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Early on the morning of Thursday, March 13, 2008, Robert K. Steel, Undersecretary of the Treasury for Domestic Finance, had breakfast with H. Rodgin Cohen, the senior partner of Sullivan & Cromwell, the Wall Street law firm. The gregarious Steel '73 asked Cohen how things were going. "He said, 'I'm great, but I'm kind of
pooped,' " Steel recalls. "I was up late, and there are a lot of challenges at Bear Stearns."
That, of course, was an understatement. Cohen, Bear's lead outside counsel, had spent the better part of the night before on the phone from his home in Irvington, New York, with the top management at Bear Stearns, including CEO Alan Schwartz '72, helping them grapple with their rising fear that Bear, then the world's fifth-largest securities firm, might not be able to stay in business much longer. The market was rapidly losing confidence in the firm. Its stock had closed at $61.58 that day, down from its all-time high of $172.69 a share in January 2007. Its hedge-fund clients were withdrawing their cash balances, and, worse, Bear's overnight lenders, on whom the firm had become largely dependent—for up to as much as $75 billion a day—were balking at continuing to provide that funding. Without it, Bear Stearns simply would not have the cash to operate and to meet its obligations. In other words, Bear would be bankrupt.
As the night wore on and concerns about Bear's viability mounted, Cohen convinced Schwartz that the situation was so dire that Timothy Geithner, then the president of the New York Federal Reserve Bank, should be informed. Although Geithner was not technically Wall Street's regulator—that job belonged to the head of the Securities and Exchange Commission—he was based in New York and was very familiar with the liquidity issues facing the securities industry. Plus, just six days earlier, he had announced a new $200 billion short-term lending program for banks and securities firms that was meant "to address heightened liquidity pressures" and set to begin March 27.
With Schwartz's consent, at around 11 p.m., Cohen called Geithner and urged him to take remedial action as quickly as possible by speeding up the start of the new Fed loan program and opening the Fed "discount window" to securities firms, an action that would have allowed Bear Stearns and other firms to borrow money directly, at low interest rates, from the Fed for the first time since the 1930s. "I think I've been around long enough to sense a very serious problem, and this seems like one," Cohen recalls telling him.
"If it's this serious, Alan should pick up the phone and call me first thing in the morning," Geithner replied.
The next morning, while Cohen ate breakfast with Steel, Schwartz was on the phone with Geithner. "There's a chance we can work through this," Steel says Cohen told him. "But this is pretty unattractive." Steel began to worry that the failure of a securities firm the size and complexity of Bear Stearns might pose a systemic risk that could potentially undermine the confidence needed to ensure the smooth running of the international financial system. After breakfast, as he and Cohen walked down one of the grand corridors of the Treasury building, near his office, his secretary stuck her head out and told him that Alan Schwartz was on the phone. As the designated liaison between Wall Street and the Treasury, Steel regularly received calls from top executives on Wall Street, but in light of what Cohen had told him at breakfast, he raced to take it.
Schwartz told him that he would have a better idea about the severity of Bear Stearns' growing liquidity problem that afternoon, Steel recalls, but said he was "hopeful" he could "stem this" and "cauterize" the initial bleeding. Schwartz recalls the conversation as a "heads up that if things took a turn for the worse, we needed to figure out what the backup plan was."
After the call, Steel ducked into the office of the Secretary of the Treasury, Henry Paulson, and told him about the potentially dangerous situation unfolding at Bear Stearns. "We're not going to know a lot more for a few hours, but let's get some people to start to think about various issues and ways to deal with this," Steel said.
This, in foreshortened detail, is how two Duke graduates of the same vintage—Steel, from Durham, and Schwartz, from Brooklyn—pulled the curtain back on a financial crisis that approaches the severity of the Great Depression. More than a few Duke alumni have played central roles in this drama—among them not only Steel, chair of Duke's board of trustees from 2005 to 2009, and Schwartz, a current Duke trustee, but also Steven D. Black '74, Schwartz's fraternity brother, a former member of the Trinity board of visitors, and co-head of global investment banking at JPMorganChase; John Mack '68, chair and CEO of Morgan Stanley and a current Duke trustee; Michael Alix '83, head of risk management at Bear Stearns, who now works at the New York Federal Reserve Bank; and John Koskinen '61, acting CEO and chair of the board of Freddie Mac and a Duke trustee emeritus. Their statistically outsized presence is, and will continue to be, delicious fodder for social scientists and historians. (That none of these central figures is female is a reflection of the extent to which Wall Street remains a male-dominated enclave.)
