Ode to Bear Stearns

News: Fortunately, I have no stock left in Bear. But I have friends who do, and they've been emailing me as though someone died.

By Nomi Prins

March 18, 2008

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During the six years that have passed since my days in banking, I've written a lot about companies that combusted into bankruptcy and the human damage their waning flames left behind. I've also written about firms that I thought would surely join their ranks as corporate epitaphs.

But none of them hit close to home until now. With Sunday night's demise (which the media are calling a bailout) of Bear Stearns & Co. at the hands of the Federal Reserve, Henry Paulson's Treasury, and JPMorgan Chase, the professional and personal combined for me. As with Enron, WorldCom, and other corporate catastrophes, there are real people below the top.

A dear friend of mine in the technology area described "a sense of shock and awe when the stock slid to $30 on Friday, and the feeling of getting punched in the face when it reached $2 a share." It's been a long time, but I do feel for him, and some of the others.

My foray into international investment banking began with Bear, Stearns in 1993, in East London. Bear was the first bank resident of the 50-story tower at 1 Canada Square, Canary Wharf. Local fishermen arrived before dawn to sell their catch by its waters. Our cafeteria was the fruit lady who used to come by the lobby every afternoon with her wares. Developers had to give away free storefronts to companies like The Body Shop to entice them to the area for pre-Christmas sales. Ultimately, Canary Wharf began to command high rents for luxurious accommodations, a new subway line was constructed to quickly connect it with the city of London, and the fruit lady was replaced by chain restaurants and upscale haunts. The development is now a mini metropolis, the ritzy backdrop for the last James Bond flick.

I ran the European analytics group until leaving to return to the United States and a job at Goldman Sachs in 2000, as the CDO market was climbing from infancy to a $2 trillion global disaster. As the London office grew tenfold, the bank weathered takeover rumors for years—from UBS, to ABN-AMRO, to Deutschebank. During the 1990s, it endured calamities including the 1994 emerging market collapse, the 1997 Asian currency crash, the 1998 Long Term Capital Management implosion.

It was a colorful place, especially compared to the colder elitist environments of Goldman Sachs and Lehman Brothers (where I also worked briefly). Internally and externally, the talk was always that Bear didn't fit the standard mold. It was the oddball amongst investment banks from the standpoint of "corporate culture"—a "maverick," the Wild West of banking. We actually left our desks to eat lunch. Some of the sales-force drank theirs.

It didn't merely hire the Ivy Leaguers that snottier firms coveted, but people from state schools (like me), or with street knowledge. One of the mortgage-backed securities analysts who worked with me got his job by having worked as former chairman "Ace" Greenberg's doorman.

It was also less connected than its competitors to Washington. It never had the revolving door to the Capitol that Goldman or Citigroup enjoys, never was on the top lists of corporate donors to politicians.

To differentiate itself from more established competitors, Bear concentrated on the more analytically intense products, like mortgage-backed securities, the very first CDO ("collateralized debt obligation," comprised first of emerging market bonds in 1996, then of high-yield, formerly known as "junk," bonds in 1998) and prime brokerage for hedge funds. That's the part that the Fed got JPM to buy while it shelled out $30 billion for the toxic remains of subprime and other esoteric loans to continue greasing the wheels of the industry and avoid a system collapse.

A former colleague who left Bear to head a division at a Japanese bank told me, "Unless you're in this full time, you've got no idea how bad it is. So many assets created in a system with leverage upon leverage upon leverage, and neither the Fed nor the system is big enough to bail itself out."

Fortunately, I have no stock left in Bear (I sold it to support my writing habit), except for a retirement plan worth, well, not so much. My remaining connection is with former colleagues and friends, and people have been emailing me who I haven't heard from in a decade, as though someone had died. Bear was a corporation that underwent, like so many others, explosive growth based on overleveraging subprime and other risky securities. That, coupled with bad management of an unregulated business, is what in the end caused it to run out of cash, much as people who can't pay off their declining valued homes go into foreclosure.

The overriding view that the Fed bailed out this investment bank is wrong. One senior managing director I once worked with said, "This isn't a blowup because of one bad traceable bond trade, but a concerted effort on the part of the government. The Fed closed us down. We had no choice. If we went into bankruptcy, we'd have taken 30 or 40 other firms, all hedge funds that borrow from us, down too. They needed people to think the worst was over. They wanted to open a discount window to banks [which they did by 25 basis points after the Bear announcement] with a statement they were in control."

The Fed bailed out the Bush administration's complete negligence of the subprime and credit crisis. The Fed bailed out Hank Paulson's Treasury, the same Hank Paulson that presided for years as CEO over Goldman Sachs. The Fed covered its own ass.

Being forced to sell itself at a bargain-basement rate was not a bailout for Bear Stearns. A quick death is helpful to the perception of Washington's ability to control the mess of the markets, but that doesn't help the homeowners facing foreclosure or those whose economic futures remain uncertain, including many of the 14,000 Bear employees who had little to no control over the policies under which the entire banking system still operates.

Sadly, not a single lesson has been learned. The way to avert a credit crisis is to regulate its source. How low must we go before we curtail a credit monster borne of lax lending, packaging, leveraging, and trading? I fear we may find out.

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