inside the meltdown

Alan "Ace" Greenberg


A legendary trader, Greenberg started at Bear Stearns in 1949. He was CEO from 1978 to 1993 and chairman of the board from 1985 to 2001. At the time of Bear's collapse, he was chairman of its executive committee. This is the edited transcript of an interview conducted on Dec. 15, 2008.

“I wasn't as vociferous as I should have been, maybe. It's very hard to stop a locomotive going 60 miles per hour.”

Give me the brief history of Ace Greenberg on Wall Street.

It's very short. Came to New York after I got out of college in 1949. Got a job at Bear Stearns a couple weeks later punching pins on a map where oil wells were being drilled in Texas and Canada, and I've been there ever since. So there's nothing to it.

And you rode Bear Stearns all the way to the top?



It was a meritocracy, and I worked hard, and I was very ambitious and needed the money. That's a great incentive. And things worked out.

When you look back, ... what were the big boom and bust moments from 1950 until now?

Obviously the market went up and down a lot during that period. There was some steep breaks in the market; 1973 I think the market went down 45 percent. But it was nothing like this. The market in 1987, as you probably remember, went down 32 percent. The blue chips went down 32 percent in two days. But nothing happened afterward to justify that drop. There was no recession, no war, no anything -- just a bunch of people running to get out the door at the same time, and it caused a calamity. But that was over with very quickly.

Now this one is just plain different. It's different than anything I've seen over 60 years I've been in the business. ...

The Wall Street that we find in the summer of 2007 is very different than, let's say, the Wall Street --

There is no Wall Street. It's gone. There is no Wall Street. It's a street just like Broadway or Madison Avenue now. There are no firms on it. The model of the investment banking firm is gone forever. It will never come back, in my opinion. There are no investment banks.

There were three basic ways that people could make money in the brokerage business: They could be strictly stockbrokers doing commission business for people; they could give advisory service to advise the corporations who were going to merge; ... and the third thing was they could be a full-line investment banking firm, which means they risk their capital to help their clients accomplish certain things -- give them bridge loans, buy their securities, hold them for a while, resell them.

That third model is gone, because it's been proven without a question of a doubt in the last year that a rumor can put any of these firms at peril. You certainly saw it with us. You saw it with Lehman [Brothers]. Even the firm that I had the most admiration for, Goldman Sachs, found itself the victim of rumors. And Merrill Lynch did. And both of these firms had to convert over the weekend to banks, had to have infusions of capital because they couldn't withstand the self-fulfilling prophecies of the rumors.

That won't happen with the bank, because if a bank is solid, the Fed will just say, "The bank is solid; we'll give them money to pay off the crazy people that are running on the bank." If the bank isn't solid, the Fed will say, "Let it go," like they [did] in many instances in the past year. So there is security in being a bank. ...

Let's go back and pull it apart and what happened to Bear and what happened to Lehman from your vantage point. ... Was the cratering of the two Bear hedge funds in the summer of 2007 where you marked the start, or was it earlier than that?

The two funds that went under were ahead of their time, obviously, and that certainly started some of the problems. And then the whole question of what inventory was worth caused more problems. They were very hard to evaluate what it was worth. Some of these securities were hard to monetize, to turn into cash.

And so the rest is history. We were very fortunate that JPMorgan wanted to buy us. The government did not bail out Bear Stearns. JPMorgan bought Bear Stearns. The government facilitated by lending some money against some of the securities. They lent $30 billion against some securities, and if the securities went down, the first billion dollars of loss was going to be paid by [JPMorgan].

My understanding is these securities have gone down more than a billion dollars, not much more. So the Fed is out a little bit now. But don't think the Fed just wrote a check for $30 billion and it's gone. That isn't the case at all. They have securities that may end up being worth more than $30 billion, and whether they'd like to sell them or keep them is up to the Fed. ...

Did you know the housing bubble was going to burst?

I knew this: I knew that it was crazy to see people flipping houses for profit. The vigorish in buying and selling a house is so big that it's ridiculous. I mean, the house has to go up 5 to 10 percent in value before you're even by the expenses and maintenance and so forth. So I thought that was crazy, and the speculation was crazy. I thought it was crazy to see ads where people would lend you 140 percent of the assessed value of your house. I thought that was nuts. Did I know that grassroots brokers were getting people financing that had no business [buying], that they were falsifying their wages, they were falsifying their ability to carry the mortgage? Did I know it was that bad? No, I did not.

