March 17 (Bloomberg) -- Alan Schwartz wasn't supposed to be running Bear Stearns Cos., and now he is presiding over the 85- year-old securities firm's sale.
As far back as 1999 analysts predicted the top job would go to Warren Spector, the former bond chief who calculated complex securities trades by hand and shared a passion for bridge with Bear's chairman and chief executive officer, Jimmy Cayne. Both men lost their jobs after bets on subprime mortgage bonds soured.
They were at a bridge tournament in Detroit last week as Schwartz, the CEO for two months, fought a run on Bear's cash brought on by widening subprime losses and negotiated the largest government bailout ever of a U.S. securities firm. An investment banker for much of his 32 years at Bear Stearns, Schwartz is ending it with a last deal: The purchase of the firm by JPMorgan Chase & Co. for less than 7 percent of its March 14 value.
``The people who did this are Jimmy Cayne and Warren Spector,'' said Richard Bove, an analyst at Punk, Ziegel & Co. in Lutz, Florida.
JPMorgan agreed yesterday to acquire Bear Stearns for stock worth about $2 a share, or $240 million, the companies said in a statement. The firm's value March 14 was about $4 billion, after an 80 percent decline in 12 months, more than half of it after a bailout last week by the Federal Reserve.
``This transaction represents the best outcome for all of our constituencies based upon the current circumstances,'' Schwartz said in the statement. On a conference call with analysts March 14, he said Bear Stearns had retained investment bank Lazard Ltd. to consider options.
The firm had 14,153 employees as of Nov. 30 and is the smallest of the top five Wall Street investment banks.
Fed and Bailout
The Federal Reserve said March 14 it would provide emergency funding to Bear Stearns through JPMorgan, capping a week in which Schwartz first denied, then acknowledged, the firm was running short of cash. Shares of New York-based Bear Stearns fell $27, or 47 percent, to $30 on March 14, the lowest since 1998.
The crucial period came over 24 hours starting March 13, when Schwartz, 57, realized withdrawals by customers and lenders had escalated so rapidly they would wipe out the firm's $17 billion in cash, and culminated in a 5 a.m. conference call the next day among regulators including Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson.
The Fed acted to forestall a market panic as credit losses by banks and brokers reached $195 billion and stocks plunged for a third day last week.
Different Kind of Run
Bear is the second-largest underwriter of mortgage bonds after Lehman Brothers Holdings Inc. The bonds package together homeowners' loans into widely held securities, which are now plummeting in value because of record foreclosures and the slump in U.S. housing prices over the past year. Subprime loans were made to the least credit-worthy borrowers.
British mortgage lender Northern Rock Plc suffered the first run on a U.K. bank in a century last year, forcing a Bank of England bailout and eventually a government takeover. That run was by depositors. In Bear's case, counterparties in trades pulled their cash.
``This is a firm with a great tradition run by some fabulous people, and it's a pity,'' said Peter Solomon, a former vice chairman at Lehman who now runs Peter J. Solomon Co., an advisory firm in New York. ``Wall Street gives people a lot of reason to lose confidence.''
Microsoft-Yahoo
A Brooklyn native and a 1972 graduate of Duke University in Durham, North Carolina, Schwartz started at Bear's Dallas office in 1976 as an institutional stock salesman. Three years later, he moved to New York and became head of research. In 1985, he was named chief of investment banking. After being appointed co- president with Spector in 2001, he kept overseeing that unit while Spector handled trading.
As recently as this month, Schwartz was still advising clients on mergers. Microsoft Corp. retained him on its hostile bid for Yahoo! Inc., one person familiar with the situation said earlier this month.
It was bond chief Spector who pushed the firm into new securities offering higher returns for higher risk. Bets on mortgage bonds helped the bank earn $2.1 billion in 2006 on revenue of $9.2 billion. Its shares gained 41 percent in 2006.
Bear Stearns's financial troubles began in July, when two hedge funds that invested in securities tied to mortgages collapsed. The firm had to bail out the funds and take possession of many of the instruments.
In August, Cayne ousted Spector, who was allowed to keep stock and option awards worth about $23 million.
`Reluctant CEO'
Three months later, Cayne, 74, sent a memo to employees saying he remained ``intensely focused'' on the firm after the Wall Street Journal reported he spent 10 of 21 working days outside the office in July as the two funds collapsed. The newspaper also said he smoked pot at bridge tournaments; Cayne denied ``inappropriate conduct.''
Schwartz replaced Cayne as CEO on Jan. 8 after the firm reported an $854 million fourth-quarter loss, the first quarterly deficit in its history. Cayne remains non-executive chairman.
