Rise and Fall of Bear Stearns (eBook)

ON MARCH 16, 2008, I WAS AT WORK AT Bear Stearns, but in a distinct departure from my usual routine. For one thing, it was a Sunday, and the last time I had worked weekends was during the 1950s, when the stock market had Saturday trading hours. This particular Sunday was drizzly and gray--fitting weather (actually, a squall with golf-ball-size hail plus an earthquake would have been more like it) for confronting a calamity that even in my gloomiest risk calculations I hadn't seen coming. Shortly before noon, I went to our headquarters at 383 Madison Avenue for an emergency meeting of the corporate board of directors. The week just ended had been the most maddening, bizarre, and bewildering in our eighty-five-year history.

Occasional bad news is inevitable, but I've tried to order my life to avoid getting blindsided. Sixty-one years ago I moved to New York and found work as a clerk at Bear Stearns, an investment firm that had 125 employees. Before I turned forty, I was running the place. At its peak, Bear Stearns employed almost 15,000 people. Along the way, my formal titles included chief executive officer, chairman, and chairman of the executive committee, my principal occupation was and continues to be calculating and managing risks.

My workday typically started off like this: out the door by 8:00 a.m. and at my desk by 8:15, where my morning reading consisted of the Wall Street Journal--at home I'd already digested the New York Times and the New York Post--and printed reports that specified how various departments that handled the firm's capital had performed the previous day. If a trader had an especially good day, I'd probably call to congratulate him. If the opposite occurred, I'd want to find out what happened. Before the markets opened at 9:30, I'd usually handled more than a dozen phone calls. As the day progressed, I'd be easy to get hold of but hard to keep on the line. Most phone conversations that last longer than thirty seconds, I find, have reached a point of diminishing returns. I have many interests and hobbies, but making small talk isn't one of them.

Anyone who invests money and neglects to calculate the risks at hand with a cold eye has no business being in our business. Contrary to common belief, securities markets are not casinos, and the last thing I ever want to depend upon is getting lucky. The best risk managers instinctively anticipate the fullest range of plausible outcomes. Maintaining that discipline, I understood early on, was indispensable to long-term success.

It would be disingenuous to suggest that making money is not a reasonable way of keeping score. For any financial institution, it's obviously the essential priority. But I never regarded making money, either when Bear Stearns was a private partnership or after it became a public company, as an end in itself. The more Bear Stearns flourished, the greater the variety of products and services we offered our clients, the more our capital grew, the more people we employed, and thus the more families that depended upon the well-being of the enterprise, the deeper was my conviction that we existed, above all, for the purpose of existing. On any given day, my ultimatepriority was that we conduct ourselves so that Bear Stearns would still be in business tomorrow.

THE PREVIOUS Monday morning our stock price had begun dropping, and by noon it was off 10 percent, from $70 to $63 a share. Part of this decline was attributable to Moody's, the bond-rating agency, having just downgraded some of our corporate debt. But most of the damage was being inflicted by a much more insidious factor, a groundless rumor. (Do...