Bear Stearns talks show Wall Street takes a local view
NEW YORK: Just before JPMorgan Chase announced its initial $2-a-share deal to buy Bear Stearns, Ben Bernanke, the chairman of the U.S. Federal Reserve Board, held an extraordinary impromptu conference call. The participants in the Sunday night call, who got a preview of the deal, were Wall Streets biggest power brokers: Lloyd Blankfein of Goldman Sachs dialed in from home. John Mack of Morgan Stanley rushed to the office to listen on speakerphone. Richard Fuld of Lehman Brothers, who had been directed to return home from a business trip in New Delhi by none other than Henry Paulson, the Treasury secretary, was patched in, too, among others.
The half-hour call was a rallying cry for support of Bear Stearns - and more broadly, the financial markets, which, as it was described on the call, were on the verge of a major meltdown if not for the pre-emptive steps that the Fed and JPMorgan took. “It was much worse than anyone realized; the markets were on the precipice of a real crisis,” said one participant. Given that Bear held trading contracts with an outstanding value of $2.5 trillion with firms around the world, “we were talking about the possibility of a global run on the bank.”
In another era, the participants in the phone call would have been an exclusive fraternity of high-powered Manhattanites. But this conversation was also filled with foreign accents - from UBS, Credit Suisse, Deutsche Bank, HSBC and beyond.
In truth, though, the call was more of a courtesy to our foreign neighbors than it was a genuine effort to gather outside views. Call it speakerphone diplomacy. The “possibility of a global run on the bank” may have been real, but the important decisions had been made long before the folks in London, Dubai and Hong Kong were let in on the secret. The chiefs of Wall Streets top banks had been taking calls from each other and the Fed all weekend.
So goes the world of Wall Street. The Four Seasons crowd may talk a big game about being global - sending lieutenants to start offices halfway around the world - but when it comes to opening up its secret society to foreigners, doing so is still an afterthought.
It is not just a problem in business. While the Fed and the Treasury Department often check in with their foreign counterparts, they still sometimes take a view that is more local than global. Paulson, formerly of Goldman Sachs, can propose a radical plan to regulate the financial industry in the United States, as he did this week, but it doesnt address the larger problem: were now so interconnected with the markets abroad, whether it be Japan or even Brazil, that whatever we do on our own is almost beside the point.
“We need much tighter global coordination,” Bruce Wasserstein, the chairman of Lazard, told me this week. “It is myopic to look at things in a narrow box. Where weve been moving right, the EU is moving left. That doesnt seem sensible.”
If the United States, for example, were to limit the amount of leverage - or debt - that investment banks or hedge funds could use, that wouldnt offer any protection from debt-fueled implosions at rival firms abroad. A blowup at a highly leveraged fund in China would still ripple across the system.
Superleveraged funds have been a major culprit in the latest downturn, because their use of debt to juice returns has amplified the effects on the downside. (Just ask investors in two of Bear Stearnss now-bankrupt hedge funds.) When things go bad, the fallout doesnt stop at national borders. A fund in London may be connected to another in Thailand and not even know it. Who would have imagined that dentists in Germany owned subprime mortgages in Texas? (They did, or rather, still do - at a huge loss.)
The explosion in the use of derivatives has only tightened the global links - and made a worldwide meltdown easier to imagine. Banks and hedge funds across the world are routinely on opposite sides of contracts tied to debt, interest rates or other, more esoteric benchmarks.
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