Okay, let's start with a visual. It is Friday,
March 14th, 2008. Right. And you are standing
in the lobby of 383 Madison Avenue in Manhattan.
It's this stunning building. an octagon, all
glass and stone. It's designed to look like a
cut diamond. A real monument. But the scene inside
is, I mean, it's the total opposite of that.
It looks like a funeral. Yeah, completely. You've
got employees just flooding the elevators and
they're all carrying cardboard boxes. And these
aren't work files. This is personal stuff. You
know, pictures of their kids, gym clothes, the
little potted plant from their desk. It is the
visual language of a bank run. It's a scene you
usually, you know, you associate it with those
old grainy black and white. photos from 1929.
Men in hats lining up outside a bank that's just
closed its door. Exactly. But this was 2008.
And these people weren't lining up for cash from
a vault. They were watching their entire net
worth, everything, just evaporate in real time
on their Bloomberg terminals. And that is exactly
where we have to start this deep dive, because
the speed of this collapse is what makes it so,
so unique and, frankly, just terrifying. The
speed is everything. In January 2007, so just
a year before this scene. Bear Stearns stock
is trading at $172 a share. $172. It's the fifth
largest investment bank in the entire United
States. It's been around for 85 years. It survived
the Great Depression, World War II, the dot -com
bubble. I mean, this thing was a fortress. And
it wasn't just surviving. It was, by all accounts,
thriving. Fortune magazine had just named it
the most admired securities firm. The most admired,
which is just incredible irony. It's unbelievable.
They were the envy of the street. They were known
for being smarter, scrappier, you know, grittier
than... anyone else out there. And yet, just
about one year later, that $172 stock is being
valued in a shotgun merger at $2. $2? Yeah. That
is a 99 % wipeout. I mean, for all intents and
purposes, it is zero. So today, we are not just
going to recount the timeline of what happened.
We are doing a deep dive into the actual mechanics
of how a global institution can just dissolve
and what... 72 hours. We pull the SEC filings.
We have the bankruptcy reports, the internal
emails. We really want to understand the specific
financial instruments, the toxic sludge that
just completely clogged the gears of this machine.
We need to understand why. And we really need
to answer the biggest question that still kind
of hangs over all of this in financial circles,
which is, was this a case of murder? Or was it
suicide? Right. Was Bear Stearns killed by malicious
rumors and these predatory short sellers, like
some of their executives claimed? Or was the
business model itself just fundamentally broken?
Was it, you know, a machine designed to self
-destruct? Let's get into it. But before we get
to the panic, I think we have to understand who
these people were. Because, you know, reading
through the history here. Bear Stearns wasn't
like a Goldman Sachs or a Morgan Stanley. They
had a really different DNA. Completely different.
Yeah, if you look at the history, Bear was always
the outsider, the underdog. It was founded in
1923 by Joseph Bear, Robert Stearns, and Harold
Mayer. And they started with, what, half a million
dollars? $500 ,000, which is decent money back
then, about $9 .2 million today. But they were
not what you'd call a white shoe firm. They didn't
rely on, you know, Ivy League connections or
family dynasties to get business. I saw this
famous acronym in our notes associated with their
hiring policy. PSD. PSD, yes. Poor, smart, and
a deep desire to get rich. Wow. That was the
internal motto. They didn't care if you went
to Harvard or Yale. In fact, a lot of the time
they actually preferred it if you didn't. They
wanted street fighters. They wanted people who
were hungry, who had a chip on their shoulder.
And that seems absolutely crucial to understanding
2008. If your entire culture is built on being
the aggressive underdog, you're just naturally
going to take risks that the... You know, the
gentleman bankers down the street might have
always trying to prove something always. Exactly.
And they were famous for the phrase eating what
they killed. It was this ruthless meritocracy.
If you made money, you were a king. If you didn't,
you were out the door. And this grit, this whole
identity, it was forged in fire. I mean, a key
data point here is the crash of 1929. Right.
When the Great Depression hits, banks are just
failing left and right. Unemployment is through
the roof. But Bear Stearns, they famously did
not lay off a single employee following that
crash. Which has to create this mythos of invincibility.