The Journal on Jan. 8 called Schwartz ``the reluctant CEO,'' speculating he may not have wanted the job in mid-crisis.
``The reluctant CEO title, I would simply say that I've been a part of the Bear Stearns team for a long time,'' Schwartz said in a Jan. 11 interview. ``I think of us as a team-oriented culture.''
With quarterly results of Bear and other Wall Street securities firms due this week, investors began to speculate more losses were coming. The stock plummeted 11 percent March 10 on concern the firm was running short of funds.
`Liquidity Rapidly Eroded'
Schwartz said in a statement that ``there is absolutely no truth to the rumors of liquidity problems.''
On March 11, and increasingly through the week, lenders and customers began to withdraw funds, according to a timeline published by the U.S. Securities and Exchange Commission.
``As a result, Bear Stearns's excess liquidity rapidly eroded,'' the SEC said.
Bear Stearns was handling the withdrawals until March 13, the day the Journal said trading partners were reluctant to engage in long-term transactions, Schwartz told analysts on a conference call. As withdrawals escalated, Bear began talking to JPMorgan, the clearing bank for its trades, about ``providing a liquidity facility that would allow us to achieve the objective of calming down the marketplace,'' he said.
Paulson Briefs Bush
Fed officials were told of the situation's severity at 7:30 p.m. that day, and Fed examiners spent the night at Bear, according to people with knowledge of the matter. At the dawn conference call the next day, Bernanke, Paulson, New York Fed President Timothy Geithner, Fed Vice Chairman Donald Kohn and Treasury Undersecretary Robert Steel for two hours debated extending the loan and decided it was necessary to avoid panic, the people said.
Paulson phoned to brief President George W. Bush, who was due to speak on the economy in New York. The Fed invoked a law it hasn't used since the 1960s to lend to a private corporation. With two governors' seats vacant and one governor overseas and unreachable, the Fed used a special clause to approve the funding with only four of seven votes, the people said. Normally five would be required.
At 9 a.m., Geithner, Paulson, Erik Serri, the SEC's head of market regulation, Schwartz and JPMorgan CEO Jamie Dimon had a conference call with the Bank of New York and the heads of the primary dealers who trade with the Fed, according to the people with knowledge of the events. Paulson argued on the call that they all had a stake in keeping the financial system working smoothly, they said.
`The Answer Is No'
The Fed agreed to provide financing to Bear through JPMorgan for up to 28 days. It became clear over the weekend that the window of survival was even shorter. Schwartz was unlikely to revive the firm without convincing a buyer to take on its assets, said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York, before the deal was announced.
``How do you re-start a trading operation? We really don't have any examples of that being successful in the marketplace,'' Hintz said. ``Will you do that foreign exchange trade with Bear? Will you do that bond trade with Bear? And the answer is no, because you don't know whether Bear's going to be there.''
On the conference call March 14, Schwartz and his finance chief, Samuel Molinaro, didn't have ready answers when analysts asked about the firm's remaining prime brokerage balances and its trading position in derivatives that are traded off exchanges.
``I'd like to defer that to Monday only because I don't know the exact number,'' Molinaro said.
Condos at the Plaza
Cayne and Spector were making critical judgments too last week -- as competitors in the 2008 North American Bridge Championships in Detroit. On March 13, Cayne's team lost a close match, 123.5 to 126, in the Vanderbilt Knockouts division, considered the most competitive at the tournament. Cayne played as well as ever, said Jim Mahaffey, a member of the rival team who called himself an old friend.
``When he's playing bridge that's what he's thinking about,'' Mahaffey said.
A woman who answered the phone in Cayne's hotel room and identified herself as his wife said he had no comment on Bear Stearns.
Cayne still owns 5 percent of Bear's stock, the value of which fell under the JPMorgan buyout to $11.7 million from $333 million four days ago. Last month, Cayne paid $27.5 million for two adjacent 14th-floor condominiums at New York's Plaza Hotel overlooking Central Park, according to city property records.
The new digs may not insulate him from scrutiny as regulators try to determine who's at fault for the expanding credit crunch, Bove said.
``It will be interesting to see what kind of iron doors Cayne puts on his new apartment,'' he said.
-- With reporting by Yalman Onaran, Shannon D. Harrington, Sharon L. Lynch, Margaret Popper and John Brinsley in New York; Scott Lanman, Rich Miller and Jesse Westbrook in Washington; and Alex Ortolani in Detroit. Editors: William Ahearn, Robert Simison.
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