US concedes Kremlin’s first military response in Georgia was “legitimate”

DEBKAfile Special Report

The US ambassador to Moscow, endorsing Russia's initial moves in Georgia, described the Kremlin's first military response as legitimate after Russian troops came under attack.

This was the first positive statement by an American official about Moscow’s first response to the Georgian invasion of South Ossetia, after a string of condemnations from the heads of the Bush administration. It came from US ambassador John Beyrle, who arrived in Moscow last month, in an interview published by the Russian daily Kommersant Friday, Aug. 22.

DEBKA-Net-Weekly disclosed Friday in its lead article that Washington and Moscow are working quietly and intensively to set up a summit between President George W. Bush and Russian prime minister Vladimir Putin to bring crisis-ridden US-Russian relations back on an even keel. (Both Powers Push for a Bush-Putin Summit.)

Ambassador Beyrle’s words were the first public departure by a US official from the critical remarks of Moscow’s conduct heard uniformly from Bush, Condoleezza Rice and Robert Gates.

The ambassador said Washington had not sanctioned Georgia’s initial actions when on Aug. 8, after a succession of tense skirmishes, Georgian forces attacked South Ossetia, triggering a massive Russian reaction when its peacekeepers came under fire.

“We did not want to see a recourse to violence and force and we made that very, very clear,” said Beyrle. “The fact that we were trying to convince the Georgian side not to take this step is clear evidence that we did not want all this to happen,” he said.

DEBKAfile: This was the first US admission that Georgia was the aggressor in South Ossetia and showed cracks in their hitherto solid support for president Mikhail Saakashvili.

Beyrle said Washington still supports Russia's bid to join the World Trade Organization – an official departure from implied American threats to punish Moscow by international isolation.

The US ambassador’s interview was run in the same Russian paper which quoted Syrian president Bashar Assad on Wednesday, as announcing he was willing to accept Russian missile bases in his country. Beyrle’s words look like a bid to halt the deterioration in Russo-American relations before they veer out of control in a second global arena.

In another telling remark, the US ambassador said: “We have seen the destruction of civilian infrastructure, as well as calls by some Russian politicians to change the democratically-elected government of Georgia. That is why we believe that Russia has gone too far.”

The subtext here, say DEBKAfile’s sources, is that if Moscow continues to pull troops out of Georgia and does not threaten the country’s integrity and regime, Russian and US leaders can do business.

DEBKAfile reported Wednesday, Aug. 20: Back-door US-Russian contacts to de-escalate war of words - after Moscow threatens to nuke Poland

Both powers have begun acting to cool the rhetoric and review relations, after spokesmen in Washington - and especially Moscow - raised the threat level of their oratory to its highest pitch since the Cold War’s end.

Oil jumps $5 on US-Russia tensions, sliding dollar

by STEVENSON JACOBS

NEW YORK (AP) — Oil prices shot up more than $5 a barrel Thursday, rising to the highest level in over two weeks as escalating tensions with Russia stoked fears of supply disruptions to the West.

Crude's rally mimicked the wild price swings seen last month and have at least temporarily halted oil's slide back toward $100 a barrel. A weaker U.S. dollar and worries about tightening output from OPEC countries are also supporting prices.

After days of brushing off geopolitical flare-ups and a tropical storm, oil spiked above $122 a barrel as traders became rattled over increasingly hostile Russian rhetoric toward a U.S.-Poland deal to install a missile defense system in Eastern Europe — a move Moscow views as a threat.

The continued presence of Russian troops in Georgia — a key conduit for Western-bound oil shipments — injected even more bullish sentiment into a market that had appeared to be losing momentum on the idea that high energy prices were curbing demand.

Oil watchers said the market's sudden reaction to the standoff reflects a growing acknowledgment of Russia's bear-like influence over world energy supplies.

"People are finally realizing that this Russian situation has the potential to be bad for a very long time," said Addison Armstrong, director of market research at Tradition Energy in Stamford, Conn. "The Russians have shown evidence that they're willing to cut off energy supplies to advance their aims. There is concern that they are now going to be much more assertive in that area."

Light, sweet crude for October delivery jumped $5.62 to settle at $121.18 a barrel on the New York Mercantile Exchange after earlier rising as high as $122.04, crude's highest trading level since Aug. 4. Crude prices have settled higher for three straight sessions.

Russia is the world's second largest oil exporter after Saudi Arabia. It supplies a quarter of the European Union's oil and half of its natural gas. If those shipments were cut off, EU countries would be forced to seek supplies elsewhere at a time when spare crude capacity is already stretched to an extremely thin margin of about 2 million barrels per day, analysts say.

"If military activity heats up again, pipeline flows into Europe could be disrupted and that would affect the United States as well," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill.

The price jump came as retail gas prices continued to fall, shedding more than a penny overnight to a new national average of $3.702, according to auto club AAA, the Oil Price Information Service and Wright Express. Prices have now fallen 10 percent from record highs above $4 a gallon set July 17, but the pace of the drop off could slow if oil holds onto Thursday's gains.

"This is probably about it in terms of a retail gas drop. We may be a few cents away from the August bottom," said Tom Kloza, publisher and chief analyst at the Oil Price Information Service in Wall, N.J.

Prices were supported Thursday by a weaker dollar compared to the euro. The 15-nation currency rose to $1.4874 in afternoon trading in New York from $1.4768 late Wednesday. A falling greenback encourages investors to seek commodities such as oil as a hedge against inflation and a weaker dollar.

"The slide in the dollar has taken some of the wind out of the bear's sail in the energy complex," oil analyst and trader Stephen Schork said in a note.

Oil's rise came despite a huge increase in U.S. crude inventories reported Wednesday. But other supplies were less abundant.

Gasoline inventories shrank by a larger-than-expected 6.2 million barrels to below-average levels in the week ended Aug. 15, the U.S. Energy Department's Energy Information Administration said Wednesday. Meanwhile, distillate inventories — which include heating oil and diesel fuel — rose by less than expected, the EIA said.

That was enough to offset a hefty 9.4 million barrel rise in U.S. crude stocks last week when the average analyst forecast had been for a 1.7 million barrel increase, according to energy information provider Platts.

But growing concerns over Russia's standoff with Georgia and NATO grabbed the attention of most oil traders Thursday.

On Wednesday, Secretary of State Condoleezza Rice and her Polish counterpart signed a deal to build an American missile defense base in Poland. Last week, a top Russian general warned Poland was risking an attack, possibly a nuclear one, by developing the base.

JBC Energy in Vienna said the "political risk premium of oil prices" had widened to more than $10 a barrel, which could be attributed at least in part to the Russian angle.

Investors are also anxious about the next Organization of the Petroleum Exporting Countries meeting in early September. Venezuelan Oil Minister Rafael Ramirez said he might propose an output cut at the next OPEC meeting.

U.S. energy consultancy Cameron Hanover noted in its daily market report that some members of the oil group were "terrified of allowing Western countries to build any kind of cushion for the unexpected, because it has the potential to return prices to normal or sustainable economic levels" and interfere with OPEC's ability to keep building massive foreign currency reserves.

Oil prices have rebounded after falling about $35, or nearly a quarter, from their all-time trading record $147.27 on July 11. Many investors expect that high gasoline prices and slowing economic growth in the U.S., Europe and Japan will undermine global energy demand.

In other Nymex trading, heating oil futures rose 13.71 cents to settle at $3.3006 a gallon, while gasoline prices gained 13.49 cents to settle at $3.0452 a gallon. Natural gas futures increased 17.5 cents to settle at $8.252 per 1,000 cubic feet.

In London, October Brent crude rose $5.83 to $120.19 a barrel.

Information sparse on cyanide death

Family seeks to reconstruct man's last days as U.S. probe continues

by Andrew Seymour
Ottawa Citizen

OTTAWA - An Ottawa man found dead of cyanide poisoning in a Denver hotel room Monday had been in contact with a female relative in the Colorado city in the days before his death, according to the director of a U.S.-based Somali activist group who is now assisting the man's family.

Omar Jamal, executive director of the Somali Justice Center in St. Paul, Minnesota, said Saleman Abdirahman Dirie, 29, had been speaking with the relative before travelling to the city about four or five days before his death.

Mr. Dirie was buried in a Denver cemetery Thursday amid a NBC news report that he committed suicide.

The report, citing unnamed federal officials, said it's believed Mr. Dirie mixed sodium cyanide with water and drank it. According to the NBC news report, traces of cyanide were found in a glass next to the bed.

Spokespeople for the Denver police and FBI would not confirm the report Thursday, and Denver's deputy chief coroner, Michelle Weiss-Samaras, was adamant that her office had not determined the manner of Mr. Dirie's death. However, they could confirm he died of cyanide poisoning, she said.

Mr. Jamal, a prominent Somali activist who said he is acting as a spokesman for Mr. Dirie's family, said they could not verify the suicide reports.

He added it was not yet clear whether Mr. Dirie - who suffered from schizophrenia - was travelling to Denver to meet the relative.

According to Mr. Jamal, Mr. Dirie left Ottawa on or about Aug. 7 by bus for Denver. That contradicted information provided by a spokesman for U.S. Immigration and Customs Enforcement Thursday, whose records indicate Mr. Dirie entered the U.S. on Aug. 5 at a border crossing in Detroit.

Additional information, such as whether he was on a bus or travelling by car, was not available.

Mr. Jamal said he planned to talk with the woman Mr. Dirie spoke to about what she knows about his visit. According to Mr. Jamal, the relative's phone number was one of the last numbers Mr. Dirie called from his cellphone in the days before his death.

Mr. Jamal said the Somali community has been dismayed following rampant speculation that Mr. Dirie may have been involved in a terrorist plot targeting the Democratic National Convention, which is to open in Denver on Aug. 25.

Denver police have since rejected any suggestions Mr. Dirie's death is terrorism-related, calling it an "isolated incident."

However, the FBI's joint terrorism task force was involved in the investigation after Mr. Dirie's body was found next to a jar of a powdery substance that was later identified as sodium cyanide, the crystal form of the chemical.

According to a report in the Rocky Mountain News, the FBI recovered a jar labelled hazardous, which contained about half a litre of white powder.

Denver police have said foul play is not suspected in Mr. Dirie's death.

They were releasing no further information Thursday about why they think Mr. Dirie was in possession of the sodium cyanide.

Mr. Dirie's sister told the Citizen Wednesday that her brother suffered from mental illness, and she angrily rejected any suggestion that he was tied to terrorism or had any intention of harming Democratic presidential nominee Barack Obama.

She said her brother was on vacation when he died.

He was not suicidal, and had been taking his medication regularly since being diagnosed with schizophrenia about three years ago, she said.

He never got into trouble with the law, according to friends, family and police.

A Canadian citizen, Mr. Dirie had lived in Ottawa for 13 years. His family arrived as refugees from Somali when he was 17.

Mr. Jamal chastised both the FBI and the media for making a "rush to judgment" on the case by fuelling speculation Mr. Dirie was in possession of the cyanide for terrorist purposes.

"There are more questions than answers," he said, adding Mr. Dirie's family is "as confused as everyone else" about what has happened.

McCain aide lobbied for republic of Georgia

by Pete Yost
San Francisco Chronicle

WASHINGTON -- John McCain's chief foreign-policy adviser and his business partner lobbied the senator or his staff on 49 occasions in a 3 1/2-year span while being paid hundreds of thousands of dollars by the government of the former Soviet republic of Georgia.

