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Bringing Down Bear Stearns

On Mon­day, March 10, the rumor start­ed: Bear Stearns was hav­ing liq­uid­i­ty prob­lems. In fact, the mav­er­ick invest­ment bank had around $18 bil­lion in cash reserves. But soon the spec­u­la­tion cre­at­ed its own real­i­ty, and the race was on to keep Bear’s cri­sis from rav­aging Wall Street. With the blow-by-blow from insid­ers, Bryan Bur­rough fol­lows the players—Bear’s stunned exec­u­tives, trig­ger-hap­py reporters at CNBC, a ner­vous Fed, a shad­owy group of short-sellers—in what some believe was the great­est finan­cial scan­dal in his­to­ry.

by Bryan Bur­rough
Van­i­ty Fair [1]

On Mon­day, March 10, Wall Street was tense, as it had been for months. The mort­gage mar­ket had crashed; major com­pa­nies like Cit­i­group and Mer­rill Lynch had writ­ten off bil­lions of dol­lars in bad loans. In what the econ­o­mists called a “cred­it cri­sis,” the big banks were so spooked they had all but stopped lend­ing mon­ey, a trend which, if it con­tin­ued, would spell dis­as­ter on 21st-cen­tu­ry Wall Street, where trad­ing firms rou­tine­ly bor­row as much as 50 times the cash in their accounts to trade com­plex finan­cial instru­ments such as deriv­a­tives.

Still, as he drove in from his Con­necti­cut home to the glass-sheathed Mid­town Man­hat­tan head­quar­ters of Bear Stearns, Sam Moli­naro wasn’t expect­ing trou­ble. Moli­naro, 50, Bear’s pop­u­lar chief finan­cial offi­cer, thought he could spot the first rays of day­light at the end of nine sol­id months of non­stop cri­sis. The nation’s fifth-largest invest­ment bank, known for its noto­ri­ous­ly freewheeling—some would say maverick—culture, Bear had pledged to fork over more than $3 bil­lion the pre­vi­ous sum­mer to bail out one of its two hedge funds that had bet heav­i­ly on sub­prime loans. At the time, rumors flew it would go bank­rupt. Bear’s swash­buck­ling C.E.O., 74-year-old Jim­my Cayne, pil­lo­ried as a detached fig­ure who played bridge and rounds of golf while his firm was in cri­sis, had been oust­ed in Jan­u­ary. His replace­ment, an easy­go­ing 58-year-old invest­ment banker named Alan Schwartz, was down at the Break­ers resort in Palm Beach that morn­ing, rub­bing elbows with News Corp.’s Rupert Mur­doch and Viacom’s Sum­n­er Red­stone at Bear’s annu­al media con­fer­ence.

It was an unevent­ful morning—at first. Moli­naro sat in his sixth-floor cor­ner office, over­look­ing Madi­son Avenue, catch­ing up on paper­work after a week-long trip vis­it­ing Euro­pean investors. Then, around 11, some­thing hap­pened. Exact­ly what, no one knows to this day. But Bear’s stock began to fall. It was then, ques­tion­ing his trad­ing desks down­stairs, that Moli­naro first heard the rumor: Bear was hav­ing liq­uid­i­ty trou­bles, Wall Street’s way of say­ing the firm was run­ning out of mon­ey. Moli­naro made a face. This was crazy. There was no liq­uid­i­ty prob­lem. Bear had about $18 bil­lion in cash reserves.

Yet the whiff of gos­sip Moli­naro heard that morn­ing was the first tiny rip­ple in what with­in hours would grow into a tidal wave of rumor and spec­u­la­tion that would crash down upon Bear Stearns and, in the span of one fate­ful week, destroy a firm that had thrived on Wall Street since its found­ing, in 1923.

The fall of Bear Stearns wasn’t just anoth­er finan­cial col­lapse. There has nev­er been any­thing on Wall Street to com­pare to it: a “run” on a major invest­ment bank, caused in large part not by a crim­i­nal indict­ment or some mam­moth quar­ter­ly loss but by rumor and innu­en­do that, as best one can tell, had lit­tle basis in fact. Bear had endured more than its share of self-inflict­ed wounds in the pre­vi­ous year, but there was no rea­son it had to die that week in March.

What hap­pened? Was it death by nat­ur­al caus­es, or was it, as some sus­pect, mur­der? More than a few vet­er­an Wall Streeters believe an inves­ti­ga­tion by the Secu­ri­ties and Exchange Com­mis­sion will uncov­er evi­dence that Bear was the vic­tim of a gigan­tic “bear raid”—that is, a mali­cious attack brought by so-called short-sell­ers, the vul­tures of Wall Street, who make bets that a firm’s stock will go down. It’s a sur­pris­ing­ly dif­fi­cult the­o­ry to prove, and noth­ing short of gov­ern­ment sub­poe­nas is like­ly to do it. Faced with a thick­et of law­suits and fed­er­al inves­ti­ga­tions, not a soul in Bear’s board­room will speak for the record, but on back­ground, a few are final­ly ready to name names.

“I don’t know of any firm, no mat­ter the cap­i­tal, that could have with­stood that kind of bom­bard­ment by the shorts,” says a vice-chair­man of anoth­er major invest­ment bank. “This was not about cap­i­tal. It was about peo­ple los­ing con­fi­dence, spurred on by rumors fueled by peo­ple who had an inter­est in the fall of Bear Stearns.”

He paus­es to let the idea sink in. “If I had to pick the biggest finan­cial crime ever per­pet­u­at­ed,” he con­cludes, “I would say, ‘Bear Stearns.’ ”

At Phi Kap­pa Wall Street, most of the frat boys are instant­ly rec­og­niz­able. There’s the big, back­slap­ping Irish­man, Mer­rill Lynch, the humor­less grind, Gold­man Sachs, and the strait­laced rich kid, Mor­gan Stan­ley. And then, off in the cor­ner, wear­ing its beat-up leather jack­et and nurs­ing a cig­a­rette, was the tough-guy lon­er, scrawny Bear Stearns, who dis­dained secret hand­shakes and tow­el snap­ping in favor of an extend­ed mid­dle fin­ger toward pret­ty much every­one. Bear was bridge-and-tun­nel and proud of it. Since the days when the Gold­mans and Mor­gans cared most­ly about hir­ing young men from the best fam­i­lies and schools, “the Bear,” as old-timers still call it, cared about one thing and one thing only: mak­ing mon­ey. Brook­lyn, Queens, or Pough­keep­sie; City Col­lege, Hof­s­tra, or Ohio State; Jew or Gentile—it didn’t mat­ter where you came from; if you could make mon­ey on the trad­ing floor, Bear Stearns was the place for you. Its long­time chair­man Alan “Ace” Green­berg even coined a name for his mot­ley hires: P.S.D.’s, for poor, smart, and a deep desire to get rich.

Bear Stearns was an invest­ment bank, but the tra­di­tion­al bank­ing roles, such as advis­ing on cor­po­rate merg­ers and trad­ing stocks, were always an after­thought there. What the P.S.D.’s at Bear Stearns did best was trade bonds. The firm’s exec­u­tive his­to­ry was the sto­ry of three bond traders, each with his own out­size per­son­al­i­ty. From the mid-1930s till the late 1970s, Bear was the province of Sal­im “Cy” Lewis, the can­tan­ker­ous Wall Street leg­end who forged a cut­throat cul­ture run less as a mod­ern cor­po­ra­tion than as a series of squab­bling fief­doms, each vying for his approval. Ace Green­berg, an avun­cu­lar sort who kept his desk on the trad­ing floor and answered his own phone, took over after Lewis’s death, in 1978, and while his edges were soft­er, Bear remained a Mame­tesque pres­sure cook­er where top traders could pull down $10 mil­lion a year while run­ners-up were tossed into the alley.

