James Cayne, former chairman and CEO of Bear Stearns, prepares to testify at hearing held by the Financial Crisis Inquiry Commission in Washington on Wednesday.KEVIN LAMARQUE/Reuters
James (Jimmy) Cayne, the former head of Bear Stearns, says there was nothing he or anyone else could have done to save the venerable Wall Street bank from collapse.
Telling his side of the story for the first time, Mr. Cayne emerged from months of seclusion blaming a cast of others, including suspicious trading in its shares by hedge funds, panicky investors and shoddy work by credit rating agencies.
Pressed Wednesday by members of a special panel appointed by Congress to investigate the causes of the 2008 financial crisis, Mr. Cayne, 76, did acknowledge that Bear Stearns and other Wall Street banks may have taken on too much risk.
"That was the business. That was, really, industry practice," Mr. Cayne told a hearing of the Financial Crisis Inquiry Commission in Washington. "In retrospect, in hindsight, I would say leverage was too high."
But in prepared testimony, Mr. Cayne and several other former top Bear Stearns executives rejected suggestions that the bank was overly exposed to the mortgage market or that it poorly managed its risk.
Instead, he blamed unfounded rumours for triggering a run on the bank and a sudden loss of liquidity, which cost Mr. Cayne his job and forced Bear Stearns to merge with JPMorgan Chase & Co. in a March 2008 fire sale.
"The market's loss of confidence, even though it was unjustified and irrational, became a self-fulfilling prophecy," Mr. Cayne told the commission.
He also pointed to "some very unnatural trades" in the bank's shares before its demise, which he urged the commission to investigate.
Alan Schwartz, who succeeded Mr. Cayne as chief executive in January 2008, offered a similar explanation for Bear Stearns' sudden demise.
"In my heart, I think there was stuff going on," Mr. Schwartz testified of the sudden panic by investors and clients to flee the bank. "When everyone is running from a crowded theatre, it's hard to figure out who yelled "fire," he added.
Those answers didn't sit well with commission chairman Phil Angelides, a real estate developer and former California state treasurer.
"There's a form of financial Russian roulette that Bear Stearns was playing along with other investment banks," Mr. Angelides said.
He pointed out that by the end of 2007 - just three months before its collapse - Bear Stearns was leveraged 38-to-one, measured strictly by tangible assets and common equity.
Just prior to its failure, the bank had about $12.5-billion (U.S.) in loans that were poorly documented - more than the value of its equity, Mr. Angelides remarked.
"It seems like there were a lot of warning signs, a lot of red and yellow lights going off," he said.
Commission vice-chairman Bill Thomas was similarly skeptical. "How could you folks, as sophisticated as you were, with the models that everyone felt comfortable with, believe you were the victim... of unsubstantiated rumours, fears and innuendo - that your colleagues did you in?" Mr. Thomas asked.
The 10-member commission, which has been holding a series of hearings, is to deliver its final report to Congress and the Obama administration by Dec. 15.
The hearing comes as the Senate debates a sweeping overhaul of financial regulation, including tough new rules on derivatives and measures to curb risky behaviour.
Bear Stearns failed in March 2008, even after securing an emergency line of credit from the U.S. Federal Reserve. The Fed and the Treasury department orchestrated a buyout by JPMorgan at $10 per share, wiping out millions of dollars worth of equity Mr. Cayne and other executives held in the bank.
Mr. Cayne likened the sale to the end of the world "for a lot of us."