Three years after the collapse of Bear Stearns Cos., which helped fuel the worst financial crisis since the Great Depression, former bond executives of the firm are running businesses at one-time rivals, including Bank of America Corp. (BAC) and Goldman Sachs Group Inc. (GS)
Alumni of Bear Stearns, which has been accused in lawsuits of building faulty mortgage securitizations, have contributed to a Wall Street rebound. Profits at broker-dealers totaled $89 billion in 2009 and 2010, the best two years on record, according to New York state’s comptroller.
“That’s Wall Street,” said Jeanne Branthover, a managing director at Boyden Global Executive Search Ltd. in New York. “Maybe the rest of the world looks at it negatively, to have been associated with Bear Stearns, but if we didn’t have these types of survivors and Wall Street couldn’t reinvent itself, we as a country wouldn’t survive.”
Others see things differently. Even if former Bear Stearns employees operated within the rules of the period and lost money when the company’s shares tumbled 94 percent, their subsequent good fortune may be resented on Main Street, said Simon Johnson, a professor at the Massachusetts Institute of Technology’s Sloan School of Management and a Bloomberg News columnist.
“Bear Stearns was an integral part of how the system became dangerous,” said Johnson, a former International Monetary Fund chief economist and author of “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.” “I have no idea whether these individuals did anything wrong, but they were reemployed quickly, unlike the rest of the real economy, or the teachers now losing their jobs because of the damage done. There’s an asymmetry of outcomes here that’s unfair and feeds into the broader resentment.”
Among the most highly placed members of the Bear Stearns diaspora are Michael B. Nierenberg, 48, who’s now in charge of Bank of America’s global mortgage and securitized-products business; Jeffrey L. Verschleiser, 41, who runs mortgage operations at Goldman Sachs; and Scott Eichel, 36, now Royal Bank of Scotland Plc’s global head of securitized products and U.S. credit trading.
The three men, none defendants in mortgage-related lawsuits, were among a group of former Bear Stearns employees at a fund-raising event for the Samuel Waxman Cancer Research Foundation in New York in November, where singer Sheryl Crow performed, according to a person who was there. The party raised about $3.4 million, a record for the group, whose board Nierenberg chairs, according to the foundation’s website.
The paths of former Bear Stearns employees often cross at such gatherings, a legacy of the firm’s requirement that executives donate 4 percent of pay to charity, said Scott Buchta, a former senior managing director at Bear Stearns who’s now head of investment strategy at broker Braver Stern Securities LLC in Chicago and wasn’t at the dinner.
“Quite often these events become a mini-reunion of sorts,” Buchta said.
Under Nierenberg, whose family ran a meat company, Charlotte, North Carolina-based Bank of America last year was the largest underwriter of repackaged slices of U.S. government- backed mortgage bonds, a business that has thrived as investors look to protect against potential increases in interest rates from record lows.
Eichel, who joined Bear Stearns after graduating from Duke University in Durham, North Carolina, in 1997, has turned Edinburgh-based RBS into the second-largest manager of worldwide sales for securitizations without government backing, a reviving business. In December, Verschleiser’s group at New York-based Goldman Sachs snapped up $6 billion of home-loan bonds that State Street Corp. was selling.
Nierenberg, who oversaw adjustable-rate debt at Bear Stearns, and Verschleiser, whose purview included subprime loans, were co-heads of the New York-based firm’s U.S. mortgage business until they were promoted in late 2007, when Eichel and another trader took the posts.
Their second acts echo those of former executives at Drexel Burnham Lambert Inc., which during the 1980s helped create an explosion in high-yield company bonds that later soured, helping fuel the savings-and-loan crisis of that era. After Drexel’s 1990 collapse, Leon Black, its chief of mergers, founded buyout giant Apollo Management LP, and Stephen Feinberg, one of the firm’s traders, went on to start private-equity firm Cerberus Capital Management LP.
Other Bear Stearns bond executives landing at rival banks include its last co-heads of global fixed income, Jeffrey Mayer and Craig Overlander, both 51. Mayer now runs the North America region for the securities unit of Frankfurt-based Deutsche Bank AG (DBK), whose sales and trading revenue rose 30 percent last quarter while five big rivals posted an average 8 percent decline. Overlander is deputy chief executive officer of Societe Generale (GLE)’s investment-bank division for the Americas.
Thomas Marano, 49, global head of mortgages, rates and foreign exchange at Bear Stearns, is now CEO of the mortgage unit of Ally Financial Inc., the auto and home lender rescued by the U.S. government. Randy Reiff, 40, Bear Stearns’s head of commercial-mortgage finance and commercial-mortgage securities, now holds a similar role at Australia’s Macquarie Group. Japan’s Mitsubishi UFJ Securities USA is relying on Bear Stearns alumni in corporate bonds, including James Gorman, its managing director of high-yield capital markets.
The former Bear Stearns executives all declined to comment directly or through spokesmen for the firms where they now work.
‘On Their Feet’
“Most of them landed on their feet,” said Alan “Ace” Greenberg, 83, the firm’s CEO until 1993. “No question about it -- they were talented.”
