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Investment: 10-year Anniversary of the Fall of Bear Stearns

Today is the ten-year anniversary of the fall of Bear Stearns. I think of Bear Stearns as a "canary in a coal mine"; its failure was a precursor to the investment industry bloodbath a few months later. The following article focusses on its CEO at the time, Jimmy Cayne, who apparently channeled Nero, playing cards while his firm burned.


The stunning downfall of Bear Stearns and its bridge-playing CEO
by Matt Egan March 16, 2018
© 2018 Cable News Network. A Time Warner Company. All Rights Reserved.
Source; excerpts follow (drill down for hyperlinked references):

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Bear Stearns was on fire. And its colorful chairman, Jimmy Cayne, was playing cards.

The smallest investment bank on Wall Street had survived the Great Depression, Black Monday and the September 11 terror attacks. But by March 2008, clients and trading partners were bolting the firm because it had made huge bets on what turned out to be toxic mortgages.

In the span of just weeks, Bear Stearns would run out of cash. On March 16, 2008, it agreed to a government-backed fire sale, and it was acquired by JPMorgan Chase for the unthinkable price of $2 a share…

Even 10 years later, the collapse of Bear Stearns is stunning, both for how fast it happened and because Cayne, who had led the bank through years of success, was apparently asleep at the wheel…

Time listed Cayne among the 25 people who are to blame for the financial crisis…

Friedman, the former senior Bear Stearns exec, said CEOs are like American presidents: They get too much credit when things are going well and too much blame during downturns…

Alan Schwartz, who took over as CEO from Cayne in early 2008, was a "leading proponent of investing in the mortgage sector," the Financial Crisis Inquiry Commission found.

Those investments blew up in Bear's face when the housing market crashed. The firm had loaded up on subprime loans, mortgages that were made to the weakest borrowers.

Just days before its fire sale to JPMorgan, Schwartz appeared on CNBC to insist there was no liquidity crisis at the firm…

Famous Last Words. And if you want the oversimplified explanation of why Bear Stearns failed, the author provides this poignant sentence:

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Bear Stearns eventually ran out of cash.

On March13, 2008, the Fed agreed to provide a $13-billion loan to Bear Stearns, but when its stock plunged even further on Friday the 14th: "Geithner told Bear Stearns the Fed would yank its loan after the weekend, forcing the bank to... immediately find a buyer."

Sunday night, March 16, 2008, JPMorgan agreed to purchase Bear Stearns at a bargain-basement price. The Fed assumed some of its "toxic assets".

Cayne continued to play bridge.
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Famous Last Words. And if you want the oversimplified explanation of why Bear Stearns failed, the author provides this poignant sentence:

Quote

Bear Stearns eventually ran out of cash.


Yeah, I'll buy that.

As a small-biz owner, I know one thing: Cash-flow is not only vital, it's the lifeblood. Booked sales are nice, Assets are nice, Future projections are nice, Intellectual Property is nice... but all of which mean diddly-squat if you don't have enough cold hard coin-of-the-realm in the bank when it comes time to make payroll and/or keep the lights on.

Crunch time comes, you can stretch it a while. Suppliers that are normally net-30 can sometimes be pushed to 120. (Even, god forbid, the IRS can be staved off for a while. Miss a quarterly? "Oops, clerical error, we'll get right on it." 1.5% penalty which is a cheap loan if you're THAT desperate. But it's swatting a baseball bat at a hornet's nest.)(Kids, don't try this at home.)

Crunch time for the Smithee Organization was 2010; It took a while for the '08 collapse to filter down to the "engineering project" level. I might also add that I now know at least a dozen ways to make Ramen noodles tasty.
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Dean Adam Smithee, on 21 March 2018 - 05:06 PM, said:

... I might also add that I now know at least a dozen ways to make Ramen noodles tasty.

A chopped-up slice of bologna and some hot sauce? :-)

You are correct; out of cash means out of liquidity, and usually out of options. Cash management is a balancing act that requires math and analytical skills, plus self-awareness and foresight. This is not a “seat of the pants” or “gut feeling” aspect of business; just ask our current President. (On second thought, ask anyone BUT him.)

I hope you’re doing well, and thank you for sharing.
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