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exsearchcsearchtives, who told him that any bid was likely to be less than the $8-to-$12 range mentioned the night before. In fact, they suggested the likely number was $4. When Schwartz relayed the $4 idea to his board, several, including Cayne, grew apoplectic. Cayne argued strenuously that Bear simply file for bankruptcy. “There were a lot of people at that point who were just saying, ‘Fuck ’em—let’s go 11,”’ remembers one person in the boardroom. It was then that Gary Parr and the bankruptcy attorneys patiently explained that bankruptcy was actually not an option, not for a major securities firm. Changes to the bankruptcy code in 2005 would force federal regulators to take over customer accounts. All its securities would be subject to immediate seizure by creditors. Slowly, the humiliating inevitability of a $4-a-share buyout—for a firm whose shares had traded as high as $170 the year before—sank in. It was at that point, midafternoon, that Treasury secretary Paulson twisted the knife. As the ranking politician involved in the deal, he was concerned with appearances—both how it would look that the federal government was bailing out a well-heeled investment bank at a time when normal Americans were losing their homes, and the appearance of something lawyers call “moral hazard,” that is, the idea that a Bear deal, by appearing to “save” a bank whose poor judgment had pushed it to the brink of bankruptcy, might actually encourage risky behavior by other financial institutions. This deal, Paulson judged, had to hurt Bear. And it had to hurt badly. Paulson and Tim Geithner telephoned Dimon at Morgan. He put them on speaker. Dimon said he was considering a price in the $4-to-$5 range. “That sounds high to me,” Paulson said. “I think this should be done at a very low price.” A little later, Morgan’s Doug Braunstein reached Gary Parr at Bear. A formal offer would be forthcoming, Braunstein said. “The number’s $2,” he said.Parr nearly choked. “You can’t mean that,” he said. He did. Schwartz took the news quietly, which was more than one could say about some of his board members. Jimmy Cayne—whose 5.66 million shares, once worth nearly a billion, would now be worth less than $12 million—swore he would never accept such a humiliating offer. “The people around the table, some of them, their net worth was being wiped out,” says one person who was in the room. “There was every emotion you can think of: sadness, anger. They saw the tragedy. But the bottom line was, you know, when they got in a pickle, Bear Stearns didn’t have many friends.”
Schwartz took a half-hour explaining that the board really had no choice. It was Morgan or bankruptcy, which would mean liquidation, putting 14,000 employees out of work by noon the next day. “What can I say?” he said at one point. “It’s better than nothing.”
And like that, with the signatures on an unprecedented merger agreement, a major American investment bank vanished, along with $29 billion in shareholder value and the secure futures of 14,000 employees. In the following days the hallways of Bear Stearns & Co. erupted in rage. Longtime friends fumed and even screamed in Schwartz’s face—at a town-hall meeting he chaired, where one man hollered, “This is rape!”; in the hallway outside his office; even in the Bear gym. Shareholders were so angry that everyone was forced back to the negotiating table the next weekend, when Morgan and the Fed, in a second set of manic around-the-clock meetings, agreed to boost the price to $10 a share. Yet, for all the anger, all the frustration, no one could answer the one question on everyone’s mind: How on earth had this happened?
Even among the circle of top executives who lived through that frantic week, no two people see the crisis at Bear the same way. Many, though, agree with some version of the scenario Alan Schwartz has come to believe. Yes, Schwartz tells friends, mistakes were made. Yes, the firm was financially weakened. But the more he learned about what had happened behind the scenes that week, the more Schwartz came to believe that Bear’s collapse was a pre-meditated attack orchestrated by market speculators who stood to profit from its demise. According to those Schwartz has briefed, these unnamed speculators—several now being investigated by the S.E.C.—employed a complex scheme to force a handful of major Wall Street firms to hold up trades with Bear, then leaked the news to the media, creating an artificial panic.
“Something happened Monday that triggered this mess,” says one Bear executive who has spoken to the S.E.C. “It was as though a computer virus had been launched. Where the hell was this coming from? Who started it? We tried, believe me, but we could not track it down. We know lots of big hedge funds were spreading rumors, but how can you pursue that? Only the S.E.C. can, and they’re all over this.”
