Wall Street’s Hall of Shame is welcoming new members. Bear Stearns chairman Jimmy Cayne and the rest of the failed investment bank’s board now take their places as inductees to the club alongside financial luminaries like Jay Cooke, Charles Barney and Michael Milken.
You’d hope the lessons of history would halt the expansion of this rogues’ gallery, but unfortunately that doesn’t seem to be the case.
Cayne and his cohorts at Bear share a common bond with other members of the club: They will be forever known for precipitating a financial crisis and failing to avert the demise of a storied financial institution.
In the case of Bear Stearns, it is doubly surprising that the firm is destined to disappear into the arms of JPMorgan at a knock-down price to stave off almost-certain bankruptcy. After all, it was the early summer collapse of two Bear hedge funds that kicked off the subprime woes that have roiled the financial world since.
At least Cayne, who reportedly returned to Bear’s offices with an armed bodyguard after the low-priced deal was struck with JPMorgan, will find common ground with many in his new club. He will meet Jay Cooke, for example, the man widely credited with beginning the Panic of 1873. Cooke, a principal financier of the Union military effort during the US Civil War, played a major role in financing the efforts of the Northern Pacific Company to build a transcontinental railroad. But his company became financially overextended and went bankrupt.
And then there’s Charles Barney, whose association in 1907 with F. Augustus Heinze’s attempts to corner the copper market led to a run on his company, Knickerbocker Trust. That sparked a run on other trusts, which were unregulatedfinancial houses that worked like commercial banks (sounds familiar?).
Thankfully for the market, J. Pierpont Morgan himself corralled Wall Street into a rescue of the industry—but not Knickerbocker. Shortly after the crisis was resolved, Barney shot himself.
Wall Street’s Hall of Shame inducted new members in the latter years of the 20th century, too, when another institution was brought to extinction: Drexel Burnham Lambert. Dealings by Drexel’s former junk bond king, Michael Milken, with convicted inside-trader Ivan Boesky led authorities in September 1988 to file complaints against Drexel, Milken and five other individuals.
Drexel wound up paying the largest fine ever for a Wall Street firm and, depleted of capital and clients, went belly-up in 1990.
Cayne and his colleagues managed to salvage something for their owners, albeit a small fraction of what the shares were trading at just days before. On 14 March, Bear Stearns received emergency funding from the US Federal Reserve via JPMorgan. Two days later, JPMorgan announced a deal to acquire Bear for stock worth about $2 a share. On 24 March, JPMorgan increased the deal value to about $10 a share.
On 7 March, Bear stock closed at $70.08; on 14 March, after the emergency funding was announced, it closed at $30.
And there is no indication that the firm’s managers did anything wrong—they may have just been incompetent. But surely this is not the sort of accolade Cayne envisioned for himself as he chipped onto the greens at Hollywood Country Club while his firm headed for disaster.