With the possibility of a full-scale market collapse, the Federal Reserve stepped in to save the once leading global investment bank Bear Stearns by extending a $30 billion credit line to rival JPMorgan to buy out the firm for nearly 1% of its value.
Bear's breakdown could be seen as a management miscalculation after a year of announcing bad quarter after quarter, staff layoffs, and a CEO switch-off, thereby fueling rumors.
But ultimately, the nation's fifth-largest investment firm can find much to blame in its communications strategy. The wave of bad news seemed to strengthen gossip that questioned the company's liquid assets and ability to do business.
It broke its silence with an official refusal of the rumormongers in a March 10 press release stating, "There is absolutely no truth to the rumors of liquidity problems that circulated today in the market."
Apparently that was true. Liquidity was reportedly $18.1 billion on March 10, with a gradual declination throughout the week. But Fortune reported that an undisclosed major bank rebuffed a short-term loan, an effect of the rumors and a harbinger for the run on stock that was to follow.
Both CFO Sam Molinaro and CEO Alan Schwartz soon went on CNBC to deny liquidity issues, but it was too late. In a business where reputation and assurances are essential, Bear had lost by default.
In one day, Bear lost about $10 billion in liquidity, falling from $12.4 billion on the morning of March 13 to $2 billion later in the day. The company's stock fell precipitously the next day. The rumors had been self-fulfilling.
Michael Robinson, SVP at Levick Strategic Communications, agrees.
"There isn't such a thing as reality when dealing with the global economy," Robinson says. "There's no vault under Madison Avenue. [Even if it was] adequately capitalized, that didn't matter once the momentum began, the downward perception spiral, [the rumors] became reality. It's a classic run on the bank, via the Internet."
A former SEC public affairs and policy chief, Robinson oversaw the office during the cases of Enron, Anderson, Worldcom, and Sarbanes-Oxley.
"Outside of a crisis, you have the opportunity to help people understand complicated issues," he says. "Once in the middle of the crisis, there is no time or ability to learn, [you] simply report and regurgitate."
Neither Bear nor JPMorgan could be reached for comment.
Less than a week after Bear was sold, Christopher Cox, SEC chairman, sent a letter to Dr. Nout Wellink, chairman of the Committee on Banking Supervision in Switzerland.
The increasing whispers of liquidity problems that were eventually addressed on March 10 "eroded investor confidence in the firm," according to Cox.
Bear Stearns had the necessary collateral to acquire loans, while "counterparties became less willing to enter into collateralized funding arrangements, [resulting in] a crisis of confidence late in the week," with shares bottoming out at a fraction of their previous price, Cox wrote.
Robinson believes Bear's outcome might have been different had it preempted rumors by trying to educate the general about the nature of its business.
"There should have been an attempt to help people understand that these are liquid investments that are hard to value," Robinson explains. "So, in the event that people ask you how much [they're] worth [during a crisis], they understand that you're telling them the truth and why you're telling them."
However, Dan Spelling, CEO of Spelling Communications, argues that the communications issues occurred at the end of Bear Stearns' crisis.
"Schwartz's reputation and the reputation of the company could have been mitigated if he had come out on Monday or Tuesday, in doing a joint press release with James Dimon [CEO of JP Morgan], as two captains of industry joining together to stabilize the ship," he says.
Regardless of the timeframe, an acknowledgement that trouble was arising, as well as an announcement of a different course of action for future profitability, could have ultimately forestalled Bear Stearns' loss.