Book Review: Street Fighters-The Last 72 Hours of Bear Stearns, The Toughest Firm on Wall Street

The Financial Crisis holds a special interest on my bookshelf. Street Fighters, provides a narrower perspective based on the experience of the employees inside Bear Stearns. Bear was one of the first dominoes to begin falling and be "saved" due to government intervention.

Capital flight from Wall Street's investment banks triggered the crisis at Bear Stearns. The prime brokerage department experienced a bank run with large institutional investors demanding their accounts be closed and funds withdrawn from the investment bank. As their cash on had decreased, the firm attempted to raise capital through asset sales and equity investment directly into the firm.

The selling of assets could not stem the outflows on Bear's balance sheets. Fear was reaching new heights on Wall Street and firms only wanted AAA rated securities. Normally this would not have been an issue. However, many of Bear Stearn's mortgage-backed securities had been downgraded as the industry began to realize that the mortgages that should have been producing income from home buyers had in mass begun missing payments. While trying to raise its capital buffer, Bear's liabilities began to come up for renewal. Bear argues their counterparts on these trades reacted like any eager capitalist banker would, they began pressuring Bear and taking advantage of the firms weakened position. This predatory style behavior is not new on Wall Street but Bear employees react as if it was poor sportsmanship. The only way to survive for Bear became a reliance on an equity infusion or purchase of the firm.

The Treasury Secretary, Henry Paulson, stepped in to help in the process of having Bear acquired. He broke tradition and made available funds to back the investment bank, opening the taxpayer to possible losses. Simultaneously, Paulson put pressure on other institutions to help Bear... especially JP Morgan. Through the lens of Bear Stearns employees, JP Morgan took advantage of the firm's dire situation with a lowball bid of  $2 which eventually turned into a final bid of $10/share for 40% of Bear's outstanding stock. A total price of $1.2billion. Employees at Bear argued that Paulson wanted Bear to make an example of the firm... Lehman employees thought the same thing.

The C-level management received both praise and disdain in the book. As with many of the firms I have read into, there was the good: hard-working executives who tried to warn those around them of the storm that was brewing, the bad: hard-working executives who remained so myopic in their focus that they could not see the larger picture, and the ugly: the pot smoking, bridge playing (at the expense of the company), CEO who did not realize the firm was going under until the last 72 hours.

A quote that I feel summarizes the lesson learned by Bear and through reading this book comes from the former Goldman Sachs Ceo, "You are no longer in Charge, Paulson thought. He wasn't sure this idea was coming across. 'Maybe this is an inelegant way to put it,' but he told Schwartz, 'but you are in the hands of the government". Like Tony Soprano, one you are indebted, your decision making capability is forfeited.