When you learned about what we now know as kind of commonplace, sophisticated securities and other instruments -- CDOs [collateralized debt obligations], credit default swaps [CDS], all of those things -- did it seem kosher to you?

... Credit default swaps are very misunderstood. All they are is insurance policies, period. And you can't go out and just poison the well all by yourself. You can't go out and just sell a credit default swap. ... You have to have somebody on the other side that thinks, number one, that the company is going to survive and the debt is going to be paid, because you're taking out an insurance policy that if the debt isn't paid, they will pay you off in case of failure.

So it's insurance. There's nothing wrong with insurance. And some people say it's terrible that people are buying credit default swaps and don't even own the securities. That's like saying you can't bet on the Missouri-Oklahoma football game unless you went to one of the schools. Well, that's not quite true. You can bet in this country on anything. ...

Now, the issue is, I think you have to be careful who you buy a credit default swap from. You can't buy it from somebody that doesn't have any money and can't pay any more than you can buy insurance from somebody on your life if you find out they've been in business two weeks and they have no capital. You wouldn't do that. You could go to one of the big companies and maybe pay a little bit more of the insurance for the right to be able to ensure your heirs can collect.

So this whole thing with credit default swaps is people have said in print that Bear Stearns was taken down by credit default swaps. It had nothing to do with our demise, nothing. We had no problem with credit default swaps. We made a lot of money off of them. So it's just something that has been blown out of proportion. ... If you buy a credit default swap, you should know who you're buying it from so at least he can pay when it's whip-out time. So far I think they have worked remarkably well.

So when all this is happening and people are making money hand over fist and doing real well, and the market is growing, are you ever nervous? ...

I was, and I felt some things were going on that were just nuts. Some of the demands our clients were making upon us I thought were just unbelievable.


They would just ask you to run risks that you didn't want to run or shouldn't run. On the other hand, in theory, you couldn't afford to offend your biggest clients; they wouldn't do business with you anymore. So that was a problem. Our biggest clients obviously were the ones who were buying and selling these corporations, creating debt maybe that was in excess of what the company could support.

But I wasn't as vociferous as I should have been, maybe. It's very hard to stop a locomotive going 60 miles per hour. It takes a lot of braking power to stop that. And this stuff was highly lucrative when it was working. Excesses did occur. Deals were done that were just too big for the companies they were buying. And you read about the ones that are in big trouble that were done [over] the last two years. The equity has gone entirely and maybe even more. So did I know things were getting a bit out of hand? Yes. Was I as vociferous as I should have been? Maybe not.

Why not?

As I said, it's hard to turn off the spigot when things are profitable. You have a tremendous amount of people working for you in this area, and it meant virtually closing it down, because if you turn down one of these clients on something they wanted to do, they just put an X through your name and say, "You're finished." So the pressure is -- but we were big boys. I'm not complaining. We made mistakes.

... What was Bear's [culture]?

Oh, I think we had a distinct culture. I think it was remarkable. The people there were extremely generous, the charities. They felt it was a meritocracy. We didn't allow any family at all to work at Bear Stearns -- no son-in-laws, no children, no anything. We really tried to make it a place for somebody to reach his full potential very quickly. Everybody realized that. So we had a lot going for us. We truly did. ...

Talk to me about that week in March when Bear went down. What was your sense? Did you feel it coming that week? Did you know that it would go that fast?

I knew that rumors are such that they just can plain put you out of business. People that you have been doing business with for years in terms of giving them securities and borrowing against it and so forth, all of a sudden they just say, "No, we don't want to touch it." Just something may happen. It could be litigation. So then you're out of business if you can't borrow money against your securities, which are good. Forget mortgages. ... If you can't borrow money against the U.S. governments that you own, then you're out of business, because we in turn are lending to our customers, and we don't have enough money to lend to our customers unless we can take their securities and hypothecate them in a bank or something.

So we were having trouble finding banks that would even take our securities, because they just said: "Well, we'll wait a week or two. Right now we don't want to get involved." There's always a fear when there is litigation that they could be tied up in some way, even though I think they're fully protected. But anyway, that's their choice, and I'm not blaming them.

That weekend before March 10, the word is out. We know that [Bear Stearns president and CEO Alan] Schwartz is down at the Breakers. Where are you then?

I was in the office.

And what is it like?

First, please understand Alan Schwartz was at the Breakers -- he was not on vacation. He was down there heading a major conference, and he had to be there. It was a media conference. All our big clients were there, and Alan certainly knew them all.

