Risk-taker submits to its rival
It weathered the 1929 stock market crash without laying off any workers. It survived the Great Depression that followed, plus wars, recessions and the 1994 bond market crash. But 85-year-old Bear Stearns Cos. met its downfall in the sub-prime mortgage crisis.
Formed in 1923 by Joseph Bear, Robert Stearns and Harold Mayer with $500,000 in capital, Bear Stearns had by last year grown into the nation’s fifth-largest investment bank. It ranked 138 in the Fortune 500 list of the biggest American companies, with $2 billion in profit, more than 14,000 employees and offices in Chicago, Los Angeles, Beijing, London and other major cities.
But over the years, the firm developed a reputation for aggressive securities trading -- due in part to its penchant for selecting up-by-the-bootstrap types to run the company.
Its chief during the 1950s and ‘60s was a former trader, Salim “Cy” Lewis, who started as a runner at Salomon Bros. The chief executive from 1978 to 1993 was Alan “Ace” Greenberg, a Kansas native and former trading desk clerk who oversaw the company’s debut as a publicly traded company in 1985.
The company’s appetite for risk made it a major player in the corporate takeover arena in the 1980s and the expansion into Latin America in the 1990s. But its aggressive style caused problems on several occasions. The firm was badly scarred by the 1994 bond market crash, and it was repeatedly hit with lawsuits related to junk bonds, sales tactics and fizzled stock offerings.
Greenberg’s handpicked successor, James Cayne, was noted for taking a more cautious approach than Greenberg, often bringing in consultants to help with big decisions. But that didn’t prevent the firm from becoming a leading victim of the sub-prime mortgage crisis, which began last year to take a heavy toll on firms that had invested in exotic securities tied to the housing market.
Last summer, Bear Stearns revealed that two of its hedge funds that had invested heavily in sub-prime debt had lost almost all of their value. The funds’ demise set the stage for an $854-million fourth-quarter loss -- the first in the firm’s history -- which was followed by Cayne’s resignation in January. He had been criticized for playing golf and attending a bridge tournament while the sub-prime crisis unfolded.
Cayne was succeeded by Alan Schwartz, who had overseen the firm’s investment banking and stock trading operations. But Schwartz may be remembered mainly for stunning Wall Street last week with the news that his company was running out of cash -- only two days after he had assured investors that Bear Stearns was on solid ground.
For JPMorgan Chase & Co., meanwhile, riding to the rescue marked a return to the company’s roots.
In the late 19th and early 20th centuries, legendary financier John Pierpont Morgan patrolled Wall Street, using his firm’s capital to stem financial panics and stabilize the nation’s economy.
In 1893, he put together a syndicate that essentially bailed out the government by resupplying the Treasury’s depleted gold reserves. During the stock market panic of 1907, he headed a group that directed the disposition of large government deposits, helping to save many banks from failure.
Morgan’s role as a one-man fire brigade was largely supplanted by the creation of the Federal Reserve system in 1913, and his high profile made him a target at a time when the ruthless practices of Wall Street financiers were drawing sharp criticism from populist politicians and others. In 1920, when terrorists set off a massive bomb in the New York financial district, killing 38 people, the explosives-laden wagon was parked directly across the street from Morgan’s headquarters at 23 Wall St.
Over the years, as many of its Wall Street competitors merged with rivals or went out of business, J.P. Morgan & Co. remained an independent force. In 2000, though, the company was acquired by Chase Manhattan Corp. for $28 billion. (Chase itself had merged four years earlier with Chemical Bank.)
The combined entity adopted the name J.P. Morgan Chase and cemented its status as one of the nation’s leading banks with the $58-billion purchase in 2004 of Bank One Corp. Today, it’s the nation’s No. 3 financial services firm in terms of assets, behind Citigroup Inc. and Bank of America Corp. Its CEO, Jamie Dimon, the former head of Bank One, is now regarded by some on Wall Street as the most valuable part of the 2004 deal.
Dimon has quickly established a reputation as a no-nonsense executive who works to cut costs and perks (not a popular notion on Wall Street) while keeping an eye peeled for growth opportunities.
Most important, he appears to have skirted the worst of the sub-prime mortgage meltdown. JPMorgan Chase has posted $3.7 billion in write-downs tied to the crisis. In comparison, Citigroup has recorded $22.4 billion.
That left the company in a position to pick up Bear Stearns for a fraction of what it was worth a few days ago -- a deal that JPMorgan executives are already predicting will net the firm $1 billion in profit.
John Pierpont would have been proud.
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