What follows is a snapshot of what these alumni faced as the financial crisis unfolded—the first draft of a history still being written.
According to Schwartz, the Duke connections may have made this difficult situation slightly easier. "What it creates when you have a relationship is the opportunity to at least know that you can talk to each other and trust that you're being as honest as you can be," he says. "With the Duke guys, you've known them your whole career, and there's just a deeper reservoir that you're tapping into."
Thursday afternoon, March 13, 2008, back on the front lines of the emerging crisis, Steel, Paulson, and Geithner had to figure out whether or not to try to save Bear Stearns. "You really had just a few days to decide," Steel says. "The first decision was whether this was challenging enough to push it into the weekend"—that is, find a way to keep Bear afloat until the closing bell on Friday, in order to buy some time. The solution was radical and unprecedented: putting government money "back to back" at JPMorganChase. What it meant was that the Fed would lend money to JPMorgan, which would in turn lend it to Bear Stearns. By law at that time, the Fed could not lend money directly to Bear, a securities firm, but it could lend to JPMorgan, a commercial bank. Given the Treasury's prevailing bias that no one securities firm was systemically important, this was a harder decision than it now seems in hindsight.
"None of us liked it," Steel says. "You had to ask yourself 'What's the best of the series of least appealing alternatives?' If you keep looking for an attractive alternative, you're not going to find one." Through a series of discussions among Paulson, Geithner, and Ben S. Bernanke, the chair of the Federal Reserve Board, the government quickly decided that Bear Stearns had to be saved for the good of the system. "Humpty Dumpty falling was not an attractive outcome, given the market conditions that day," Steel says.
That was when the call went out to James L. "Jamie" Dimon, the CEO of JPMorganChase (and, coincidentally, the father of Julia Dimon '07). Dimon was celebrating his fifty-second birthday at Avra Estiatorio, a midtown Manhattan Greek restaurant, when Schwartz called and urged him to take a serious look at helping Bear Stearns out of its predicament.
Dimon, in turn, called Steve Black, who was enjoying a vacation in Anguilla after months of keeping one step ahead of the financial crisis that had started a year earlier with the meltdown of two heavily leveraged Bear Stearns hedge funds. Black was having dinner with his wife at a restaurant on the island. Dimon told him to get back to New York by the next morning.
By March 2008, Dimon, Black, and other top executives at JPMorganChase were plenty familiar with Bear Stearns. Dimon had tried unsuccessfully to buy the firm in 2001, when he was CEO of BankOne, a Chicago-based commercial bank.
After Dimon's call, Black kicked his army into high gear. "That's not to say that when all the stuff started happening on Thursday our first thought was, 'Gee, great. We're going to get to buy Bear Stearns,' " he says. "It was, 'Can we help Bear Stearns and the Fed find a mechanism to keep them open for business so that they don't blow up, which is going to cause everybody a lot of pain?' " This was a hotly discussed topic among JPMorgan senior executives and board members. "We spent a lot of time and energy debating whether the transaction was the right thing to do for our shareholders—as opposed to whether it was the right thing for the Bear Stearns shareholders or the financial system," says Black.
"We also spent a lot of time debating that if we thought it was the right thing to do, how we could do it and make sure that we protected our company. Because it wasn't going to do anybody good—us, them, our shareholders, or the financial system—if all we did was jeopardize JPMorgan because of buying Bear Stearns."
It was a taxing, around-the-clock exercise. "It was a pain in the ass," Black says. "There was a lot of work to do in a short period of time, and being wrong had some pretty significant implications. On the other hand, you get into deal mode, and the adrenaline starts flowing, and there is an excitement to it."
In the end, of course, with the Fed's help —to the tune of $29 billion—JPMorgan agreed to buy Bear Stearns for $10 per share (up from $2 per share originally). All Bear's creditors were made whole, and JPMorgan assumed some $370 billion of Bear's assets, along with its headquarters and other buildings, an energy-trading business, and a host of talented people (many of whom are no longer at JPMorgan). "When I look back now, I feel better than I did then," Schwartz says. "It felt like somebody had come and set fire to our house, and I felt terrible.
"But then, six months later, a tsunami came through town and blew away all the other houses, and I don't see how, frankly, we would have survived that tsunami. With Lehman going under, with Merrill about to go under, and with Morgan Stanley and Goldman an inch away, I don't see how Bear Stearns was a big enough franchise to survive that kind of storm. The reality is that going through that in March probably, on balance, Bear Stearns people did better than they would have if we'd survived until September."
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