We are the survivors. The whole world can burn
around us and we will still be here trading,
making money. It breeds a very specific kind
of arrogance, you know. So fast forward to the
2000s. They are massive. They've got 15 ,500
employees, offices in Beijing, Tokyo, London,
Sao Paulo, a global behemoth. Right. But inside
the walls of 383 Madison, they still operated
with that same trader mentality. They were not
looking at five year strategic plans. They were
looking at the P &L at the end of the day. And
looking at the breakdown of their business in
the. mid -2000s, it's pretty clear that the biggest
driver of that daily T &L was housing. Securitization.
That was the engine, 100%. Okay, so we hear this
word constantly, securitization. It sounds so
boring, so technical, like filing paperwork.
But based on these sources, it effectively turned
the entire global financial system into a casino.
We really need to unpack this properly. I know
Louis Ranieri, who was at Bear Stearns, was a
pioneer here. What did they actually build? OK,
so historically, a mortgage was a simple relationship.
You'd go to your local bank. You know, I think
it's a wonderful life. You borrow money for a
house and you pay that specific bank back for
the next 30 years. And the bank holds that risk.
If you default, the bank is the one that loses
money. Exactly. Which is a huge constraint. It
limits how many loans the bank can actually give
out. Eventually, the vault is empty and they
have to wait for people to pay them back before
they can lend out any more money. It's slow.
It's very slow. And Ranieri and the team at Bear
Stearns, they realized that was inefficient.
They realized that if you take thousands of these
individual mortgages, you bundle them all together
into one giant pool, and then you slice that
pool into pieces, you can sell those pieces to
investors as bonds. And these are mortgage -backed
securities, or MBS. So the local bank now sells
the loan to Bear Stearns. They get their cash
back immediately and they can go lend it to the
next guy. Right. And Bear Stearns packages it
up and sells it to, say, a pension fund in Norway
or an insurance company in Japan. The risk is
transferred to the investor. In theory, it's
brilliant. It lubricates the housing market.
It spreads risk around the globe. It lowers interest
rates for everyone. But then they added complexity.
Then they created CDOs, collateralized debt obligations.
The Frankenstein monster of finance. That's a
good way to put it. Imagine taking the riskiest,
junkiest slices of those mortgage bonds. So the
loans to people with bad credit, no income verification,
the so -called NINJA loans. No income, no job
or assets. Right. And you bundle those together.
Then you repackage them, slice them up again,
and you pay the rating agencies, Moody's, S &P,
to stamp the top slice with a AAA rating. Because
the underlying theory was, well, what are the
odds that everyone defaults at the exact same
time? Precisely. Diversification was supposed
to be the magic shield. They truly believed that
if you had a loan from Florida and a loan from
California and a loan from Ohio, they couldn't
possibly all go bad at once. It seems so obvious
in hindsight. Well, yeah. And for a while, Bear
Stearns was the absolute king of this. They weren't
just packaging these loans. They were vertically
integrated. They owned the mortgage originators
who were lending the money in the first place.
They owned the trading desk that packaged the
loans into bonds. owned the hedge funds that
bought the bonds at the other end. So they were
cooking the meal, serving the meal, and eating
the meal. Yes. And that is where the trap was
set. Because by 2006 and early 2007, the housing
market starts to cool off. Prices stop going
up. Subprime borrowers start missing their payments.
A prudent bank would look at this data and say,
OK, the party's over. Let's reduce our inventory.
Let's stop buying these toxic loans. Any prudent
bank would. But Bear Stearns didn't stop. Why?
I mean, was it just pure greed? Or did they genuinely
believe their own height that they were smarter
than everyone else? I think it was a combination
of greed and, you know, sunk cost fallacy. They
had built this massive, massive infrastructure
just to process mortgages. Turning it off would
mean firing thousands of people and losing market
share. So they doubled down. They doubled down.
They actually increased their exposure. And this
brings us to what might be the most terrifying
number in our entire research stack, the leverage
ratio. I saw this in the 2007 annual report,
35 .6 to 1. It is a staggering, staggering number.
