The Financial Crisis Inquiry Commission (FCIC) had the former execs of Bear Stearns under the hot lights on Wednesday. It seems it wasn’t their fault, they said. Which caused Chairperson Phil Angelides to quip that the whole thing must have been an “immaculate calamity.” Great line and it’s been going around the blogosphere like a virus.

Here is what the executives said:

• None of the former Bear Stearns executives could point to particular actions they took that they felt contributed to the collapse.
• “The market’s loss of confidence, even though it was unjustified and irrational, became a self-fulfilling prophecy,” Former Bear Stearns Chief Executive Officer James Cayne told the Financial Crisis Inquiry Commission in Washington.
• Mr. Molinaro said that “market fears surrounding mortgage-backed securities and rumors and innuendo in the end resulted in fear-induced, irrational behavior that caused a run on the bank.”
• Cayne said Wednesday that his firm’s risk level was too high in the year before it collapsed. ”That was the business,” Mr. Cayne told a hearing held by the Financial Crisis Inquiry Commission, a congressional panel scrutinizing the financial crisis. “That was really industry practice. In retrospect, in hindsight, I would say leverage was too high. [42:1]
• Alan Schwartz, who became CEO at Bear Stearns after Mr. Cayne, agreed that the firm’s leverage was high, but he also said gross leverage is “one of the most misleading” measurements. Schwartz told the panel the firm was well capitalized and blamed its failure partly on market rumors and speculation. He called Bear Stearns “the first firm to fall victim to the credit and liquidity crisis.”
• Former President Warren J. Spector said Bear Stearns had better risk management than many of its competitors.
• Mr. Cayne said he had hoped that the Securities and Exchange Commission would launch an investigation into a possible conspiracy against Bear Stearns as rumors began circulating that the firm was sinking.
• “Regardless of whether there was a conspiracy or not, the bottom line was that the firm came under attack,” Mr. Cayne said. ”In my heart I believe there was some stuff going on,” Mr. Schwartz said. “Can I prove it? It’s very hard to distinguish when a bunch of people are running out of a crowded theater, which one yelled, ‘Fire.’”

In other words, insanely high leverage (up to 42:1), large holdings of MBS, poor risk management, and overnight borrowing from the repo market ($50 to $60 billion) had nothing to do with their collapse. They did nothing wrong and were the victims of a conspiracy of evil traders who seized upon their temporary lack of liquidity and sent them over the edge when investors irrationally lost confidence. Talking about an alternate universe, these folks should be sent to St. Helena to think about cause and effect for a while. Jimmy Cayne would probably just play bridge there. … Continue reading Bear Stearns: The ‘Immaculate Calamity’