As a special panel delves into the financial crisis, the executives who led Bear Stearns Cos. before the big Wall Street firm's implosion two years ago are saying they did all they could to keep it afloat before it fell victim to an unstoppable run on the bank.
James Cayne, who was Bear Stearns' CEO until January 2008, and Alan Schwartz, who succeeded him for a few months, are to testify Wednesday before the bipartisan panel investigating the roots of the crisis.
The firm's collapse "was due to overwhelming market forces that Bear Stearns ... could not resist," Cayne said in his testimony prepared for the hearing.
Bear Stearns was the first Wall Street bank to blow up in the recent crisis, caught in the credit crunch in early 2008 and foreshadowing the cascading financial meltdown in the fall of that year.
Two of Bear Stearns' hedge funds failed in June 2007 as a result of bad bets on the subprime mortgage market, costing investors $1.8 billion and touching off the domino chain that brought the firm to the brink in March 2008.
The congressionally chartered Financial Crisis Inquiry Commission, which has been holding a series of hearings on the causes of the crisis, is looking at Bear Stearns as a case history of what it calls the "shadow" banking system — a network of financial institutions and markets operating outside of the regulatory structure.
The role of federal regulators also is key in the autopsy of the financial disaster and the huge Wall Street investment banks. The Securities and Exchange Commission's oversight of the firms — some rotting from within from piled-up securities tied to subprime mortgages — was criticized by lawmakers and investor advocates both during and after the crisis.
The "Big Five" investment banks, including Bear Stearns, were in a voluntary program of supervision by the SEC established in March 2004. It was terminated in September 2008 by then-SEC Chairman Christopher Cox, who said it clearly hadn't worked.
Cox and William Donaldson, who preceded Cox as SEC chief from 2003 to mid-2005, also were scheduled to testify at Wednesday's hearing, along with former SEC official Erik Sirri and David Kotz, now the agency's inspector general.
The members of the inquiry panel are likely to grill Cayne, Schwartz and three other former Bear Stearns executives due to appear at the hearing: Samuel Molinaro Jr., former chief financial officer and chief operating officer; and Warren Spector, former president and co-chief operating officer; and Paul Friedman, former chief operating officer for fixed income.
Wednesday's hearing marks Cayne's first public appearance in the aftermath of the crisis. Cayne was a flamboyant character who led Bear Stearns — a firm known for its go-against-the-grain scrappiness — for 15 years. As the two hedge funds melted down, he reportedly managed to spend 10 of 21 workdays out of the office, taking a helicopter from Manhattan to New Jersey on Thursday afternoons for regular golf games and skipping work to play in bridge tournaments.
Cayne recounts in his prepared testimony that amid "unfounded" concerns and "rumors" in the market about Bear Stearns' solvency in the week of March 10, 2008, the firm's brokerage customers pulled out assets and other firms canceled special loans known as repurchase agreements.
"The market's loss of confidence, even though it was unjustified and irrational, became a self-fulfilling prophecy," he says.
"The efforts we made to strengthen the firm were reasonable and prudent, although in hindsight they proved inadequate," Cayne says. "Considering the severity and unprecedented nature of the turmoil in the market, I do not believe there were any reasonable steps we could have taken, short of selling the firm, to prevent the collapse that ultimately occurred."
Other financial giants later tumbled: Lehman Brothers, which filed the biggest bankruptcy in U.S. history in September 2008; Washington Mutual, the biggest U.S. bank ever to fail; Merrill Lynch, Countrywide Financial Corp. Insurance conglomerate American International Group Inc. teetered near collapse and received about $180 billion in bailout aid from the government.
"There was, simply put, a run on the bank," Schwartz says in his prepared remarks. "... (I) believe that we took all the appropriate steps that we could to try to survive the storm that was breaking upon us. ... Despite all of our efforts, Bear Stearns was unable to weather this period of unprecedented market dislocation."
Schwartz urges that lawmakers and regulators consider changes that would "minimize these kinds of risks in the future."
A statement by Cox, the former SEC chairman, haunts. He was speaking to reporters on March 11, 2008, a few days before Bear Stearns' fall: "We have a good deal of comfort about the capital cushions at these firms at the moment."
A report issued by Inspector General Kotz in September 2008 found that the SEC's oversight of Bear Stearns and the other four investment banks was lacking.
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