The third man, the one who over­saw Bear’s demise after nudg­ing Green­berg aside in 1993, was his long­time pro­tégé, Jim­my Cayne. Cayne was a cig­ar-chomp­ing kid from Chicago’s South Side, who in his ear­ly years sold scrap met­al for his father-in-law. After a divorce, he found him­self dri­ving a New York taxi while pur­su­ing his beloved pas­time, play­ing bridge. It was at a bridge table, in fact, that Green­berg, him­self an ardent play­er, met Cayne and lured him to Bear Stearns. “If you can sell scrap met­al,” Bear lore quotes Green­berg telling Cayne, “you can sell bonds.” Cayne found his life’s call­ing on the trad­ing floor, earn­ing his bones by mov­ing huge num­bers of New York munic­i­pal bonds dur­ing the city’s finan­cial cri­sis of the 1970s. He became the embod­i­ment of Bear Stearns, a go-it-alone mav­er­ick who hun­kered down in his smoke-filled sixth-floor office, not giv­ing a rat’s ass what Wall Street thought so long as Bear made mon­ey. When an ear­ly hedge fund, Long-Term Cap­i­tal Man­age­ment, col­lapsed in 1998, los­ing $4.6 bil­lion a
nd trig­ger­ing fears of a glob­al finan­cial melt­down, Cayne famous­ly refused to join the syn­di­cate of Wall Street firms that bailed it out. Instead, while much of the Street reaped bil­lions trad­ing stocks dur­ing the boom­ing 1990s, Cayne kept Bear focused on bonds and the grim­i­er cor­ners of Wall Street plumb­ing, clear­ing trades for just about any­one, how­ev­er noto­ri­ous their rep­u­ta­tion.

Through it all, Bear remained proud­ly inde­pen­dent, refus­ing to sell out to larg­er firms. Cayne lis­tened to lots of offers, espe­cial­ly after his pal Don Mar­ron sold rival PaineWeb­ber to U.B.S. for $12 bil­lion, in 2000, but Cayne pre­ferred life as it was. Senior man­agers had wide auton­o­my, and in good years Bear all but ran itself, allow­ing Cayne to spend weeks away from his desk at bridge tour­na­ments or play­ing golf near his vaca­tion home on the Jer­sey Shore. In recent years much of the over­sight fell to Cayne’s two co-pres­i­dents, Alan Schwartz, a one­time pitch­er at Duke Uni­ver­si­ty who spe­cial­ized in media merg­ers, and anoth­er bridge afi­ciona­do, a tal­ent­ed trad­er named War­ren Spec­tor. Bear con­tin­ued to thrive, pil­ing up record prof­its all through the 2000s, and Bear’s stock price rose near­ly 600 per­cent dur­ing Cayne’s 14 years as C.E.O.
Trea­sury Sec­re­tary Hen­ry Paul­son, J. P. Mor­gan Chase C.E.O. Jamie Dimon, and Fed­er­al Reserve Chair­man Ben Bernanke

From left: Trea­sury Sec­re­tary Hen­ry Paul­son, J. P. Mor­gan Chase C.E.O. Jamie Dimon, and Fed­er­al Reserve Chair­man Ben Bernanke.

Even­tu­al­ly Bear, like most on Wall Street, branched into asset man­age­ment, form­ing a series of large funds that put investor mon­ey to work in a vari­ety of stocks, bonds, and deriv­a­tives. Unlike some firms, how­ev­er, Bear pro­mot­ed its own traders rather than out­siders to run these funds, and decid­ed that each would spe­cial­ize in a spe­cif­ic type of secu­ri­ty, rather than a diver­si­fied mix. As co-pres­i­dent, Alan Schwartz, for one, ques­tioned the move, think­ing it was a bit risky, but deferred to the think­ing of Spec­tor and oth­ers.

Every­thing went swim­ming­ly, in fact, until poor Ralph Ciof­fi ran into trou­ble.

Ciof­fi, 52, was a Bear lif­er, a wise­crack­ing sales­man who com­mut­ed to Mid­town from Tenafly, New Jer­sey, to over­see two hedge funds at Bear Stearns Asset Man­age­ment, an affil­i­ate known as B.S.A.M. His main fund, the High-Grade Struc­tured Cred­it Strate­gies fund, plowed investor cash into com­plex deriv­a­tives backed by home mort­gages. For years he was spec­tac­u­lar­ly prof­itable, post­ing aver­age month­ly gains of one per­cent or more. But as the hous­ing mar­ket turned down in late 2006, his returns began to even out. Like many a Wall Street gam­bler before him, Ciof­fi decid­ed to dou­ble-down, cre­at­ing a sec­ond fund. Where­as the first bor­rowed, or “lever­aged,” as much as 35 times its avail­able mon­ey to trade, the new fund would bor­row an astound­ing 100 times its cash.

It blew up in his face. As the hous­ing mar­ket wors­ened dur­ing the win­ter of 2006–7, Cioffi’s returns for both funds plum­met­ed. He urged investors to stay put, promis­ing an immi­nent turn­around. (Ciof­fi and a col­league, Matthew Tan­nin, were indict­ed in June for mis­lead­ing investors.) When the mar­ket down­turn accel­er­at­ed last spring, leav­ing Ciof­fi with bil­lions of dol­lars in mon­ey-los­ing mort­gage-backed secu­ri­ties no one would take off his hands, he con­coct­ed an auda­cious way to res­cue him­self, plan­ning an ini­tial offer­ing for a new com­pa­ny called Everquest Finan­cial that would sell its shares to the pub­lic. Everquest’s main asset, it turned out, was bil­lions of dol­lars of Cioffi’s untrad­able secu­ri­ties, or, as Wall Street termed it, “tox­ic waste.”

Foist­ing his garbage onto the pub­lic might have worked, but finan­cial jour­nal­ists at Busi­ness­Week and The Wall Street Jour­nal dis­cov­ered the scheme in ear­ly June. Once the truth was out, B.S.A.M. had no choice but to with­draw Everquest’s offer­ing, at which point Ciof­fi was all but doomed. Investors were begin­ning to flee. Worse, some of Cioffi’s biggest lenders, firms like Mer­rill Lynch and J. P. Mor­gan Chase, were threat­en­ing to seize his col­lat­er­al, which was about $1.2 bil­lion. In a pan­ic, Ciof­fi and his aides con­vened a meet­ing of cred­i­tors, where they asked for more time and more mon­ey. The gath­er­ing turned angry when sev­er­al in the audi­ence urged Bear to pony up its own mon­ey to save the funds, an alter­na­tive Bear exec­u­tives dis­missed out of hand.

After­ward, War­ren Spec­tor got on the phone with a series of Cioffi’s lenders, includ­ing a group of J. P. Mor­gan exec­u­tives. “I’ll nev­er for­get this,” one recalls. “Spec­tor gets on and goes, ‘You guys don’t know what you’re talk­ing about—you don’t under­stand the busi­ness; only [Ciof­fi and col­leagues] under­stand the busi­ness; only we are stand­ing in the way of them fin­ish­ing this [res­cue] deal.’ ” It was a clas­sic dis­play of Bear-style arro­gance, and it incensed the Mor­gan men. Steve Black, Morgan’s head of invest­ment bank­ing, tele­phoned Alan Schwartz and said, “This is bull­shit. We’re default­ing you.”

Mer­rill Lynch, in fact, did con­fis­cate Bear’s collateral—an aggres­sive and high­ly unusu­al move that forced Cayne into the unthink­able: using Bear’s own mon­ey, about $1.6 bil­lion, to bail out one of Cioffi’s two trou­bled funds, both of which ulti­mate­ly filed for bank­rupt­cy. It was a mas­sive blow not only to Bear’s cap­i­tal base but to its rep­u­ta­tion on Wall Street. Inside the firm, much of the blame fell square­ly on Spec­tor, who over­saw Ciof­fi and oth­er B.S.A.M. man­agers. “When­ev­er some­one raised a ques­tion, War­ren would always say, ‘Don’t wor­ry about Ralph—he’ll be fine,’ ” one top Bear exec­u­tive recalls. “Every­body assumed War­ren knew what was going on. Well, lat­er, after every­thing hap­pened, War­ren would say, ‘Well, I nev­er knew his actu­al posi­tions.’ It was one of those things where every­one thought some­one else was pay­ing atten­tion.”

As one of Bear’s lenders told me, “The B.S.A.M. sit­u­a­tion con­firmed to me my impres­sion, which was that [Bear’s] sub­sidiary busi­ness­es were run in silos—basically the guys ran their sub-busi­ness­es as they saw fit. So long as they were hit­ting their P&L tar­gets, no one asked any real ques­tions. To my mind, that con­tributed in a very large part to what hap­pened lat­er.”

For the rest of the sum­mer of 2007, Bear was buf­fet­ed by rumors that the bailout might force it into bank­rupt­cy, or worse. For the most part, Cayne rode out the storm at the bridge table and his golf club, though by late July he began to sour on Spec­tor. “War­ren nev­er showed any real remorse or con­tri­tion,” says anoth­er Bear exec­u­tive. “That just drove Jim­my mad.” For three sol­id hours Alan Schwartz sat down with Cayne and argued against fir­ing Spec­tor, whom he gen­uine­ly liked, a con­ver­sa­tion that end­ed when Cayne said of Spec­tor, “Do you know he’s nev­er once said, ‘I’m sor­ry’?” Schwartz replied, “That’s kind of shock­ing.”

