After watching their company get sold for a song this week, Bear Stearns employees can probably be forgiven for engaging in a little black humor.
In that vein, the firm's economists released a report Wednesday titled, "Other than that, Mrs. Lincoln, how did you like the play?" The report partially blames the collapse of the 85-year-old investment bank on the Federal Reserve Board, saying the Fed played a big role in creating the housing bubble and waiting too long to react to the current problems.
But the reasons behind Bear Stearns' demise go well beyond the timeliness of the Fed's actions — or inactions.
Even on ultra-competitive Wall Street, Bear Stearns stood out. Money wasn't just important, it was pretty much all that mattered.
A Bear of a Life
William Smith, who worked at the firm in the '90s, offers some insight into the ultra-competitive culture at the firm.
"There's definitely a very, very distinct culture at Bear Stearns, and it's a place with a lot of sharp elbows," he recalls. "People want to get ahead there. You're there to make money."
Bear Stearns was also a place for second chances, hiring many people who had failed elsewhere. The firm didn't care if you had an MBA or went to an Ivy League school. Bear Stearns' legendary Chairman Ace Greenberg once half-jestingly told PBS's Charlie Rose that "we certainly are not going to limit ourselves to hiring people with advanced degrees. We want people with PSD degrees — poor, smart and a deep desire to become rich."
Success at Bear Stearns was well-rewarded. But for employees who didn't measure up, it could be a brutal place known for pinching pennies.
"The firm has these very sort of strange rules," says Dan Scotto, Bear Stearns' director of research for six years. "You must buy your own paper clips and rubber bands. Managing directors had to buy their own office furniture; otherwise you would end up with some World War II-vintage era tin desk."
Over the Hedge
However, there was no disputing the firm's success. It was the country's fifth biggest investment bank and regularly voted one of Wall Street's most-admired firms. It was smart and cutting-edge.
When the mortgage boom got under way, Bear Stearns had its own subprime lending operation. It packaged and sold mortgage-backed bonds. And its hedge funds bought complex debt products backed by mortgages.
Structured-finance expert Janet Tavakoli says the lending giant was more concentrated in mortgage investments than other Wall Street firms, and it refused to acknowledge the risks in housing or hedge adequately against a downturn.
"It seemed to be a whole combination of self-delusion and foolishness that got Bear Stearns to this point," says Tavakoli.
When the mortgage downturn began last summer, two of Bear Stearns' hedge funds collapsed. For months it was rumored to be in trouble. Last week, it ran out of cash to pay its investors and had to go to the Fed for help.
A Case of Bad Karma
What happened to the firm was karma, says Smith. Alone among Wall Street firms, it refused to assist in the 1998 bailout of Long Term Capital Management.
"Bear Stearns operates on their own ... and they don't believe in the greater good," he says. "They believe in Bear Stearns and that's ultimately what brought them down. No one came out of the woodwork to help these guys. As a matter of fact, it was the exact opposite."
Now, with its losses mounting, Bear Stearns has been sold to JPMorgan Chase for just $2 a share, a small fraction of its former value. Some big shareholders have vowed to fight the deal, insisting it's worth a lot more.
But Smith disagrees: "It's not worth more, it's worth zero. It's actually worth less than zero. And the $2 is symbolic, and they should be glad they're getting that and it's unfortunate. Their entire life savings was in Bear Stearns stock, and it's gone."
Smith believes the acquisition will ultimately go through, if only because the firm has no good options. And if it does go through, the storied investment bank will exist only as a part of the bigger and even more venerable JPMorgan Chase.