Members of a special panel on Wednesday challenged former Bear Stearns' executives on their view of what caused the big Wall Street firm to implode two years ago.
The executives testified that they did all they could to keep Bear Stearns afloat before it fell victim to an unstoppable run on the bank. Its business strategy of borrowing funds from rival firms was sound under the crimped credit market conditions at the time, they said.
"In retrospect I don't believe that there was anything that Bear Stearns could have done differently with respect to its funding model that would have prevent this run on the bank," said Paul Friedman, who was the firm's chief operating officer for fixed income.
Bear Stearns was the first Wall Street bank to blow up. It was caught in the credit crunch in early 2008 and foreshadowed the cascading financial meltdown in the fall of that year.
Unfounded concerns by brokerage customers and rumors in the market about Bear Stearns' solvency in the week of March 10, 2008 sparked the firm's collapse, Friedman and other former executives testified.
But Phil Angelides, chairman of the Financial Crisis Inquiry Commission, pointed to the firm's mounting dependence on special loans from other investment banks, known as repurchase agreements. Those loans fell outside the regulated market and added up to $50 billion to $60 billion overnight in the period before the firm failed, Angelides said.
"At the end of the day, it almost was the ultimate hand to mouth," Angelides said.
When rival Wall Street firms canceled the agreements and brokerage customers pulled their assets out of Bear Stearns, the firm was pushed to the brink.
Said Bill Thomas, the panel's vice chairman: "You had no fallback to your fallback." The firm's business model relied on the
trust in it by rivals on Wall Street, he said.
A former head of the Securities and Exchange Commission, Christopher Cox, is telling the inquiry panel that Congress must act to close gaps in the regulatory system that helped caused the financial crisis. He said in his prepared testimony that the SEC and the
Federal Reserve tried to work together to fill the gaps in regulation of investment banks before the crisis struck in 2008.
"It is urgent that these gaps be filled," Cox said in his testimony.
The role of federal regulators also is key in the probe of the financial meltdown. Lawmakers and investor advocates have criticized the SEC's oversight of Wall Street firms during and after the crisis.
The "Big Five" investment banks, including Bear Stearns, were in a voluntary program of supervision by the SEC established in March 2004. It was terminated in September 2008 by then-SEC chairman Cox, who said it clearly hadn't worked.
"We were in pretty steady dialogue" with the SEC in the period when Bear Stearns came under stress, said Samuel Molinaro Jr., the former chief financial officer and chief operating officer. "They were comfortable with the actions we were taking and the way we were managing the situation."
James Cayne, who was Bear Stearns' CEO until January 2008, and Alan Schwartz, who succeeded him for a few months, also are testifying before the panel.
The firm's collapse "was due to overwhelming market forces that Bear Stearns ... could not resist," Cayne said in his prepared testimony.
The
Federal Reserve orchestrated Bear Stearns rescue buyout by JPMorgan Chase & Co. with a $29 billion federal backstop.
Angelides said a "shadow banking system" of financial institutions and markets operating outside the regulatory structure grew out of control and represented $8 trillion in assets.
The congressionally chartered inquiry panel, which has been holding a series of hearings on the causes of the crisis, is looking at Bear Stearns as a case history of an institution that operated in the "shadow" banking system. The panel will hear testimony Thursday by Treasury Secretary Timothy Geithner and former Treasury chief Henry Paulson, the chief architect of the federal bailout.
"Our job is to find out how the fire started. ... Who was playing with matches," Angelides said.