Let's explain what that means for your wallet
because this is the mechanics of the disaster
right here. Okay. Imagine you have $1 of your
own money. That's your equity. You want to invest.
So you go out and you borrow $35 from a lender.
So I've got one of my dollars, $35 borrowed dollars.
I'm controlling $36 in total. Right. And you
take that combined $36 and you invest all of
it in, let's say, housing bonds. Now, let's say
the value of those bonds goes up by just 1%.
You make $0 .36. On your original $1 investment,
that is a 36 % return. You look like an absolute
genius. And this is how Bear Stearns was generating
those massive returns on equity that investors
just loved. It's like printing money. It is until
it isn't. Yeah. Because the math works both ways.
Cruelly so. Yes. If the value of those assets
drops by just 3%. which is roughly $1 in this
example, your $1 of equity is gone. It's wiped
out. You are at zero. You're bankrupt. A 3 %
move in the markets is nothing. That can happen
in a week, sometimes in a single day. Exactly.
And Bear Stearns was running this 35 to 1 leverage
on assets that were illiquid. This is the level
three asset problem we need to talk about. By
the end of 2007, they had about $28 billion of
these level three assets sitting on their books.
So define level three for us. What does that
mean? Well, accounting rules categorize assets
by how easy they are to price. Level one is simple.
It's a stock on the New York Stock Exchange.
You know the price down to the penny every second.
Right. Level two is something similar to other
things that trade, so you can make a good estimate.
But level three... These are assets that trade
so rarely there is no market price. You basically
have to guess what they're worth using your own
internal mathematical models. This is mark to
model. Which critics at the time were calling
mark to make believe. Right. Because there was
no active market for these subprime CDOs. Nobody
wanted to buy them anymore. Bear Stearns just
used their own models to value them. They said,
well, our model says this is worth 98 cents on
the dollar. Meanwhile. if they had actually tried
to sell it in the real world. The market might
have only paid 40 cents, maybe less. So they're
carrying $28 billion of this stuff, supported
by a tiny, tiny sliver of their own money, and
just pretending it was worth full price. Yes,
and as long as they didn't have to sell it, they
could keep up the charade. But then came the
tremors. June 2007, the hedge funds. This feels
like the first act of the tragedy. This is the
canary in the coal mine. It was the warning shot
that everyone, including them, Just ignored.
Bear Stearns managed these two really high profile
hedge funds, the high grade structured credit
fund and the high grade structured credit enhanced
leveraged fund. Even the name sounds dangerous.
Enhanced leverage. Yeah. It just sounds like
we take your money and we risk it twice as fast.
That's essentially what it was. And these funds
were just stuffed to the gills with those toxic
CDOs we were talking about. In June 2007, as
subprime borrowers started defaulting in greater
numbers, the value of the assets inside those
funds just plummeted. And the lenders banks like
Merrill Lynch, who had lent money to these funds,
they got nervous. They issued a margin call.
OK, explain a margin call in this context. What
are they asking for? The lender is basically
saying, hey, the collateral you gave us, those
mortgage bonds. It's dropping in value. You need
to give us more cash right now to cover the loan
or we are going to seize your bonds and sell
them ourselves. And Bear Cern's funds didn't
have the cash. The funds didn't. No. So Merrill
Lynch seized the collateral $850 million worth
of bonds and they tried to auction them off to
get their money back. And this is the moment.
This is when the mark to make believe fantasy
ends. This is it. Correct. Because when Merrill
tried to auction off that $850 million, they
hit a wall. Nobody showed up. No one wanted to
buy it. Wow. They only managed to sell about
$100 million worth. And even that was at deep,
deep discounts. And suddenly the curtain was
pulled back. The entire world could now see that
these so -called AAA assets were essentially
toxic waste. And Bear Stearns, the parent company,
had to step in and bail out their own funds,
right? They threw in. What was the number? Something
like $3 .2 billion. $3 .2 billion. And here's
a fascinating detail from the reports. Originally,
Bear Stearns had only invested. $25 million of
their own money in these funds. So they had very
little skin in the game. Almost none. But when
the collapse started, they threw $3 .2 billion
of the firm's capital right into this black hole.
