Buddy, Can You Spare a Billion?
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 corporate-welfare recipient whether he shares any blame for his indigent circumstances. "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."