The payments raise ethical questions about the intersection of Randy Scheunemann's personal financial interests and his advice to the Republican presidential candidate who is seizing on Russian aggression in Georgia as a campaign issue.

McCain warned Russian leaders Tuesday that their assault in Georgia risks "the benefits they enjoy from being part of the civilized world."

On April 17, a month and a half after Scheunemann stopped working for Georgia, his partner signed a $200,000 agreement with the Georgian government. The deal added to an arrangement that brought in more than $800,000 to the two-man firm from 2004 to mid-2007. For the duration of the campaign, Scheunemann is taking a leave of absence from the firm.

"Scheunemann's work as a lobbyist poses valid questions about McCain's judgment in choosing someone who -- and whose firm -- are paid to promote the interests of other nations," said New York University law professor Stephen Gillers. "So one must ask whether McCain is getting disinterested advice, at least when the issues concern those nations."

McCain has been to Georgia three times since 1997 and "this is an issue that he has been involved with for well over a decade," McCain campaign spokesman Brian Rogers said.

McCain's strong condemnation in recent days of Russia's military action against Georgia as "totally, absolutely unacceptable" reflects long-standing ties between McCain and hard-line conservatives such as Scheunemann, an aide in the 1990s to then-Senate Majority Leader Trent Lott.

Pound of cyanide found in room where man died

DENVER (AP) — Authorities in Denver say they have found about a pound of highly toxic sodium cyanide in a hotel room where a man's body was discovered.

Police say foul play is not suspected and FBI spokeswoman Kathy Wright said Wednesday there was no apparent connection to terrorism.

The man's body was found Monday at the Burnsley Hotel about four blocks from the Colorado state Capitol, and investigators say he had been dead for several days.

Police on Wednesday identified a white powder found in the room as sodium cyanide, which can be used as a pesticide or to extract gold from ore.

The medical examiner's office says it is awaiting test results to determine whether cyanide killed the 29-year-old Canadian man.

Gunman kills Arkansas Democratic Party chairman

by ANDREW DeMILLO
AP

LITTLE ROCK, Ark. - A man barged into the Arkansas Democratic headquarters and opened fire Wednesday, fatally shooting the state party chairman before speeding off in his pickup. Police later shot and killed the suspect after a 30-mile chase.

Police said they don't know the motive of the suspect, who they described as about 50 years old but whose name has not been released. However, they said that moments after the shooting he pointed a handgun at the building manager at the nearby the Arkansas Baptist headquarters. He told the manager "I lost my job," said Dan Jordan, a Baptist convention official.

Chairman Bill Gwatney died four hours after the shooting. The 48-year-old former state senator had been planning to travel to the Democratic National Convention later this month as a superdelegate. He had backed Hillary Rodham Clinton but endorsed Barack Obama after she dropped out of the race.

Clinton and her husband, former President and former Arkansas Gov. Bill Clinton, issued a statement saying Gwatney was "not only a strong chairman of Arkansas' Democratic Party, but ... also a cherished friend and confidante."

Witnesses said the gunman entered the party offices shortly before noon and said he wanted to see Gwatney.

"He said he was interested in volunteering, but that was obviously a lie," said 17-year-old party volunteer Sam Higginbotham. He said that when the suspect was refused a meeting with Gwatney, he pushed past employees to reach the chairman's office.

Little Rock police spokesman Lt. Terry Hastings said the suspect and Gwatney introduced themselves to one another, at which time the suspect "pulled out a handgun and shot Gwatney several times." Hastings didn't say what the two discussed, but said their discussion was not a heated one.

After the suspect avoided spike strips and a roadblock along U.S. 167 near Sheridan, police rammed his car, spinning it, said Grant County Sheriff Lance Huey. He got out of his truck and began shooting, and state police and sheriff's deputies fired back, striking him several times, he said.

Hastings said investigators found at least two handguns in the suspect's truck.

The state Capitol was locked down for about an hour until police got word the gunman had been captured, said Arkansas State Capitol police Sgt. Charlie Brice.

Gov. Mike Beebe, a Democrat who served with Gwatney in the state Senate, had been on a flight to Springdale in northwestern Arkansas. He returned to Little Rock and joined an impromptu vigil at University Hospital after what he called a "shocking and senseless attack." Gwatney had been Beebe's finance chairman during the governor's 2006 campaign.

"Arkansas has lost a great son, and I have lost a great friend. There is deep pain in Arkansas tonight because of the sheer number of people who knew, respected and loved Bill Gwatney," Beebe said.

Karen Ray, executive director of the Republican Party of Arkansas, sent her workers home early "out of an abundance of caution."

"Our hearts go out to everyone at the Democratic headquarters. What a tragedy," Ray said. "This is just a very upsetting, troubling and scary thing for our staff as well."

Sarah Lee, a sales clerk at a flower shop across street from the party headquarters, said that around noon Gwatney's secretary ran into the shop and asked someone to call 911.

Lee said the secretary told her the man had come into the party's office and asked to speak with Gwatney. When the secretary said she wouldn't allow him to meet with Gwatney, the man went into his office and shot him, Lee said.

Last November, a distraught man wearing what appeared to be a bomb walked into a Clinton campaign office in New Hampshire and demanded to speak to the candidate about access to mental health care. A hostage drama dragged on for nearly six hours until he peacefully surrendered.

The confrontation brought Clinton's campaign to a standstill just five weeks before the New Hampshire primary. Security for her was increased as a precaution. She said she did not know the suspect.

Follow the pipeline

On Conflict in Georgia

by Mark David Iden
San Francisco Chronicle

The war in Georgia and the inadequacy of the West's response points again to the power of the Russian energy monopoly.

Europe fears protesting too much, as this might induce Russia to reduce the flow of natural gas to the continent this coming winter (Russia presently supplies 50 percent of Europe's natural gas).

Whether or not Russia marches on to Tibilisi, its assault on Georgia has further strengthened Russia's hold on Europe: Financiers are unlikely to back new proposed pipeline systems bringing Caspian oil and gas to the United States and Europe via Georgia.

This suggests that growing Caspian oil and gas production would have to use the vast Russian pipeline network to get to market.

The most sensible and cost-effective way out of this is to transport the resources by pipeline south to Iran. A competitive Iranian alternative would thwart Russian designs, and help bring down natural gas prices.

Georgia war is a neocon election ploy

by Robert Scheer
Creators Syndicate, Inc.

Is it possible that this time the October surprise was tried in August, and that the garbage issue of brave little Georgia struggling for its survival from the grasp of the Russian bear was stoked to influence the U.S. presidential election?

Before you dismiss that possibility, consider the role of one Randy Scheunemann, for four years a paid lobbyist for the Georgian government, ending his official lobbying connection only in March, months after he became Republican presidential candidate Sen. John McCain's senior foreign policy adviser.

Previously, Scheunemann was best known as one of the neoconservatives who engineered the war in Iraq when he was a director of the Project for a New American Century. It was Scheunemann who, after working on the McCain 2000 presidential campaign, headed the Committee for the Liberation of Iraq, which championed the U.S. Iraq invasion.

There are telltale signs that he played a similar role in the recent Georgia flare-up. How else to explain the folly of his close friend and former employer, Georgian President Mikhail Saakashvili, in ordering an invasion of the breakaway region of South Ossetia, which clearly was expected to produce a Russian counter-reaction. It is inconceivable that Saakashvili would have triggered this dangerous escalation without some assurance from influential Americans he trusted, like Scheunemann, that the United States would have his back. Scheunemann long guided McCain in these matters, even before he was officially running foreign policy for McCain's presidential campaign.

In 2005, while registered as a paid lobbyist for Georgia, Scheunemann worked with McCain to draft a congressional resolution pushing for Georgia's membership in NATO. A year later, while still on the Georgian payroll, Scheunemann accompanied McCain on a trip to that country, where they met with Saakashvili and supported his bellicose views toward Russia's Vladimir Putin.

Scheunemann is at the center of the neoconservative cabal that has come to dominate the Republican candidate's foreign policy stance in a replay of the run-up to the war against Iraq. These folks are always looking for a foreign enemy on which to base a new Cold War, and with the collapse of Saddam Hussein's regime, it was Putin's Russia that came increasingly to fit the bill.

Yes, it sounds diabolical, but that may be the most accurate way to assess the designs of the McCain campaign in matters of war and peace. There is every indication that the candidate's demonization of Putin is an even grander plan than the previous use of Hussein to fuel American militarism with the fearsome enemy that it desperately needs.

McCain gets to look tough with a new Cold War to fight while Democratic presidential candidate Sen. Barack Obama, scrambling to make sense of a more measured foreign policy posture, will seem weak in comparison. Meanwhile, the dire consequences of the Bush legacy McCain has inherited, from the disaster of Iraq to the economic meltdown, conveniently will be ignored. But it will provide the military-industrial complex, which has helped bankroll the neoconservatives, with an excuse for ramping up a military budget that is already bigger than that of the rest of the world combined.

What is at work here is a neoconservative, self-fulfilling prophecy in which Russia is turned into an enemy that ramps up its largely reduced military, and Putin is cast as the new Joseph Stalin bogeyman, evoking images of the old Soviet Union. McCain has condemned a "revanchist Russia" that should once again be contained. Although Putin has been the enormously popular elected leader of post-Communist Russia, it is assumed that imperialism is always lurking, not only in his DNA but in that of the Russian people.

How convenient to forget that Stalin was a Georgian, and indeed if Russian troops had occupied the threatened Georgian town of Gori, they would have found a museum still honoring their local boy, who made good by seizing control of the Russian revolution. Indeed five Russian bombs were allegedly dropped on Gori's Stalin Square on Tuesday.

It should also be mentioned that the post-Communist Georgians have imperial designs on South Ossetia and Abkhazia. What a stark contradiction that the United States, which championed Kosovo's independence from Serbia, now is ignoring Georgia's invasion of its ethnically rebellious provinces.

For McCain to so fervently embrace Scheunemann's neoconservative line of demonizing Russia in the interest of appearing tough during an election is a reminder that a senator can be old and yet wildly irresponsible.

Sovereign Funds Become Big Speculators

Pools of Foreign Wealth Move Into Commodities
by David Cho
Washington Post

Sovereign wealth funds, the massive investment pools run by foreign governments, are now among the biggest speculators in the trading of oil and other vital goods like corn and cotton in the United States, according to interviews with brokers who handle their investments at leading Wall Street banks, veteran traders and congressional investigators.

Some lawmakers say the unregulated activity of sovereign wealth funds and other speculators such as hedge funds has contributed to the dramatic swing in oil prices in recent months.

The agency regulating the market said it had not picked up on this activity by sovereign wealth funds. In a June letter, the Commodity Futures Trading Commission told lawmakers that its monitoring showed that these funds were not a significant factor in commodity trading.

But the CFTC is not detecting the growing influence of foreign funds because they invest through Wall Street brokers known as "swap dealers" who often operate on unregulated markets, sources familiar with the transactions said.

Several Democrats said the Republican-led CFTC won't use its authority to clamp down on such unregulated activity because it doesn't want to hurt the influential Wall Street firms it favors.

