Former CEOs defend Bear Stearns
Cayne, Schwartz blame market forces for collapse
WASHINGTON — James Cayne, who led Bear Stearns for 15 years, and his successor defended the conduct of the Wall Street firm against members of a special panel who were skeptical that uncontrollable outside forces were to blame for its demise two years ago.
The firm’s stunning collapse in March 2008 “was due to overwhelming market forces that Bear Stearns . . . could not resist,’’ Cayne testified yesterday before the congressionally chartered Financial Crisis Inquiry Commission. “Considering the severity and unprecedented nature of the turmoil in the market, I do not believe there were any reasonable steps we could have taken, short of selling the firm, to prevent the collapse that ultimately occurred.’’
Members of the panel said Bear Stearns’s mounting debt and reliance on rival banks for tens of billions in loans on a daily basis must have played a role.
“It appears the financial crisis was an ‘immaculate calamity’; no one was responsible,’’ said panel chairman Phil Angelides.
The panel is investigating the roots of the crisis that plunged the country into the most severe recession since the 1930s and brought losses of jobs and homes for millions of Americans.
The role of federal regulators also came under scrutiny by the panel. Lawmakers and investor advocates have criticized the Securities and Exchange Commission’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.
Former SEC chairman Christopher Cox terminated the program in September 2008. He testified yesterday that it was “fundamentally flawed from the beginning.’’ Cox said the SEC lacked the legal authority to act as regulator of big investment bank holding companies.
Cayne was Bear Stearns’s chief executive until January 2008. Also appearing was Alan Schwartz, who succeeded Cayne for a few months.
“It does seem to me that there was an extraordinary level of risk taken’’ by Bear Stearns, Angelides told Cayne. “That was the business. That was really industry practice,’’ Cayne responded. He did acknowledge, though, that in hindsight the mounting debt levels taken on by the bank were excessively high.
Cayne said “we made a conscious decision’’ in 2006 to move to using special loans from other investment banks, known as repurchase agreements, in the belief that would provide a more stable source of borrowing than commercial paper if the credit markets were to come under stress. The temporary loan “repos’’ are used by banks, hedge funds, and other investors to borrow against collateral.
Those loans grew to $50 billion to $60 billion overnight in the period before Bear Stearns failed.
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. The Federal Reserve orchestrated Bear Stearns’s rescue buyout by JPMorgan Chase & Co.