Bringing Down Bear Stearns

On Monday, March 10, Wall Street was tense, as it had been for months. The mortgage market had crashed; major companies like Citigroup and Merrill Lynch had written off billions of dollars in bad loans. In what the economists called a “credit crisis,” the big banks were so spooked they had all but stopped lending money, a trend which, if it continued, would spell disaster on 21st-century Wall Street, where trading firms routinely borrow as much as 50 times the cash in their accounts to trade complex financial instruments such as derivatives.

Still, as he drove in from his Connecticut home to the glass-sheathed Midtown Manhattan headquarters of Bear Stearns, Sam Molinaro wasn’t expecting trouble. Molinaro, 50, Bear’s popular chief financial officer, thought he could spot the first rays of daylight at the end of nine solid months of nonstop crisis. The nation’s fifth-largest investment bank, known for its notoriously freewheeling—some would say maverick—culture, Bear had pledged to fork over more than $3 billion the previous summer to bail out one of its two hedge funds that had bet heavily on subprime loans. At the time, rumors flew it would go bankrupt. Bear’s swashbuckling C.E.O., 74-year-old Jimmy Cayne, pilloried as a detached figure who played bridge and rounds of golf while his firm was in crisis, had been ousted in January. His replacement, an easygoing 58-year-old investment banker named Alan Schwartz, was down at the Breakers resort in Palm Beach that morning, rubbing elbows with News Corp.’s Rupert Murdoch and Viacom’s Sumner Redstone at Bear’s annual media conference.

It was an uneventful morning—at first. Molinaro sat in his sixth-floor corner office, overlooking Madison Avenue, catching up on paperwork after a week-long trip visiting European investors. Then, around 11, something happened. Exactly what, no one knows to this day. But Bear’s stock began to fall. It was then, questioning his trading desks downstairs, that Molinaro first heard the rumor: Bear was having liquidity troubles, Wall Street’s way of saying the firm was running out of money. Molinaro made a face. This was crazy. There was no liquidity problem. Bear had about $18 billion in cash reserves.

Yet the whiff of gossip Molinaro heard that morning was the first tiny ripple in what within hours would grow into a tidal wave of rumor and speculation that would crash down upon Bear Stearns and, in the span of one fateful week, destroy a firm that had thrived on Wall Street since its founding, in 1923.

The fall of Bear Stearns wasn’t just another financial collapse. There has never been anything on Wall Street to compare to it: a “run” on a major investment bank, caused in large part not by a criminal indictment or some mammoth quarterly loss but by rumor and innuendo that, as best one can tell, had little basis in fact. Bear had endured more than its share of self-inflicted wounds in the previous year, but there was no reason it had to die that week in March.

What happened? Was it death by natural causes, or was it, as some suspect, murder? More than a few veteran Wall Streeters believe an investigation by the Securities and Exchange Commission will uncover evidence that Bear was the victim of a gigantic “bear raid”—that is, a malicious attack brought by so-called short-sellers, the vultures of Wall Street, who make bets that a firm’s stock will go down. It’s a surprisingly difficult theory to prove, and nothing short of government subpoenas is likely to do it. Faced with a thicket of lawsuits and federal investigations, not a soul in Bear’s boardroom will speak for the record, but on background, a few are finally ready to name names.

“I don’t know of any firm, no matter the capital, that could have withstood that kind of bombardment by the shorts,” says a vice-chairman of another major investment bank. “This was not about capital. It was about people losing confidence, spurred on by rumors fueled by people who had an interest in the fall of Bear Stearns.”

He pauses to let the idea sink in. “If I had to pick the biggest financial crime ever perpetuated,” he concludes, “I would say, ‘Bear Stearns.”’ 

At Phi Kappa Wall Street, most of the frat boys are instantly recognizable. There’s the big, backslapping Irishman, Merrill Lynch, the humorless grind, Goldman Sachs, and the straitlaced rich kid, Morgan Stanley. And then, off in the corner, wearing its beat-up leather jacket and nursing a cigarette, was the tough-guy loner, scrawny Bear Stearns, who disdained secret handshakes and towel snapping in favor of an extended middle finger toward pretty much everyone. Bear was bridge-and-tunnel and proud of it. Since the days when the Goldmans and Morgans cared mostly about hiring young men from the best families and schools, “the Bear,” as old-timers still call it, cared about one thing and one thing only: making money. Brooklyn, Queens, or Poughkeepsie; City College, Hofstra, or Ohio State; Jew or Gentile—it didn’t matter where you came from; if you could make money on the trading floor, Bear Stearns was the place for you. Its longtime chairman Alan “Ace” Greenberg even coined a name for his motley hires: P.S.D.’s, for poor, smart, and a deep desire to get rich."