"It took prodding from Congress to persuade the CFTC to finally request information from swap dealers about the participation of sovereign wealth funds in the commodity markets," said Rep. John D. Dingell (D-Mich.), chairman of the Committee on Energy and Commerce. "The regulatory body in charge of policing our futures markets has been remarkably incurious about the role sovereign wealth funds play in commodity markets."

CFTC officials say their data show that fundamental factors of supply and demand, not financial actors, are the best explanation for the run-up in oil prices and their precipitous fall.

The officials have ordered swap dealers to open their books and reveal to the agency more information about the unregulated activities of sovereign wealth funds and other financial actors, CFTC spokeswoman Ianthe Zabel said. The findings will be published in a report in mid-September, she said.

Like most speculators, sovereign wealth funds have moved into U.S. commodity exchanges for profit, not to accumulate goods. In general, they make these investments through index funds, a kind of mutual fund composed of commodity futures contracts, which bet on the price the goods will fetch at a future date.

The index allows investors to enjoy the returns of a commodity investment without actually buying futures contracts on an exchange. For this reason, the extent of their activities may be known only to the swap dealers at investment banks such as Goldman Sachs, Lehman Brothers and Morgan Stanley, which handle such transactions.

The foreign funds involved in commodity trading are not those from oil-producing nations from the Middle East, according to a large swap dealer. Instead they are mainly from countries, such as those in Asia, that do not already make money from producing oil.

While it is difficult to quantify how large foreign funds have become, they now represent 12 percent or more of the overall commodity business for some of the largest investment banks, said an industry veteran who spoke on condition of anonymity because he had proprietary data about those firms.

Other sources familiar with the activities of sovereign wealth funds spoke on condition of anonymity because their firms did not give them permission to speak publicly.

After spiking to a record high of $147.27 a barrel on July 11, crude oil settled at $114.45 yesterday, a plummet of 22 percent in a few weeks.

Although some analysts have attributed the recent reversal in oil prices to a stronger dollar and a sluggish U.S. economy, other experts in commodity trading have suggested that the price shifts have been accentuated by unregulated, speculative activity.

Over the past year, sovereign wealth funds have become increasingly active in the broader U.S. markets, investing more than $40 billion in Wall Street's biggest names, including UBS, Morgan Stanley and Bear Stearns. China put $3 billion of its $200 billion fund into private-equity giant Blackstone. Abu Dhabi, part of the United Arab Emirates, invested $1.35 billion of its estimated $875 billion fund into District private-equity giant Carlyle Group.

About two dozen countries have established or are in the process of forming large funds, including Iran, Norway, Singapore, Kuwait, Australia, Russia and Libya. While precise data about each of the funds can be difficult to obtain, Wall Street analysts say their collective value has exceeded $2 trillion and will probably grow at least fivefold by 2012.

In a June 20 letter to the House Committee on Energy and Commerce, CFTC acting chairman Walter Lukken wrote, "The growth of sovereign wealth funds and their collective investment in U.S. markets is of interest to a number of U.S. regulators."

He said the agency was aware of only one sovereign wealth fund with large holdings trading on regulated U.S. exchanges. He added that his staff had "not observed any positions of sovereign wealth funds in the data received to date" from a London exchange that shares information with the CFTC. Trading activity anywhere else would not be regulated or captured by CFTC surveillance reports, agency officials said.

Some Democrats greeted Lukken's responses with skepticism. Sen. Maria Cantwell (D-Wash.), for one, has put a hold on Lukken's nomination in the Senate, preventing him from becoming the permanent chairman of the CFTC on the grounds that he has not kept speculation under control.

Speculators, she said, "are causing a colossal impact on the markets, and we don't have the right team to oversee and analyze whether the consumer is being protected."

The CFTC, she added, is "banking on this being too complicated for anyone to understand."

Denver police suspect cyanide death at hotel

DENVER (AP) — Officials performing an autopsy Monday noticed an indication of cyanide poisoning, leading police to cordon off streets as they investigated at the downtown hotel where the man's body was found.

The Burnsley Hotel was later declared safe, though the floor where the body was found remained off limits, said Fire Department spokesman Alex Paez. Streets reopened later Monday.

A hazardous materials team found white powder in a bottle in the man's fourth-floor room and was trying to determine what it was, Paez said.

It appears the man was dead for several days before his body was found, police spokesman John White said. Nothing suggests foul play.

The Democratic National Convention opens in Denver this month, but The Burnsley is not on the list of hotels where delegates are staying.

Five rooms on the fourth floor were occupied, and those guests were moved to other floors.

The Centers for Disease Control and Prevention describe cyanide as a fast-acting chemical that prevents the body from processing oxygen. It can be used in manufacturing, metallurgy and pest extermination.

BTC oil pipeline fire extinguished: BP

by Orhan Coskun

ANKARA (Reuters) - A fire on the Baku-Tbilisi-Ceyhan (BTC) oil pipeline in Turkey was extinguished on Monday, a senior source at BP, a major shareholder in the pipeline, told Reuters.

The pipeline carrying Azeri crude, which passes through Georgia, was hit by an explosion on Turkish territory two days before conflict began over the South Ossetia region.

Repairs may not be finished for one to two weeks or longer, according to a source at Turkey's state-owned pipeline company Botas. No oil is currently flowing through the pipeline.

World oil prices rose last week after the announcement of the blaze, and estimates that it could take up to two weeks to get the pipeline on stream again.

"Today we put the fire out, and immediately after that we started trying to cool down the pipeline. As soon as the cooling process ends, we will begin assessing the damage and start repairs," the BP source, who declined to be named, said.

The pipeline normally carries Azeri oil which is high quality and commands a premium. The $4 billion BTC pipeline can pump up to a million barrels per day, the equivalent of more than 1 percent of world supply, from fields in the Azeri sector of the Caspian Sea to Ceyhan on the Turkish Mediterranean coast.

Traders said loadings of Azeri crude from Ceyhan would be delayed by about three weeks and lifting dates for September were not yet available because of the pipeline damage.

The shipping schedule for Azeri crude is normally released around the ninth of every month.

The biggest hindrance to firefighting efforts was oil that settled in the pipeline since the flow was stopped last Tuesday.

Technical teams sent to the site of the fire will assess the damage and the BTC consortium will decide how to proceed.

One repair method put forth by the teams could take two weeks or longer, pushing back original estimates for a date to get the pipeline back on line.

Britain's BP Plc owns 30.1 percent of BTC, while Azeri state oil company Socar holds 25 percent. Other shareholders include U.S. companies Chevron and ConocoPhillips, Norway's StatoilHydro, Italy's ENI and France's Total.

Kurdish separatists claimed responsibility for the explosion and said they would carry out more attacks on economic targets inside Turkey.

Military and local official sources said the fire was due to a technical error and was not due to sabotage.

Bringing Down Bear Stearns

On Monday, March 10, the rumor started: Bear Stearns was having liquidity problems. In fact, the maverick investment bank had around $18 billion in cash reserves. But soon the speculation created its own reality, and the race was on to keep Bear’s crisis from ravaging Wall Street. With the blow-by-blow from insiders, Bryan Burrough follows the players—Bear’s stunned executives, trigger-happy reporters at CNBC, a nervous Fed, a shadowy group of short-sellers—in what some believe was the greatest financial scandal in history.

by Bryan Burrough
Vanity Fair

On Monday, March 10, Wall Street was tense, as it had been for months. The mortgage market had crashed; major companies like Citigroup and Merrill Lynch had written off billions of dollars in bad loans. In what the economists called a “credit crisis,” the big banks were so spooked they had all but stopped lending money, a trend which, if it continued, would spell disaster on 21st-century Wall Street, where trading firms routinely borrow as much as 50 times the cash in their accounts to trade complex financial instruments such as derivatives.

Still, as he drove in from his Connecticut home to the glass-sheathed Midtown Manhattan headquarters of Bear Stearns, Sam Molinaro wasn’t expecting trouble. Molinaro, 50, Bear’s popular chief financial officer, thought he could spot the first rays of daylight at the end of nine solid months of nonstop crisis. The nation’s fifth-largest investment bank, known for its notoriously freewheeling—some would say maverick—culture, Bear had pledged to fork over more than $3 billion the previous summer to bail out one of its two hedge funds that had bet heavily on subprime loans. At the time, rumors flew it would go bankrupt. Bear’s swashbuckling C.E.O., 74-year-old Jimmy Cayne, pilloried as a detached figure who played bridge and rounds of golf while his firm was in crisis, had been ousted in January. His replacement, an easygoing 58-year-old investment banker named Alan Schwartz, was down at the Breakers resort in Palm Beach that morning, rubbing elbows with News Corp.’s Rupert Murdoch and Viacom’s Sumner Redstone at Bear’s annual media conference.

It was an uneventful morning—at first. Molinaro sat in his sixth-floor corner office, overlooking Madison Avenue, catching up on paperwork after a week-long trip visiting European investors. Then, around 11, something happened. Exactly what, no one knows to this day. But Bear’s stock began to fall. It was then, questioning his trading desks downstairs, that Molinaro first heard the rumor: Bear was having liquidity troubles, Wall Street’s way of saying the firm was running out of money. Molinaro made a face. This was crazy. There was no liquidity problem. Bear had about $18 billion in cash reserves.

Yet the whiff of gossip Molinaro heard that morning was the first tiny ripple in what within hours would grow into a tidal wave of rumor and speculation that would crash down upon Bear Stearns and, in the span of one fateful week, destroy a firm that had thrived on Wall Street since its founding, in 1923.

The fall of Bear Stearns wasn’t just another financial collapse. There has never been anything on Wall Street to compare to it: a “run” on a major investment bank, caused in large part not by a criminal indictment or some mammoth quarterly loss but by rumor and innuendo that, as best one can tell, had little basis in fact. Bear had endured more than its share of self-inflicted wounds in the previous year, but there was no reason it had to die that week in March.

What happened? Was it death by natural causes, or was it, as some suspect, murder? More than a few veteran Wall Streeters believe an investigation by the Securities and Exchange Commission will uncover evidence that Bear was the victim of a gigantic “bear raid”—that is, a malicious attack brought by so-called short-sellers, the vultures of Wall Street, who make bets that a firm’s stock will go down. It’s a surprisingly difficult theory to prove, and nothing short of government subpoenas is likely to do it. Faced with a thicket of lawsuits and federal investigations, not a soul in Bear’s boardroom will speak for the record, but on background, a few are finally ready to name names.

“I don’t know of any firm, no matter the capital, that could have withstood that kind of bombardment by the shorts,” says a vice-chairman of another major investment bank. “This was not about capital. It was about people losing confidence, spurred on by rumors fueled by people who had an interest in the fall of Bear Stearns.”

He pauses to let the idea sink in. “If I had to pick the biggest financial crime ever perpetuated,” he concludes, “I would say, ‘Bear Stearns.’ ”

At Phi Kappa Wall Street, most of the frat boys are instantly recognizable. There’s the big, backslapping Irishman, Merrill Lynch, the humorless grind, Goldman Sachs, and the straitlaced rich kid, Morgan Stanley. And then, off in the corner, wearing its beat-up leather jacket and nursing a cigarette, was the tough-guy loner, scrawny Bear Stearns, who disdained secret handshakes and towel snapping in favor of an extended middle finger toward pretty much everyone. Bear was bridge-and-tunnel and proud of it. Since the days when the Goldmans and Morgans cared mostly about hiring young men from the best families and schools, “the Bear,” as old-timers still call it, cared about one thing and one thing only: making money. Brooklyn, Queens, or Poughkeepsie; City College, Hofstra, or Ohio State; Jew or Gentile—it didn’t matter where you came from; if you could make money on the trading floor, Bear Stearns was the place for you. Its longtime chairman Alan “Ace” Greenberg even coined a name for his motley hires: P.S.D.’s, for poor, smart, and a deep desire to get rich.

