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.
Nomi Prins is a journalist and Senior Fellow at Demos, a non-partisan public policy research and advocacy organization. She is the author of Other People’s Money: The Corporate Mugging of America and Jacked: How “Conservatives” are Picking your Pocket (whether you voted for them or not).
© 2008 The Foundation for National Progress
Thanks, Nomi for connecting the Bear with the people that were it. i am just now, starting to hear and understand the connections between the bailled out and the bailors and the flowing of capital to the upper levels of corporate mgnt. historically, we have seen this before and it continues to occur faster than ever.
now we’re all set, been building a sustainable farm community for the last 25 yrs. My question is, what can be done to bring the beast to heal and the sooner the better?
Thanks to Ms. Prins for pointing out that CDO’s and even various kinds of junk bonds are children of the Clintonian “Boom” Era of massive deregulation. It would be nice if Obama’s handlers would use some of that in their continually weak critique of Hillary’s “experience” claim.
It’s also nice to know that she became affluent, if not rich, from her own corporate binging, so now she can afford to feed her “writing habit,” and let us common folk see some of the details demonstrate that capitalism is nothing more than legalized theft. Were we all so lucky. As if we didn’t already know. Whatever…
So here’s my question: now that the US taxpayer has guaranteed Bear Stearns’ CDOs (while handing over any worthwhile remenants of what was BS to JPM) exactly how do we ever get our money back? Or has BushCo simply passed on $30 billion of taxpayers’ money to various corporate scamsters?
Bear Stearns is a corporate welfare whore.
I don’t care if I can make money. I will not play the stockmarket because that means I am supporting the enemy. I will do business with every co-operative I can find. www.ica.coop
I have heard the figure of 500 trillion dollars in bad debt out there. That’s about enough to buy everything in the world about 5 times over. I don’t think any amount of [bail out] money is going to solve this mess. Printing more money seems to be the perscription, which leads to inflation and a worthless dollar. The foxes have been guarding the hen house. Little or no regulation has been put on these people.
Funny how all the people who rail against welfare are silent when it comes to bailing out banks that have been criminally negligent. Run for cover, the sky [is] falling. Good luck.
Nome.
I read yesterday that the top officers of Bear Sternes paid themselve massive bonuses six week ‘before’ the bailout. Do you know anything about this?
We don’t have much substance regarding what ‘exactly’ caused a rush to ’seal the deal’ by Monday - and that too on Sunday. I suspect besides being over-leveraged and possibly causing some damage to “other” institutions - there may be the more nefarious motive of the ’sweetheart’ deal for one of the ‘member’ banks of the Federal Reserve. Hey- get the building in NYC prime financial turf, and the company for ONLY 240M.
Wonderful deal for JP Morgan- the urgency - I am sure was a ruse to make sure that no other firms would be able to actually have an open and fair bidding on the assets of Bear Sterns (like some Japanese Banks/Chinese Banks/ or god forbid- American banks that were not insider ‘members’ of the federal reserve.
We have finally sunk to inglorious feudalism — the rest is all polite charade.
There is not 500 trillion in bad debt, our M3 money supply is only 14 trillion. The 500 trillion is the notional value of derivates, bets between 2 parties, off balance sheets and not regulated. When one party wins the bet, the other loses, no money is created or lost, unless one party reneges on the bet due to being bankrupt. So there is risk, it just is not 500 trillion.
Bear Sterns did not receive any bonuses, they refused them. Google it.
The bigger picture is the housing bubble collapse was on Paulsons watch, triggered by Bernankes interest rate increases. Beneficiary was GS which shorted the sub-prime market. Paulson was GS CEO before becoming SOT.
Bearn Stearns, who just happened to be GS’s bigest competitor, finds itself in trouble, and forced to sell to JPM, all orchestrated by Paulson and the Fed (JPM is one of the biggest shareholders of the Fed). Win-Win for GS.
Greenspan just happened to be a Corporate Director of JPM. JPM just happened to invent derivatives and holds more of them than anyone else.
Heads Bare Sterns wins, tails the government assumes wildly enormous debts.
http://news.yahoo.com/s/nm/20080320/bs_nm/bearstearns_sec_dc_1
Curiouser and curiouser…
It is bad enough that nobody is even suggesting that the only possible long term solution (that the financial industry be re-regulated as Nomi points out in her last paragraph). To add insult to injury, each time Bernanke lowers interest rates it does not help distressed homeowners, rather it gives the same sharks that caused the housing bubble to speculate in other commodities that are causing higher inflation and will create future financial crisis that will require ever larger taxpayer bailouts.
dlnelson7-I’m with you. I’m kinda lucky in that my phone company is co-op, my electric company is co-op, my ag supplier and usual grain buyer is co-op, my homeowner’s insurance is co-op. I’m lucky that here in S.MN. there’s a long history of cooperatives.
We’ve(our wonderful government) let these frat-boys play high-stakes poker with our economy with no betting limit. It’s insane. Laissez-faire capitalism doesn’t work; it destroys lives. Stop worshipping it.
The avalanche has begun. Too late for the pebbles to vote.
Bank is a four letter word.
Here’s what the Eliot Spitzer story AND the Bear Sterns story are REALLY about-bush corruption and crony capitalists raping the American people
http://www.gregpalast.com/
This is a great essay to help start the awakening. I note she is also writing books on the disease. However, it is time that we stop being polite. I know it is hard. My wife is a high school teacher and she has to flunk some nice people to wake them up. We need to tell the participants that they have bad breath. As long as they think whatever they do is o.k., if it helps pay for a 7,000 dollar a month 800 sq. ft. condo for;glorious me, then excuse me I won’t have lunch with you. As right wing idiots say- its the person not the gun- I will agree. A person can shun antisocial and personal behavior that is a threat to the collective good , even if they are (seem) friends.
What’s most interesting is that Commondreams.org is covering this whole issue in such a ‘lite’ manner. In fact the whole society is focused where the media wants us to be-sit coms, fantasy shows about being rich and famous and phony issues surrounding the playground activities of Hillary and Obama.
I did find, after googling the site, these interesting links in the archives:
Report Says US Lenders Prey on Minorities - CommonDreams.org
Mortgage lenders, represented by the Mortgage Bankers Association, have defended subprime loans as necessary to enable them to extend credit to chancy …
Institute for Public Accuracy (IPA): Obama Finance Chair Tied to …
This collapse came amid harsh criticism of how Superior’s owners promoted sub-prime home mortgages.” Bernstein is an award-winning investigative reporter …
www.commondreams.org/news2008/0228-18.htm - 18k
www.commondreams.org/archive/2008/01/16/6409
Off-topic a bit I suppose, but I keep wondering everytime I see on the TV, US homeowners being evicted - their house contributes to the street of deserted houses depicted - why don’t people just move back into their house - are there police patrols checking to see if they return? After all no one else is going to be moving in are they???