Did Bear Stearns melt down — or was it murdered?

That is one of the big questions that Bryan Burrough, who co-wrote
the best-selling 1990 book “Barbarians at the Gate,” tries to answer in
a lengthy article in the August Vanity Fair magazine.

Mr. Burrough spoke with many Bear executives and board members who
described in vivid detail the events that unfolded that fateful week in
March when Bear Stearns was ultimately forced to sell itself to JPMorgan Chase for a pittance.

According to Mr. Burrough’s account, Bear did not have a liquidity
problem, at least at first. In fact, he said it had more than $18
billion in cash to cover its trades when the week began. There were no
major withdrawals until late in the week, after rumors flew that the
company was in trouble.

A top Bear executive told Mr. Burrough, “There was a reason [the
rumor] was leaked, and the reason is simple: someone wanted us to go
down, and go down hard.”

Bear executives frantically tried to find the source of the rumors,
but failed to do so. They have their suspicions, and they have turned
over the names to federal authorities that are investigating the matter.

Two possible sources named in the article — albeit with few supporting details — are hedge funds: Chicago-based Citadel, run by Ken Griffin, and SAC Capital Partners of Stamford, Conn., run by Steven Cohen. The third was one of Bear’s main competitors, Goldman Sachs.

All three firms denied any involvement in spreading the rumor, according to the article.

Several Bear executives also told Mr. Burroughs that an individual
may have been spreading rumors about the firm that week — Jeff Dorman.
Mr. Dorman briefly served as global co-head of Bear’s prime brokerage
business until resigning to take a similar position at Deutsche Bank.
One Bear executive said, “We heard Dorman was saying things last summer
[…] At the time we reached out to Deutsche Bank and told them he better
stop it.”

But the rumors caused a run on the bank and depleted Bear’s capital
base. Alan Schwartz, the firm’s chief executive, then reached out to
his counterpart at JPMorgan, James Dimon, for help. Mr. Schwartz called
Mr. Dimon, who was eating dinner with his family, celebrating his 52nd
birthday.

Mr. Burrough described the call this way:

Dimon stepped outside onto the sidewalk. Schwartz
quickly explained the depth of Bear’s plight and said, ‘We really need
help.’ Still irked, Dimon said, ‘How much?’ ‘As much as 30 billion,’
Schwartz said. ‘Alan, I can’t do that,’ Dimon said. ‘It’s too much.’
‘Well, could you guys buy us overnight?’ ‘I can’t — that’s impossible,’
Dimon replied. ‘There’s no time to do the homework. We don’t know the
issues. I’ve got a board.’

Mr. Dimon then called the New York Federal Reserve and worked out a
deal where the government would lend the money to JPMorgan, which would
then lend it to Bear Stearns. Bear would live another day — but just a
few more. Bear executives thought they had 28 days to pay the money
back. The article recounts a conversation that Mr. Schwartz had with
federal officials informing him that he had far less time than he
thought:

Schwartz’s phone rang. It was Tim Geithner of the Fed,
with the Treasury secretary, Hank Paulson. Paulson came right to the
point. ‘You’ll recall I told you when we cut this facility [that] your
fate was no longer in your hands,’ he told Schwartz. ‘Well, we don’t
plan on being here on Sunday night like we were last night. You’ve got
the weekend to do a deal with J.P. Morgan or anyone else you can find.
But if you’re not done by Monday, we’re pulling the plug.’ And, like
that, Bear’s 28-day cushion evaporated. The Fed’s credit line was good
only till Sunday night.”

The news came as a shock to Bear executives.

When Bear’s chief financial officer, Sam Molinaro, heard the news
from Mr. Schwartz he said, “You’ve got to be kidding me.” The firm was
eventually forced to sell itself to JPMorgan to avoid a bankruptcy
filing.