The Rise and Fall of Bear Stearns

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Alan “Ace” Greenberg is the former CEO and Chairman of the Board at Bear Stearns: a financial firm he started working at in 1949. He recently wrote about a book called “The Rise and Fall of Bear Stearns” about his career there, as well as the firm’s demise. Courtesy of Simon and Schuster

Wall Street—according to former Bear Stearns CEO Alan “Ace” Greenberg—used to be a gentlemanly place where Midwestern boys made good, partners carpooled together to downtown offices, and the keys to success simply meant selling poor-performing stocks quickly.

Greenberg puts forth this utopian history in his new book, The Rise and Fall of Bear Stearns, which he co-wrote with Mark Singer following the collapse of the storied bank. Greenberg recently sat down with NEWSWEEK’s Nancy Cook at his new office on the third floor of JPMorgan, the financial firm that acquired Bear Stearns in May 2008. There Greenberg talked about his regrets, his beef with mortgage brokers, and the reasons why financial reform is unnecessary. Excerpts:

Do you regret anything about your time at Bear Stearns?
No, I don’t. There’s very little in my whole life that I’d do over again. There were a lot of forks in the road, and most of the time I took the correct one. Certainly at Bear Stearns, I think that I didn’t make many mistakes. But, you know, you have to keep in mind that the only people who don’t make mistakes are the ones who don’t do anything. After the collapse, I think there were three people working on books. All of them wanted my cooperation. Then when the books came out—I’m not blaming the writers—but their sources were just so far off base that it was sickening. It was then that I said, “I have to set the record straight for me, my children, and my grandchildren because this is just not what happened.” My book has accomplished that purpose, as far as I’m concerned.

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Do you feel like you, as a businessman, learned anything following the financial collapse?
Nothing that I didn’t know before.

You have a really interesting line in the book in which you talk about how presidents of companies never really know what goes on. Can you elaborate?
I don’t care how much you watch things or how acutely involved you are, there are probably bad things that happen. We had three people whose job was to constantly check on people, but their job wasn’t to check on the purchasing department. They were to supposed to check on the traders. I hate to say it, but every firm that has a purchasing department [should] beware. They are presented with so many opportunities to do wrong. The only way you can protect yourself would be to fire everyone who works in the purchasing department.

Whenever a company gets in trouble, the leader always has to pay the price, whether it’s right or wrong. For Obama to be criticized for the oil spill is ridiculous. That is like criticizing the head of Iceland for the volcano. What do they want Obama to do? Put on the wetsuit and go down there and fool around with a screwdriver? Is that what they want him to do? He’s no more responsible for the oil spill than I am.

I’m curious to hear your thoughts on financial reform as it works its way through the conference committee this week. Do you think the bills, as they stand now, will be effective?
You mean, do I think it’s necessary? None of us know what will happen, but some of what will happen is absolutely ridiculous. I don’t know of one bank that got in trouble with credit default swaps or trading with their own account. The banks got into trouble because they lent money to people who could not afford their homes, or they lent money to developers who were developing things that didn’t make any sense.

And derivatives?
The banks made money on derivatives. The banks made money in credit default swaps, so why penalize them? If you took a highly intelligent businessman—who had no exposure to the banks—and said, “Look you’re a bright guy, read the report by Paul Volcker.” He’d come to the conclusion that the businesses should stay in trading, derivatives, and credit default swaps and stop lending. Now, we know the banks won’t do that, but to me, they’ve just gone crazy. The public is fed this line about the fat cats on Wall Street. There are no fat cats on Wall Street. It’s ridiculous.

During the last year and a half, certain TV personalities and certain athletes were signing contracts at unbelievable amounts of money. Yet, when the banks borrowed money and paid it back with options and with interest—which was a great deal for the government and American taxpayer—the government said the banks can’t pay the employees that much money. There are super brains and talent in every field except for financial? Well, they’re wrong. There are super talents in finance who demand to get paid, and they will get paid. Once again, the public is fed this propaganda that’s just so wrong.

Do you think the banks or financial firms need to be regulated in any way that they’re not currently?
It is regulated now. The SEC regulates it now. The banks are highly regulated. I’m not against regulation. What they’re doing here is that they’re saying what businesses can be in, what they can’t, and according to Mr. Volcker, they shouldn’t be in any businesses they make money in. It doesn’t make sense to me.

What about specific proposals that may or may not pass, such as regulating derivatives?
It wouldn’t make any difference. People don’t understand derivatives. They’re confused. They remember when Warren Buffett issued a long essay on derivatives that said they’re easy to get into and impossible to get out of. The whole article was about how awful derivatives were, and then in the last line of the article, it said that Berkshire Hathaway uses derivatives to hedge their positions. Something is wrong there, right? We found a few weeks ago, when Buffett wanted his derivative transactions to be grandfathered in, that it looks like he has a derivatives position of $60 billion. So, there are some inconsistencies here. Derivatives are terrific. You can get in bad trouble from driving a car, riding a bicycle, drinking too much, or riding a horse. You can get in trouble doing anything. Even sitting at home, you can fall in the bathtub. But all of these things that I just mentioned, if you don’t do them with good sense you get in trouble. So to say that derivatives are just plain bad is ridiculous. Derivatives were great for the banks, and they were great for the people who bought them. Now, if someone didn’t know what he was buying and sold them by a salesman who didn’t have his best interests at heart, then he’s going to get stuck. It’s the same thing as buying furniture.

What about the idea that certain financial products need to have greater transparency?
I think people should understand what an adjustable-rate mortgage is. I don’t think they did. I think it’s a disgrace that the banks sold this to people who couldn’t pay.

Whose fault is that, then?
I think it’s the banks’ fault. I don’t think you should sell anything to a person who can’t pay. In many cases, it was the mortgage brokers who were doing it—who packaged the stuff and sold it. The banks and firms like Bear Stearns took the word of the mortgage brokers that the stuff was correct, and it wasn’t. They were saying that a person had an income of $65,000, when he actually had an income of $5,000 a year. Well, we were taken, and people did something that was illegal.

So you think Bear Stearns was innocent in all of this?
We didn’t issue a mortgage to anybody. We had people who would get mortgages and ship it to us with papers attached. We would in turn give them to Freddie or Fannie with the paper attached. There’s always a start and finish to everything. If you ask me where was the start here, you have certain mortgage brokers and certain mortgage companies that were packaging and arranging financing for people who can’t pay. Who were we to say Countrywide didn’t know what they were doing? Everyone loved them. They were helping the whole world buy houses, supposedly. Should we have said to Countrywide, “We don’t believe you”? “Give us more verification”? It wouldn’t have helped anything. Bear Stearns’s mistake, in my opinion, was that we were overleveraged. We had securities that were called Triple-A with floating rates on them, so we assumed the risk on these securities was 2 to 3 percent. Much to our surprise, they weren’t Triple-A, and the risk was 40 to 50 percent. When you’re overleveraged and something goes down by half, you’ve got a big problem. That was our problem.

How do you think the culture of Wall Street has changed since you were hired at Bear Stearns in 1949?
It’s hard for me to say. I was only at one firm, and the culture of Bear Stearns was so distinctive. Any time anyone would come to work for us, the first thing they said was how much they enjoyed the change. People who left said the culture at other firms was so different. But I only worked at one place, so it’s just hearsay.

But did the culture at Bear Stearns change while you were there?
Let’s put it this way. It never occurred to me to have a private elevator.

What are you doing now?
I’m handling my own money and dealing with clients. I come in about five days a week.

Any plans to retire?
I’ll retire when I die. I’m 82 now. As long as I’m productive and I enjoy it, I’ll keep working.

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