So why? Why throw good money after bad like that?
Reputation. That was it. James Caan, who was
the CEO at the time, and the other top executives
were terrified that if these funds collapsed,
it would just destroy confidence in the bank's
ability to manage risk. They tried to plug the
dam with cash. But the dam broke anyway. It did.
The funds lost nearly all their value. And this
is where the legal drama really starts to heat
up. We have emails from the two fund managers,
Ralph Schiaffi and Matthew Tannen. This is the
smoking gun part of the story. What were they
saying in these emails? Well, publicly, they
were on conference calls with their investors
saying things like, we are comfortable with where
we are and the market looks robust. Right. Everything's
fine. Exactly. But privately, Tannen sent an
email to Schiaffi saying, quote, the subprime
market looks pretty damn ugly. He even suggested
they should just close the fund and sell everything
they could. So they knew. They were telling investors
to hang on and stay calm. while they were privately
panicking. It certainly looked that way to prosecutors.
They were arrested in June of 2008 and charged
with fraud. Now, to be fair to the legal record,
we have to note they were found not guilty in
criminal court. OK. The burden of proof for criminal
fraud is incredibly high. You have to prove intent
to deceive beyond a reasonable doubt. And the
jury decided the prosecution just didn't meet
that bar. But the civil suits and the reputational
damage. That was fatal. So that's the summer
of 2007. The hedge funds implode. Profits at
the main bank plunge by 61 percent. Standard
& Poor's downgrades their credit rating for the
first time in 83 years. But they stagger on.
They survive the fall. They survive the winter.
Why didn't they just fold right then and there?
Because the main bank was still on paper. profitable
or it appeared to be. They had other businesses,
clearing services, wealth management. They honestly
thought they could ride it out. They thought
the housing market would bounce back. A huge
miscalculation. A fatal one because they were
bleeding from a wound they couldn't see or maybe
chose to ignore the repo market. OK, we need
to stop and explain the repo market, because
every time I read about the 2008 crisis, this
comes up as the mechanism of death for these
firms. But most people have no idea what it is.
Right. It stands for repurchase agreement. And
it is the absolute plumbing of Wall Street. It's
how investment banks fund their daily lives.
You have to remember, Bear Stearns didn't have
customer deposits like a Bank of America. They
didn't have savings accounts to lend out. So
to fund their daily operations, to pay the electric
bill, to fund trades, to pay salaries, they borrowed
massive amounts of money overnight. Every single
night. Every single night. They would take their
assets, those mortgage bonds, and pledge them
as collateral to another bank or a big money
market fund. here's $100 million in bonds. Lend
me $98 million in cash until tomorrow morning.
I'll buy the bonds back from you tomorrow for
a slightly higher price. So it's basically a
high finance pawn shop. You pawn your watch every
evening to buy dinner, and then you buy it back
in the morning when your paycheck clears. It's
the perfect analogy, and it works beautifully
as long as the pawn shop owner trusts that your
watch is real. Right. But in March 2008, the
pawn shop owners, the lenders in the repo market,
they looked at Bear Stearns Collateral, those
mortgage bonds, and they said, you know what?
We don't want this anymore. This watch looks
fake. Or we don't know what this watch is worth,
but we know for sure we don't want to be holding
it if you go bust tomorrow morning. It became
a crisis of confidence, not just a crisis of
capital. And this leads us directly to the week
of panic. March 10th, 2008. Monday, Bear Stearns
has a liquidity pool of $18 .1 billion. That
is their cash on hand to operate. $18 billion.
I mean, that seems it's a lot of money. It's
a fortune. Most companies couldn't dream of having
that much cash. It wasn't nearly enough. On that
Monday, rumors start circulating that Bayer is
having trouble processing trades. By Tuesday,
major clients start pulling their money out.
By Wednesday, the repo lenders stop rolling over
the loans. They're demanding their cash back.
When you are leveraged 35 to 1, you can't pay
everyone back at once. There's no way. You can't.
