In FED We Trust by David Wessel

Author:David Wessel
Language: eng
Format: mobi, epub
ISBN: 9780307459701
Publisher: Crown Publishing Group
Published: 2009-02-11T05:00:00+00:00

BEAR AT THE DOOR

A few hours after the Fed announced the TSLF, Geithner hosted a closed-door lunch for Bernanke in the New York Fed’s Washington Dining Room, one of several get-togethers he had convened so the Fed chairman could meet Wall Street’s brass. Paul Volcker and Alan Greenspan were familiar faces long before they became Fed chairmen. Each had a mystique that conveyed competence and wisdom. But Wall Street was not Bernanke’s milieu, and it showed. “Greenspan was at home at the markets,” one executive at the lunch said. “I don’t think Bernanke has a feel for this stuff.”

That was a problem. The notion that the Fed did banks (Citigroup, Bank of America, JPMorgan Chase) and the SEC did investment houses (Bear Stearns, Lehman Brothers, Goldman Sachs) went up in smoke on Wednesday, March 12.

That evening, Bear CEO Alan Schwartz called Rodgin Cohen, the dean of the banking bar, for strategic advice. Cohen’s firm, Sullivan & Cromwell, wasn’t representing Bear Stearns, although it had handled a few projects for the firm. But Cohen was the go-to banking lawyer in a crisis — so much so that he had ended up with a client in nearly every significant financial controversy in modern memory.

Cohen heard Schwartz out, then said: “We’ve got to call the Fed.” Moments later, the lawyer had Tim Geithner on the phone. “I think I’ve been around long enough to sense a very serious problem, and this seems like one,” he said. That message alone was more dire than anything Bear Stearns had delivered directly to the Fed.

“If Alan is worried, he needs to call me,” Geithner replied.

Schwartz did so the next morning. He explained that, while Bear Stearns was continuing to look for a partner to provide long-term financing, its problems weren’t only long term. Two days earlier, he told Geithner, Bear Stearns had opened for business with $18 billion in cash or securities that were so easily sold that they were as good as cash. By day’s end, $6.5 billion of that was gone. The firm was down to its last $11.5 billion. This was the bad news that builds on itself once word gets out, so the next few days would be deeply challenging.

The problems were the ones that would recur throughout the Great Panic: credit and collateral. Commercial banks use deposits, insured by the government, so they aren’t wholly reliant on short-term borrowing. Investment banks like Bear Stearns hadn’t any deposits, so they were reliant on borrowing in the markets, often overnight. Bear had pledged collateral in the repo market, the market that had caused a scare for Geithner in the Countrywide episode months earlier. The repo market, in its collective wisdom, had now decided that Bear Stearns collateral wasn’t good enough to secure loans, even when that collateral was U.S. Treasury securities.

Bear couldn’t borrow, and without borrowing, it couldn’t do business. It was the twenty-first-century equivalent of a bank run in a world organized for twentieth-century finance. “I just never, frankly, understood or dreamed it could happen as rapidly as it did,” Bear Stearns’s Schwartz said.

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