The Sellout by Charles Gasparino

Author:Charles Gasparino [Gasparino, Charles]
Language: eng
Format: epub
Publisher: HarperCollins
Published: 0101-01-01T00:00:00+00:00

Bear Stearns’ problem was more immediate: securing its funding and restoring its reputation. Alan Schwartz, now Cayne’s heir apparent, went to work. He was a great investment banker who knew how to woo clients, but none of his schmoozing worked on Citigroup as he prodded and pushed the bank for large long-term lines of credit and other funding that Cayne had gone begging for earlier. He called up Citigroup’s CFO, Gary Crittenden, and blamed Citigroup for creating the mess at Bear by selling the mortgage securities to Cioffi that had blown up the hedge funds and destroyed confidence in the firm.

Crittenden held his ground; Bear wasn’t getting money primarily because Citigroup didn’t want the collateral Bear was offering in exchange for the funds—speculative mortgage-related bonds. “I don’t understand this,” Schwartz shot back. “You guys underwrote and sold these bonds to Ralph, and now you’re balking at taking them?” Crittenden said there was nothing he could do.

Cioffi was, of course, one of Citigroup’s biggest customers for the CDOs that were now the bane of the capital markets. But now Citigroup was chock full of its own inventory of CDOs and there were no Ralph Cioffis to sell them to.

The deteriorating conditions had Bear’s management scrambling to line up other sources of funding as a cash crisis loomed. One major issue: the possibility that its hedge fund clients with large cash balances in their prime brokerage accounts might desert Bear and yank out billions of dollars in cash, out of fear that the firm could become insolvent.

For years, Bear, like the rest of the Street, largely ignored the risk associated with their reliance on prime brokerage accounts for business purposes. No longer. Cayne worked the phones to get assurances from Bear’s top prime brokerage clients that they would remain at the firm. For now, Cayne’s efforts were working. James Simons, a former math professor who ran the massive Renaissance Technologies hedge fund, stated that he would stay with Bear, as did others.

Meanwhile, Friedman and Overlander met with executives at foreign banks to secure repo lines and other lines of credit. The broker Kurt Butenhoff’s relationship with the billionaire commodities trader Joseph Lewis proved useful as Lewis took a 7 percent stake in the company, while Cayne’s trip to China paid off; Bear and China’s CITIC Group reached “an agreement in principle” for a deal in which Bear would get $1 billion from the bank (great for its balance sheet) and CITIC would get an investment in the form of a convertible bond from Bear.

The crisis had been averted, though just barely. In late August and through September, the credit markets didn’t exactly recover, but at least they stopped deteriorating, and regulators breathed a sigh of relief. Bear’s stock price also recovered somewhat, and so did Cayne.

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