On Monday somebody came over to me and said, "You've got to make a statement." I said, "About what?" And he said, "All of our institutions are calling us, and we're in trouble." And I called the chief financial officer. I said, "Are we in trouble?" He said, "No, everything's fine." So I said, "It's ridiculous, everything's fine," which it was.

Then Alan came back I think on Wednesday, and on Thursday the thing started all over again. And then Alan made a statement on Thursday, and nobody paid any attention to it. And on Thursday afternoon there was a tremendous run on Bear Stearns. People wanted their money and their securities out immediately, which they got. But in effect, [that run] had us out of business by Friday. That's how fast it can happen when a run starts on any bank.

... On Wednesday they decide it's time for Schwartz to get on CNBC, ... and then [CNBC anchor David] Faber's question is where he says Goldman is stopping a trade.

I don't think that was accurate; I think that was just a rumor. I think that was another rumor. I don't think they didn't stop trading. I don't blame them for anything.

But you were talking rumor and fear. Faber asked the question; Schwartz is there; CNBC is on every trading desk on Wall Street. What are the implications of that question, whether it's true or not? And how important was it?

It's not good. It's a negative; let's put it that way. Major negative.

In what sense?

People that didn't even think there was a problem now think maybe there could be a problem. Therefore they call up and say: "Get my securities out of there. Get my cash balance over to the bank today."

That's basically what happened.


And you're sitting there and you're thinking?

Nothing I could do. You're sitting in the middle of an avalanche. What can you do if you're on the side of a mountain and an avalanche comes at you? An avalanche goes, what, 60 miles an hour? You can't outrun it, right? So what can you do?

What could he have done? Anything?

Alan? No, he tried as hard as he could.

... Were you involved in any of the talks with JPMorgan?

Yes, I was involved, as the whole board was. ... The deal was struck, as you know, Sunday afternoon, and had to be struck by 6:30 because at 6:30 Asia opens. And the SEC -- we had to announce before 6:30 if a deal had been done or not. Otherwise they would notify Asia not to do business because we were in Chapter 11. And everything was signed and sealed prior to 6:30.

On Friday night Schwartz is driving home back out to Greenwich, [Conn.]. Everybody thinks that the deal has been done with JPMorgan. At least the money has moved. You've got 28 days. He gets a phone call from [then-Treasury Secretary Henry] Paulson, and Paulson says, "No, you've got the weekend." What are the implications of that call?

We had the weekend, clear.

When you hear that, what do you think it means?

We've got the weekend.

That's a mountain to climb, yes?

Well, a lot has to be done in a weekend. And luckily it was.

We've read that [former Bear Stearns CEO] Jimmy Cayne says: "Let's go bankrupt on Saturday. This is crazy what's happening to us." True story?

Yes, that's what he said. It was stupid. If you're bankrupt, you're dead. If you're alive, you're alive; all kinds of good things can happen. You might even get a heart transplant, right, if you're alive. If you're dead, you don't get a heart transplant. So he ended up coming around.

Hard to bring him around?

Well, he came around. Let's just put it that way.

... How critical were the roles of Paulson and [then-President of the Federal Reserve Bank of New York Timothy] Geithner, and how did the Fed involvement happen?

Oh, I'd say it was certainly the lending of $30 billion against those securities [that] made it palatable for JPMorgan to go ahead, even though the government did get securities; they did get collateral. So without that there wouldn't have been a deal.

Now, as you also probably know, the government decided over that weekend to make available to all investment banks, which there were four left, that they could go to the discount window and borrow it just like we did. ...

You must have been arguing for that?

Prior? No, you don't really argue with the Fed. They don't call you up and say, "What's your opinion?" Who do you argue with?

Tell me about the role of the Fed in all of this.

The Fed and the government over the last few months have been very active, which I think is good. That doesn't mean every action of theirs has worked. ... To be critical of the Fed and Paulson because they've changed their mind on something, that's ridiculous. Intelligent people change their mind. Only dumbbells are stubborn. If you look at the history of the Great Depression in the '30s, the government did nothing. They let the banks fail and everything. They just said, "Let it work itself out."

Certainly our government has tried very hard with the other big countries. The central banks, they've tried very hard to stem this and try and work it out. And of course we all hope they'll be successful. And they have been successful. Certainly the municipal bond market a few months ago was in total disarray; that's been straightened out. The commercial paper market was in total disarray; they straightened that out. Some of these money funds, there were people who were making a run on [them]. ... The government straightened that out by putting guarantees in effect, which will cost them nothing, by the way. So they've done a lot. And unfortunately it hasn't really reached the lower levels yet, and I hope it does.