Bear Stearns was an investment bank, but the traditional banking roles, such as advising on corporate mergers and trading stocks, were always an afterthought there. What the P.S.D.’s at Bear Stearns did best was trade bonds. The firm’s executive history was the story of three bond traders, each with his own outsize personality. From the mid-1930s till the late 1970s, Bear was the province of Salim “Cy” Lewis, the cantankerous Wall Street legend who forged a cutthroat culture run less as a modern corporation than as a series of squabbling fiefdoms, each vying for his approval. Ace Greenberg, an avuncular sort who kept his desk on the trading floor and answered his own phone, took over after Lewis’s death, in 1978, and while his edges were softer, Bear remained a Mametesque pressure cooker where top traders could pull down $10 million a year while runners-up were tossed into the alley.

The third man, the one who oversaw Bear’s demise after nudging Greenberg aside in 1993, was his longtime protégé, Jimmy Cayne. Cayne was a cigar-chomping kid from Chicago’s South Side, who in his early years sold scrap metal for his father-in-law. After a divorce, he found himself driving a New York taxi while pursuing his beloved pastime, playing bridge. It was at a bridge table, in fact, that Greenberg, himself an ardent player, met Cayne and lured him to Bear Stearns. “If you can sell scrap metal,” Bear lore quotes Greenberg telling Cayne, “you can sell bonds.” Cayne found his life’s calling on the trading floor, earning his bones by moving huge numbers of New York municipal bonds during the city’s financial crisis of the 1970s. He became the embodiment of Bear Stearns, a go-it-alone maverick who hunkered down in his smoke-filled sixth-floor office, not giving a rat’s ass what Wall Street thought so long as Bear made money. When an early hedge fund, Long-Term Capital Management, collapsed in 1998, losing $4.6 billion and triggering fears of a global financial meltdown, Cayne famously refused to join the syndicate of Wall Street firms that bailed it out. Instead, while much of the Street reaped billions trading stocks during the booming 1990s, Cayne kept Bear focused on bonds and the grimier corners of Wall Street plumbing, clearing trades for just about anyone, however notorious their reputation.

Through it all, Bear remained proudly independent, refusing to sell out to larger firms. Cayne listened to lots of offers, especially after his pal Don Marron sold rival PaineWebber to U.B.S. for $12 billion, in 2000, but Cayne preferred life as it was. Senior managers had wide autonomy, and in good years Bear all but ran itself, allowing Cayne to spend weeks away from his desk at bridge tournaments or playing golf near his vacation home on the Jersey Shore. In recent years much of the oversight fell to Cayne’s two co-presidents, Alan Schwartz, a onetime pitcher at Duke University who specialized in media mergers, and another bridge aficionado, a talented trader named Warren Spector. Bear continued to thrive, piling up record profits all through the 2000s, and Bear’s stock price rose nearly 600 percent during Cayne’s 14 years as C.E.O.
Treasury Secretary Henry Paulson, J. P. Morgan Chase C.E.O. Jamie Dimon, and Federal Reserve Chairman Ben Bernanke

From left: Treasury Secretary Henry Paulson, J. P. Morgan Chase C.E.O. Jamie Dimon, and Federal Reserve Chairman Ben Bernanke.

Eventually Bear, like most on Wall Street, branched into asset management, forming a series of large funds that put investor money to work in a variety of stocks, bonds, and derivatives. Unlike some firms, however, Bear promoted its own traders rather than outsiders to run these funds, and decided that each would specialize in a specific type of security, rather than a diversified mix. As co-president, Alan Schwartz, for one, questioned the move, thinking it was a bit risky, but deferred to the thinking of Spector and others.

Everything went swimmingly, in fact, until poor Ralph Cioffi ran into trouble.

Cioffi, 52, was a Bear lifer, a wisecracking salesman who commuted to Midtown from Tenafly, New Jersey, to oversee two hedge funds at Bear Stearns Asset Management, an affiliate known as B.S.A.M. His main fund, the High-Grade Structured Credit Strategies fund, plowed investor cash into complex derivatives backed by home mortgages. For years he was spectacularly profitable, posting average monthly gains of one percent or more. But as the housing market turned down in late 2006, his returns began to even out. Like many a Wall Street gambler before him, Cioffi decided to double-down, creating a second fund. Whereas the first borrowed, or “leveraged,” as much as 35 times its available money to trade, the new fund would borrow an astounding 100 times its cash.

It blew up in his face. As the housing market worsened during the winter of 2006–7, Cioffi’s returns for both funds plummeted. He urged investors to stay put, promising an imminent turnaround. (Cioffi and a colleague, Matthew Tannin, were indicted in June for misleading investors.) When the market downturn accelerated last spring, leaving Cioffi with billions of dollars in money-losing mortgage-backed securities no one would take off his hands, he concocted an audacious way to rescue himself, planning an initial offering for a new company called Everquest Financial that would sell its shares to the public. Everquest’s main asset, it turned out, was billions of dollars of Cioffi’s untradable securities, or, as Wall Street termed it, “toxic waste.”

Foisting his garbage onto the public might have worked, but financial journalists at BusinessWeek and The Wall Street Journal discovered the scheme in early June. Once the truth was out, B.S.A.M. had no choice but to withdraw Everquest’s offering, at which point Cioffi was all but doomed. Investors were beginning to flee. Worse, some of Cioffi’s biggest lenders, firms like Merrill Lynch and J. P. Morgan Chase, were threatening to seize his collateral, which was about $1.2 billion. In a panic, Cioffi and his aides convened a meeting of creditors, where they asked for more time and more money. The gathering turned angry when several in the audience urged Bear to pony up its own money to save the funds, an alternative Bear executives dismissed out of hand.

Afterward, Warren Spector got on the phone with a series of Cioffi’s lenders, including a group of J. P. Morgan executives. “I’ll never forget this,” one recalls. “Spector gets on and goes, ‘You guys don’t know what you’re talking about—you don’t understand the business; only [Cioffi and colleagues] understand the business; only we are standing in the way of them finishing this [rescue] deal.’ ” It was a classic display of Bear-style arrogance, and it incensed the Morgan men. Steve Black, Morgan’s head of investment banking, telephoned Alan Schwartz and said, “This is bullshit. We’re defaulting you.”

Merrill Lynch, in fact, did confiscate Bear’s collateral—an aggressive and highly unusual move that forced Cayne into the unthinkable: using Bear’s own money, about $1.6 billion, to bail out one of Cioffi’s two troubled funds, both of which ultimately filed for bankruptcy. It was a massive blow not only to Bear’s capital base but to its reputation on Wall Street. Inside the firm, much of the blame fell squarely on Spector, who oversaw Cioffi and other B.S.A.M. managers. “Whenever someone raised a question, Warren would always say, ‘Don’t worry about Ralph—he’ll be fine,’ ” one top Bear executive recalls. “Everybody assumed Warren knew what was going on. Well, later, after everything happened, Warren would say, ‘Well, I never knew his actual positions.’ It was one of those things where everyone thought someone else was paying attention.”

As one of Bear’s lenders told me, “The B.S.A.M. situation confirmed to me my impression, which was that [Bear’s] subsidiary businesses were run in silos—basically the guys ran their sub-businesses as they saw fit. So long as they were hitting their P&L targets, no one asked any real questions. To my mind, that contributed in a very large part to what happened later.”

For the rest of the summer of 2007, Bear was buffeted by rumors that the bailout might force it into bankruptcy, or worse. For the most part, Cayne rode out the storm at the bridge table and his golf club, though by late July he began to sour on Spector. “Warren never showed any real remorse or contrition,” says another Bear executive. “That just drove Jimmy mad.” For three solid hours Alan Schwartz sat down with Cayne and argued against firing Spector, whom he genuinely liked, a conversation that ended when Cayne said of Spector, “Do you know he’s never once said, ‘I’m sorry’?” Schwartz replied, “That’s kind of shocking.”

Cayne forced Spector to resign on August 5. Bear Stearns had survived what many came to call a “near-death experience,” but its troubles were only just beginning.

As summer turned to fall, mortgage-related losses hit scores of big banks just as they had Bear, yet Bear, for reasons that eluded Cayne and others, seemed to remain the poster boy for the credit crunch. Every story about other firms’ losses seemed to carry a mention of Bear’s, dredging up memories Bear executives would just as soon have buried. The perception of Bear’s weakness put Cayne and Alan Schwartz in a bind. The bailout had blown a sizable hole in Bear’s bottom line, and while the firm was in no immediate danger, everyone expected it would seek some kind of capital infusion.

Both Cayne and Schwartz, however, were deeply ambivalent about accepting a big chunk of money from another bank or private-equity fund. Cynics would later snipe that this was because Cayne didn’t want to dilute his own substantial share of Bear’s stock. In fact, it was more complicated. If they accepted outside help, Schwartz argued, they risked looking as if they needed it, which would only worsen the whispers about their financial health. In those early weeks of fall, Cayne and Schwartz engaged in a lengthy negotiation with private-equity veteran Henry Kravis in which he considered buying 20 percent of Bear’s stock. The deal died, however, when Schwartz pointed out that Bear’s own private-equity clients might not be thrilled to see Kravis on the board.

In the following months Cayne and Schwartz held a series of discussions with potential investors, at one point hiring a top investment banker, Gary Parr, of Lazard, to help out. There were discussions with private-equity investment company J. C. Flowers, a long set of talks with Jamie Dimon, J. P. Morgan Chase’s C.E.O., who wasn’t interested, and even a flirtation with legendary investor Warren Buffett that left Bear executives feeling Buffett was averse to risk. “Warren Buffett will only take nickels from dead people,” one snipes. In the end, Cayne managed to arrange one deal: a strategic partnership with a leading Chinese securities firm, citic, which agreed to invest $1 billion in Bear in return for Bear’s investing $1 billion with it. The market yawned.

Then, in November, came back-to-back body blows. On November 1, The Wall Street Journal, in a widely read front-page story, excoriated Cayne for his relaxed management style, portraying him as a bridge-crazy, pot-smoking Nero who fiddled while Bear burned. A few weeks later the firm was forced to disclose it would write down another $1.2 billion (which ended up being $1.9 billion) in mortgage-related securities and post the first quarterly loss in its history. The stock went into a prolonged dive—down 40 percent for the year. By January many executives were openly calling for Cayne’s head. A few slipped into Schwartz’s 42nd-floor office with an ultimatum: if Cayne wasn’t gone by the time bonuses were paid in late January, they would leave. Schwartz was conflicted. He loved Cayne, but he couldn’t afford to lose a group of top people, not at this point. He canvassed Bear’s board, found them open to a change, then broke the news to Cayne himself. To Schwartz’s surprise, Cayne took the news peacefully. He resigned as C.E.O. on January 8, but remained chairman of the board.