Cayne forced Spec­tor to resign on August 5. Bear Stearns had sur­vived what many came to call a “near-death expe­ri­ence,” but its trou­bles were only just begin­ning.

As sum­mer turned to fall, mort­gage-relat­ed loss­es hit scores of big banks just as they had Bear, yet Bear, for rea­sons that elud­ed Cayne and oth­ers, seemed to remain the poster boy for the cred­it crunch. Every sto­ry about oth­er firms’ loss­es seemed to car­ry a men­tion of Bear’s, dredg­ing up mem­o­ries Bear exec­u­tives would just as soon have buried. The per­cep­tion of Bear’s weak­ness put Cayne and Alan Schwartz in a bind. The bailout had blown a siz­able hole in Bear’s bot­tom line, and while the firm was in no imme­di­ate dan­ger, every­one expect­ed it would seek some kind of cap­i­tal infu­sion.

Both Cayne and Schwartz, how­ev­er, were deeply ambiva­lent about accept­ing a big chunk of mon­ey from anoth­er bank or pri­vate-equi­ty fund. Cyn­ics would lat­er snipe that this was because Cayne didn’t want to dilute his own sub­stan­tial share of Bear’s stock. In fact, it was more com­pli­cat­ed. If they
accept­ed out­side help, Schwartz argued, they risked look­ing as if they need­ed it, which would only wors­en the whis­pers about their finan­cial health. In those ear­ly weeks of fall, Cayne and Schwartz engaged in a lengthy nego­ti­a­tion with pri­vate-equi­ty vet­er­an Hen­ry Kravis in which he con­sid­ered buy­ing 20 per­cent of Bear’s stock. The deal died, how­ev­er, when Schwartz point­ed out that Bear’s own pri­vate-equi­ty clients might not be thrilled to see Kravis on the board.

In the fol­low­ing months Cayne and Schwartz held a series of dis­cus­sions with poten­tial investors, at one point hir­ing a top invest­ment banker, Gary Parr, of Lazard, to help out. There were dis­cus­sions with pri­vate-equi­ty invest­ment com­pa­ny J. C. Flow­ers, a long set of talks with Jamie Dimon, J. P. Mor­gan Chase’s C.E.O., who wasn’t inter­est­ed, and even a flir­ta­tion with leg­endary investor War­ren Buf­fett that left Bear exec­u­tives feel­ing Buf­fett was averse to risk. “War­ren Buf­fett will only take nick­els from dead peo­ple,” one snipes. In the end, Cayne man­aged to arrange one deal: a strate­gic part­ner­ship with a lead­ing Chi­nese secu­ri­ties firm, citic, which agreed to invest $1 bil­lion in Bear in return for Bear’s invest­ing $1 bil­lion with it. The mar­ket yawned.

Then, in Novem­ber, came back-to-back body blows. On Novem­ber 1, The Wall Street Jour­nal, in a wide­ly read front-page sto­ry, exco­ri­at­ed Cayne for his relaxed man­age­ment style, por­tray­ing him as a bridge-crazy, pot-smok­ing Nero who fid­dled while Bear burned. A few weeks lat­er the firm was forced to dis­close it would write down anoth­er $1.2 bil­lion (which end­ed up being $1.9 bil­lion) in mort­gage-relat­ed secu­ri­ties and post the first quar­ter­ly loss in its his­to­ry. The stock went into a pro­longed dive—down 40 per­cent for the year. By Jan­u­ary many exec­u­tives were open­ly call­ing for Cayne’s head. A few slipped into Schwartz’s 42nd-floor office with an ulti­ma­tum: if Cayne wasn’t gone by the time bonus­es were paid in late Jan­u­ary, they would leave. Schwartz was con­flict­ed. He loved Cayne, but he couldn’t afford to lose a group of top peo­ple, not at this point. He can­vassed Bear’s board, found them open to a change, then broke the news to Cayne him­self. To Schwartz’s sur­prise, Cayne took the news peace­ful­ly. He resigned as C.E.O. on Jan­u­ary 8, but remained chair­man of the board.

Schwartz was named the new C.E.O. His imme­di­ate pri­or­i­ty was mak­ing sure Bear post­ed a prof­it in its cur­rent quar­ter, which end­ed Feb­ru­ary 29. There were still whis­pers out there about Bear’s finan­cial health, many fanned by rumors of fed­er­al inves­ti­ga­tions into the hedge-fund col­lapse, and Schwartz bad­ly need­ed some good news to report. As mort­gage-relat­ed loss­es struck firm after firm that win­ter, Schwartz kept his fin­gers crossed, watch­ing the cal­en­dar tick off the days until February’s end. He sweat­ed out an entire extra day—leap day, Feb­ru­ary 29—but Bear made it. Pre­lim­i­nary fig­ures showed they would report a quar­ter­ly prof­it of $1.10 or so a share. With luck, Schwartz said, that would end the whis­pers.

Nev­er­the­less, by Wednes­day, March 5, Schwartz wasn’t breath­ing any eas­i­er. The rumors con­tin­ued, faint but insis­tent, now fueled by the trou­bles at a trio of hedge funds, Car­lyle Cap­i­tal, Pelo­ton Part­ners, and Thorn­burg Mort­gage. At a week­ly risk-assess­ment meet­ing that day, Schwartz queried his peo­ple about Bear’s expo­sure to the three funds, all of which were thought near col­lapse. Bear had lent to all three. Still, Bear’s risk, Schwartz was told, was believed to be min­i­mal.

The next day, Thurs­day, Schwartz flew to Palm Beach, where the firm’s annu­al media con­fer­ence was poised to start the fol­low­ing Mon­day at the Break­ers hotel. The con­fer­ence, one of Bear’s best-attend­ed events, brought togeth­er a host of media titans, many of them Schwartz’s long­time clients: Mur­doch, Red­stone, Viacom’s Philippe Dau­man, Time Warner’s Jeff Bewkes, Disney’s Robert Iger. On Fri­day, while check­ing in with head­quar­ters, Schwartz heard the rumors again, now a bit stronger: Bear was hav­ing liq­uid­i­ty prob­lems. He trained his eye on a key auc­tion of munic­i­pal bonds that Fri­day after­noon. Bear was pro­vid­ing $2 bil­lion in liq­uid­i­ty to var­i­ous buy­ers. “That was the trip wire,” anoth­er Bear exec­u­tive recalls. “If any­one refused to take our name there, we knew we were in real trou­ble.” All through the after­noon and into the evening, Schwartz mon­i­tored the note sales. To his relief, they went off with­out a hitch.

The storm struck full force with­out warn­ing on Mon­day. That morn­ing, when Sam Moli­naro returned to his sixth-floor cor­ner office from a week-long trip in Europe, he expect­ed a nor­mal day, noth­ing spe­cial; they would release the new, pos­i­tive earn­ings the fol­low­ing week. After the trad­ing day opened, at 9:30, one of the rat­ing agen­cies, Moody’s, down­grad­ed anoth­er group­ing of Bear’s bonds. It was to be expect­ed; the agency had been down­grad­ing most of its offer­ings. Then, around 11, Bear’s stock sud­den­ly began to fall, grad­u­al­ly at first, then sharply. All the “financials”—Lehman, Mer­rill, Citi—were falling. Moli­naro shrugged. But as he checked with the trad­ing floor, he heard the rumors: Bear was hav­ing liq­uid­i­ty prob­lems. Moli­naro rolled his eyes. Not again.

Bear’s P.R. man, Rus­sell Sher­man, heard the rumors, too. As the stock con­tin­ued to slide, Sher­man began call­ing reporters, try­ing in vain to pin down their source. As he did, Moli­naro checked to see what could be fuel­ing the rumor. Bear itself had no liq­uid­i­ty problem—he knew that. That morn­ing the firm sat atop $18 bil­lion in cash reserves. Moli­naro checked with his finance desk, the repo desk, his trea­sur­er. Had any­one heard of any­thing like a mar­gin call (in which a lender was demand­ing a huge chunk of cash back)? A trade gone bad? Was any­thing out of the ordi­nary? “Across the board, it was ‘No, no, no, no—no prob­lems,’ ” a Bear exec­u­tive says.