It's a classic bank run. But instead of people
standing in a line on the sidewalk, it's all
electronic. Billions of dollars leaving in seconds.
By Thursday, March 13th, that $18 .1 billion
cushion had dropped to just $2 billion. They
burned through $16 billion in three days. It
just evaporated. Their CEO at the time, Alan
Schwartz, he even went on CNBC on Wednesday to
try and calm the markets down. He said, our balance
sheet has not changed. We have plenty of liquidity.
Famous last words. It actually made things worse.
It signaled to the entire market that they were
desperate enough to have to go on TV. It's like,
you know, a pilot coming on the intercom and
screaming, everything is fine. You immediately
assume the engines are on fire. Exactly. So it's
Thursday night. They have $2 billion left. They
probably can't even open for business on Friday.
What happens next? This is the call. They make
the call that no bank ever wants to make. They
call the Federal Reserve. They call Timothy Gaithner
at the New York Fed and basically say, we're
done unless you help us. We are filing for bankruptcy
tomorrow morning when the market opens. Now,
traditionally, the Fed lends to commercial banks,
right? Banks that take deposits from regular
people. Bear Stearns is an investment bank. The
Fed isn't supposed to bail them out. That's right.
This was completely uncharted territory. But
Ben Bernanke, who was the Fed chair, and Tim
Gaithner, they were terrified of contagion. The
domino effect. Absolutely. If Bear Stearns collapsed,
they owed money to everyone. J .P. Morgan, Citi,
Goldman, they were all counterparties on trillions
of dollars of derivatives. If Bear didn't pay
them, they might fail too. And that could take
down the whole global economy. So the Fed tries
a Band -Aid first. Right. On Friday morning,
March 14th, they announce a secured loan facility.
JP Morgan will funnel money from the Fed to Bear
Stearns for 28 days. It was just supposed to
buy them some time. OK, 28 days to find a buyer
or fix the books. That sounds reasonable. It
lasted for about 12 hours. The market saw the
loan and panicked even harder. The stock crashed
by 47 % that day alone. Customers fled. By Friday
night, the Fed realized the loan wasn't working.
It wasn't enough. So they changed the plan. Drastically.
They called Bear Stearns and said, the 28 -day
deal is off. You have until Sunday night to sell
this company. If you do not have a signed deal
by the time the Asian markets open on Sunday
night, you are filing for bankruptcy Monday morning.
Talk about a high -pressure deadline. You have
48 hours to sell a company that was worth $20
billion a year ago or just... dies. And there
was really only one serious buyer at the table,
JPMorgan Chase. Enter Jamie Dimon. Yes. And Jamie
Dimon is a shark. He smells blood in the water
and he knows he holds all the cards. Bear Stearns
has zero leverage in this negotiation. None.
But Dimon also had a problem. He had his team
look at Bear's books over the weekend. I mean,
they pulled a complete all -nighter and they
saw all that toxic waste, those subprime assets.
And he said, I'll buy the company, but I am not
taking that garbage. So who takes the garbage?
You do. I do. The American taxpayer. And this
is where the Maiden Lane deal comes in. Yes.
The Federal Reserve Bank of New York created
what's called a special purpose vehicle, basically
a shell company, and they called it Maiden Lane
LLC. Named after the street next to the Fed building
in Manhattan. That's the one. So how did it work?
What was the structure? The Fed lent this new
company, Maiden Lane, $29 billion. Maiden Lane
then used that money to buy $30 billion of Bear
Stearns' worst, most toxic, unsellable assets.
So the bad loans get moved over into a government
-funded trash can. Essentially, yes. JP Morgan
put in a $1 billion subordinated loan, which
just means that if the assets lost value, JP
Morgan would lose its billion dollars first.
But after that first billion, any and all losses
were on the Fed. This was the only way Diamond
would agree to buy the rest of the firm. So the
deal is, JP Morgan takes the good stuff. The
shiny headquarters building, the client list,
the technology, and the Fed takes the bad stuff.