Schwartz was named the new C.E.O. His immediate priority was making sure Bear posted a profit in its current quarter, which ended February 29. There were still whispers out there about Bear’s financial health, many fanned by rumors of federal investigations into the hedge-fund collapse, and Schwartz badly needed some good news to report. As mortgage-related losses struck firm after firm that winter, Schwartz kept his fingers crossed, watching the calendar tick off the days until February’s end. He sweated out an entire extra day—leap day, February 29—but Bear made it. Preliminary figures showed they would report a quarterly profit of $1.10 or so a share. With luck, Schwartz said, that would end the whispers.

Nevertheless, by Wednesday, March 5, Schwartz wasn’t breathing any easier. The rumors continued, faint but insistent, now fueled by the troubles at a trio of hedge funds, Carlyle Capital, Peloton Partners, and Thornburg Mortgage. At a weekly risk-assessment meeting that day, Schwartz queried his people about Bear’s exposure to the three funds, all of which were thought near collapse. Bear had lent to all three. Still, Bear’s risk, Schwartz was told, was believed to be minimal.

The next day, Thursday, Schwartz flew to Palm Beach, where the firm’s annual media conference was poised to start the following Monday at the Breakers hotel. The conference, one of Bear’s best-attended events, brought together a host of media titans, many of them Schwartz’s longtime clients: Murdoch, Redstone, Viacom’s Philippe Dauman, Time Warner’s Jeff Bewkes, Disney’s Robert Iger. On Friday, while checking in with headquarters, Schwartz heard the rumors again, now a bit stronger: Bear was having liquidity problems. He trained his eye on a key auction of municipal bonds that Friday afternoon. Bear was providing $2 billion in liquidity to various buyers. “That was the trip wire,” another Bear executive recalls. “If anyone refused to take our name there, we knew we were in real trouble.” All through the afternoon and into the evening, Schwartz monitored the note sales. To his relief, they went off without a hitch.

The storm struck full force without warning on Monday. That morning, when Sam Molinaro returned to his sixth-floor corner office from a week-long trip in Europe, he expected a normal day, nothing special; they would release the new, positive earnings the following week. After the trading day opened, at 9:30, one of the rating agencies, Moody’s, downgraded another grouping of Bear’s bonds. It was to be expected; the agency had been downgrading most of its offerings. Then, around 11, Bear’s stock suddenly began to fall, gradually at first, then sharply. All the “financials”—Lehman, Merrill, Citi—were falling. Molinaro shrugged. But as he checked with the trading floor, he heard the rumors: Bear was having liquidity problems. Molinaro rolled his eyes. Not again.

Bear’s P.R. man, Russell Sherman, heard the rumors, too. As the stock continued to slide, Sherman began calling reporters, trying in vain to pin down their source. As he did, Molinaro checked to see what could be fueling the rumor. Bear itself had no liquidity problem—he knew that. That morning the firm sat atop $18 billion in cash reserves. Molinaro checked with his finance desk, the repo desk, his treasurer. Had anyone heard of anything like a margin call (in which a lender was demanding a huge chunk of cash back)? A trade gone bad? Was anything out of the ordinary? “Across the board, it was ‘No, no, no, no—no problems,’ ” a Bear executive says.

At one point, Schwartz called in from Palm Beach to assess the situation. “I’m getting a little nervous,” he said. Molinaro assured him there was no substance to the rumor.

At that point the rumor went public—on CNBC, the cable network that serves as Wall Street’s daily backdrop. On every trading floor dozens of TV sets, mounted high on the walls, are perpetually tuned to the network, which runs nothing but shows about finance and money—from Squawk Box to Closing Bell to Jim Cramer’s Mad Money.

By noon, when CNBC anchor Bill Griffeth opened Power Lunch, Bear’s stock was down more than $7, to $63. “There are rumors out there that some unnamed Wall Street firm might be having liquidity problems,” Griffeth noted. A correspondent on the show, Dennis Kneale, a veteran of The Wall Street Journal, said, “The speculation at this point is that it’s Bear Stearns. They’re down the most in the market today. Supposedly, a couple of weeks ago, they started looking at a way to try to shop their clearing operations.… [They] couldn’t find a buyer. At least that’s what one guy says.”

At Bear Stearns, 80-year-old Ace Greenberg was already pelting senior officials with phone calls, demanding that someone go public to rebut the rumor. “Ace was kind of freaking out that morning,” one senior Bear executive says with a sigh. “He just couldn’t contain himself.”

A few minutes past 12, another CNBC correspondent, Michelle Caruso-Cabrera, reached Greenberg at Bear. He told her the rumor was “totally ridiculous.” CNBC reported his comments within minutes, then incorporated them into a running headline—bear stearns’ ace greenberg tells cnbc liquidity rumors are “totally ridiculous”—the rest of the hour. In his office, Molinaro saw the headline and fumed. Addressing the rumor at this stage, he and others felt, merely appeared to legitimize it.

From Palm Beach, Schwartz telephoned Greenberg in frustration. “Ace, you can’t just do that!” he said.

“Well, I had to!” Greenberg replied.

Once the CNBC headline began running, reporters began calling Russell Sherman’s office. Sherman told the Bloomberg reporter the rumor was untrue, but Bear’s stock was going crazy. The total volume was over 50 million shares; on a normal day it might trade 7 million.

At a little after one CNBC correspondent Charlie Gasparino, an especially aggressive reporter who for months had been suggesting Bear’s possible indictment on criminal charges in the hedge-fund collapse, joined an on-air roundtable to discuss the rumor. Gasparino was the bane of Bear Stearns; more than once he had predicted that the firm would go under. “I don’t believe there is a liquidity problem at Bear Stearns,” Gasparino said on-air. “Bear Stearns has a problem with whether they should exist or not in the future in this sense.… What do they have left? A clearing business, a second-rate investment bank?” If the credit crisis continued, Gasparino said a few moments later, “I don’t see how they could survive independently. They don’t have enough horses out there.”

Sitting on a stool beside him, Bill Griffeth appeared startled at the strength of the statement.

“You’re on record, then,” he remarked.

Gasparino laughed. “Wouldn’t be the first time I was wrong,” he said.

At Bear Stearns, no one was laughing. Publicly speculating on a firm’s liquidity is akin to shouting “Fire!!!” in a crowded theater; in catastrophic cases it can trigger panic selling. It risks, in other words, becoming a self-fulfilling prophecy.

For the next hour the Bear Stearns rumor became a topic of conversation between CNBC correspondents and various market traders and analysts. At 1:50, Matthew Cheslock remarked, “The sentiment [on Bear] is pretty negative. The general consensus is ‘Where there’s smoke, there’s fire.’ ”

A few minutes later, Griffeth, perhaps sensing the network might have gone a bit too far, asked Dennis Kneale, “What about the jittery nature of this market right now? Are we starting to believe some rumors that may or may not be true?” Kneale agreed. “Someone,” he observed, “is always making money on the other side of that bad news or that rumor.”

Yet CNBC’s coverage remained anything but skeptical of the rumor. At two the network’s new “money honey,” Erin Burnett, headlined the hour by announcing “credit issues at Bear,” never mind that there was no such thing. She turned to correspondent David Faber, who observed, “Of course, no firm’s ever going to say that they are having trouble with liquidity, and, in fact, you’ve either got liquidity or you don’t. So if you don’t have it, you’re done. Those are the kinds of concerns in this market, concerns of confidence.… You can have crises of confidence, causing meltdowns.”

At 2:07 came shocking news: the first mention that New York governor Eliot Spitzer had had dealings with a prostitution ring. That news shoved Bear Stearns out of CNBC’s headlines, much to the relief of the firm’s executives. At day’s end, Sherman issued a formal statement denying any liquidity problems. On Monday night, Schwartz and Molinaro held their breaths, hoping the worst was over.

In fact, it had just started.

Tuesday morning the Federal Reserve announced a novel new securities lending program for major Wall Street firms to help them weather the credit crisis. Most financial stocks rebounded, but not Bear. After lunch, Gasparino went on-air and said the Fed initiative was being interpreted as an effort to save one firm—Bear. By early afternoon the rumors were once again flying, now stronger than ever.

The first to pull their money from Bear were several major hedge funds. So Molinaro and his men canvassed the repo lenders, which give banks billions of dollars in overnight loans that have to be renewed each day. However, Molinaro found that all planned to “roll over” Bear’s loans the next morning. “Nobody was cutting us off,” says a Bear executive involved in the events. “There was a lot of chatter, though. The hedge funds were agitated. That was concerning, because they could influence the outcome by pulling out cash balances.”

That same day Bear executives noticed a worrisome development whose potential significance they would not appreciate for weeks. It involved an avalanche of what are called “novation” requests. When a firm wants to rid itself of a contract that carries credit risk with another firm, in this case Bear Stearns, it can either sell the contract back to Bear or, in a novation request, to a third firm for a fee. By Tuesday afternoon, three big Wall Street companies—Goldman Sachs, Credit Suisse, and Deutsche Bank—were experiencing a torrent of novation requests for Bear instruments. Alan Schwartz thought it strange that so many requests were being channeled to the same three firms, but did his best to assure them all that Bear remained on sound footing. “Deutsche Bank we talked to, and they said, ‘We’re getting killed!’ ” says a Bear executive. “We said, ‘We’ll take you out of your positions,’ and we did. But it was too late.”

Too late—because, before Bear could calm the waters, executives at both Goldman and Credit Suisse told their traders to hold up all novation requests dealing with Bear Stearns, pending approval by their credit departments. The Credit Suisse memo, a “blast” e-mail to much of its trading staff, quickly became the subject of widespread rumor and gossip. Both memos were essentially routine, a way to handle the deluge of novation requests rather than comments on Bear’s viability, but they nevertheless served as the first concrete sign that some of Wall Street’s biggest firms were having concerns about doing business with Bear.

Sam Molinaro felt it was time for another public assurance. CNBC’s Charlie Gasparino had been peppering him with phone calls seeking comment. Molinaro talked to Russell Sherman, who felt Gasparino could be played. “He’ll say something negative if you shut him out. But if you talk to him, he’ll go positive,” one Bear executive told me.

Around three, Molinaro spoke to Gasparino, telling him, “I’ve spent all day trying to track down the source of the rumors, but they are false. There is no liquidity crisis. No margin calls. It’s all nonsense.” Gasparino’s on-air comments were mild, but for the first time he raised the specter of a nightmare scenario: “They are really worried about this inside [Bear], that these rumors are taking a very nasty turn, and they might cause a run on the bank.”

Still, by day’s end, there was no rush among Bear’s lenders to withdraw cash from the firm. At that point, this executive says, “the notion of a liquidity crisis seemed silly.”

That night Schwartz, Molinaro, and others discussed what to do. The talks centered on whether Schwartz should go public in an interview with CNBC. “We debated putting Alan on the air a long time,” says one board member. “Yes, it might draw attention to the rumors. But it would definitely answer the questions. Our view was: we had to get him out.”

Schwartz, though, wanted some assurances first. From experience, he knew he faced a risk in picking the wrong CNBC correspondent for the interview. All the network’s talent—Gasparino, Maria Bartiromo, Faber, Larry Kudlow—had requested the interview, and whoever didn’t get it, Schwartz feared, might retaliate on the air. “Each of these correspondents has his own producer, and they all seem to hate each other,” one Bear executive told me. “If you choose Faber, you know Bartiromo will bash you the next day.” Schwartz directed Russell Sherman to identify the CNBC executive who supervised the correspondents, explain the situation, and ask that the correspondents who didn’t get the interview refrain from attacks. Sherman, however, couldn’t identify a single CNBC executive who seemed to have control over the correspondents. “Everyone on Wall Street knows the joke,” says another Bear executive involved in the discussions. “At CNBC, there is simply no adult supervision.”