At one point, Schwartz called in from Palm Beach to assess the sit­u­a­tion. “I’m get­ting a lit­tle ner­vous,” he said. Moli­naro assured him there was no sub­stance to the rumor.

At that point the rumor went public—on CNBC, the cable net­work that serves as Wall Street’s dai­ly back­drop. On every trad­ing floor dozens of TV sets, mount­ed high on the walls, are per­pet­u­al­ly tuned to the net­work, which runs noth­ing but shows about finance and money—from Squawk Box to Clos­ing Bell to Jim Cramer’s Mad Mon­ey.

By noon, when CNBC anchor Bill Grif­feth opened Pow­er Lunch, Bear’s stock was down more than $7, to $63. “There are rumors out there that some unnamed Wall Street firm might be hav­ing liq­uid­i­ty prob­lems,” Grif­feth not­ed. A cor­re­spon­dent on the show, Den­nis Kneale, a vet­er­an of The Wall Street Jour­nal, said, “The spec­u­la­tion at this point is that it’s Bear Stearns. They’re down the most in the mar­ket today. Sup­pos­ed­ly, a cou­ple of weeks ago, they start­ed look­ing at a way to try to shop their clear­ing oper­a­tions.… [They] couldn’t find a buy­er. At least that’s what one guy says.”

At Bear Stearns, 80-year-old Ace Green­berg was already pelt­ing senior offi­cials with phone calls, demand­ing that some­one go pub­lic to rebut the rumor. “Ace was kind of freak­ing out that morn­ing,” one senior Bear exec­u­tive says with a sigh. “He just couldn’t con­tain him­self.”

A few min­utes past 12, anoth­er CNBC cor­re­spon­dent, Michelle Caru­so-Cabr­era, reached Green­berg at Bear. He told her the rumor was “total­ly ridicu­lous.” CNBC report­ed his com­ments with­in min­utes, then incor­po­rat­ed them into a run­ning headline—bear stearns’ ace green­berg tells cnbc liq­uid­i­ty rumors are “total­ly ridiculous”—the rest of the hour. In his office, Moli­naro saw the head­line and fumed. Address­ing the rumor at this stage, he and oth­ers felt, mere­ly appeared to legit­imize it.

From Palm Beach, Schwartz tele­phoned Green­berg in frus­tra­tion. “Ace, you can’t just do that!” he said.

“Well, I had to!” Green­berg replied.

Once
the CNBC head­line began run­ning, reporters began call­ing Rus­sell Sherman’s office. Sher­man told the Bloomberg reporter the rumor was untrue, but Bear’s stock was going crazy. The total vol­ume was over 50 mil­lion shares; on a nor­mal day it might trade 7 mil­lion.

At a lit­tle after one CNBC cor­re­spon­dent Char­lie Gas­pari­no, an espe­cial­ly aggres­sive reporter who for months had been sug­gest­ing Bear’s pos­si­ble indict­ment on crim­i­nal charges in the hedge-fund col­lapse, joined an on-air round­table to dis­cuss the rumor. Gas­pari­no was the bane of Bear Stearns; more than once he had pre­dict­ed that the firm would go under. “I don’t believe there is a liq­uid­i­ty prob­lem at Bear Stearns,” Gas­pari­no said on-air. “Bear Stearns has a prob­lem with whether they should exist or not in the future in this sense.… What do they have left? A clear­ing busi­ness, a sec­ond-rate invest­ment bank?” If the cred­it cri­sis con­tin­ued, Gas­pari­no said a few moments lat­er, “I don’t see how they could sur­vive inde­pen­dent­ly. They don’t have enough hors­es out there.”

Sit­ting on a stool beside him, Bill Grif­feth appeared star­tled at the strength of the state­ment.

“You’re on record, then,” he remarked.

Gas­pari­no laughed. “Wouldn’t be the first time I was wrong,” he said.

At Bear Stearns, no one was laugh­ing. Pub­licly spec­u­lat­ing on a firm’s liq­uid­i­ty is akin to shout­ing “Fire!!!” in a crowd­ed the­ater; in cat­a­stroph­ic cas­es it can trig­ger pan­ic sell­ing. It risks, in oth­er words, becom­ing a self-ful­fill­ing prophe­cy.

For the next hour the Bear Stearns rumor became a top­ic of con­ver­sa­tion between CNBC cor­re­spon­dents and var­i­ous mar­ket traders and ana­lysts. At 1:50, Matthew Ches­lock remarked, “The sen­ti­ment [on Bear] is pret­ty neg­a­tive. The gen­er­al con­sen­sus is ‘Where there’s smoke, there’s fire.’ ”

A few min­utes lat­er, Grif­feth, per­haps sens­ing the net­work might have gone a bit too far, asked Den­nis Kneale, “What about the jit­tery nature of this mar­ket right now? Are we start­ing to believe some rumors that may or may not be true?” Kneale agreed. “Some­one,” he observed, “is always mak­ing mon­ey on the oth­er side of that bad news or that rumor.”

Yet CNBC’s cov­er­age remained any­thing but skep­ti­cal of the rumor. At two the network’s new “mon­ey hon­ey,” Erin Bur­nett, head­lined the hour by announc­ing “cred­it issues at Bear,” nev­er mind that there was no such thing. She turned to cor­re­spon­dent David Faber, who observed, “Of course, no firm’s ever going to say that they are hav­ing trou­ble with liq­uid­i­ty, and, in fact, you’ve either got liq­uid­i­ty or you don’t. So if you don’t have it, you’re done. Those are the kinds of con­cerns in this mar­ket, con­cerns of con­fi­dence.… You can have crises of con­fi­dence, caus­ing melt­downs.”

At 2:07 came shock­ing news: the first men­tion that New York gov­er­nor Eliot Spitzer had had deal­ings with a pros­ti­tu­tion ring. That news shoved Bear Stearns out of CNBC’s head­lines, much to the relief of the firm’s exec­u­tives. At day’s end, Sher­man issued a for­mal state­ment deny­ing any liq­uid­i­ty prob­lems. On Mon­day night, Schwartz and Moli­naro held their breaths, hop­ing the worst was over.

In fact, it had just start­ed.

Tues­day morn­ing the Fed­er­al Reserve announced a nov­el new secu­ri­ties lend­ing pro­gram for major Wall Street firms to help them weath­er the cred­it cri­sis. Most finan­cial stocks rebound­ed, but not Bear. After lunch, Gas­pari­no went on-air and said the Fed ini­tia­tive was being inter­pret­ed as an effort to save one firm—Bear. By ear­ly after­noon the rumors were once again fly­ing, now stronger than ever.

The first to pull their mon­ey from Bear were sev­er­al major hedge funds. So Moli­naro and his men can­vassed the repo lenders, which give banks bil­lions of dol­lars in overnight loans that have to be renewed each day. How­ev­er, Moli­naro found that all planned to “roll over” Bear’s loans the next morn­ing. “Nobody was cut­ting us off,” says a Bear exec­u­tive involved in the events. “There was a lot of chat­ter, though. The hedge funds were agi­tat­ed. That was con­cern­ing, because they could influ­ence the out­come by pulling out cash bal­ances.”

That same day Bear exec­u­tives noticed a wor­ri­some devel­op­ment whose poten­tial sig­nif­i­cance they would not appre­ci­ate for weeks. It involved an avalanche of what are called “nova­tion” requests. When a firm wants to rid itself of a con­tract that car­ries cred­it risk with anoth­er firm, in this case Bear Stearns, it can either sell the con­tract back to Bear or, in a nova­tion request, to a third firm for a fee. By Tues­day after­noon, three big Wall Street companies—Goldman Sachs, Cred­it Suisse, and Deutsche Bank—were expe­ri­enc­ing a tor­rent of nova­tion requests for Bear instru­ments. Alan Schwartz thought it strange that so many requests were being chan­neled to the same three firms, but did his best to assure them all that Bear remained on sound foot­ing. “Deutsche Bank we talked to, and they said, ‘We’re get­ting killed!’ ” says a Bear exec­u­tive. “We said, ‘We’ll take you out of your posi­tions,’ and we did. But it was too late.”

Too late—because, before Bear could calm the waters, exec­u­tives at both Gold­man and Cred­it Suisse told their traders to hold up all nova­tion requests deal­ing with Bear Stearns, pend­ing approval by their cred­it depart­ments. The Cred­it Suisse memo, a “blast” e‑mail to much of its trad­ing staff, quick­ly became the sub­ject of wide­spread rumor and gos­sip. Both mem­os were essen­tial­ly rou­tine, a way to han­dle the del­uge of nova­tion requests rather than com­ments on Bear’s via­bil­i­ty, but they nev­er­the­less served as the first con­crete sign that some of Wall Street’s biggest firms were hav­ing con­cerns about doing busi­ness with Bear.

