spearheaded by Mr. Marano, a bearded 46-year-old trader with a Grateful Dead tattoo on his right shoulder, the mortgage team unfurled a hedging strategy known as "the chaos trade."
The trade was a deeply pessimistic bet -- essentially a method for making money if the mortgage and financial markets cratered. The traders bet that the ABX, a family of indexes made up of securities backed by subprime mortgages, would fall. They made similar moves on indexes tracking securities backed by commercial mortgages. Finally, they placed a series of bets that the stocks of major financial companies with exposure to mortgages, including Wells Fargo & Co., Countrywide Financial Corp. and Washington Mutual Inc., would decrease in value as well.
Late in September, with Bear Stearns and other financial stocks rallying, members of the firm's executive and risk committees gathered in Mr. Cayne's smoky, dark and secluded sixth-floor offices to discuss the hedges. Negotiations for Allianz SE's Pacific Investment Management Co. to take a nonequity stake of as much as 10% in Bear Stearns had recently fallen apart. That cost the brokerage a chance for capital and a coveted endorsement of Bear Stearns's creditworthiness.
Mr. Cayne had just returned from the hospital where he'd been treated for an infection, and he looked thin and drawn. Mr. Greenberg, the firm's storied trader and former CEO, took center stage. As head of the risk committee, he had been reviewing the Wells Fargo and other negative stock bets. He wasn't happy. The financial-stock hedges were too risky, he warned, and should be closed out immediately. Moreover, he wanted the mortgage inventory slashed.
"We've got to cut!" Mr. Greenberg demanded. Ms. de Monchaux and Mr. Meyer concurred.
Oklahoma-bred and Missouri-educated, Mr. Greenberg was the embodiment of the "PSDs" -- poor, smart employees with a deep desire to get rich, upon whom the firm had been built. Mr. Greenberg, who ran the firm for 15 years before Mr. Cayne nudged him aside, was known on Wall Street for his voluminous memos, in the voice of a fictional character, urging traders on issues large ("it doesn't pay to get too arrogant") and small (save paper clips to cut costs).
But it was Mr. Greenberg's trading style that had most defined Bear Stearns: Sell losing trading positions -- quickly. Mr. Greenberg still recalled what his father, an Oklahoma City clothier, told him: "If something isn't moving, sell it today because tomorrow it will be worth less."
The hedges had made close to half a billion dollars and stood to make more as the stocks continued to fall. But since they had first employed the chaos trade, Mr. Marano and his team had been hectored almost daily by complaining phone calls from colleagues. Some of Bear Stearns's more superstitious traders even objected to the strategy's name: They were tempting fate by invoking chaos.
Faced with the fierce divide among his top executives, Mr. Schwartz, who was generally supportive of the chaos trade, decided to abandon it. He wanted specific pessimistic plays that would offset specific optimistic bets, rather than the broader hedges Mr. Marano had employed. Frustrated, Mr. Marano ordered the trades undone.
As October dawned, Messrs. Cayne and Schwartz had high hopes that a deal with Citic would bolster Bear Stearns's fortunes. On Oct. 22, Bear Stearns announced a joint venture in Asia that included a $1 billion cross-investment between the two companies. If regulators approved, Bear Stearns could count on getting $1 billion in the first half of 2008. But it would spend the same amount over a longer period for a complementary stake in Citic.
Investors weren't impressed. Bear Stearns shares rose meagerly but backtracked days later.
Over the next few weeks, Bear Stearns's competitors disclosed losses from bad mortgage-related bets. Merrill Lynch & Co. announced a loss amid write-downs of $8 billion; Morgan Stanley revealed losses of nearly $4 billion.
To outsiders, it was beginning to look as if Bear Stearns had navigated the crisis relatively deftly. Inside the firm, that view wasn't as prevalent. Its mortgage holdings were still hefty, and its bond business was reeling.
The firm continued to explore ways to raise money, hiring investment banker Gary Parr of Lazard Ltd. to try to bolster the firm's prime-brokerage business, which handled trading and lending to hedge funds and other big clients. Mr. Schwartz had also discussed a merger with hedge fund Fortress Investment Group.
Neither effort would bear fruit.
Time to Move On


Alan Schwartz tells James Cayne he needs to step down as CEO.
In late November and early December, tension mounted as Bear Stearns executives contemplated a bonus pool down significantly from a year earlier. Executives in the stock division blamed their counterparts in bonds.
"Why should we pay those guys anything?" Mr. Meyer, the stock sales and trading executive, at one point demanded in a compensation meeting.
Things only got testier when Bear Stearns announced abysmal fourth-quarter results on Dec. 20. Dragged down by a drop in the value of its mortgage inventory, the company reported its first quarterly deficit since it opened for business in 1923. The bond division, always the firm's cash cow, had a loss of $1.5 billion for the quarter.
At lunchtime the next day, as employees prepared for the holidays, Bear Stearns received bleak news. An email from Pimco, the influential bond fund, said it had become uneasy about the financial sector in general. And the fund wanted to immediately unwind several billion dollars of trades it had agreed to with Bear Stearns.
"This doesn't make any sense," Jim Egan, Bear Stearns's co-head of global sales, said in a hastily arranged conference call with William De Leon, a Pimco risk manager, and William Powers, a Bear Stearns alumnus and Pimco managing director. How could a snap decision throw cold water on such a longstanding relationship with such little warning? If Pimco planned to take such drastic action, Mr. Egan and his colleagues added, the decision should be made "corner office to corner office."
Messrs. De Leon and Powers ultimately agreed to hold off on dramatic moves until January, when they'd have a chance to sit down with senior Bear Stearns executives. But before hanging up, Mr. Powers issued a stern, if familiar, warning: "You need to raise equity," he said.
Many Bear Stearns veterans began pushing hard for Mr. Cayne's ouster, arguing the firm needed a more engaged leader. The dissatisfaction had been building since the summer. It grew after a Nov. 1 story in The Wall Street Journal documenting Mr. Cayne's frequent absences from the office for golf and bridge during the worst of the summer's hedge-fund crisis. The article also mentioned that Mr. Cayne had used marijuana in the past. He told employees in an email the same day that he hadn't "engaged in inappropriate conduct."
Mr. Schwartz was reluctant to push Mr. Cayne out. He had led the company through some great years, Mr. Schwartz believed, and could be trusted to step down on his own.
"Stand calm," he told the protesters. "We've got it under control."
Several top managers began joking that they should hold a sit-in in Mr. Schwartz's 42nd-floor office until he agreed to unseat Mr. Cayne as CEO.
Investors were growing impatient, too. Bear Stearns's fourth-largest shareholder -- Bruce Sherman, chief executive of money manager Private Capital Management Inc. -- was agitating for a change at the top.
Shortly after the New Year, Mr. Schwartz stopped by Mr. Cayne's office. The pressure inside and outside of the firm for his departure had become too great, he told his boss. It was time to move on.