Editor’s Note: This story originally published on March 16, 2018.
Bear Stearns was on fire. And its colorful chairman, Jimmy Cayne, was playing cards.
The smallest investment bank on Wall Street had survived the Great Depression, Black Monday and the September 11 terror attacks. But by March 2008, clients and trading partners were bolting the firm because it had made huge bets on what turned out to be toxic mortgages.
In the span of just weeks, Bear Stearns would run out of cash. On March 16, 2008, it agreed to a government-backed fire sale, and it was acquired by JPMorgan Chase for the unthinkable price of $2 a share.
For Bear, it was the end of an 85-year run as an independent company. The bank would become the first domino to fall in the financial crisis, the worst panic to grip Wall Street since 1929.
“We were the smallest firm,” Paul Friedman, a former senior managing director at Bear Stearns, told CNN. “It was our turn.”
But three days earlier, all that lay ahead. On March 13, Bear Stearns executives in New York were scrambling to line up emergency funding, and the board of directors met by phone to discuss what amounted to a run on the bank.
Cayne joined the crucial call late, because he was busy playing bridge at a professional tournament in Detroit, according to reports at the time by Fortune and The Wall Street Journal. Records from the tournament still list Cayne as the fourth-place finisher.
“He preferred to be home in his pajamas playing bridge on his computer,” Alan “Ace” Greenberg, the Bear Stearns CEO from 1978 to 1993, wrote in his book “The Rise and Fall of Bear Stearns,” published three years after the bank fell.
“In a time of crisis he flatly wasn’t up to the task,” Greenberg wrote.
Even 10 years later, the collapse of Bear Stearns is stunning, both for how fast it happened and because Cayne, who had led the bank through years of success, was apparently asleep at the wheel.
Cayne ‘played a lot of golf and bridge’
Cayne served as Bear’s CEO for 15 years. He held that title until January 2008, when he stepped down as CEO but stayed on as chairman. In the tense months around that time, Cayne’s hands-off management style led him to miss critical events that foreshadowed the meltdown.
When a pair of Bear Stearns hedge funds that bet on mortgages collapsed in July 2007, Cayne was playing a bridge tournament in Nashville, Tennessee, without a cellphone or email access, The Wall Street Journal reported at the time.
Despite the tremors on Wall Street that summer, Cayne typically took long weekends to play golf at a country club in New Jersey. On Thursdays, the CEO would take a $1,700 helicopter ride from Manhattan — he paid for it himself — to squeeze in a late-afternoon golf game and then another on Friday, the Journal reported.
The final report of the national commission on the 2008 financial crisis concluded that Bear’s downfall was caused by its exposure to risky mortgages, heavy leverage and “weak corporate governance and risk management.”
The Financial Crisis Inquiry Commission report singled out Cayne, noting that “some senior executives sharply criticized” him. Thomas Marano, who played a critical role in the crisis because he ran Bear’s mortgage desk, told the commission that Cayne “played a lot of golf and bridge.”
Time listed Cayne among the 25 people who are to blame for the financial crisis.
‘I didn’t rein in the leverage’
Cayne himself has admitted he should have done more in the months and years before Bear’s downfall.
“I didn’t stop it. I didn’t rein in the leverage,” Cayne later told Fortune.
The financial crisis 10 years later
The collapse of Bear Stearns’ stock price caused Cayne, who joined the company in 1969, to lose about $1 billion.
Cayne, now 84, could not be reached for comment.
Before he ascended to the pinnacle of Wall Street power, Cayne worked in various jobs, including selling scrap metal, driving a taxi and selling photocopiers.
But his greatest passion was bridge, and it lured him to New York in the 1960s with the goal of going pro. He even won a national bridge tournament. Cayne’s love for the game helped him hit it off with Greenberg during a 1969 interview for a job at Bear Stearns.