In the end they chose the safest of the lot, Faber. Wednesday morning, all across Manhattan, Wall Street traders crowded around their monitors to see what Schwartz had to say. More than a few shook their heads that the Bear C.E.O. was not in his office, grappling with the emerging crisis, but in, of all places, Palm Beach! As a senior executive of one competing firm put it, “To come on CNBC from Palm Beach and, you know, tell everyone everything was going to be O.K., they had to be crazy.” (Schwartz was worried that an abrupt departure from his conference might raise even more questions.)

Faber’s first question was a bombshell. He told Schwartz he had direct knowledge of a trader—a single trader—whose credit department had held up a trade with Bear Stearns, citing concerns about its health. At Bear, many executives gasped. It was a killer statement: Faber was saying, in essence, that Bear’s status as a trader, the basis of its business, was in question. Schwartz answered as best he could, saying everything was fine; only later did Faber say on-air the trade in question had finally gone through. But the damage had been done.

“You knew right at that moment that Bear Stearns was dead, right at the moment he asked that question,” a Wall Street trader of 40 years told me. “Once you raise that idea, that the firm can’t follow through on a trade, it’s over. Faber killed him. He just killed him.”

At Bear Stearns, however, the sentiment on the sixth floor was that Schwartz had done a good job. The interview did nothing, however, to stop the rumors. When Schwartz returned to his office that afternoon, he tried calling customers, but nothing he did could stem the tide. By the end of the trading day, the first repo lenders had warned Molinaro they would not renew their loans the next morning.

“The tone of Wednesday afternoon was not positive—three days of rumors were starting to take their toll,” says a senior Bear executive. Mostly because of hedge-fund withdrawals, the firm’s reserves had shrunk to less than $15 billion. That evening, meeting in Molinaro’s conference room, the chief financial officer told Schwartz they could probably replace those reserves the following day. If the repo lenders began backing out, though, they were in serious trouble. Schwartz had a long-standing emergency plan in place, involving the sale of Bear assets, and for the first time Molinaro pulled it out and began studying it in earnest. Schwartz, meanwhile, got on the phone to Gary Parr at Lazard. They agreed to meet the next day. Late that night a Bear lawyer telephoned Tim Geithner, president of the New York Federal Reserve. He briefed him on Bear’s plight and urged him to have the Fed accelerate its plan to provide liquidity to the market.

The next morning, on his drive in from Connecticut, Molinaro began calling the repo and finance desks to check the tone of their early calls. The Journal had a story suggesting that any number of Bear’s lenders, including the all-important repo lenders, were growing nervous. Still, those first calls went as well as could be hoped. Other firms were still trading with Bear. Few of the repo lenders were talking about refusing to roll over their daily loans. “Thursday morning, things looked good,” says one Bear executive.

Then, just as they had the day before, the rumors began to multiply—and with them the withdrawals. By midafternoon the dam was breaking. One by one, repo lenders began to jump ship. As word spread of the withdrawals, still more repo lenders turned tail. The hedge-fund cash was almost all gone. “A lot of people were pulling out,” one Bear executive remembers. “The nail in the coffin was the repo capacity.”

Molinaro and Robert Upton, Bear’s treasurer, ended the day toting up the withdrawals. By five, Molinaro could see his worst fears had been realized. He picked up the phone and called Schwartz in his 42nd-floor office. “You need to get down here,” he said.

The numbers, scribbled out on a yellow legal pad, told the story. Standing in Molinaro’s conference room, Schwartz listened as Robert Upton guided them through the wreckage. A full $30 billion or so of repo loans would not be rolled over the next morning. They might be able to replace maybe half that in the next day’s market, but that would still leave Bear $15 billion short of what it needed to make it through the day. By seven it was obvious they had only two options: an emergency cash infusion or a bankruptcy filing the next day. The one thing everyone agreed upon was the need for secrecy. “If word gets out, it might be the end,” one participant recalls saying.

Schwartz was stricken. He had genuinely thought they would make it. By early evening, realizing that Bear’s life expectancy might now be numbered not in days but hours, he hit the phones. The regulators—the S.E.C., Treasury, the Fed—had been watching the situation all day and were waiting when he called to brief them. Gary Parr, the Lazard banker, had already touched base with J. P. Morgan’s C.E.O., Jamie Dimon, that afternoon, letting him know where Bear stood. J. P. Morgan was the obvious candidate for overnight cash. The two firms had long-standing ties. Their headquarters faced each other across 47th Street.

That day was Dimon’s 52nd birthday, and he was celebrating with a quiet family dinner at Avra, a Greek restaurant on East 48th Street. He was irked when his private cell phone rang; it was to be used only in emergencies. On the line was Parr, who put Schwartz on as 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.”

The people he should call, Dimon said, were at the Fed and the Treasury—the only place Bear could get $30 billion overnight. Still, Dimon promised to see what he could do to help. He hung up and dialed Tim Geithner at the New York Fed downtown.

Twenty-first-century Wall Street is a highly interconnected world, with just about everyone lending billions of dollars to everyone else, and Geithner worried that Bear’s collapse might trigger a domino effect, taking down scores of other firms around the world; he urged Dimon in the strongest terms to think about somehow helping Bear. “Tim, look, we can’t do it alone,” Dimon said. “Just do something to get them to the weekend. Then you’ll have some time.”

Dimon hung up, reluctantly realizing Morgan was in this, like it or not. He knew everyone involved would push Morgan to consider buying Bear, but while there were certain of its businesses he coveted—prime brokerage, energy, correspondent banking—he wasn’t thrilled at the prospect of taking aboard its massive mortgage-related problems. Still, in short order, he dispatched a credit team of a half-dozen traders to Bear to begin looking at its books. Then he realized he had a problem.

It was Steve Black, his investment-banking chief. The Morgan man who probably knew Bear best, Black was on a family vacation on the Caribbean island of Anguilla. That evening, in fact, Black was looking forward to three days of peace and quiet with his wife, Debbie. At her insistence, he had left his cell phone at the hotel when they went for a late dinner at a beachside restaurant. Midway through their meal, Black looked up and saw a man marching toward the table.

“Oh, shit,” Black said under his breath.

“Are you Mr. Black?” the man asked. When Black nodded, the man said, “I have an emergency call from your hotel.”

Black told the hotel to have Dimon call him at the restaurant. He was waiting in its bustling kitchen when the phone rang. “It’s for me,” he told a cook. By nine Black was back in his hotel, orchestrating the teams beginning to study Bear’s situation. A Morgan jet would arrive in the morning to ferry him back to New York.

The first team of Morgan executives reached Bear’s sixth-floor executive suite around 11 that night. It didn’t take long for them to realize the danger in what they were being asked to do. If Dimon lent Bear $15 billion or so and the firm imploded the next day, they could lose it all. A little after midnight Dimon told Schwartz in a phone call, “We’ve got to get the Fed in on this.”

Downtown, Tim Geithner was waiting when Dimon telephoned. Any bailout, Dimon reiterated, was too big, too risky, for Morgan to handle alone. Both men knew that meant only one thing: somehow Bear had to be given access to the Fed “window,” that is, the spigot of cash that was available to the nation’s commercial banks, but not its investment banks. The only way for the Fed to help, to give Bear access to the “window,” was to lend Morgan the money, allowing the bank to act as a bridge across which the Fed cash could stream into Bear’s vaults.

Geithner, quickly grasping the wisdom of the move, got on the phone with Washington, going through the details with the Fed’s chairman, Ben Bernanke, and the Treasury secretary, Hank Paulson, and his counterparts at the S.E.C. If they could just get Bear through the next day, perhaps a bigger and better deal could be forged over the weekend. By two a.m. teams from the Fed and the S.E.C. had joined the Morgan bankers at Bear, poring over the numbers. In Molinaro’s conference room, Schwartz and Molinaro paced, occasionally taking bites of cold pizza; their fate, they now realized, was largely out of their hands.

By four a.m. the outlines of a deal were taking shape. Morgan would give Bear a credit line; the money would come from the Fed. It took three more hours for the details to be pounded out. At the last minute Morgan’s general counsel, Stephen Cutler, inserted a line into the press release stating the credit line would be good for up to 28 days.

At Bear, Schwartz and Molinaro allowed themselves a few nervous smiles. They were saved—for 28 days. “We all thought this was a huge win,” remembers one Bear executive. “We were all pretty pleased, thinking we had averted our potential deaths.”

They wouldn’t be so sanguine for long.

When the markets opened Friday morning, traders greeted the news from Bear with surprise but not, at least initially, with panic. For the first hour or so of trading, the stock remained where it had been the day before, in the low 60s. In Anguilla, Steve Black furrowed his brow. “This is nuts,” he remarked to his wife as they headed for the airport. “No one understands what happened here. This stock should be half that.” By the time the Blacks arrived at the airport, it was.

By four o’clock the firm’s capital reserves, which had been $18 billion that Monday, had dwindled to almost nothing. “The balances leaving was a flood,” remembers one Bear executive. “By Friday afternoon we couldn’t even keep track of the money going out. Friday afternoon, I have to say, caught everyone by surprise. Because Friday morning we thought we had bought some ‘stop, look, and listen’ time.”

Gary Parr, meanwhile, was already on the phones, canvassing every prospective rescuer he could think of. Just about anything was on the table: a merger, a sale of prime brokerage or other valuable assets, even an outright sale of Bear itself. The only way to stop the run, everyone knew, was to find what Parr kept calling a “validating investor”—a big name, hopefully with big money, who would send a message that Bear was still solid. Warren Buffett, with his unmatched reputation for identifying value, was the ideal solution. “If Buffett had put in a hundred dollars, that would’ve been enough,” says one person involved that day. “That would have sent the message.” But there was no rush, at least not at first.

Around six Schwartz slipped into the back of a black town car for the drive home to Greenwich. Somehow Bear was still alive, if barely. Thanks to the Morgan credit line, they could probably open on Monday. Now he had 28 days—28 days to raise new capital, find a merger partner, or sell Bear outright. It wouldn’t be easy, he knew, but it was doable. Then, as the car cruised northeast, 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.

Schwartz hung up the phone, stunned. He telephoned Molinaro, who was also on his way home, at that moment buying a cup of coffee at a rest stop on the Merritt Parkway. “You’ve got to be kidding me,” Molinaro said.

To this day, top Bear officials aren’t sure whether they misread the “28-day” language or whether Paulson simply had a change of heart after the events of Friday afternoon. “Everyone thought we had 28 days,” says one senior Bear executive. “Do we think they thought that? We think so. But, look, when this was done, we just got a piece of paper that said, ‘If you agree to this, you’ll be O.K.’ We signed. No one spent a lot of time going over all the little details.”

In fact, no one—not even Federal Reserve officials—had been sure what the credit line or the “28-day” mention actually meant. “They took hope in that language,” says a Fed official. “I don’t know why they did. We made it very clear at the time, ‘This is not the be-all end-all.’ Then again, this whole thing was done so fast. We didn’t think through all the details of what would happen next.”

