For all their financial muscle, it is amazing how vulnerable investment banks are. In the last 20 years, four major firms—Drexel Burnham Lambert Inc., Salomon Brothers, Lehman Brothers Inc. and now Bear Stearns & Co. Inc.—have either been badly damaged or failed outright because they lost their creditors’ confidence.
For Drexel and Solly, creditors had good reason to cut and run. The firm of Milken, Joseph and Black imploded in 1990 in an embarrassment of hung-junk bond offerings and government prosecutions. Solly got slapped with a record fine for manipulating the treasury bond market two years later, which led to an exodus of top dealmakers.
By contrast, the markets toyed with pulling Lehman’s credit lifelines in 1998 on the basis of ill-founded rumours of losses in Asia and Russia. But its business was no worse off than those of its peers. After a couple of months of round-the-clock road shows, Lehman’s top brass convinced creditors to keep the funds flowing.
Now along comes Bear, with its dead subprime-laden hedge funds, its credit rating in jeopardy, its stock a third off its January highs, and its debt plunging. It just ousted its long-time capital markets boss, Warren Spector.
(The Wall Street Journal reported that Spector resigned at Cayne’s request on 5 August after Bear Stearns’ stock fell 6.3% on 3 August following on Standard & Poor’s revision of the firm’s credit rating outlook from stable to negative. Bear’s problems were a catalyst for a broad US market decline. Cayne held a conference call that afternoon to assure investors and analysts that it had enough medium- and longer-term debt available to be able to refinance its short-term commercial paper and other borrowings for the next 12 months.)
So, is Bear Stearns a dead duck, like Drexel? Or a stumbling but still-valuable buyout opportunity, like Solly? Clearly, Bear’s boss, Jimmy Cayne, wants to position it as a latter-day Lehman, singed by market malaise, yes, but able to carry on independently.
There are good reasons to think it is. Bear has taken steps to minimize its reliance on short-term debt, like commercial paper. It says it has enough long-term debt in place to pay off maturing short-term paper for a year.
A year is a long time to get your house in order, so that sounds promising.
But Cayne might benefit from a bit of friendly advice about presentation from Dick Fuld, Lehman’s boss who convinced that firm’s creditors to cut it some slack nearly a decade ago. Cayne and his finance chief, Sam Molinaro, spoke so darkly of the market’s prospects in a conference call on 3 August that several already spooked investors ran to dump even more of the firm’s stock.
Its recent battering has shrunk Bear’s market cap to less than half the size of Lehman’s. That means the firm is looking pretty bite-sized.
Cayne needs to do a better job of restoring investor confidence in his ability to make money by detailing how his firm will wring profits from both down and up markets if he wants Bear to bounce back like Lehman, and avoid the indignity suffered by Solly.