Ex-Bear Execs Blame `Irrational' Market, `Unnatural Trades'
“The market’s loss of confidence, even though it was unjustified and irrational, became a self-fulfilling prophecy,” Cayne told the Financial Crisis Inquiry Commission in Washington. There was also suspicious trading activity in the firm’s shares leading up to the collapse, which the commission or market regulators should investigate, he said.
The FCIC is mandated by Congress to produce a report by the end of the year on the causes of the crisis. Cayne, 76, made his first public appearance since the mortgage-market collapse destroyed his company.
Cayne lost his job to a crisis his firm helped create. Bear Stearns spurred the crash in the market for home loans to people with poor credit when two of its hedge funds, which invested in securities tied to mortgages, collapsed in July 2007. Those failures caused investors to doubt the value of any asset linked to home loans, freezing credit markets. JPMorgan Chase & Co. agreed to buy the firm through a forced sale in March 2008.
Alan Schwartz, who succeeded Cayne as CEO and negotiated Bear Stearns’s fire sale to JPMorgan, agreed with Cayne that there were “some very unnatural trades” by investors betting against the firm. When Bear Stearns’s shares were trading for about $75, there were requests for options to buy them at $20, Cayne told the commission.
Former President Warren J. Spector, who spoke before Cayne and Schwartz, said Bear Stearns had better risk management than many of its competitors. Schwartz told the panel the firm was well capitalized and blamed its failure partly on market rumors and speculation. He called Bear Stearns “the first firm to fall victim to the credit and liquidity crisis.”
“We did not foresee the extent to which housing prices had been driven to unsustainable levels,” Schwartz said.
Former Chief Financial Officer Samuel Molinaro testified that company executives “didn’t think we were overleveraged by any stretch.” Cayne contradicted his former CFO, saying that with hindsight, the firm was too highly leveraged.
None of the former Bear Stearns executives could point to particular actions they took that they felt contributed to the collapse, mirroring comments by Richard Fuld, the former CEO of Lehman Brothers Holdings Inc. Lehman, once the largest underwriter of mortgage-backed bonds, went bankrupt six months after Bear Stearns fell. Fuld, appearing before Congress twice since then, has placed the blame on market forces.
“I do not believe there were any reasonable steps we could have taken, short of selling the firm, to prevent the collapse,” Cayne said in his testimony.
Under Cayne, Bear Stearns was transformed from a bond shop into the fifth-largest investment bank on Wall Street. During his last five years at the helm, Cayne, who loved to play bridge, pulled away from hands-on management roles, spending more time away from his office even while Bear Stearns was running into trouble.
When the firm ran out of money in March 2008 and faced a bank run from its hedge-fund clients and short-term creditors, Cayne was at a bridge tournament in Detroit. He couldn’t fly back to New York in time to take part in talks to sell the firm to JPMorgan under government pressure.
After guiding the company’s stock up more than 10-fold in 14 years, Cayne got $10 a share on the sale of the 85-year-old firm, 6 percent of the peak a year earlier. He was among the largest shareholders in Bear Stearns at the time of the sale, and about two-thirds of the $1.5 billion he accumulated from stock awards was wiped out.
Cayne became president of Bear Stearns in 1985 under Chairman Alan C. “Ace” Greenberg. He was named CEO in 1993, remaining No. 2 until Greenberg relinquished the title of chairman in 2001. Greenberg remained in charge of risk management and was named chairman of the executive committee.
Cayne initially fostered steady growth by bolstering the firm’s strengths in bond trading and mortgages while minimizing trades that put too much capital on the line. The firm bet big on the mortgage market in the years before its collapse.
Cayne blamed Spector for the failure of the two hedge funds. He closed the funds and ousted Spector, without naming a replacement.
The funds’ meltdown triggered repricing of mortgage-related securities that produced more than $1.7 trillion of losses at banks worldwide, according to data compiled by Bloomberg. Congress appointed the 10-member FCIC led by Former California Treasurer Phil Angelides to investigate the causes of the financial crisis and report its findings to lawmakers by December. Panel hearings in Washington have focused on companies including Citigroup Inc. and Fannie Mae, and the commission has heard from former Federal Reserve Chairman Alan Greenspan and former Treasury Secretary Robert Rubin. Former SEC Chairman Harvey Pitt called a January FCIC hearing a “parade of sound bites” that failed to shed any light on why U.S. taxpayers had to spend $700 billion to bail out the U.S. financial industry. The panel had taken testimony from Goldman Sachs Group Inc. CEO Lloyd Blankfein, JPMorgan CEO Jamie Dimon, Bank of America CEO Brian Moynihan and former Morgan Stanley CEO John Mack.