When Schwartz returned to his office Saturday morning, one of his first calls was to Geithner. He appealed for more time, explaining that Bear thought it had 28 days. Geithner held firm. Sunday night, he repeated. By that point, representatives of prospective suitors were already streaming through Bear’s hallways, poring over financial documents. Their efforts switched into overdrive as word spread of the Sunday deadline. A team from Flowers was there, a team representing Henry Kravis, plus another half-dozen or so groups from major banks. J. P. Morgan alone had 16 different teams meeting with all of Schwartz’s top people.

It was a sobering process: as the day wore on, the bidders began dropping out, one by one. Everyone had an excuse: they didn’t have the time or the money or the balls to do such a risky deal in so short a time. The two best possibilities, it appeared, were Morgan and Flowers. The latter told Parr on Saturday afternoon it was prepared to buy 90 percent of Bear for about $30 billion, or $28 a share—that is, if it could scrape up $20 billion from a bank consortium by the next day. No one thought Flowers could possibly get such a deal done in time.

From the outset, Schwartz assumed Morgan was the bridegroom. Across the street, in Morgan’s eighth-floor executive suite, Jamie Dimon and Steve Black fielded nonstop reports from their due-diligence teams, now numbering more than 300 people. The key, everyone knew, was Bear’s mortgage “book,” that is, its inventory of mortgage-backed securities. Much of it was illiquid—it couldn’t be sold. How to value these Rube Goldberg devices was anyone’s guess. The more Black studied Bear’s book, the more worried he grew. He and another Morgan executive, Doug Braunstein, got on the phone with Schwartz and Parr that night and told them that, if Morgan did bid, it wouldn’t be much.

Bear’s stock had closed Friday at $32. “The fact you’re at 32 doesn’t mean much at this point,” Black said. He suggested that a Morgan bid might be in the range of $8 to $12 a share. “We said, ‘That’s all there is, and that’s with a lack of due diligence and a lot of other issues,’ ” says a person involved in the call. “Alan asked, ‘Will you do it come hell or high water?’ That was their key issue.”

At nightfall everyone hunkered down for long hours studying Bear’s numbers, especially its mortgage book. By dawn, however, many Morgan executives were having second thoughts. The more they studied the securities Bear owned, the worse it looked. Bear, for instance, had initially estimated it had $120 billion in so-called risk-weighted assets, those that might go bad. By Sunday morning, Morgan executives felt the actual number was closer to $220 billion.

“We all kind of slept on it,” says one executive involved in the talks, “or not slept on it, kind of closed our eyes for a half-hour, and realized that if you take a step back and remove yourself from the enormity of it, what we were being asked to take over, from a risk factor, was gargantuan.” And it wasn’t just the financial risk. The morning’s New York Times carried a piece on Bear, by veteran reporter Gretchen Morgenson, that dredged through all the seamiest aspects of Bear’s recent history. Steve Black walked around the eighth floor making sure everyone read it. “That article certainly had an impact on my thinking,” remembers one Morgan executive. “Just the reputational aspects of it, getting into bed with these people.” He shudders.

Dimon had to agree. It was just too much. Steve Black broke the news to Schwartz. “Whatever other things you are working on, you should actively pursue them,” he said. Downtown, at the Fed, Tim Geithner stepped out of his conference room to hear the news from Dimon. “I remember he came back in a minute later, with this look on his face that said, ‘Huh?’ ” recalls a member of the Fed team.

“They’re not going to do it,” Geithner said.

Geithner believed he couldn’t let Bear die. The repercussions were unthinkable. “For the first time in history the entire world was looking at the failure of a major financial institution that could lead to a run on the entire world financial system,” a Fed official recalls. “It was clear we couldn’t let that happen.”

Within minutes Geithner was back on the phone with Dimon. There ensued a series of conversations where, in one Fed official’s words, “they kept saying, ‘We’re not going to do it,’ and we kept saying, ‘We really think you should do it.’ This went on for hours. Finally, [the conversation] shifted to ‘Well, maybe if.’ They kept saying, ‘We can’t do this on our own.’ ” All through these talks, Geithner kept a nervous eye on the clock. The Australian markets opened at six on Sunday evening, New York time. They had to have some kind of deal by then or risk chaos.

Geithner had several long conversations with Ben Bernanke and Hank Paulson. There was never any serious question whether the Fed would help out. Even though it had never attempted anything like this before, there was ample precedent for the move; both the German and British central banks had stepped up to rescue institutions laid low by the mortgage crisis in just the last year. Still, the details took hours to unspool. At one point, Paulson had to sign a document confirming that, yes, in the event Bear defaulted on its securities, the American taxpayer would pay the tab.

Meanwhile, at Bear, Alan Schwartz, now merely a spectator at his firm’s funeral, watched the clock. By one, Bear’s board was in session, many of its members, including Jimmy Cayne, present by phone; Cayne was in Detroit at a bridge tournament. At one point, Schwartz took a call from Morgan executives, who told him that any bid was likely to be less than the $8-to-$12 range mentioned the night before. In fact, they suggested the likely number was $4.

When Schwartz relayed the $4 idea to his board, several, including Cayne, grew apoplectic. Cayne argued strenuously that Bear simply file for bankruptcy. “There were a lot of people at that point who were just saying, ‘Fuck ’em—let’s go 11,’ ” remembers one person in the boardroom. It was then that Gary Parr and the bankruptcy attorneys patiently explained that bankruptcy was actually not an option, not for a major securities firm. Changes to the bankruptcy code in 2005 would force federal regulators to take over customer accounts. All its securities would be subject to immediate seizure by creditors.

Slowly, the humiliating inevitability of a $4-a-share buyout—for a firm whose shares had traded as high as $170 the year before—sank in. It was at that point, midafternoon, that Treasury secretary Paulson twisted the knife. As the ranking politician involved in the deal, he was concerned with appearances—both how it would look that the federal government was bailing out a well-heeled investment bank at a time when normal Americans were losing their homes, and the appearance of something lawyers call “moral hazard,” that is, the idea that a Bear deal, by appearing to “save” a bank whose poor judgment had pushed it to the brink of bankruptcy, might actually encourage risky behavior by other financial institutions. This deal, Paulson judged, had to hurt Bear. And it had to hurt badly.

Paulson and Tim Geithner telephoned Dimon at Morgan. He put them on speaker. Dimon said he was considering a price in the $4-to-$5 range. “That sounds high to me,” Paulson said. “I think this should be done at a very low price.” A little later, Morgan’s Doug Braunstein reached Gary Parr at Bear. A formal offer would be forthcoming, Braunstein said. “The number’s $2,” he said.

Parr nearly choked. “You can’t mean that,” he said.

He did. Schwartz took the news quietly, which was more than one could say about some of his board members. Jimmy Cayne—whose 5.66 million shares, once worth nearly a billion, would now be worth less than $12 million—swore he would never accept such a humiliating offer. “The people around the table, some of them, their net worth was being wiped out,” says one person who was in the room. “There was every emotion you can think of: sadness, anger. They saw the tragedy. But the bottom line was, you know, when they got in a pickle, Bear Stearns didn’t have many friends.”

Schwartz took a half-hour explaining that the board really had no choice. It was Morgan or bankruptcy, which would mean liquidation, putting 14,000 employees out of work by noon the next day. “What can I say?” he said at one point. “It’s better than nothing.”

And like that, with the signatures on an unprecedented merger agreement, a major American investment bank vanished, along with $29 billion in shareholder value and the secure futures of 14,000 employees. In the following days the hallways of Bear Stearns & Co. erupted in rage. Longtime friends fumed and even screamed in Schwartz’s face—at a town-hall meeting he chaired, where one man hollered, “This is rape!”; in the hallway outside his office; even in the Bear gym. Shareholders were so angry that everyone was forced back to the negotiating table the next weekend, when Morgan and the Fed, in a second set of manic around-the-clock meetings, agreed to boost the price to $10 a share. Yet, for all the anger, all the frustration, no one could answer the one question on everyone’s mind: How on earth had this happened?

Even among the circle of top executives who lived through that frantic week, no two people see the crisis at Bear the same way. Many, though, agree with some version of the scenario Alan Schwartz has come to believe. Yes, Schwartz tells friends, mistakes were made. Yes, the firm was financially weakened. But the more he learned about what had happened behind the scenes that week, the more Schwartz came to believe that Bear’s collapse was a pre-meditated attack orchestrated by market speculators who stood to profit from its demise. According to those Schwartz has briefed, these unnamed speculators—several now being investigated by the S.E.C.—employed a complex scheme to force a handful of major Wall Street firms to hold up trades with Bear, then leaked the news to the media, creating an artificial panic.

“Something happened Monday that triggered this mess,” says one Bear executive who has spoken to the S.E.C. “It was as though a computer virus had been launched. Where the hell was this coming from? Who started it? We tried, believe me, but we could not track it down. We know lots of big hedge funds were spreading rumors, but how can you pursue that? Only the S.E.C. can, and they’re all over this.”

At the heart of this theory are the “novation” requests that began to pick up steam that Tuesday and Wednesday. As Bear executives later analyzed these trades, they discovered the overwhelming majority had been made with just three firms: Goldman Sachs, Credit Suisse, and Deutsche Bank. Schwartz came to believe this was no accident. In his mind, the flood of novation requests was designed to force at least one of the three firms to put a temporary halt to accepting them, which is what happened: Goldman and Credit Suisse did. News of that halt not only swept Wall Street trading floors, it appeared to gain credence the next day when David Faber asked Schwartz about it on CNBC. “I like Faber, he’s a good guy, but I wonder if he ever asked himself, ‘Why is someone telling me this?’ ” a top Bear executive asks. “There was a reason this was leaked, and the reason is simple: someone wanted us to go down, and go down hard.” (Faber says his reporting was accurate, and arose from talks with a source he has known for 20 years.)

But who? According to one vague tale, initially picked up at Lehman Brothers, a group of hedge-fund managers actually celebrated Bear’s collapse at a breakfast that following Sunday morning and planned a similar assault on Lehman the next week. True or not, Bear executives repeated the story to the S.E.C., along with the names of the three firms it suspects were behind its demise. Two are hedge funds, Chicago-based Citadel, run by a trader named Ken Griffin, and SAC Capital Partners of Stamford, Connecticut, run by Steven Cohen. (A spokesman for SAC Capital said the firm “vehemently denies” any suggestion that it played a role in Bear’s demise. A Citadel spokeswoman said, “These claims have no merit.”) The third suspect, at least in Bear executives’ minds, is one of its main competitors, Goldman Sachs. (“Goldman Sachs was supportive of Bear Stearns,” says a Goldman Sachs spokeswoman. “There is no foundation to rumors that we behaved otherwise.”)

Several Bear executives also named an individual they believed was spreading rumors about them that week, Jeff Dorman, who briefly served as global co-head of Bear’s prime brokerage business until resigning to take a similar position at Deutsche Bank last summer. “We heard Dorman was saying things last summer,” says a Bear executive. “At the time we reached out to Deutsche Bank and told them he better stop it.” (Asked about the allegation, a Deutsche Bank spokeswoman acknowledged that Bear had sent its executives a letter last August asking Dorman not to solicit its clients, as he had agreed upon leaving Bear. Deutsche Bank replied that he wasn’t. The exchange didn’t explicitly address what Dorman might have been saying about the firm, nor would the spokeswoman.)