Sam Moli­naro felt it was time for anoth­er pub­lic assur­ance. CNBC’s Char­lie Gas­pari­no had been pep­per­ing him with phone calls seek­ing com­ment. Moli­naro talked to Rus­sell Sher­man, who felt Gas­pari­no could be played. “He’ll say some­thing neg­a­tive if you shut him out. But if you talk to him, he’ll go pos­i­tive,” one Bear exec­u­tive told me.

Around three, Moli­naro spoke to Gas­pari­no, telling him, “I’ve spent all day try­ing to track down the source of the rumors, but they are false. There is no liq­uid­i­ty cri­sis. No mar­gin calls. It’s all non­sense.” Gasparino’s on-air com­ments were mild, but for the first time he raised the specter of a night­mare sce­nario: “They are real­ly wor­ried about this inside [Bear], that these rumors are tak­ing a very nasty turn, and they might cause a run on the bank.”

Still, by day’s end, there was no rush among Bear’s lenders to with­draw cash from the firm. At that point, this exec­u­tive says, “the notion of a liq­uid­i­ty cri­sis seemed sil­ly.”

That night Schwartz, Moli­naro, and oth­ers dis­cussed what to do. The talks cen­tered on whether Schwartz should go pub­lic in an inter­view with CNBC. “We debat­ed putting Alan on the air a long time,” says one board mem­ber. “Yes, it might draw atten­tion to the rumors. But it would def­i­nite­ly answer the ques­tions. Our view was: we had to get him out.”

Schwartz, though, want­ed some assur­ances first. From expe­ri­ence, he knew he faced a risk in pick­ing the wrong CNBC cor­re­spon­dent for the inter­view. All the network’s talent—Gasparino, Maria Bar­tiro­mo, Faber, Lar­ry Kudlow—had request­ed the inter­view, and who­ev­er didn’t get it, Schwartz feared, might retal­i­ate on the air. “Each of these cor­re­spon­dents has his own pro­duc­er, and they all seem to hate each oth­er,” one Bear exec­u­tive told me. “If you choose Faber, you know Bar­tiro­mo will bash you the next day.” Schwartz direct­ed Rus­sell Sher­man to iden­ti­fy the CNBC exec­u­tive who super­vised the cor­re­spon­dents, explain the sit­u­a­tion, and ask that the cor­re­spon­dents who didn’t get the inter­view refrain from attacks. Sher­man, how­ev­er, couldn’t iden­ti­fy a sin­gle CNBC exec­u­tive who seemed to have con­trol ove
r the cor­re­spon­dents. “Every­one on Wall Street knows the joke,” says anoth­er Bear exec­u­tive involved in the dis­cus­sions. “At CNBC, there is sim­ply no adult super­vi­sion.”

In the end they chose the safest of the lot, Faber. Wednes­day morn­ing, all across Man­hat­tan, Wall Street traders crowd­ed around their mon­i­tors to see what Schwartz had to say. More than a few shook their heads that the Bear C.E.O. was not in his office, grap­pling with the emerg­ing cri­sis, but in, of all places, Palm Beach! As a senior exec­u­tive of one com­pet­ing firm put it, “To come on CNBC from Palm Beach and, you know, tell every­one every­thing was going to be O.K., they had to be crazy.” (Schwartz was wor­ried that an abrupt depar­ture from his con­fer­ence might raise even more ques­tions.)

Faber’s first ques­tion was a bomb­shell. He told Schwartz he had direct knowl­edge of a trader—a sin­gle trader—whose cred­it depart­ment had held up a trade with Bear Stearns, cit­ing con­cerns about its health. At Bear, many exec­u­tives gasped. It was a killer state­ment: Faber was say­ing, in essence, that Bear’s sta­tus as a trad­er, the basis of its busi­ness, was in ques­tion. Schwartz answered as best he could, say­ing every­thing was fine; only lat­er did Faber say on-air the trade in ques­tion had final­ly gone through. But the dam­age had been done.

“You knew right at that moment that Bear Stearns was dead, right at the moment he asked that ques­tion,” a Wall Street trad­er of 40 years told me. “Once you raise that idea, that the firm can’t fol­low through on a trade, it’s over. Faber killed him. He just killed him.”

At Bear Stearns, how­ev­er, the sen­ti­ment on the sixth floor was that Schwartz had done a good job. The inter­view did noth­ing, how­ev­er, to stop the rumors. When Schwartz returned to his office that after­noon, he tried call­ing cus­tomers, but noth­ing he did could stem the tide. By the end of the trad­ing day, the first repo lenders had warned Moli­naro they would not renew their loans the next morn­ing.

“The tone of Wednes­day after­noon was not positive—three days of rumors were start­ing to take their toll,” says a senior Bear exec­u­tive. Most­ly because of hedge-fund with­drawals, the firm’s reserves had shrunk to less than $15 bil­lion. That evening, meet­ing in Molinaro’s con­fer­ence room, the chief finan­cial offi­cer told Schwartz they could prob­a­bly replace those reserves the fol­low­ing day. If the repo lenders began back­ing out, though, they were in seri­ous trou­ble. Schwartz had a long-stand­ing emer­gency plan in place, involv­ing the sale of Bear assets, and for the first time Moli­naro pulled it out and began study­ing it in earnest. Schwartz, mean­while, got on the phone to Gary Parr at Lazard. They agreed to meet the next day. Late that night a Bear lawyer tele­phoned Tim Gei­th­n­er, pres­i­dent of the New York Fed­er­al Reserve. He briefed him on Bear’s plight and urged him to have the Fed accel­er­ate its plan to pro­vide liq­uid­i­ty to the mar­ket.

The next morn­ing, on his dri­ve in from Con­necti­cut, Moli­naro began call­ing the repo and finance desks to check the tone of their ear­ly calls. The Jour­nal had a sto­ry sug­gest­ing that any num­ber of Bear’s lenders, includ­ing the all-impor­tant repo lenders, were grow­ing ner­vous. Still, those first calls went as well as could be hoped. Oth­er firms were still trad­ing with Bear. Few of the repo lenders were talk­ing about refus­ing to roll over their dai­ly loans. “Thurs­day morn­ing, things looked good,” says one Bear exec­u­tive.

Then, just as they had the day before, the rumors began to multiply—and with them the with­drawals. By midafter­noon the dam was break­ing. One by one, repo lenders began to jump ship. As word spread of the with­drawals, still more repo lenders turned tail. The hedge-fund cash was almost all gone. “A lot of peo­ple were pulling out,” one Bear exec­u­tive remem­bers. “The nail in the cof­fin was the repo capac­i­ty.”

Moli­naro and Robert Upton, Bear’s trea­sur­er, end­ed the day tot­ing up the with­drawals. By five, Moli­naro could see his worst fears had been real­ized. He picked up the phone and called Schwartz in his 42nd-floor office. “You need to get down here,” he said.

The num­bers, scrib­bled out on a yel­low legal pad, told the sto­ry. Stand­ing in Molinaro’s con­fer­ence room, Schwartz lis­tened as Robert Upton guid­ed them through the wreck­age. A full $30 bil­lion or so of repo loans would not be rolled over the next morn­ing. They might be able to replace maybe half that in the next day’s mar­ket, but that would still leave Bear $15 bil­lion short of what it need­ed to make it through the day. By sev­en it was obvi­ous they had only two options: an emer­gency cash infu­sion or a bank­rupt­cy fil­ing the next day. The one thing every­one agreed upon was the need for secre­cy. “If word gets out, it might be the end,” one par­tic­i­pant recalls say­ing.

Schwartz was strick­en. He had gen­uine­ly thought they would make it. By ear­ly evening, real­iz­ing that Bear’s life expectan­cy might now be num­bered not in days but hours, he hit the phones. The regulators—the S.E.C., Trea­sury, the Fed—had been watch­ing the sit­u­a­tion all day and were wait­ing when he called to brief them. Gary Parr, the Lazard banker, had already touched base with J. P. Morgan’s C.E.O., Jamie Dimon, that after­noon, let­ting him know where Bear stood. J. P. Mor­gan was the obvi­ous can­di­date for overnight cash. The two firms had long-stand­ing ties. Their head­quar­ters faced each oth­er across 47th Street.

