Saving Wall St. (For Now)

Andrew Ross Sorkin|The New York Times

The whispers began on Wednesday, and by Sunday it was all over.

Somehow, in the space of about 100 hours, the value of a share of Bear Stearns , one of the nation’s most storied investment banks, skidded from about $67 to a bargain-basement $2. On Monday, just to twist the knife, some wit taped a $2 bill to the glass doors of Bear’s headquarters.

How could this happen?

It is hard to say it was an accident. Bear Stearns’s stunning downfall and subsequent sale to JPMorgan Chase on Sunday was orchestrated by some of the most powerful people on Wall Street and in Washington. It will go down either as a heroic rescue of the financial system or grand theft, Wall Street style. Maybe it was a bit of both.

Make no mistake: this was one of the greatest corporate euthanizations of all time. And Wall Street played its own gleeful role in it.

Did Bear's CEO Lie?

On Friday morning, when there still seemed to be a glimmer of hope that the stricken Bear might survive, William C. Repko, former chairman of JPMorgan’s restructuring group and now senior managing director at Evercore Partners, was already writing Bear’s obituary.

“Bear failed,” Mr. Repko was telling me. “Bear is gone.” He seemed so sure. “This is a run on the bank,” he said. “It’s what happened to Enron.” Bear’s demise, it seemed, was a foregone conclusion.

The run on Bear began around midday on Wednesday, when a series of banks and hedge funds started a whisper campaign against the firm. The firm was doomed, they said. It was almost broke. But some of the money managers were clearly talking their book. They were obviously shorting Bear’s stock, betting it would decline.

How do I know? Because I was on the receiving end of a handful of phone calls from the Gang of Wall Street Whisperers. All of them offered a variation on the same theme: Bear Stearns is toast; no one is trading with the firm; clients are pulling their money out.

Bear Stearns, of course, was at that very moment telling anyone who would listen all of this was a lie. And I’ll give Alan D. Schwartz, Bear’s chief executive, the benefit of the doubt. I don’t think he saw the end coming. (That is, in part, because he was playing host to a conference of media big shots at the Breakers in Palm Beach while the bank he runs was careering off the rails. That was a better excuse than the one Jimmy Cayne, Bear’s chairman, had last year, as the firm’s troubles deepened. Mr. Cayne was off playing bridge. )

By Thursday, the drumbeat of worries over Bear had grown so loud that my voice mail box was full of gleeful short sellers and panicked investors. The talk built up that evening, as Bear went hat in hand to the Federal Reserve because the firm had run out of money. By Friday, even with the Federal Reserve’s rescue effort by way of JPMorgan in full swing, Bear’s stock fell to $30 a share. People forget that Wall Street is a fragile machine. Cash, or “liquidity,” as it is known in the trade, is the oxygen that keeps investment banks alive. No matter how healthy you are, you can’t breathe if someone puts a pillow over your head. That’s what Bear Stearns’s clients and rivals did, and they did it without remorse.

On Monday, some investors speculated that JPMorgan, the clear winner in this sorry episode, helped fan the rumors about Bear so it could pick up the firm on the cheap. I don’t buy it. But I would say that dozens of banks and hedge funds, including JPMorgan, were quick to kick Bear while it was down — and kept right on kicking. The Gang of Wall Street Whisperers has now moved on, aiming at Lehman Brothers, whose stock plunged on Monday.

For Bear, the final nail in the coffin came not from Wall Street, but from the government. After the Fed agreed to give Bear a lifeline on Friday, it became clear that the market still wasn’t prepared to do business with the firm.

The Fed was going to be on the hook Monday morning for untold billions, and it was already taking heat for using taxpayer money to backstop a private institution that had hardly been a model citizen. Bear deserved to be punished for its reckless behavior, some said. So the government, led by Henry M. Paulson, the Treasury secretary (and the former chief executive of Goldman Sachs, for you conspiracy theorists), put a gun to Bear’s head: take a deal with JPMorgan or file for bankruptcy. It was a perfect antidote to the “moral hazard” argument — Bear’s employees would lose their jobs, and shareholders would lose their shirts, but the financial markets would be saved, at least for another day.

JPMorgan’s chief executive, Jamie Dimon, took full advantage of Bear’s dire straits. When he started his sprint-speed talks with Bear on Saturday, JPMorgan suggested it might pay in the low double digits for each share of Bear, people involved in the talks said. And that was without the Fed’s agreeing to take $30 billion of Bear’s most toxic assets off its hands.

By midday Sunday, however, after looking over Bear’s books and saying it was scared stiff by what it saw, JPMorgan dropped its price to $2 a share.

“Even at $8, it was an ‘oh my god’ number. Two dollars wasn’t that much worse,” a person involved in the talks said.

Maybe so. But Bear’s shareholders are livid. An astute investor asked on a conference call with JPMorgan on Sunday night what the difference was, for shareholders, between $2 and bankruptcy? Considering that Bear’s headquarters on Madison Avenue is valued at $1.2 billion, or $8 a share, the answer isn’t as clear as it might seem.

Some investors seem to be speculating that Bear might somehow wring more money out of JPMorgan; Bear’s shares closed at $4.81 on Monday, well above JPMorgan’s offer price.

But getting JPMorgan to raise its bid is probably wishful thinking. JPMorgan has Bear over a barrel. If Bear shareholders vote down the deal, JPMorgan could turn off the cash tap and send Bear into bankruptcy. The Fed is not likely to go along with a rival plan either.And get this: JPMorgan now has an option on Bear’s headquarters. If the deal collapses, Mr. Dimon can evict Bear from its own building.

No whisper campaign needed.