Global Economy

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Bear Stearns chiefs blame market rumours for collapse

By Tom Braithwaite in Washington

Published: May 5 2010 18:59 | Last updated: May 5 2010 18:59

Bear Stearns’ former executives on Wednesday blamed market rumours for the demise of the investment bank in 2008, an event that marked a dramatic new phase in the financial crisis.



Appearing in public for the first time since then, Jimmy Cayne, the former chief executive of Bear, told the financial crisis inquiry commission that “the market’s loss of confidence, even though it was unjustified and irrational, became a self-fulfilling prophecy”.





“I have tried to avoid  . . . conspiracies, rumours,” he said, although he added that he had heard stories about “hedge funds [that] gathered together and they ganged up”. But “regardless of conspiracies . . . the bottom line was that the firm came under attack”.



Alan Schwartz, who succeeded Mr Cayne as chief executive in January 2008, testified that the speed of the “modern financial media environment” had helped ensure that “the rumours became a self-fulfilling prophecy” and produced a bank run.



Their fellow former Bear executives used the same formula to explain the liquidity run that led to an emergency sale of the bank to JPMorgan Chase, causing irritation among the FCIC’s commissioners.



Warren Spector, a former co-president, said he had believed Bear had employed an “effective and robust risk-management” strategy.



Bill Thomas, vice-chairman of the congressionally appointed panel, asked: “How could you folks, as sophisticated as you were, with the models that everyone felt comfortable with, believe you were the victim  . . . of unsubstantiated rumours, fears and innuendo – that your colleagues did you in?’’



Analysts have pointed to a failure to diversify from mortgages, too big an appetite for leverage and Mr Cayne’s frequent absences from the bank in favour of bridge tournaments and the golf course.



Asked about its level of equity capital, Mr Cayne said: “Historically, equity will save you, but it would have been an inordinate amount of capital.”



The bank had been reeling from mortgage-related losses but it was the unwillingness of counterparties and creditors to deal with Bear that caused a liquidity crisis from which it could not emerge.



Mr Cayne, 76, said there had been a deliberate shift to short-term funding: “We felt it was more safe and more secure for our investors,” he said. He stepped down as chief executive of Bear in January 2008 but remained as chairman until the government-backed sale to JPMorgan in March.



He joined the firm in 1969 and built it from a bond trader to the fifth biggest investment bank in the US. He was a significant shareholder and lost a large part of a personal fortune in the forced sale to JPMorgan.



The path to blaming an unforeseeable market shock has been trodden in recent weeks by Dick Fuld of Lehman Brothers, whose bank failed, and Chuck Prince of Citigroup, whose bank survived thanks to a huge capital injection from the government.



Mr Schwartz did acknowledge that the company had underestimated the potential collapse of the US mortgage market.



The FCIC, chaired by Phil Angelides, the former treasurer of California, is charged with the task of writing a detailed report on the origins of the 2008 crisis by the end of the year.



James Bullard, president of the St Louis Federal Reserve, told the Financial Times last week that he had seen nothing in the Senate financial regulation bill to prevent a repeat of the Bear crisis.



In his prepared testimony, Chris Cox, the for mer chairman of the Securities and Exchange Commission, blamed blurred lines of regulatory responsibility but did not accept any culpability for failures in supervision. But David Kotz, inspector-general of the SEC, noted that he had found “numerous specific concerns” with the commission’s consolidated supervised entities programme, under which Bear was regulated.