Now the price. This is the insult added to the
injury. Bear Stearns executives, they were still
hoping for maybe $20 a share, maybe $15. They
knew they were in trouble, but they thought there
was still some value there. And on Sunday afternoon,
Jamie Dimon puts his offer on the table. $2.
$2 per share. I mean, why? Why humiliate them
like that? $2 is basically zero. It's a rounding
error. Well, it wasn't just humiliation. It was
also protection. Diamond was worried his own
shareholders would revolt if he paid too much
for a failing bank. He wanted a price that was
so low, so essentially zero, that he could go
to them and say, look, even if everything goes
wrong, we basically paid nothing for it. It valued
the entire company at, what, $236 million? Something
like that, which was less than the value of their
headquarters building alone. The building was
worth over a billion dollars. They were buying
the company for less than the value of the real
estate it sat in. Exactly. Just imagine. Imagine
being an employee at that moment. You've worked
there for 20 years. Your entire 401k is in Bear
Stearns stock. You thought you were a millionaire
on paper, and now you can't even buy a used car
with your retirement savings. It was total devastation.
Employees owned about 30 % of the company. They
were just wiped out. James Cain, the former CEO,
lost hundreds of millions. Joseph Lewis, a billionaire
investor, lost over a billion dollars personally.
So there must have been a revolt from the shareholders.
There was a huge one. Class action suits were
filed almost immediately. The employees were
all threatening to vote no on the merger. And
you have to remember, a merger needs shareholder
approval. And at two dollars a share, the shareholders
were saying, forget it, let it go bankrupt. We'd
rather see it burn than give it to Jamie Dimon
for two bucks. So they had to go back to the
negotiating table. But for a very, very weird
reason, it turns out in the absolute mad rush
to write the contract on that Sunday night. I
mean, you have to picture lawyers working on
zero sleep, eating cold pizza at 3 a .m. They
made a mistake. A typo. Basically, a loophole
in the guarantee language. The contract was supposed
to say that J .P. Morgan guarantees bears trades
until the shareholder vote. But the way it was
drafted, the guarantee was open ended. What does
that mean? It basically said J .P. Morgan is
on the hook for all of bears debts forever, even
if the shareholders vote no on the deal. Oh,
wow. So if the shareholders voted no just to
spite him. J .P. Morgan would be stuck guaranteeing
a bankrupt company's debts. Yes, exactly. And
when Jamie Dimon found out about this drafting
error, the reports say he was apoplectic. He
was just furious. I can hear the yelling from
here. So they had to fix the contract. But to
get the shareholders to agree to the fix and,
you know, to approve the deal at all, J .P. Morgan
had to sweeten the pot. They had to raise the
price? They raised the bid from $2 to $10 per
share. Which is still a complete tragedy compared
to $172. But, I mean, it's five times better
than $2. It brought the total value of the deal
up to about $1 .2 billion. It was just enough
to quiet the revolt. And on May 29, 2008, the
shareholders officially approved the sale. Bear
Stearns was gone. Just like that. 85 years of
history. Just swallowed up. Swallowed up into
JPMorgan Chase. And by January 2010, JPMorgan
stopped using the Bear Stearns brand name entirely.
The name just ceased to exist. I want to zoom
out a bit. We talked about the mechanics, the
CVOs, the repo market, the leverage. But what
about the people, the leadership? We mentioned
James Cain, the CEO. Yeah. Time magazine famously
named him one of the 25 people to blame for the
financial crisis. Wow. They said he was asleep
at the switch. And there were all these reports
that while the hedge funds were imploding back
in the summer of 2007, he was away playing in
bridge tournaments. As in the card game. High
level competitive bridge. He was apparently obsessed
of it. He would just disappear for weeks at a
time to play in tournaments in Nashville or Detroit.
And he was also reportedly playing a lot of golf,
especially on Fridays. So it's the modern version
of Nero fiddled while Rome burned. But in this
case, it's Kane played bridge while the repo
market froze. It became a symbol of this huge
disconnect between Wall Street leadership and
the reality of the risks they were taking. I
mean, this was the only CEO on Wall Street who
didn't have a computer in his office. He didn't
use email. You're kidding me. In 2008, he relied
on printed memos delivered to him. It just speaks
to a culture that was completely out of touch
with the speed and complexity of modern finance.
