The main participants in the do-or-die sale of investment bank Bear Stearns bsc to JPMorgan Chase jpm gave the first detailed public account Thursday of the collapse of one of the USA's most venerable investment banks.
Appearing before a Senate panel, Bear Stearns CEO Alan Schwartz said the deal to sell his firm to JPMorgan for $2 a share, reached hastily the weekend of March 15-16, came when he and his board realized there was no alternative. Just a year earlier, the stock hit $171. "We had no leverage at all," he said.
Schwartz testified that in the days leading up to the sale, he had to combat rumors that Bear was running out of cash. "By every measure, on our balance sheet, with our capital ratios and risk ratios, we lined up well with our competitors," he said. Nevertheless, the rumors hammered Bear's stock price and raised questions among its trading partners.
Schwartz suggested traders betting Bear stock would fall may have actively fanned the fears of a cash crunch in the hopes of turning it into a self-fulfilling prophecy. "As an observer of the markets, that looked like more than just fear," Schwartz said. "It looked like people wanted to induce a panic."
Jamie Dimon, CEO of JPMorgan Chase, testified that he got involved in acquisition talks because his bank had been asked to help prevent a collapse of Bear, which would have had far-reaching repercussions on the economy. But he insisted he wasn't willing to expose his own shareholders to the risk of swallowing Bear Stearns without a $30 billion guarantee from the Federal Reserve, which monitored the negotiations.
"How many straws can you put on the camel's back?" he said. "We went about as far as we can go."
A week after the March 16 agreement was announced, Dimon upped the bid for Bear to $10 a share. The renegotiation, which also received the Fed's blessing, sparked criticism that the central bank was playing favorites.
Dimon explained his original low-ball bid by saying, "Buying a house is not the same as buying a house on fire."
Earlier in the day, Fed Chairman Ben Bernanke warned senators not to think of JPMorgan Chase's acquisition of Bear Stearns as a bailout. "Bear Stearns didn't fare very well in this operation," he said. "Shareholders took losses. I don't think it's a situation that any firm would willingly choose to endure."
As to broader criticism of the Fed's role in the Bear Stearns deal, Bernanke warned that a bankruptcy filing would have shaken confidence in other investment banks, constricting credit not just to businesses but to individual borrowers, sowing fear among consumers.
"If the American people understood that we were trying to protect the economy, they would better understand the actions we took," said Bernanke.