That day was Dimon’s 52nd birth­day, and he was cel­e­brat­ing with a qui­et fam­i­ly din­ner at Avra, a Greek restau­rant on East 48th Street. He was irked when his pri­vate cell phone rang; it was to be used only in emer­gen­cies. On the line was Parr, who put Schwartz on as Dimon stepped out­side onto the side­walk. Schwartz quick­ly explained the depth of Bear’s plight and said, “We real­ly need help.”

Still irked, Dimon said, “How much?”

“As much as 30 bil­lion,” Schwartz said.

“Alan, I can’t do that,” Dimon said. “It’s too much.”

“Well, could you guys buy us overnight?”

“I can’t—that’s impos­si­ble,” Dimon replied. “There’s no time to do the home­work. We don’t know the issues. I’ve got a board.”

The peo­ple he should call, Dimon said, were at the Fed and the Treasury—the only place Bear could get $30 bil­lion overnight. Still, Dimon promised to see what he could do to help. He hung up and dialed Tim Gei­th­n­er at the New York Fed down­town.

Twen­ty-first-cen­tu­ry Wall Street is a high­ly inter­con­nect­ed world, with just about every­one lend­ing bil­lions of dol­lars to every­one else, and Gei­th­n­er wor­ried that Bear’s col­lapse might trig­ger a domi­no effect, tak­ing down scores of oth­er firms around the world; he urged Dimon in the strongest terms to think about some­how help­ing Bear. “Tim, look, we can’t do it alone,” Dimon said. “Just do some­thing to get them to the week­end. Then you’ll have some time.”

Dimon hung up, reluc­tant­ly real­iz­ing Mor­gan was in this, like it or not. He knew every­one involved would push Mor­gan to con­sid­er buy­ing Bear, but while there were cer­tain of its busi­ness­es he coveted—prime bro­ker­age, ener­gy, cor­re­spon­dent banking—he wasn’t thrilled at the prospect of tak­ing aboard its mas­sive mort­gage-relat­ed prob­lems. Still, in short order, he dis­patched a cred­it team of a half-dozen traders to Bear to begin look­ing at its books. Then he real­ized he had a prob­lem.

It was Steve Black, his invest­ment-bank­ing chief. The Mor­gan man who prob­a­bly knew Bear best, Black was on a fam­i­ly vaca­tion on the Caribbean island of Anguil­la. That evening, in fact, Black was look­ing for­ward to three days of peace and qui­et with his wife, Deb­bie. At her insis­tence, he had left his cell phone at the hotel when they went for a late din­ner at a beach­side restau­rant. Mid­way through their meal, Black looked up and saw a man march­ing toward the table.

“Oh, shit,” Black said under hi
s breath.

“Are you Mr. Black?” the man asked. When Black nod­ded, the man said, “I have an emer­gency call from your hotel.”

Black told the hotel to have Dimon call him at the restau­rant. He was wait­ing in its bustling kitchen when the phone rang. “It’s for me,” he told a cook. By nine Black was back in his hotel, orches­trat­ing the teams begin­ning to study Bear’s sit­u­a­tion. A Mor­gan jet would arrive in the morn­ing to fer­ry him back to New York.

The first team of Mor­gan exec­u­tives reached Bear’s sixth-floor exec­u­tive suite around 11 that night. It didn’t take long for them to real­ize the dan­ger in what they were being asked to do. If Dimon lent Bear $15 bil­lion or so and the firm implod­ed the next day, they could lose it all. A lit­tle after mid­night Dimon told Schwartz in a phone call, “We’ve got to get the Fed in on this.”

Down­town, Tim Gei­th­n­er was wait­ing when Dimon tele­phoned. Any bailout, Dimon reit­er­at­ed, was too big, too risky, for Mor­gan to han­dle alone. Both men knew that meant only one thing: some­how Bear had to be giv­en access to the Fed “win­dow,” that is, the spig­ot of cash that was avail­able to the nation’s com­mer­cial banks, but not its invest­ment banks. The only way for the Fed to help, to give Bear access to the “win­dow,” was to lend Mor­gan the mon­ey, allow­ing the bank to act as a bridge across which the Fed cash could stream into Bear’s vaults.

Gei­th­n­er, quick­ly grasp­ing the wis­dom of the move, got on the phone with Wash­ing­ton, going through the details with the Fed’s chair­man, Ben Bernanke, and the Trea­sury sec­re­tary, Hank Paul­son, and his coun­ter­parts at the S.E.C. If they could just get Bear through the next day, per­haps a big­ger and bet­ter deal could be forged over the week­end. By two a.m. teams from the Fed and the S.E.C. had joined the Mor­gan bankers at Bear, por­ing over the num­bers. In Molinaro’s con­fer­ence room, Schwartz and Moli­naro paced, occa­sion­al­ly tak­ing bites of cold piz­za; their fate, they now real­ized, was large­ly out of their hands.

By four a.m. the out­lines of a deal were tak­ing shape. Mor­gan would give Bear a cred­it line; the mon­ey would come from the Fed. It took three more hours for the details to be pound­ed out. At the last minute Morgan’s gen­er­al coun­sel, Stephen Cut­ler, insert­ed a line into the press release stat­ing the cred­it line would be good for up to 28 days.

At Bear, Schwartz and Moli­naro allowed them­selves a few ner­vous smiles. They were saved—for 28 days. “We all thought this was a huge win,” remem­bers one Bear exec­u­tive. “We were all pret­ty pleased, think­ing we had avert­ed our poten­tial deaths.”

They wouldn’t be so san­guine for long.

When the mar­kets opened Fri­day morn­ing, traders greet­ed the news from Bear with sur­prise but not, at least ini­tial­ly, with pan­ic. For the first hour or so of trad­ing, the stock remained where it had been the day before, in the low 60s. In Anguil­la, Steve Black fur­rowed his brow. “This is nuts,” he remarked to his wife as they head­ed for the air­port. “No one under­stands what hap­pened here. This stock should be half that.” By the time the Blacks arrived at the air­port, it was.

By four o’clock the firm’s cap­i­tal reserves, which had been $18 bil­lion that Mon­day, had dwin­dled to almost noth­ing. “The bal­ances leav­ing was a flood,” remem­bers one Bear exec­u­tive. “By Fri­day after­noon we couldn’t even keep track of the mon­ey going out. Fri­day after­noon, I have to say, caught every­one by sur­prise. Because Fri­day morn­ing we thought we had bought some ‘stop, look, and lis­ten’ time.”

Gary Parr, mean­while, was already on the phones, can­vass­ing every prospec­tive res­cuer he could think of. Just about any­thing was on the table: a merg­er, a sale of prime bro­ker­age or oth­er valu­able assets, even an out­right sale of Bear itself. The only way to stop the run, every­one knew, was to find what Parr kept call­ing a “val­i­dat­ing investor”—a big name, hope­ful­ly with big mon­ey, who would send a mes­sage that Bear was still sol­id. War­ren Buf­fett, with his unmatched rep­u­ta­tion for iden­ti­fy­ing val­ue, was the ide­al solu­tion. “If Buf­fett had put in a hun­dred dol­lars, that would’ve been enough,” says one per­son involved that day. “That would have sent the mes­sage.” But there was no rush, at least not at first.

Around six Schwartz slipped into the back of a black town car for the dri­ve home to Green­wich. Some­how Bear was still alive, if bare­ly. Thanks to the Mor­gan cred­it line, they could prob­a­bly open on Mon­day. Now he had 28 days—28 days to raise new cap­i­tal, find a merg­er part­ner, or sell Bear out­right. It wouldn’t be easy, he knew, but it was doable. Then, as the car cruised north­east, Schwartz’s phone rang. It was Tim Gei­th­n­er of the Fed, with the Trea­sury sec­re­tary, Hank Paul­son.

Paul­son came right to the point. “You’ll recall I told you when we cut this facil­i­ty [that] your fate was no longer in your hands,” he told Schwartz. “Well, we don’t plan on being here on Sun­day night like we were last night. You’ve got the week­end to do a deal with J. P. Mor­gan or any­one else you can find. But if you’re not done by Mon­day, we’re pulling the plug.” And, like that, Bear’s 28-day cush­ion evap­o­rat­ed. The Fed’s cred­it line was good only till Sun­day night.

Schwartz hung up the phone, stunned. He tele­phoned Moli­naro, who was also on his way home, at that moment buy­ing a cup of cof­fee at a rest stop on the Mer­ritt Park­way. “You’ve got to be kid­ding me,” Moli­naro said.