Of course, Cayne’s management style isn’t the only reason Bear Stearns needed a JPMorgan rescue to avoid bankruptcy. And his tactics did seem to work for many years, as the bank enjoyed enormous success. Bear’s stock price surged from about $16 when he took over as CEO in 1993 to nearly $173 at its peak in early 2007.
Friedman, the former senior Bear Stearns exec, said CEOs are like American presidents: They get too much credit when things are going well and too much blame during downturns.
“Jimmy was one of the people responsible for the place, good and bad,” said Friedman, who worked at Guggenheim Partners after Bear Stearns and is now semi-retired.
Toxic mortgage bets
Other senior leaders also played a role in Bear’s downfall.
Warren Spector, Bear’s co-president and chief operating officer, was in a heated internal battle to replace Cayne. Among his responsibilities: overseeing the hedge funds that eventually blew up.
“Clearly there were failures at the highest levels of the firm,” said veteran banking analyst Dick Bove. “But the day-to-day failures that resulted in the disaster in mortgages were probably due to Warren Spector.”
Alan Schwartz, who took over as CEO from Cayne in early 2008, was a “leading proponent of investing in the mortgage sector,” the Financial Crisis Inquiry Commission found.
Those investments blew up in Bear’s face when the housing market crashed. The firm had loaded up on subprime loans, mortgages that were made to the weakest borrowers.
Just days before its fire sale to JPMorgan, Schwartz appeared on CNBC to insist there was no liquidity crisis at the firm.
The comments failed to halt a panic among Bear Stearns’ hedge fund customers and lenders desperate to get their money out of the bank.
Neither Schwartz nor Spector responded to requests for comment.
Heading to a ‘black hole’
Like other Wall Street firms, Bear Stearns relied to an alarming degree on short-term funding to run its business. During times of stress, so-called “repo lending” can dry up almost instantly. And that’s exactly what happened to Bear Stearns in 2008.
Robert Upton, Bear’s treasurer, told the financial crisis commission that, before the collapse, “he had never worried about the disappearance of repo lending.” Upton, now a managing director at UBS, did not respond to a request for comment.
Bear Stearns eventually ran out of cash. The bank told the SEC on March 13, 2008, a Thursday, that it wouldn’t be able to operate normally the next morning.
Schwartz called Jamie Dimon, JPMorgan’s CEO, to request a $30 billion credit line. Dimon rejected the request — unless the federal government was ready to step in with emergency aid.
After talks between Treasury Secretary Henry Paulson, Federal Reserve chief Ben Bernanke and New York Fed leader Tim Geithner, the Fed agreed to provide a $12.9 billion loan to Bear Stearns through JPMorgan.
But the backing from the Fed failed to restore confidence in Bear Stearns. The firm’s stock price plunged 47% further on Friday, March 14. Geithner told Bear Stearns the Fed would yank its loan after the weekend, forcing the bank to find immediately find a buyer.
JPMorgan was the obvious buyer because the two banks already had a close relationship. Bear Stearns reached a fire sale agreement that Sunday night, March 16, that valued the firm at just $2 per share. (The price was later raised to $10 per share.) The sale was backed by the Fed, which agreed to take some of Bear’s toxic assets off its balance sheet.
Bernanke later told investigators he feared the collapse of Bear Stearns would freeze all credit markets.
His description of Bear’s fate stood as a forewarning of the much darker days ahead for Wall Street in 2008.
“It was heading sort of to a black hole,” Bernanke said.
Even after Bear’s demise, Cayne kept playing cards. In fact, he found himself in the middle of a bridge scandal in 2015 after two of his teammates were accused of cheating.
Cayne also admitted to crisis investigators that he played a role in what went wrong at Bear Stearns.
“I take responsibility for what happened,” he said. “I’m not going to walk away from that responsibility.”
A Decade Later: It’s been 10 years since the financial crisis rocked America’s economy. In a special yearlong series, CNN will examine the causes of the crisis, how the country is still feeling its effects, and the lessons we have — and have not — learned.