Bear Stearns' Cayne concedes leverage was too high
WASHINGTON (Reuters) - The former chairman and chief executive of Bear Stearns conceded on Wednesday that the failed investment bank had taken on too much risk.
"In retrospect, in hindsight, I would say leverage was too high," a weary-sounding James Cayne told a hearing of the Financial Crisis Inquiry Commission.
Cayne's admission under questioning came after he and other former Bear executives had blamed market rumors and a classic run on the bank for the firm's collapse in March of 2008.
Commission Chairman Phil Angelides said Bear Stearns seemed to have taken on an extraordinary level of risk involving high leverage, a concentration in mortgage-backed securities and short-term funding of its operations.
"There's a form of financial Russian roulette that Bear Stearns was playing along with other investment banks," said Angelides.
The congressionally-appointed commission is charged with chronicling the causes of the worst financial crisis since the 1930s and has been holding a series of hearings. It is due to deliver a report to lawmakers and White House by December 15.
Congress is already working on a bill to overhaul financial regulation but Angelides has said there will still be scope for further reforms, including possible changes to mortgage financing.
Bear Stearns was the first investment bank to experience a run on the bank in the crisis. Similar fears led to the demise of Lehman Brothers in September 2008 and the reorganization of the other three large investment banks.
NOT OUR FAULT
Paul Friedman, Bear's former senior managing director, said the loss of confidence in the firm was unwarranted given the firm's strong capital position and substantial liquidity.
Samuel Molinaro, Bear's former chief financial officer, told the commission that fears, rumors and innuendo in March 2008 resulted in "irrational behavior that caused a quintessential run on the bank at Bear Stearns."
"While our liquidity and capital planning failed in the face of these overwhelming market forces, in this environment, without a lender of last resort or the stability of a deposit base, neither we nor the independent investment banking model itself could survive," Molinaro told the commission.
Cayne left the CEO post in January 2008, just months before Bear was sold to JPMorgan Chase & Co for a fire-sale price. Cayne said in his prepared testimony that the lack of confidence in the firm was "unjustified and irrational."
The financial commission's vice-chair Bill Thomas did not buy the former executives' arguments.
"How could you folks, as sophisticated as you were, with the models that everyone felt comfortable with, believe you were the victim... of unsubstantiated rumors, fears and innuendo -- that your colleagues did you in?" Thomas asked.
SWIFT FALL
Angelides sounded incredulous that Bear did not better position itself to survive a credit crunch. "It seems like there were a lot of warnings signs, a lot of red and yellow lights going off."
Bear's fall was swift in March 2008. Despite an emergency line of credit from the Federal Reserve, it became clear within days the firm could not survive on its own, and the Federal Reserve and U.S. Treasury scrambled to arrange a sale to JPMorgan for the eventual price of $10 per share.
Five months later, Lehman filed for bankruptcy and the remaining large investment banks -- Merrill Lynch, Goldman Sachs and Morgan Stanley -- sought safety in the form of federal oversight. Merrill was bought by Bank of America. Goldman and Morgan became bank holding companies and are now subject to much stricter capital requirements and regulation.
All five investment banks were loosely supervised by the Securities and Exchange Commission for capital and liquidity requirements under the agency's voluntary so-called Consolidated Supervised Entity program.
SEC inspector General David Kotz said in prepared testimony for the commission that Bear Stearns was a highly leveraged firm with less capital and less diversification than other investment banks.
He criticized the SEC for becoming aware of "numerous potential red flags" about Bear Stearns' risk-taking but not taking action.
The SEC monitoring program has since been dismantled.
Other witness due to testify on Wednesday include former SEC chairmen Christopher Cox and William Donaldson.
(Reporting by David Lawder, Rachelle Younglai, Karey Wutkowski; Editing by Tim Dobbyn)