At the heart of this theory are the “novation” requests that began to pick up steam that Tuesday and Wednesday. As Bear executives later analyzed these trades, they discovered the overwhelming majority had been made with just three firms: Goldman Sachs, Credit Suisse, and Deutsche Bank. Schwartz came to believe this was no accident. In his mind, the flood of novation requests was designed to force at least one of the three firms to put a temporary halt to accepting them, which is what happened: Goldman and Credit Suisse did. News of that halt not only swept Wall Street trading floors, it appeared to gain credence the next day when David Faber asked Schwartz about it on CNBC. “I like Faber, he’s a good guy, but I wonder if he ever asked himself, ‘Why is someone telling me this?”’ a top Bear executive asks. “There was a reason this was leaked, and the reason is simple: someone wanted us to go down, and go down hard.” (Faber says his reporting was accurate, and arose from talks with a source he has known for 20 years.)
But who? According to one vague tale, initially picked up at Lehman Brothers, a group of hedge-fund managers actually celebrated Bear’s collapse at a breakfast that following Sunday morning and planned a similar assault on Lehman the next week. True or not, Bear executives repeated the story to the S.E.C., along with the names of the three firms it suspects were behind its demise. Two are hedge funds, Chicago-based Citadel, run by a trader named Ken Griffin, and SAC Capital Partners of Stamford, Connecticut, run by Steven Cohen. (A spokesman for SAC Capital said the firm “vehemently denies” any suggestion that it played a role in Bear’s demise. A Citadel spokeswoman said, “These claims have no merit.”) The third suspect, at least in Bear executives’ minds, is one of its main competitors, Goldman Sachs. (“Goldman Sachs was supportive of Bear Stearns,” says a Goldman Sachs spokeswoman. “There is no foundation to rumors that we behaved otherwise.”) Several Bear executives also named an individual they believed was spreading rumors about them that week, Jeff Dorman, who briefly served as global co-head of Bear’s prime brokerage business until resigning to take a similar position at Deutsche Bank last summer. “We heard Dorman was saying things last summer,” says a Bear executive. “At the time we reached out to Deutsche Bank and told them he better stop it.” (Asked about the allegation, a Deutsche Bank spokeswoman acknowledged that Bear had sent its executives a letter last August asking Dorman not to solicit its clients, as he had agreed upon leaving Bear. Deutsche Bank replied that he wasn’t. The exchange didn’t explicitly address what Dorman might have been saying about the firm, nor would the spokeswoman.)
Today, many of Bear Stearns’s former employees are out of work. The firm has effectively disappeared into the maw of J. P. Morgan along with a number of key executives, including Ace Greenberg, who became a Morgan vice-chairman, and Alan Schwartz, who will probably take a position in the investment-banking department. Maybe the S.E.C. will figure out whether Bear was murdered. But maybe it won’t. Even those who believe the firm was the victim of a predatory raid have their doubts it can ever be proved.
“Even with subpoena power, I’m not sure the S.E.C. will get to the bottom of this, because the standard of proof is just so difficult,” says a vice-chairman at another major investment firm. “But I hope they do. Because you can look at this as just another run on a bank or as a seminal point in the financial history of this country that could bring about a change, perhaps a drastic change, in the way we govern financial markets. If there is a solution to this kind of thing, it must be found in the roots of what happened at Bear Stearns. Because otherwise, I can guarantee you, it will happen again somewhere else.”
Bryan Burrough is a Vanity Fair special correspondent.
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First page: By Roger Wollenberg/UPI Landov, James Lense/Corbis (building), Oscar Hidalgo/The New York Times/Redux, Jennifer Altman/Bloomberg News/Landov. Second page: Photograph by Jacques Del Conte (background). By Daniel Barry/Redux (Paulson), Matthew Cavanaugh/EPA/Corbis (Dimon), J.Scott Applewhite/A.P. Images (Bernake).