To this day, top Bear offi­cials aren’t sure whether they mis­read the “28-day” lan­guage or whether Paul­son sim­ply had a change of heart after the events of Fri­day after­noon. “Every­one thought we had 28 days,” says one senior Bear exec­u­tive. “Do we think they thought that? We think so. But, look, when this was done, we just got a piece of paper that said, ‘If you agree to this, you’ll be O.K.’ We signed. No one spent a lot of time going over all the lit­tle details.”

In fact, no one—not even Fed­er­al Reserve officials—had been sure what the cred­it line or the “28-day” men­tion actu­al­ly meant. “They took hope in that lan­guage,” says a Fed offi­cial. “I don’t know why they did. We made it very clear at the time, ‘This is not the be-all end-all.’ Then again, this whole thing was done so fast. We didn’t think through all the details of what would hap­pen next.”

When Schwartz returned to his office Sat­ur­day morn­ing, one of his first calls was to Gei­th­n­er. He appealed for more time, explain­ing that Bear thought it had 28 days. Gei­th­n­er held firm. Sun­day night, he repeat­ed. By that point, rep­re­sen­ta­tives of prospec­tive suit­ors were already stream­ing through Bear’s hall­ways, por­ing over finan­cial doc­u­ments. Their efforts switched into over­drive as word spread of the Sun­day dead­line. A team from Flow­ers was there, a team rep­re­sent­ing Hen­ry Kravis, plus anoth­er half-dozen or so groups from major banks. J. P. Mor­gan alone had 16 dif­fer­ent teams meet­ing with all of Schwartz’s top peo­ple.

It was a sober­ing process: as the day wore on, the bid­ders began drop­ping out, one by one. Every­one had an excuse: they didn’t have the time or the mon­ey or the balls to do such a risky deal in so short a time. The two best pos­si­bil­i­ties, it appeared, were Mor­gan and Flow­ers. The lat­ter told Parr on Sat­ur­day after­noon it was pre­pared to buy 90 per­cent of Bear for about $30 bil­lion, or $28 a share—that is, if it could scrape up $20 bil­lion from a bank con­sor­tium by the next day. No one thought Flow­ers could pos­si­bly get such a deal done in time.

From the out­set, Schwartz assumed Mor­gan was the bride­groom. Across the street, in Morgan’s eighth-floor exec­u­tive suite, Jamie Dimon and Steve Black field­ed non­stop reports from their due-dili­gence teams, now num­ber­ing more than 300 peo­ple. The key, every­one knew, was Bear’s mort­gage “book,” that is, its inven­to­ry of mort­gage-backed secu­ri­ties.
Much of it was illiquid—it couldn’t be sold. How to val­ue these Rube Gold­berg devices was anyone’s guess. The more Black stud­ied Bear’s book, the more wor­ried he grew. He and anoth­er Mor­gan exec­u­tive, Doug Braun­stein, got on the phone with Schwartz and Parr that night and told them that, if Mor­gan did bid, it wouldn’t be much.

Bear’s stock had closed Fri­day at $32. “The fact you’re at 32 doesn’t mean much at this point,” Black said. He sug­gest­ed that a Mor­gan bid might be in the range of $8 to $12 a share. “We said, ‘That’s all there is, and that’s with a lack of due dili­gence and a lot of oth­er issues,’ ” says a per­son involved in the call. “Alan asked, ‘Will you do it come hell or high water?’ That was their key issue.”

At night­fall every­one hun­kered down for long hours study­ing Bear’s num­bers, espe­cial­ly its mort­gage book. By dawn, how­ev­er, many Mor­gan exec­u­tives were hav­ing sec­ond thoughts. The more they stud­ied the secu­ri­ties Bear owned, the worse it looked. Bear, for instance, had ini­tial­ly esti­mat­ed it had $120 bil­lion in so-called risk-weight­ed assets, those that might go bad. By Sun­day morn­ing, Mor­gan exec­u­tives felt the actu­al num­ber was clos­er to $220 bil­lion.

“We all kind of slept on it,” says one exec­u­tive involved in the talks, “or not slept on it, kind of closed our eyes for a half-hour, and real­ized that if you take a step back and remove your­self from the enor­mi­ty of it, what we were being asked to take over, from a risk fac­tor, was gar­gan­tu­an.” And it wasn’t just the finan­cial risk. The morning’s New York Times car­ried a piece on Bear, by vet­er­an reporter Gretchen Mor­gen­son, that dredged through all the seami­est aspects of Bear’s recent his­to­ry. Steve Black walked around the eighth floor mak­ing sure every­one read it. “That arti­cle cer­tain­ly had an impact on my think­ing,” remem­bers one Mor­gan exec­u­tive. “Just the rep­u­ta­tion­al aspects of it, get­ting into bed with these peo­ple.” He shud­ders.

Dimon had to agree. It was just too much. Steve Black broke the news to Schwartz. “What­ev­er oth­er things you are work­ing on, you should active­ly pur­sue them,” he said. Down­town, at the Fed, Tim Gei­th­n­er stepped out of his con­fer­ence room to hear the news from Dimon. “I remem­ber he came back in a minute lat­er, with this look on his face that said, ‘Huh?’ ” recalls a mem­ber of the Fed team.

“They’re not going to do it,” Gei­th­n­er said.

Gei­th­n­er believed he couldn’t let Bear die. The reper­cus­sions were unthink­able. “For the first time in his­to­ry the entire world was look­ing at the fail­ure of a major finan­cial insti­tu­tion that could lead to a run on the entire world finan­cial sys­tem,” a Fed offi­cial recalls. “It was clear we couldn’t let that hap­pen.”

With­in min­utes Gei­th­n­er was back on the phone with Dimon. There ensued a series of con­ver­sa­tions where, in one Fed official’s words, “they kept say­ing, ‘We’re not going to do it,’ and we kept say­ing, ‘We real­ly think you should do it.’ This went on for hours. Final­ly, [the con­ver­sa­tion] shift­ed to ‘Well, maybe if.’ They kept say­ing, ‘We can’t do this on our own.’ ” All through these talks, Gei­th­n­er kept a ner­vous eye on the clock. The Aus­tralian mar­kets opened at six on Sun­day evening, New York time. They had to have some kind of deal by then or risk chaos.

Gei­th­n­er had sev­er­al long con­ver­sa­tions with Ben Bernanke and Hank Paul­son. There was nev­er any seri­ous ques­tion whether the Fed would help out. Even though it had nev­er attempt­ed any­thing like this before, there was ample prece­dent for the move; both the Ger­man and British cen­tral banks had stepped up to res­cue insti­tu­tions laid low by the mort­gage cri­sis in just the last year. Still, the details took hours to unspool. At one point, Paul­son had to sign a doc­u­ment con­firm­ing that, yes, in the event Bear default­ed on its secu­ri­ties, the Amer­i­can tax­pay­er would pay the tab.

Mean­while, at Bear, Alan Schwartz, now mere­ly a spec­ta­tor at his firm’s funer­al, watched the clock. By one, Bear’s board was in ses­sion, many of its mem­bers, includ­ing Jim­my Cayne, present by phone; Cayne was in Detroit at a bridge tour­na­ment. At one point, Schwartz took a call from Mor­gan exec­u­tives, who told him that any bid was like­ly to be less than the $8‑to-$12 range men­tioned the night before. In fact, they sug­gest­ed the like­ly num­ber was $4.

When Schwartz relayed the $4 idea to his board, sev­er­al, includ­ing Cayne, grew apoplec­tic. Cayne argued stren­u­ous­ly that Bear sim­ply file for bank­rupt­cy. “There were a lot of peo­ple at that point who were just say­ing, ‘Fuck ’em—let’s go 11,’ ” remem­bers one per­son in the board­room. It was then that Gary Parr and the bank­rupt­cy attor­neys patient­ly explained that bank­rupt­cy was actu­al­ly not an option, not for a major secu­ri­ties firm. Changes to the bank­rupt­cy code in 2005 would force fed­er­al reg­u­la­tors to take over cus­tomer accounts. All its secu­ri­ties would be sub­ject to imme­di­ate seizure by cred­i­tors.

