By Dana Milbank -
06/04/08 "Wa****ngton Post" -- - Meet Alan Schwartz, welfare recipient.
As the chief executive of Bear Stearns, he's getting rather more
public assistance than your typical welfare mom -- specifically, $30
billion in federal loan guarantees to help J.P. Morgan Chase take over
his firm. But then, Schwartz has had rather more than his share of
suffering of late.
As his firm collapsed, he was forced to forgo his entire 2007 bonus,
leaving his compensation for the past five years at a paltry $141
million, according to Business Week. Things have become so bad that,
the Wall Street Journal discovered, Schwartz has had to rent out his
7,850-square-foot home on the ninth green of a suburban New York golf
course -- leaving the poor fellow with only his 17-room, seven-acre
home in Greenwich, his condo in Colorado and the athletic center he
built for Duke University.
Schwartz's tale of woe tugs at the heartstrings all the more because
he and his colleagues at Bear Stearns were, he believes, blameless for
the bankruptcy of two hedge funds and the subsequent collapse of the
85-year-old investment bank. "I am saddened," Schwartz told the Senate
banking committee yesterday. He was saddened that Bear Stearns was
undone by "unfounded rumors and attendant speculation," despite its
impeccable balance sheet.
"Due to the stressed condition of the credit market as a whole and the
unprecedented speed at which rumors and speculation travel and echo
through the modern financial media environment, the rumors and
speculation became a self-fulfilling prophecy," Schwartz told the
senators. "There was, simply put, a run on the bank."
Sen. Richard Shelby (R-Ala.) asked the cor****ate-welfare recipient
whether he shares any blame for his indigent cir***stances. "Do you
believe that your management team has any responsibility for the
company's collapse?"
Schwartz could think of no missteps -- not even his decision to remain
at a conference at the Breakers in Palm Beach while his firm was
imploding. "I just simply have not been able to come up with anything,
even with the benefit of hindsight," said the blameless chief
executive, escorted into the hearing room by superlawyer Robert
Bennett.
Fortunately for Schwartz, he had a sympathetic audience in the banking
committee, whose members have received more than $20 million in
campaign contributions from the securities and investment industry,
according to the Center for Responsive Politics. "I want the witnesses
to know, and others, that as a bottom-line consideration, I happen to
believe that this was the right decision," Chairman Chris Dodd (D-
$5,796,000) said before hearing a single word of testimony.
"You made the right decision," Sen. Evan Bayh (D-$1,582,000) told the
regulators who worked out the loan guarantee.
"The actions had to be done," agreed Sen. Chuck Schumer (D-
$6,162,000).
Only a minority of senators, particularly those with smaller pieces of
the campaign-cash pie, dissented. "That is socialism!" railed Sen. Jim
Bunning (R-$452,000). "And it must not happen again."
To the extent the lawmakers objected to the Bear Stearns bailout, they
worried that the Fed's actions would create a "moral hazard" -- an
economic term of art -- that, as Shelby put it, "encourages firms to
take excessive risk based on the expectations that they will reap all
the profits while the federal government stands ready to cover any
losses if they fail."
Shelby's notion was a curiosity for the senators, who don't often
spend a lot of time worrying about moral hazards. No fewer than five
other senators invoked the phrase. "I think the moral hazard was
minimized," Federal Reserve Chairman Ben Bernanke, one of the
witnesses, reassured the senators.
No moral hazard, however, would interfere with the lawmakers'
compassion for the beleaguered Schwartz and his fellow witness, J.P.
Morgan Chase's Jamie Dimon, who had given a combined $260,000 in
political contributions in recent years -- a small part of the $1.7
million their co-workers contributed in this election cycle alone.
That's a sizable handout -- but a good investment compared with the
$30 billion federal hand-up.
"On behalf of all of us here on this dais, our sympathies go out to
your employees," Dodd told Schwartz after his opening statement.
"There's no adequate way we can express our sorrow to them for what
happened. Obviously, shareholders, same sort of feelings, but
obviously the employees particularly. It's a particularly hard blow."
Of course, some might consider $30 billion an adequate expression of
sympathy, but Dodd was apologetic as he gently probed Schwartz. "You
both will have forgotten more in the next 10 minutes than I'll ever
probably understand about all of this," he told the witnesses, but
didn't the irregular trading at Bear Stearns mean than "more than just
rumors" were behind Bear Stearns's demise?
"You could never get facts out as fast as the rumors," Schwartz
explained. "It looked like there were people that wanted to induce
panic."
Sen. Bob Menendez (D-N.J.) reminded Schwartz that two of the firm's
funds went bankrupt in 2007. "It caused concern, not only here but on
Wall Street," the senator said. "Did that dramatically alter your
behavior?"
Evidently not. "I'm not sure I understand the question," Schwartz
answered.
=A9 2008 The Wa****ngton Post Company
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