Greenberg came into the office until the end and became a vice chairman emeritus at JPMorgan Chase & Co. (JPM) after the bank agreed to buy Bear Stearns with Federal Reserve assistance on March 16, 2008. He coined the term “PSD” in a 1981 memo to employees describing Bear Stearns’s preference for scrappy recruits who were “poor, smart and had a deep desire to become rich,” according to a book he wrote last year.
Lehman Brothers Holdings Inc. bond executives have had a different experience, according to Branthover. Instead of dispersing widely to banks, many remained with Barclays Plc (BARC), which bought the firm’s U.S. investment bank after its September 2008 bankruptcy, or joined Nomura Holdings Inc. Bear Stearns’s early collapse may have been good luck for its employees, allowing them to land before others began looking, she said.
Before the mortgage-securitization market imploded, fueling $2 trillion of losses at the world’s largest financial companies, it accounted for the biggest share of business at Bear Stearns’s most-profitable division, its fixed-income unit, which generated 45 percent of total revenue, according to the final report of the Financial Crisis Inquiry Commission.
Bear Stearns underwrote 10 percent, or $298 billion, of U.S. home-loan bonds without government backing sold from 2005 through 2007, second to top-ranked Lehman, according to data from newsletter Inside MBS & ABS. The company issued $167 billion of such debt, which was blamed by the FCIC for fueling the housing bubble.
Allegations unsealed in January in a 2008 lawsuit by bond insurer Ambac Assurance Corp. suggested practices at Bear Stearns that were “dirty beyond my skeptical imagination,” said Howard Hill, a former Babson Capital Management LLC money manager who helped start securitized-debt departments at four firms. Ambac was partly seized by its regulator after housing- debt losses depleted the company’s capital.
The bank ignored information from employees and mortgage- review companies showing loans were shoddy, the insurer alleged in the lawsuit, filed in federal court in Manhattan. It also went back to originators of mortgages it had packaged into bonds and sold as securities and demanded refunds when loans quickly defaulted, according to an amended complaint based on evidence obtained in discovery. Cash raised from those settlements wasn’t shared with investors who bought the securities, Ambac said.
In one e-mail to colleagues from March 2007, Verschleiser, referring to $73 million of new mortgages still in its inventory, said he “did not understand why they were dropped from deals and not securitized before,” when the bank could have demanded refunds from lenders after a single missed payment, according to the complaint.
Marano, in an October 2007 e-mail to co-workers, vowed to retaliate against Moody’s Investors Service and Standard & Poor’s after the credit-rating companies relied on by investors downgraded some Bear Stearns securities, the complaint said.
“We are going to demand a waiver of fees,” Marano wrote, according to the complaint. “In the interim, do not pay a single fee to either rating agency. Hold every fee up.”
A judge last month denied Ambac’s bid to add 10 individuals, including Verschleiser and Marano, to its suit. Spokesmen at the firms where Verschleiser and Marano now work declined to comment.
Buyers and bond insurers suing over mortgage securities created or sold by Bear Stearns also include Allstate Corp. (ALL), the Federal Home Loan Banks of Pittsburgh and Seattle, Syncora Guarantee Inc., CIFG Assurance North America Inc. and MBIA Insurance Corp. As a trustee, Wells Fargo & Co. this year sued a Bear Stearns unit now owned by JPMorgan to force it to turn over loan files.
Allstate said in a suit filed this year that, based on credit and tax records, 80.6 percent of borrowers underlying one 2006 securitization planned to live in the properties they bought instead of the 92.5 percent Bear Stearns claimed. That was important, the insurer said in its complaint, “because borrowers are less likely to ‘walk away’ from properties they live in, as compared to properties being used as a vacation home or investment.”
Ambac and Allstate are “large, sophisticated insurance companies that are trying to blame others for risks they knowingly took and were paid for taking,” said Jennifer Zuccarelli, a spokeswoman for JPMorgan in New York. “We do not believe their claims are meritorious and intend to defend Bear vigorously.”
Allstate, a Northbrook, Illinois-based insurer, has sued at least four other firms over similar mortgage problems. So-called put-backs, in which a lender or bond issuer repurchases loans that didn’t comply with contract terms, may cost companies as much as $90 billion, JPMorgan analysts said in an October report.
“Bear Stearns is just the tip of the iceberg,” said Isaac Gradman, a San Francisco-based consultant and formerly a lawyer at Howard Rice Nemerovski Canady Falk & Rabkin, where he represented mortgage insurer PMI Group Inc. Firms in the industry “all knew they were putting together securitizations with highly deficient loans.”
A Securities and Exchange Commission examination report from November 2005 released by the FCIC reveals regulators were concerned about Bear Stearns controls. The SEC questioned the extent to which, in response to agency critiques, “the firm will establish, document, and maintain a system of internal risk management controls to assist it in managing the legal risks associated with its business activities as is required.”
Aside from two former hedge-fund managers, who worked in Bear Stearns’s asset-management unit, U.S. officials haven’t sued any of the firm’s employees or executives for wrongdoing in relation to the mortgage crisis.