Slow­ly, the humil­i­at­ing inevitabil­i­ty of a $4‑a-share buyout—for a firm whose shares had trad­ed as high as $170 the year before—sank in. It was at that point, midafter­noon, that Trea­sury sec­re­tary Paul­son twist­ed the knife. As the rank­ing politi­cian involved in the deal, he was con­cerned with appearances—both how it would look that the fed­er­al gov­ern­ment was bail­ing out a well-heeled invest­ment bank at a time when nor­mal Amer­i­cans were los­ing their homes, and the appear­ance of some­thing lawyers call “moral haz­ard,” that is, the idea that a Bear deal, by appear­ing to “save” a bank whose poor judg­ment had pushed it to the brink of bank­rupt­cy, might actu­al­ly encour­age risky behav­ior by oth­er finan­cial insti­tu­tions. This deal, Paul­son judged, had to hurt Bear. And it had to hurt bad­ly.

Paul­son and Tim Gei­th­n­er tele­phoned Dimon at Mor­gan. He put them on speak­er. Dimon said he was con­sid­er­ing a price in the $4‑to-$5 range. “That sounds high to me,” Paul­son said. “I think this should be done at a very low price.” A lit­tle lat­er, Morgan’s Doug Braun­stein reached Gary Parr at Bear. A for­mal offer would be forth­com­ing, Braun­stein said. “The number’s $2,” he said.

Parr near­ly choked. “You can’t mean that,” he said.

He did. Schwartz took the news qui­et­ly, which was more than one could say about some of his board mem­bers. Jim­my Cayne—whose 5.66 mil­lion shares, once worth near­ly a bil­lion, would now be worth less than $12 million—swore he would nev­er accept such a humil­i­at­ing offer. “The peo­ple around the table, some of them, their net worth was being wiped out,” says one per­son who was in the room. “There was every emo­tion you can think of: sad­ness, anger. They saw the tragedy. But the bot­tom line was, you know, when they got in a pick­le, Bear Stearns didn’t have many friends.”

Schwartz took a half-hour explain­ing that the board real­ly had no choice. It was Mor­gan or bank­rupt­cy, which would mean liq­ui­da­tion, putting 14,000 employ­ees out of work by noon the next day. “What can I say?” he said at one point. “It’s bet­ter than noth­ing.”

And like that, with the sig­na­tures on an unprece­dent­ed merg­er agree­ment, a major Amer­i­can invest­ment bank van­ished, along with $29 bil­lion in share­hold­er val­ue and the secure futures of 14,000 employ­ees. In the fol­low­ing days the hall­ways of Bear Stearns & Co. erupt­ed in rage. Long­time friends fumed and even screamed in Schwartz’s face—at a town-hall meet­ing he chaired, where one man hollered, “This is rape!”; in the hall­way out­side his office; even in the Bear gym. Share­hold­ers were so angry that every­one was forced back to the nego­ti­at­ing table the next week­end, when Mor­gan and the Fed, in a sec­ond set of man­ic around-the-clock meet­ings, agreed to boost the price to $10 a share. Yet, for all the anger, all the frus­tra­tion, no one could answer the one ques­tion on everyone’s mind: How on earth had this hap­pened?

Even among the cir­cle of top exec­u­tives who lived through that fran­tic week, no two peo­ple see the cri­sis at Bear the same way. Many, though, agree with some ver­sion of the sce­nario Alan Schwartz has come to believe. Yes, Schwartz tells friends, mis­takes were made. Yes, the firm was finan­cial­ly weak­ened. But the more he learned about what had hap­pened behind the scenes that week, the more Schwartz came to believe that Bear’s col­lapse was a pre-med­i­tat­ed attack orches­trat­ed by mar­ket spec­u­la­tors who stood to prof­it from its demise. Accord­ing to those Schwartz has briefed, these unnamed speculators—several now being inves­ti­gat­ed by the S.E.C.—employed a com­plex scheme to force a hand­ful of major Wall Street firms to hold up trades with Bear, then leaked the news to the media, cre­at­ing an arti­fi­cial pan­ic.

“Some­thing hap­pened Mon­day that trig­gered this mess,” says one Bear exec­u­tive who has spo­ken to the S.E.C. “It was as though a com­put­er virus had been launched. Where the hell was this com­ing from? Who start­ed it? We tried, believe me, but we could not track it down. We know lots of big hedge funds were spread­ing rumors, but how can you pur­sue that? Only the S.E.C. can, and they’re all over this.”

At the heart of this the­o­ry are the “nova­tion” requests that began to pick up steam that Tues­day and Wednes­day. As Bear exec­u­tives lat­er ana­lyzed these trades, they dis­cov­ered the over­whelm­ing major­i­ty had been made with just three firms: Gold­man Sachs, Cred­it Suisse, and Deutsche Bank. Schwartz came to believe this was no acci­dent. In his mind, the flood of nova­tion requests was designed to force at least one of the three firms to put a tem­po­rary halt to accept­ing them, which is what hap­pened: Gold­man and Cred­it Suisse did. News of that halt not only swept Wall Street trad­ing floors, it appeared to gain cre­dence the next day when David Faber asked Schwartz about it on CNBC. “I like Faber, he’s a good guy, but I won­der if he ever asked him­self, ‘Why is some­one telling me this?’ ” a top Bear exec­u­tive asks. “There was a rea­son this was leaked, and the rea­son is sim­ple: some­one want­ed us to go down, and go down hard.” (Faber says his report­ing was accu­rate, and arose from talks with a source he has known for 20 years.)

But who? Accord­ing to one vague tale, ini­tial­ly picked up at Lehman Broth­ers, a group of hedge-fund man­agers actu­al­ly cel­e­brat­ed Bear’s col­lapse at a break­fast that fol­low­ing Sun­day morn­ing and planned a sim­i­lar assault on Lehman the next week. True or not, Bear exec­u­tives repeat­ed the sto­ry to the S.E.C., along with the names of the three firms it sus­pects were behind its demise. Two are hedge funds, Chica­go-based Citadel, run by a trad­er named Ken Grif­fin, and SAC Cap­i­tal Part­ners of Stam­ford, Con­necti­cut, run by Steven Cohen. (A spokesman for SAC Cap­i­tal said the firm “vehe­ment­ly denies” any sug­ges­tion that it played a role in Bear’s demise. A Citadel spokes­woman said, “These claims have no mer­it.”) The third sus­pect, at least in Bear exec­u­tives’ minds, is one of its main com­peti­tors, Gold­man Sachs. (“Gold­man Sachs was sup­port­ive of Bear Stearns,” says a Gold­man Sachs spokes­woman. “There is no foun­da­tion to rumors that we behaved oth­er­wise.”)

Sev­er­al Bear exec­u­tives also named an indi­vid­ual they believed was spread­ing rumors about them that week, Jeff Dor­man, who briefly served as glob­al co-head of Bear’s prime bro­ker­age busi­ness until resign­ing to take a sim­i­lar posi­tion at Deutsche Bank last sum­mer. “We heard Dor­man was say­ing things last sum­mer,” says a Bear exec­u­tive. “At the time we reached out to Deutsche Bank and told them he bet­ter stop it.” (Asked about the alle­ga­tion, a Deutsche Bank spokes­woman acknowl­edged that Bear had sent its exec­u­tives a let­ter last August ask­ing Dor­man not to solic­it its clients, as he had agreed upon leav­ing Bear. Deutsche Bank replied that he wasn’t. The exchange didn’t explic­it­ly address what Dor­man might have been say­ing about the firm, nor would the spokes­woman.)

Today, many of Bear Stearns’s for­mer employ­ees are out of work. The firm has effec­tive­ly dis­ap­peared into the maw of J. P. Mor­gan along with a num­ber of key exec­u­tives, includ­ing Ace Green­berg, who became a Mor­gan vice-chair­man, and Alan Schwartz, who will prob­a­bly take a posi­tion in the invest­ment-bank­ing depart­ment.

Maybe the S.E.C. will fig­ure out whether Bear was mur­dered. But maybe it won’t. Even those who believe the firm was the vic­tim of a preda­to­ry raid have their doubts it can ever be proved.

“Even with sub­poe­na pow­er, I’m not sure the S.E.C. will get to the bot­tom of this, because the stan­dard of proof is just so dif­fi­cult,” says a vice-chair­man at anoth­er major invest­ment firm. “But I hope they do. Because you can look at this as just anoth­er run on a bank or as a sem­i­nal point in the finan­cial his­to­ry of this coun­try that could bring about a change, per­haps a dras­tic change, in the way we gov­ern finan­cial mar­kets. If there is a solu­tion to this kind of thing, it must be found in the roots of what hap­pened at Bear Stearns. Because oth­er­wise, I can guar­an­tee you, it will hap­pen again some­where else.”