Kate Kelly wraps up her three-part series on the Bear Stearns Cos. implosion Thursday in The Wall Street Journal. This is the best of the traditional WSJ: It's informative, exciting and gives you a vivid sense of being there, though the art still stinks. It lacks the cheap ad hominem attack-by-anecdote that the Journal occasionally indulges in, like Steve Schwarzman's stone crabs and Kelly's own "scoop" about Jimmy Cayne's toke in the bathroom. It has that compulsive readability that "Barbarians at the Gate" had many years ago. But for all of that, consider a huge caveat about both this series and "Barbarians." This is no knock on Kelly, but the Journal is offering a version of events here. Anyone who knows anything about the "Barbarians" saga -- certainly anyone involved in that episode -- knows how the story was shaped by access. Some folks talked (some a lot), others didn't. The folks that talked tended to get their version of events and particularly their characterizations and motivational theories across. Reality and narrative are two very different phenomena. The same applies here.
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Besides, the so-called tick-tock genre -- how it happened -- always trades analysis for the moment-by-moment play of events. In Thursday's episode, the key moment that's recounted and passed over is the call by Treasury Secretary and former Goldman chairman Henry Paulson insisting that J.P. Morgan Chase & Co. pay a mere $2 a share for Bear -- almost killing a deal and a "rescue" (of Bear or the financial markets, you decide) then and there. Paulson had been invisible in parts one and two. It was the Federal Reserve that was first called. But suddenly, there he is, essentially demanding a rock-bottom price to avoid political blow-back from folks who would think this was a fat-cat bailout by the government and rationalizing it with a high-minded gesture toward moral hazard.
What was really going on here? Paulson's sudden demand puts the Fed's precipitous seizure of responsibility in a new light, particularly any notion of Fed independence. (Paulson had been consulting with the New York Fed's Timothy Geithner, but the fact that the Treasury secretary -- not Geithner or Ben Bernanke -- made the call is significant.) Technically, the Fed is independent of Treasury, and the Fed was backstopping the deal with its own funds. But Paulson's conclusion seemed to be that Fed action would be viewed politically as administration policy. He was probably right, which is why previous Fed chairmen have been so careful to avoid the kind of intervention that occurred here. And why was the Fed suddenly on the front line? Because no other regulator or government body had the means or the will to act, including Treasury.
The $2 was thus a political valuation on Bear, based on little more than what would play in the media, on the campaign trail, in Congress. And, of course, it almost killed the deal when Bear shareholders revolted, forcing a renegotiation to $10, pretty close to what Chase was considering before Paulson's call. The mess this left behind will take years to sort out. The $2 a share demand was a milder variation of the Arthur Andersen prosecution in the Enron case, without the criminality. The fact that the market had turned on Bear was accepted as evidence that all of Bear -- shareholders, stakeholders, everyone -- needed to be punished. And indeed Bear was characterized (by the WSJ among others) as a firm that was a renegade, even on Wall Street, led by an aging, pot-toking, bridge- and golf-obsessed CEO. Bear wouldn't play along with the rescue of Long-Term Capital Management and thus deserved whatever it got. If the markets, in their reflexive, even panicked, way, decided that a firm should fail -- even one that was not technically "failing" at the time (you can debate this forever) -- then that convulsive judgment had to be underlined politically. And don't forget, Paulson was low-balling Bear at the same time government intervention was being justified on the fear of wider systemic destruction caused by a firm failure. He either miscalculated the willingness of shareholders to surrender or discounted the consequences of failure.
The episode leaves behind odd paradoxes. Politically, the folks who most distrust the "wisdom" of the markets -- or markets generally -- cheered the destruction of Bear as a sudden visitation of justice from above. The folks who are normally market cheerleaders -- among them Paulson -- were eager to override those closest to the scene to demand a price in the name of greater social good, that is, moral hazard. And the real market mavens -- the Bear traders themselves -- were quick to cry foul at everything. As for the moral hazard itself, the fundamental question remains how did we get to the place where such an issue even had to be raised? The answer: In terms of politics and regulation, we blithely assumed the markets would handle such crises. We were dead wrong. And thus we started down the long, dark path to $2 a share. - Robert Teitelman
Comments
If CEO Richard Fuld could pull off an oversubscribed $4B convert offering in the aftermath of Bear's failure, why couldn't Bear have done the same thing months earlier. While Alan Schwartz walks on water as an M&A advisor, if Warren Spector had still been on board his connections to the debt world might have changed the outcome. So Spector got pushed out, but who's laughing now.