The Weekend That Changed Wall Street

origins were small but whose rapid, multiplying effect could bring down the financial infrastructure.
“The news that Bear’s liquidity position was so dire that a bankruptcy filing was imminent presented us with a very difficult set of policy judgments,” he would explain to a congressional committee months later. “In our financial system, the market sorts out which companies survive and which fail. However, under the circumstances prevailing in the markets the issues raised in this specific instance extended well beyond the fate of one company. It became clear that Bear’s involvement in the complex and intricate web of relationships that characterize our financial system, at a point in time when markets were especially vulnerable, was such that a sudden failure would likely lead to a chaotic unwinding of positions in already damaged markets. Moreover, a failure by Bear to meet its obligations would have cast a cloud of doubt on the financial position of other institutions whose business models bore some superficial similarity to Bear’s, without due regard for the fundamental soundness of those firms.”
Whether or not Geithner’s analysis was accurate, there is no question that his response to the crisis was forceful and immediate. On the Thursday that Schwartz sounded the alarm, he assembled teams in New York and Washington, D.C., that worked overnight to study the situation and come up with potential solutions. A group of examiners was dispatched from the New York Fed to examine Bear’s books. Geithner also held conversations with Dimon, who reiterated his contention that JPMorgan was a potential purchaser but would require a federal backstop. Dimon was not willing to take a big risk. His primary obligation was to his own shareholders. He also knew far more than other banks as he was the lender to some of those vulnerable institutions.
As dawn broke over lower Manhattan Friday morning, Geithner held another conference call with the Fed board of governors and members of the Treasury Department to review the options and decide on a way forward. They settled on a stopgap measure to buy some time. With the support of Treasury secretary Paulson, Fed chairman Bernanke, and the board of governors, it was agreed that the New York Fed would help engineer a rescue.
The arrangement that was presented to Schwartz on Friday morning was nothing short of a lifeline. JPMorgan Chase would issue a credit line, backed by the Fed, good for twenty-eight days. Schwartz, who had never accepted that his company was on the brink of ruin, believed he could secure capital or engineer a lucrative sale in that period of time. But that’s when things got weird. Late Friday, Geithner told Schwartz he didn’t have twenty-eight days, after all. The federal money would be available only for the weekend. Schwartz was stunned. He felt betrayed, although he subsequently shrugged it off as a misunderstanding on his part: he thought they’d said twenty-eight days; they’d actually said two.
To this day it isn’t entirely clear what happened. It seems unlikely that Schwartz was confused. With his company in dire jeopardy, would he make such an error? More plausible is the explanation that as they studied Bear’s books, the Feds decided the risk was too great. The cord had to be cut by Sunday night.
Overnight deals are the most stressful kind, especially when the stakes are so high. While several firms initially expressed interest in Bear Stearns, it was nearly impossible to perform the due diligence, create a plan, and get the approvals in the space of forty-eight hours. The question was, who had the nerve, the independence, and the cash to make it work? The answer kept returning to JPMorgan Chase. By late Saturday it was the only buyer left. But the deal was constantly threatened by the hard realities Dimon’s people faced as they scoured Bear’s books.
“It happened very quickly,” a source at the White House who was monitoring the situation told me. “In the days before their fateful weekend, they were trading at around $40 a share. Bear Stearns looked like a solvent company even as of Friday morning before it failed. We had these issues that we thought were liquidity issues, where the institutions simply couldn’t raise the money to cover their short-term obligations, but they were solvent in the sense that the value of their assets exceeded the value of their liabilities. The problem was that they became illiquid and they couldn’t raise the money, so they had to start dumping assets. And the assets no longer were worth as much as they thought they were. The liquidity crisis turned into a solvency crisis, and it happened, literally, within hours.”
When I spoke with Dimon the following month, he shook his head in amazement, recalling the weekend. “It’s the last time I will ever do something like that,” he said. “You have to know that there were two hundred people from JPMorgan and probably an equal number of people from Bear Stearns working around the clock. They didn’t go to sleep for a two- or three-day period. Just watching that teamwork of those folks was something special. But it was brutal. It’s unprecedented in a forty-eight-hour period that two companies and the government get together and pull off a transaction like that.”
The most brutal aspect of the negotiations was setting the price. “It was really hard to come up with a price,” Dimon acknowledged. “The question was, how much risk could JPMorgan bear? We wanted to make sure that JPMorgan was never put in a position where it was jeopardized in any way, shape, or form.”
What Dimon didn’t mention was that, behind the scenes, Paulson was pushing for a lower price, not wanting the appearance that the government was rewarding a failing company for its misdeeds. The concept he invoked was that of “moral hazard”; that is, if the government was seen as rescuing a company whose bad choices were responsible for its failures, other companies would not be discouraged from making similar bad choices. Paulson was also extremely sensitive to the