You must have known Hank Paulson when he was at Goldman?

I didn't know him well. I knew him.


Good. The head of one of the biggest firms on Wall Street.

And when he becomes Treasury secretary, does it seem like a good idea?

Great idea.


He's smart. He's a proven smart guy. You don't get to the top of the heap at Goldman Sachs if you're a dumbbell. His father wasn't named Goldman or Sachs, by the way. His name's Paulson, raised in the Midwest -- you get the story. So you've got to have talent.

And what does it mean to have a guy from one of the five banks as secretary of Treasury in a crisis like this? Is there an advantage?

In my opinion? Definitely. To get to the top of that heap at Goldman Sachs you have to be very, very smart, and you have to be very knowledgeable of securities and of the industry and money and finance, believe me.

There was a sense that there was something personal in this because of Bear's refusal to participate in the 1998 rescue of [the hedge fund] Long-Term Capital Management. Did you feel any of that?

No, that whole thing is silly. Blown completely out of proportion and totally inaccurate. Just take my word for that. ...

And [Federal Reserve Chairman Ben] Bernanke, do you know him?


Ever met him?


What do you think about him as the new [Alan] Greenspan?

I'll let you know in a few years, after they dissect and bisect him, which they will, of course. And with the benefit of hindsight they'll do a pretty good job, I guess.

But about near term, what you can tell right now about how he's been? I mean, he's a Great Depression expert, right?

I think that's what he wrote his thesis on, right? No, look, the proof of the pudding is in the eating thereof, right? We'll see how the pudding eats.

So far?

So far they've been very active, and I think they've done the right thing.

On that Sunday afternoon, JPMorgan is prepared to pay $4 per share for Bear. Paulson calls [JPMorgan CEO Jamie] Dimon and, invoking moral hazard, says, "Not $4 -- $2." Talk to me about that.

It's been chronicled, and it's true: $2. People thought it was a misprint. They thought it must have been a couple zeroes left off. They were wrong; it was $2. But we were still alive, and we ended up getting about $10.

How did you feel about the moral hazard comment?

By the government? Well, they didn't want it to look like -- and even though they were lending $30 billion against securities -- that they were bailing out Wall Street or Wall Street fat cats, which is of course another expression you can forget about. There are no fat cats on Wall Street. There are no skinny cats, no fat dogs -- there's nothing. There's nothing left. There is no more Wall Street. ...

When the price goes from $4 to $2, what does [that mean] for the people at Bear who were sitting there in that office building that day?

It was terribly depressing. Many of them borrowed money against the securities, which, of course, is never intelligent. And they were in terrible financial straits. It was a very sad day for a huge number of people.


I didn't really have much stock then. I retired as chairman I think when I was 75 years old, so that was six years ago. We had no retirement benefits at all for senior executives at Bear Stearns; didn't believe in them. So I set up my own retirement plan, so as a result I didn't have much stock.

... Did you know it was going to be Lehman next?


What did you think when it was?

I felt bad for them. I felt terrible. Yeah, I got no fun out of seeing somebody else get in trouble. I was an admirer of [Lehman chairman and CEO] Dick Fuld. I thought he did a great job over the years. Resurrected that firm. They were tremendous competitors, and I felt bad.

What happened to them?

Don't know.

When the government decides, for whatever set of reasons, not to help them live --

That's been chronicled and chronicled, and the government has always said one thing; they've said, "We've tried to help them, but nobody wanted to buy them." Somebody wanted to buy Bear Stearns. There's a big difference.

Now, I don't think anyone expected the government to take over Bear Stearns, run it for a while and give it back to management. And I don't think that they expected that they'd do the same thing with Lehman. There were people who wanted to buy pieces of Lehman, but nobody wanted to buy Lehman, according to the government, because of their exposure and their investment in certain things that nobody could tell really what they were worth. So to say the government didn't try to help Lehman, from what I've read, is not true. They tried very hard to help Lehman, but they didn't have anybody that said they wanted to buy Lehman. So who were they going to help, themselves? Who was there to help?

What about Barclays? Didn't they want to buy Lehman?

No, no. They wanted to buy pieces of it. They ended up buying I think the European operation. And somebody else wanted to buy Neuberger Berman, and somebody else wanted to buy this. Nobody wanted to buy the whole thing because of what they felt the potential loss was in some of their so-called assets, from what I've read. Haven't discussed this with anybody.

Do you think they should have known -- I mean, the government is getting whacked pretty hard for not having anticipated the effect of Lehman going down.

I don't know what the effect of that is. I don't know.

