Richard Whalen

Washington rescued Wall Street last weekend. J. P. Morgan Chase bought Bear Stearns (BSC) for stock equal to $2 a BSC share. In January 2006, Bear Stearns stock had hit a high of $171 a share. It closed at $30 a share Friday, March 14th, prior to the weekend-long negotiations with J. P. Morgan Chase. The Federal Reserve guaranteed the loan underlying the deal and $30 billion of the Bear’s complex, illiquid assets.

The smallest of the major Wall Street investment banks, Bear Stearns had just $11 billion in capital – all now swept away along with the one-third equity owned by the firm’s 14,000 employees. The Bear used very risky 30:1 leverage to compete and it lost everything when panicky clients staged a “run” on its accounts, depleting its operating cash.

I have known Bear Stearns’ people as consulting clients and friends since 1975 and I am saddened by the sudden collapse of an enterprise run by tough, street-smart money men. They lived a world away from the old-line WASP white shoe firms – and their moneymaking audacity made them feared and hated – permanent outsiders.

For most of its 85-year life, the Bear was an extended, mostly German-Jewish family, with a sprinkling of useful, politically connected Irishmen like ex-Governor Hugh Carey and special limited partners like me. I watched and reported on Washington politics and government, and traveled from Frankfurt to Tokyo advising the firm’s clients. My companion often was the firm’s senior partner, John Slade, a German Jew who in 1936 escaped Hitler and came to New York with $50 in his pocket.

Slade joined the U.S. Army, became a citizen and was the 40-year-old goalie on the U.S. field hockey team in the 1948 Olympics – one of the great events of his life. After the war, he returned to Germany to seek his late friends’ sons in Frankfurt and brought them to America and the Bear. There, they became “John’s boys.” In time, I sent my own eldest son Chris to school with John, who eventually sent him to London.

That old Wall Street is now gone with a mensch like Slade, who died in 2005 at the age of 97. Until just before his death, he worked every day from a desk in the midst of the Bear’s noisy, block-long trading room floor.

In a world awash in dollars, dominated by mega-banks and sovereign wealth funds (SWFs) run by foreign governments, even the largest, best run U.S.-based old-line investment banks and their capital are too small to compete and are vulnerable to being squeezed or crushed.

“Financial Services” has become the largest U.S. industry, twice as big as manufacturing. I think the next evolutionary step is for regulated banks and government-sponsored enterprises (GSE) like Fannie Mae and Freddie Mac to become de facto government-owned and capitalized to compete with giant SWFs in a new form of state market capitalism. In their present form, the federal housing mortgage-guaranty firms created during the New Deal are poorly run and vulnerable to the next downturn in housing finance. Wake up, Washington.