The Scramble to Save Bear

The WSJ has been talking to Bear Stearns directors, JP Morgan executives, Fed officials, and others, and has a wonderful narrative of exactly what happened this weekend, complete with a fantastic lead quote. The overarching impression is of both banks and regulators scrambling to keep up with - let alone stay ahead of - deteriorating real-world events. The bailout of Bear was policy on the fly, and no one has a clue what the long-term implications might be. What we're looking at is tactical firefighting, not strategic policymaking.

Bear Stearns's board of directors was whipsawed by the rapidly unfolding events, in particular by the pressure from Washington to clinch a deal, says one person familiar with their deliberations.
"We thought they gave us 28 days," this person says, in reference to the terms of the Fed's bailout financing. "Then they gave us 24 hours."

There's a lot of very interesting detail in the story. For one thing, Bear seems to have done pretty much nothing between Tuesday and Thursday to try to stop the run on the bank, besides the CEO giving a CNBC interview in Florida saying everything was fine. No one seems to have realized how serious the situation was: there were fingers pointed (anonymous hedge funds were being blamed for "spreading negative rumors") but no action taken.

Suddenly, on Thursday,

In a conference call at 7:30 p.m., officials at Bear Stearns and the Securities and Exchange Commission told Fed and Treasury officials that the firm saw little option other than to file for bankruptcy protection the next morning.

Does it seem to you that Bear just gave up without a fight? It does to me. It just went running to Mom and Dad asking for a bailout, hoping that they would do what Bear itself was seemingly unable or unwilling to do. There was no internal strategy, only the external "let's hope we can blackmail the Fed into bailing us out" strategy.

We also learn that the Fed has been toying with the idea of lending money directly to investment banks "for months" without actually doing it:

Fed officials led by Bill Dudley, head of open-market operations, began planning a more direct response: opening the discount window to all investment banks, a request the Fed had resisted for months.

I also love this picture of Hank Paulson lying around at home putting Vikram Pandit on call waiting, "hey, can you hold a minute, I've got John Mack on the other line":

Mr. Paulson, a former Goldman Sachs chief executive and the administration's point man for financial markets, thought Bear Stearns would survive through the weekend.
That illusion was shattered Saturday morning, when Mr. Paulson was deluged by calls to his home from bank chief executives. They told him they worried the run on Bear would spread to other financial institutions.

The end result was undoubtedly bad for Bear Stearns shareholders, but I think ultimately they have only Bear's executives to blame. If you run to the Fed on a Thursday night saying that you have to declare bankruptcy on Friday morning, you can't expect your shareholders to be well compensated on Monday.