There's also this other theory, you hear it from
the diehard Bear Stearns defenders, the naked
short selling argument. Right. The idea that
we didn't fail, we were murdered. The argument
is that these predatory traders sold phantom
shares. So shares that they didn't actually own
or borrow to artificially drive the price down
and force the collapse. Matt Taibbi wrote a really
famous piece on this in Rolling Stone, arguing
that naked short selling played a major role.
So is there any evidence for that? It's highly
controversial. The SEC looked into it. A major
academic study by the University of Oklahoma
looked at the trading data for both Bear Stearns
and Lehman Brothers, and they found, quote, no
evidence. that the stock price declines were
caused by naked short selling. So what was their
conclusion? Their conclusion was that the price
dropped because the company was fundamentally
broken, not because of some secret market manipulation.
It's always easier to blame a villain in the
shadows than to admit you leveraged your entire
company 35 to 1 on bad mortgages. Exactly. The
short sellers were the vultures circling the
dying animal, but they didn't kill it. The animal
died of gluttony and a flawed business model.
You simply cannot be leveraged 35 to 1 on illiquid
assets. and survive a downturn. It is simple
math. So looking back on all this, was Bear Stearns
sort of the sacrificial lamb? In a way, yeah.
The Fed thought that by facilitating the sale,
by sort of engineering this rescue, they had
solved the problem. They thought, OK, we prevented
a chaotic collapse. The market will calm down
now. But it didn't calm down at all. No, it actually
set a very dangerous precedent. It taught the
market that the government might intervene in
a crisis, but that shareholders would get completely
wiped out. It also showed the Fed stretching
its powers to the absolute limit. It did. Paul
Volcker, the former Fed chair, was very, very
critical of the deal. What did Volcker say about
it? He said the Fed took actions that extended
to the very edge of its lawful and implied powers.
The Federal Reserve is supposed to manage inflation
and employment for the whole country, not buy
toxic mortgage bonds from one specific investment
bank using a shell company it just created. It
really crossed a line. And crucially, the Bear
Stearns bailout. set the stage for the Lehman
Brothers crisis later that same year because
everyone in the market assumed the Fed would
save Lehman too. And then when they didn't save
Lehman, the panic was 10 times worse. But you
know what? That is a story for another deep dive.
It certainly is. So as we wrap this up, let's
just summarize the tragedy here. You have a firm
founded in 1923. It survives the Great Depression.
It builds this incredible reputation as a savvy,
gritty survivor. And then, completely seduced
by the easy, almost unbelievable profits of the
housing bubble, they bet the farm. They just
bet the entire firm. They ignored every single
warning sign in 2007. They thought they could
hold on until the market turned back in their
favor. But confidence is fragile. And once the
rumors started... the liquidity just vanished.
From $172 a share to a $10 buyout and 15 ,500
people left wondering what happened to their
careers and their life savings. Employees lost
about $5 billion in personal wealth. That is
the real human cost of that 35 to 1 leverage
ratio. It really makes you think about the whole
concept of value in the modern financial system.
That is the provocative thought I think we should
leave listeners with. We think of money as something
solid, right? A dollar is a dollar. A building
is a building. But Bear Stearns proved that in
modern finance, value is really just... It's
a confidence trick. It is, literally. Bear Stearns
had the exact same assets on its books on Monday
as it did on Thursday. The buildings were still
there. The trading contracts were still there.
But because the belief in their ability to pay
their bills evaporated, the value evaporated
right along with it. If people stop believing
you can pay your bills, you are bankrupt, no
matter what your spreadsheet says. Precisely.
The entire system relies on faith. And in March
2008, for Bear Stearns, that faith just broke.
A very sobering thought to end on. If you want
to dig deeper, definitely check out the full
timeline of the 2008 crisis. It only gets crazier
from here. But for now, that is the story of
the fall of Bear Stearns. Thanks for taking the
deep dive with us. Thank you. Keep asking questions.
See you next time.