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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
including April and June —S&P had confirmed Bear’s strong ratings, noting in
April that “Bear’s risk profile is relatively conservative” and “strong senior manage-
ment oversight and a strong culture throughout the firm are the foundation of Bear’s
risk management process.” On June , Moody’s had also confirmed its A rating,
and Fitch had confirmed its “stable” outlook.
Now, in early August, Upton provided them information about Bear and argued
that management had learned its lesson about governance and risk management
from the failure of the two hedge funds and was going to rely less on short-term un-
secured funding and more on the repo market. Bear and other market participants
did not foresee that Bear’s own repo lenders might refuse to lend against risky mort-
gage assets and eventually not even against Treasuries.
“I requested some forbearance” from S&P, Upton told the FCIC. He did not get
it. On August , just three days after the two Bear Stearns hedge funds declared bank-
ruptcy, S&P highlighted the funds, Bear’s mortgage-related investments, and its rela-
tively small capital base as it placed Bear on a “negative outlook.”
Asked how he felt about the rating agency’s actions, Jimmy Cayne, Bear’s CEO un-
til , said, “A negative outlook can touch a number of parts of your businesses. . . .
It was like having a beautiful child and they have a disease of some sort that you
never expect to happen and it did. How did I feel? Lousy.”
To reassure investors that no more shoes would drop, Bear invited them on a con-
ference call that same day. The call did not go well. By the end of the day, Bear’s stock
slid , to ., below its all-time high of ., reached earlier in .
“WE WERE SUITABLY SKEPTICAL”
On Sunday, August , two days after the conference call, Bear had another opportu-
nity to make its case: this time, with the SEC. The two SEC supervisors who visited
the company that Sunday were Michael Macchiaroli and Matthew Eichner, respec-
tively, associate director and assistant director of the division of market regulation.
The regulators reviewed Bear’s exposures to the mortgage market, including the
billion in adjustable-rate mortgages on the firm’s books that were waiting to be secu-
ritized. Bear executives gave assurances that inventory would shrink once investors
returned in September from their retreats in the Hamptons. “Obviously, regulators
are not supposed to listen to happy talk and go away smiling,” Eichner told the FCIC.
“Thirteen billion in ARMs is no joke.” Still, Eichner did not believe the Bear execu-
tives were being disingenuous. He thought they were just emphasizing the upside.
Alan Schwartz, the co-president who later succeeded Jimmy Cayne as CEO, and
Thomas Marano, head of Global Mortgages and Asset Backed Securities, seemed un-
concerned. But other executives were leery. Wendy de Monchaux, the head of propri-
etary trading, urged Marano to trim the mortgage portfolio, as did Steven Meyer, the
co-head of stock sales and trading. According to Chief Risk Officer Michael Alix,
former chairman Alan Greenberg would say, “the best hedge is a sale.” Bear finally
reduced the portfolio from billion in the third quarter of to . billion in
the fourth quarter, but it was too little too late.