Ralph Cioffi and Matthew Tannin, who lost $1.6 billion of investors’ money, were acquitted in a criminal case in 2009. One juror said she would invest with them if she had the money. A civil case in which the SEC also alleges that the two lied to investors is still pending. They deny wrongdoing.
Bear Stearns wasn’t among the top five underwriters of collateralized debt obligations that repackaged mortgage bonds and related derivatives. CDOs fueled some of the biggest losses at rivals and remain a focus of agency investigations, according to disclosures by banks.
Eichel refused to help hedge fund Paulson & Co. create mortgage CDOs to bet against, as Goldman Sachs and Deutsche Bank did. He told author Greg Zuckerman for his book “The Greatest Trade Ever” that the idea “didn’t pass our moral compass.” Goldman Sachs later paid a record fine to settle SEC charges about a CDO it created for Paulson.
Bear Stearns also avoided the market for structured- investment vehicles, or SIVs, the $400 billion of funds that relied on short-term paper and whose collapse roiled bond and money markets, forcing banks to suffer losses on debt kept off their balance sheets, according to Henry Tabe, co-founder of Sequoia Investment Management Co. in London and author of a 2010 book on SIVs.
“Bear Stearns may have played an important role in the crisis, but the bank also showed good judgment in some instances,” said Tabe, a former Moody’s analyst.
While Marano was criticized internally for not offloading $13 billion of adjustable-rate mortgages when markets were first roiled in the summer of 2007, according to the FCIC report, the company’s assets are proving less toxic than expected.
The Fed extended a $29 billion loan to a vehicle called Maiden Lane LLC that bought $30 billion of Bear Stearns assets to facilitate the company’s sale. JPMorgan offered an additional $1 billion. As of March 9, the assets of Maiden Lane were valued at $26.1 billion, with the central bank’s loan paid down to $24 billion, according to Fed data.
The rise of former Bear Stearns bond executives shows that other banks agree with Greenberg’s assessment that only “some people at the top made some bad mistakes.” Greenberg, in his 2010 book “The Rise and Fall of Bear Stearns,” blamed Bear Stearns Chairman and CEO James Cayne for his decision to let the firm employ too much leverage.
Cayne, 77, in testimony to the FCIC last year, blamed “the market’s loss of confidence” in the company, “even though it was unjustified and irrational.” Cayne didn’t return messages left at his home seeking comment.
‘Rough and Tumble’
Many top Bear Stearns executives left shortly after the firm’s purchase by JPMorgan, which attempted to keep at least some of them. It named Mayer and Overlander as vice chairmen of its investment bank before the merger was finished. They left a month later, even after Mayer reached a verbal agreement to be paid about $27 million in cash and restricted stock if he had joined the bank, according to a regulatory filing.
Some may have been turned off by their new employer’s culture, which was more “big, corporate and soulless” compared with what had been an “obviously rough and tumble” environment, said William Cohan, author of “House of Cards,” a 2009 account of Bear Stearns’s collapse.
“It couldn’t be more different than Bear,” said Cohan, who also worked as a banker at JPMorgan and is a Bloomberg Television contributing editor.
Cerberus, Credit Suisse
Some former Bear Stearns employees joined Eichel at RBS and Nierenberg at Bank of America. Others landed at smaller firms seeking to challenge Wall Street’s largest banks. Dan Hoffman, who spent 22 years at the company, including a stint as head of mortgage and rate sales, last year joined broker Amherst Securities Group LP in New York as head of sales. David Connelly, who ran fixed-income sales in Chicago for 17 years, last year opened an office in the area for broker Braver Stern.
Investment firms have also hired Bear Stearns alumni. Josh Weintraub, 38, co-head of mortgage- and asset-backed bond trading with Eichel, now runs that business at Cerberus. Gyan Sinha, 46, who ran Bear Stearns’s research for asset-backed securities and CDOs, is a portfolio manager at New York-based hedge fund KLS Diversified Asset Management LP.
Other senior Bear Stearns mortgage analysts have ended up at banks. Credit Suisse Group AG this year hired Dale Westhoff as global head of structured-products research, and Deutsche Bank last year hired Steve Abrahams as head of securitization and mortgage-bond research.
“They’re everywhere,” said Paul Norris, a senior portfolio manager at Dwight Asset Management Co. in Burlington, Vermont, who said it would be “unfair” to overstate Bear Stearns’s role in the crisis. “The bond-trading guys that I knew were very talented and very good at their markets, so it’s not surprising that they’ve filtered around.”
Ruhi Maker, a lawyer at the Empire Justice Center in Rochester, New York, who told Fed officials at a 2004 hearing that investment banks were producing such bad mortgages their survival might be challenged, has a different perspective.
“At a karmic level, I don’t begrudge the folks at Bear Stearns jobs,” because others in the industry who engaged in at least “a suspension of disbelief” remain employed too, she said. “I’m sure they’re smart people and there’s money to be made. But I worry that until there is a real price to pay for costing the economy trillions of dollars, and jobs and homes, people are going to keep doing it.”
To contact the reporter on this story: Jody Shenn in New York at firstname.lastname@example.org