Everybody says this was the fundamental mistake.

Do I think that? No, I don't at all.


Why? Our problems are people with houses -- people being foreclosed, people that can't pay their obligations. These people weren't stockholders of Lehman. They're trying to help people keep their houses. The worst thing I think you can have is a house that nobody lives in. After three weeks there will be nothing left; all the fixtures will be stolen. So these are the problems.

Now, Lehman, I'm sorry what happened. I'm sorry that somebody didn't step forward and say, "We'll buy it." But to say that it's a problem here is, I think, utterly ridiculous.

But what about this idea that they represented such a linchpin in the paper market and all of that stuff, that with them going, everything was so interconnected that it just all imploded? No?



Do you know somebody who was imploded? Who do you know that was imploded? Who? I don't know anybody. Can't blame the people we read about last week on Lehman, can you? Can't blame [attorney Marc] Dreier or [broker Bernard] Madoff, or that goofy governor of Illinois [Rod Blagojevich] on Lehman. You think they caused them to implode? I don't know of anybody that imploded because of Lehman. If you own Lehman stock, of course you imploded. If you owned the bonds that didn't buy a credit default swap, you imploded. But that's it.

I talked to a fellow from AIG yesterday who said AIG would not have got into the trouble it got into if Lehman would have been kept alive.

AIG was in trouble months before Lehman got in trouble. AIG was one of the biggest writers of credit default swaps. The person writing them didn't know what he was doing. He wasn't charging enough money. He was just writing them, getting a commission on what he was doing. That was in the paper also. I didn't look at AIG's books, but they had somebody in London who was just writing these things like crazy, and there was nobody watching what he was doing. All of a sudden AIG woke up and saw they had insurance liabilities that they had no idea they had. And all of a sudden the people said: "OK, I bought a credit default swap. The thing went bust, and pay me." That's what their problem was. It had nothing to do with Lehman. Nothing. AIG was in trouble months before Lehman went under.

How does a company like AIG get in that kind of trouble?

I guess they didn't watch what was going on in England.

And one small thing like that can --

It wasn't small; it was huge. They're still paying these things off. ... It's OK to write insurance as long as the premium resembles the risk, right? That didn't. So when they said credit default swaps are awful, yeah, if you write dumb things, anything is awful.

The government throws in $85 billion to AIG that same week right after Lehman. Why?

According to the government, they think they're well protected. They think they'll end up making money off of that. They virtually own AIG now. They own 80 percent, I think, of the common stock. AIG insurance is still a very big name throughout the world. They're not a very big name in credit default swaps, but the rest of the insurance business seems to be OK. If they ever see an end to credit default swaps, they'll start making a lot of money. So to say the government has lost $140 billion on AIG is wrong. It's much too early to figure that out, much.

But they're in there. They're exposed anyway.

They're in there, and they have assets to cover it.

Paulson calls in the banks, nine of them, into the Treasury Department on a Monday afternoon. They're all sitting there in alphabetical order, and [he] slides a piece of paper across the table that says: "$25 billion or so for each of you. I'm in your business now."

Well, he's got options.

What did you think of that when you read about it?

As you know, a couple of the banks say, "We don't need the money." And Paulson said: "Take it anyway, because I [don't] want the fact that you don't need the money [to] make these other banks look like they're sick. So if everybody takes the money, everybody will be looked at through the same glasses." I think that was the theory. So they did it. They weren't going to argue with Paulson. So the two banks that didn't want to take the money ended up taking it.

What does it represent? Is that a sea change in the way business is done in your lifetime?

Yeah, correct, in my short lifetime I've never seen that, right.

What does it mean?

It means the government was being active. The government was doing what they're supposed to do. The government was trying to do the right thing. Not everything the government does will end up being the right thing. I'm sure there will be some miscues, but at least they're trying. It's better than doing nothing, isn't it? As my friend [billionaire Texas oilman] Boone Pickens says, "A plan is better than no plan at all," right? ...

... Of all this mess of the past year, what's the big lesson you derive?

I guess it's a question of overexuberance and getting caught up in thinking the good times are here forever and they never are. The tech bust of nine years ago certainly wasn't a surprise to me. That was so obvious, much more obvious than this. I had no idea that people throughout the country were buying homes they couldn't even come close to afford. It just didn't occur to me that the banks or the mortgage brokers at the grassroots level were doing these things. Maybe I should have known. I don't know why I would, though. So these things, if they're not built on solid ground, they just disintegrate in a hurry. ...

posted february 17, 2009

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