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Authors: William D. Cohan
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its own momentum. We put out a statement—I did—that our liquidity and balance sheet are strong, and maybe I should expand on that a little.” Schwartz's comments bring to mind the truism first penned by the financial writer Walter Bagehot, a former editor of the
Economist,
in 1873: “Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone.”
Faber encouraged Schwartz to try to prove to the world his firm was still worthy of credit, and reminded him of their conversation two months before when he'd become CEO of Bear and “you were fairly positive aboutBear having taken the marks”—marking securities to market—“that you thought were necessary, having treated its balance sheet conservatively.” How had things changed in two months?
“Well, the markets have certainly gotten worse,” Schwartz answered. “But our liquidity position has not changed at all. Our balance sheet has not weakened at all. So let me just talk about that for a few seconds. What I did say to you a few months ago is that we had spent last year moving away from any reliance on the unsecured markets into secured facilities, using our collateral to borrow against, and we finished the year and we reported that we had $17 billion in cash sitting at the parent company as a liquidity cushion. As the year has gone on, since year-end, that liquidity cushion has virtually been unchanged. So we still have many, many billions—$17 billion or so—in excess cash sitting on the balance sheet of the holding company as a liquidity cushion. That's in addition to billions of dollars of cash and unpledged collateral that are at our subsidiaries. So we don't see any pressure on our liquidity, let alone a liquidity crisis.” Schwartz made no mention of the fact that Bear's hedge fund clients had started to ask for their free-cash balances back and that fulfilling that obligation had begun to drain Bear's cash reserves.
The two men then had a conversation about the outlook for Bear Stearns's first-quarter 2008 performance—the earnings announcement that had been scheduled for March 20—and Faber asked Schwartz if he thought the Fed's action the day before would relieve the crisis. “I think there is still going to be a bunch of volatility,” he said. “I think the Fed's moves—as opposed to any one of them making the situation that much better—I think it shows that they are really on top of the situation. They understand that it's not just the level of interest rates but the technicals of the market that have been very difficult, and I think they're looking at a variety of ways to make sure that liquidity is available to all of us as dealers to be able to finance appropriately our customer activities. I think we'll continue to do that and I think the situation with time will stabilize.” Certainly that is what the Bear Stearns executives hoped would happen. “I think everybody hoped that things would subside” after Schwartz appeared on CNBC, explained Robert Upton.
But Schwartz's comments did not calm anyone down. “Mr. Schwartz's delivery made some experts wince,”
Wall Street Journal
columnist George Anders wrote. “He gazed upward before speaking. He pinched his lips tightly after several answers.” Anders then quoted a communications coach who said, “Such grimaces made Mr. Schwartz look uncomfortable.”
His own partners noticed, too. “Everybody on the trading floor, we must have had ten TV screens, they were all turned on,” Friedman recalled.“Business came to a grinding halt while everybody watched it…. Then Alan finished and there was this ‘Oh. Back to work.' The hope was he was going to announce the earnings. He didn't. He gave that lame ‘It's well within the range of estimates,' or whatever it was. That didn't help. It was a nothing. It was terrible. It certainly didn't stop phone calls [from] people wanting to take cash out.”
Added a
Economist,
in 1873: “Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone.”
Faber encouraged Schwartz to try to prove to the world his firm was still worthy of credit, and reminded him of their conversation two months before when he'd become CEO of Bear and “you were fairly positive aboutBear having taken the marks”—marking securities to market—“that you thought were necessary, having treated its balance sheet conservatively.” How had things changed in two months?
“Well, the markets have certainly gotten worse,” Schwartz answered. “But our liquidity position has not changed at all. Our balance sheet has not weakened at all. So let me just talk about that for a few seconds. What I did say to you a few months ago is that we had spent last year moving away from any reliance on the unsecured markets into secured facilities, using our collateral to borrow against, and we finished the year and we reported that we had $17 billion in cash sitting at the parent company as a liquidity cushion. As the year has gone on, since year-end, that liquidity cushion has virtually been unchanged. So we still have many, many billions—$17 billion or so—in excess cash sitting on the balance sheet of the holding company as a liquidity cushion. That's in addition to billions of dollars of cash and unpledged collateral that are at our subsidiaries. So we don't see any pressure on our liquidity, let alone a liquidity crisis.” Schwartz made no mention of the fact that Bear's hedge fund clients had started to ask for their free-cash balances back and that fulfilling that obligation had begun to drain Bear's cash reserves.
The two men then had a conversation about the outlook for Bear Stearns's first-quarter 2008 performance—the earnings announcement that had been scheduled for March 20—and Faber asked Schwartz if he thought the Fed's action the day before would relieve the crisis. “I think there is still going to be a bunch of volatility,” he said. “I think the Fed's moves—as opposed to any one of them making the situation that much better—I think it shows that they are really on top of the situation. They understand that it's not just the level of interest rates but the technicals of the market that have been very difficult, and I think they're looking at a variety of ways to make sure that liquidity is available to all of us as dealers to be able to finance appropriately our customer activities. I think we'll continue to do that and I think the situation with time will stabilize.” Certainly that is what the Bear Stearns executives hoped would happen. “I think everybody hoped that things would subside” after Schwartz appeared on CNBC, explained Robert Upton.
But Schwartz's comments did not calm anyone down. “Mr. Schwartz's delivery made some experts wince,”
Wall Street Journal
columnist George Anders wrote. “He gazed upward before speaking. He pinched his lips tightly after several answers.” Anders then quoted a communications coach who said, “Such grimaces made Mr. Schwartz look uncomfortable.”
His own partners noticed, too. “Everybody on the trading floor, we must have had ten TV screens, they were all turned on,” Friedman recalled.“Business came to a grinding halt while everybody watched it…. Then Alan finished and there was this ‘Oh. Back to work.' The hope was he was going to announce the earnings. He didn't. He gave that lame ‘It's well within the range of estimates,' or whatever it was. That didn't help. It was a nothing. It was terrible. It certainly didn't stop phone calls [from] people wanting to take cash out.”
Added a
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