Today, many of Bear Stearns’s former employees are out of work. The firm has effectively disappeared into the maw of J. P. Morgan along with a number of key executives, including Ace Greenberg, who became a Morgan vice-chairman, and Alan Schwartz, who will probably take a position in the investment-banking department.

Maybe the S.E.C. will figure out whether Bear was murdered. But maybe it won’t. Even those who believe the firm was the victim of a predatory raid have their doubts it can ever be proved.

“Even with subpoena power, I’m not sure the S.E.C. will get to the bottom of this, because the standard of proof is just so difficult,” says a vice-chairman at another major investment firm. “But I hope they do. Because you can look at this as just another run on a bank or as a seminal point in the financial history of this country that could bring about a change, perhaps a drastic change, in the way we govern financial markets. If there is a solution to this kind of thing, it must be found in the roots of what happened at Bear Stearns. Because otherwise, I can guarantee you, it will happen again somewhere else.”

A Onetime ‘Person of Interest’ Moves a Step Closer to Public Exoneration

by CHARLIE SAVAGE

The New York Times

WASHINGTON — Having been named a “person of interest” in the investigation of the 2001 anthrax attacks, the former Army scientist Steven J. Hatfill has tried for six years to clear his name, both inside court and out.

Now the disclosure that a former colleague died this week, apparently by suicide, just as investigators prepared to seek his indictment in the case has provided the clearest indication yet that Dr. Hatfill may finally achieve his goal.

The Justice Department, which has not publicly exonerated Dr. Hatfill, would not comment about the case on Friday. But all indications are that investigators have lost interest in him.

A lawyer familiar with the investigation of the former colleague, Bruce E. Ivins, who like Dr. Hatfill worked at the Army’s biodefense laboratories at Fort Detrick, Md., said the expectation had been that Dr. Ivins would be indicted alone. But he died Tuesday after taking an overdose of prescription painkillers.

Dr. Hatfill, now 54, spent years in the glare of official suspicion after someone mailed envelopes containing anthrax powder to government officials and news organizations in late 2001.

Those suspicions became public in mid-2002, when F.B.I. agents wearing biohazard suits were shown on television raiding Dr. Hatfill’s apartment. John Ashcroft, then the attorney general, later described Dr. Hatfill as a “person of interest” in the investigation.

Dr. Hatfill held a tearful news conference in August 2002 where he denied any involvement in the attacks and contended that he had been smeared by F.B.I. leaks and irresponsible news reporting. But he would spend years more under scrutiny.

He accused investigators of alerting the news media in advance to the search of his home, and later of conducting constant surveillance of him. His home phone was wiretapped, he said, and agents followed him wherever he went.

Five years ago in the Georgetown section of Washington, he approached the car of an F.B.I. agent who had been trailing him, wanting to take the agent’s picture. The agent drove off, and his car ran over Dr. Hatfill’s foot. The police later issued a ticket to Dr. Hatfill for “walking to create a hazard,” and he was fined $5. No ticket was given the agent.

Declaring that his life was being destroyed by harassment, Dr. Hatfill went to court to try to clear his name.

He filed a lawsuit against the government contending that officials had leaked information about him in violation of the Privacy Act. As part of that case, the court subpoenaed reporters who had quoted anonymous law enforcement officials and tried to force them to disclose those sources.

In February, the judge in the case, Reggie B. Walton, found Toni Locy, a former reporter for USA Today, in contempt of court after Ms. Locy said she could not recall the sources of information in several articles she had written.

“There’s not a scintilla of evidence to suggest Dr. Hatfill had anything to do with it,” Judge Walton said at the time, yet the public notoriety has “destroyed his life.”

Ms. Locy appealed the decision, but Dr. Hatfill’s lawyers dropped their demands for her testimony after the government agreed in June to pay him $2.825 million plus a 20-year annual annuity of $150,000 to settle the lawsuit.

Dr. Hatfill also waged a legal battle against news organizations, saying articles suggesting that he might have been behind the anthrax mailings had defamed him.

One of his suits was against The New York Times and its Op-Ed columnist Nicholas D. Kristof. Mr. Kristof was later dropped as a defendant, and the suit against The Times was dismissed. In July, a three-judge panel of a federal appeals court unanimously upheld the dismissal, though Dr. Hatfill has asked the full court to rehear the case.

David E. McCraw, assistant general counsel of The New York Times Company, declined to comment Friday on the death of Dr. Ivins or its effect on the litigation. Mr. Kristof, who is on vacation and out of cellphone range, could not be reached for comment.

Dr. Hatfill also sued Vanity Fair for publishing an article about the case by Donald Foster, along with Reader’s Digest, which published a condensed version. As part of a 2007 settlement, other terms of which were confidential, the defendants issued a statement retracting any implication that Dr. Hatfill had been behind the attacks.

Thomas G. Connolly, a lawyer for Dr. Hatfill, said Friday that he had “nothing at this point” to say about the case. Mr. Connolly said he would wait until the F.B.I., having first briefed the families of the anthrax attacks’ victims, released more information about its investigation of Dr. Ivins.

“Out of respect for the victims’ families, we’re not going to make any comments until the families are briefed,” Mr. Connolly said.

Dr. Hatfill, he added, is not interested in speaking directly with reporters about the case.

Scott Shane contributed reporting.

Scientist’s Suicide Linked to Anthrax Inquiry

by SCOTT SHANE and ERIC LICHTBLAU
The New York Times
Correction Appended

WASHINGTON — After four years pursuing one former Army scientist on a costly false trail, F.B.I. agents investigating the deadly anthrax letters of 2001 finally zeroed in last year on a different suspect: another Army scientist from the same biodefense research center at Fort Detrick in Frederick, Md.

Over the last 18 months, even as the government battled a lawsuit filed by the first scientist, Steven J. Hatfill, investigators built a case against the second one, Bruce E. Ivins, a highly respected microbiologist who had worked for many years to design a better anthrax vaccine.

Last weekend, after learning that federal prosecutors were preparing to indict him on murder charges, Dr. Ivins, a 62-year-old father of two, took an overdose of Tylenol with codeine. He died in a Frederick hospital on Tuesday, leaving behind a grieving family and uncertainty about whether the anthrax mystery had finally been solved.

The apparent suicide of Dr. Ivins, a Red Cross volunteer and amateur juggler who had won the Defense Department’s highest civilian award in 2003, was a dramatic turn in one of the largest criminal investigations in the nation’s history. The attack, the only major act of bioterrorism on American soil, came in the jittery aftermath of the Sept. 11 attacks. It killed five people, sickened 17 others and set off a wave of panic.

In the early days after the letter attacks, in September and October 2001, Dr. Ivins joined about 90 of his colleagues at the Army Medical Research Institute of Infectious Diseases in a round-the-clock laboratory push to test thousands of samples of suspect powder to see if they were anthrax. Later, in April 2002, he came under scrutiny in an Army investigation of a leak of potentially deadly anthrax spores outside a sealed-off lab at Fort Detrick. He later admitted he had discovered the leak but not reported it.

Whether the focus on Dr. Ivins had resolved the case of the anthrax letters was unclear. A federal law enforcement official said that Dr. Ivins had been regarded as a strong suspect and that agents had been nearing an arrest, and a lawyer familiar with the investigation said he believed that prosecutors had planned to charge only Dr. Ivins. The link between Dr. Ivins’s suicide and the federal investigation was first reported on Friday in The Los Angeles Times.

But the Federal Bureau of Investigation declined on Friday to make public its case against Dr. Ivins, noting that evidence was under court seal as part of a grand jury investigation. Officials said they were briefing the victims of the anthrax letters — those who recovered, as well as family members of those who died — and would need to go to court to have evidence unsealed before it could even be summarized for the public.

A lawyer who had represented Dr. Ivins since May 2007, Paul F. Kemp, insisted that Dr. Ivins was innocent and had been driven to suicide by false suspicions.

“For six years, Dr. Ivins fully cooperated with that investigation, assisting the government in every way that was asked of him,” Mr. Kemp said in a written statement, calling the microbiologist “a world-renowned and highly decorated scientist who served his country for over 33 years with the Department of the Army.”

“We assert his innocence in these killings and would have established that at trial,” Mr. Kemp said. “The relentless pressure of accusation and innuendo takes its toll in different ways on different people, as has already been seen in this investigation.”

Mr. Kemp was clearly referring to the case of Dr. Hatfill, who was the focus of intensive F.B.I. and news media attention in the case beginning in mid-2002 and received a $4.6 million settlement from the government in June to settle a lawsuit accusing the F.B.I. and the Justice Department of destroying his career and personal life with leaks.

Whatever the cause of his suicide, Dr. Ivins had been behaving bizarrely in the weeks before his death. He was hospitalized briefly for depression and, according to a complaint filed with the police, threatened to kill a social worker who had treated him in group therapy, among others, in rants referring to his expectation that he would be charged with five counts of capital murder.

“It’s out of character,” said Norman M. Covert, a former spokesman and historian for the Army biodefense center who served with Dr. Ivins on an animal care committee. “But if the F.B.I. was really leaning on him, what a tremendous load that was on him.”

A spokesman for the Frederick police, Lt. Clark Pennington, said he could not say whether Dr. Ivins had left a suicide note because the anthrax investigation remained open.

Investigators in the huge inquiry traveled to many countries and by late 2006 had conducted 9,100 interviews, sent out 6,000 grand jury subpoenas and conducted 67 searches, the F.B.I. said. But the prime focus steadily narrowed: first to the Army infectious diseases laboratories, apparently linked to the letters by genetic analysis, then to Dr. Hatfill, a medical doctor who had become a bioterrorism consultant, and finally to Dr. Ivins, who worked in the same building as Dr. Hatfill and lived two blocks away from him outside the gates to Fort Detrick.

Two puzzles have haunted investigators from the beginning: the motive of the perpetrator and his skills. Because the notes in some of the letters mailed to news media organizations and two senators included radical Islamist rhetoric, investigators initially believed the letters might have been sent by Al Qaeda.

But the F.B.I. quickly settled on a different profile: a disgruntled American scientist or technician, perhaps one specializing in biodefense, who wanted to raise an alarm about the bioterrorism threat. That theory accounted for the letters’ taped seams and the notes’ use of the word anthrax, a warning that allowed antibiotic treatment — not to be expected from a Qaeda attack intended mainly to kill.

That theory of a biodefense insider placed many scientists at the infectious diseases institute and other laboratories under scrutiny, even as they helped the F.B.I. analyze the anthrax powder in the letters.

“The F.B.I. would be remiss not to look at us, especially those of us who worked with anthrax,” said John W. Ezzell, an anthrax researcher who hired Dr. Ivins at the institute and knew him well. “We were all subjected to lie detector tests. We were all interviewed.”

Mr. Ezzell called Dr. Ivins “intense about his work, but a popular guy.” Asked whether he was aware that Dr. Ivins had become a more serious suspect, Mr. Ezzell declined to comment.

The other puzzle involved the skills necessary to produce the high-quality aerosol powder contained in the letters addressed to the senators, Tom Daschle, Democrat of South Dakota, and Patrick J. Leahy, Democrat of Vermont.

Scientists familiar with germ warfare said there was no evidence that Dr. Ivins, though a vaccine expert with easy access to the most dangerous forms of anthrax, had the skills to turn the pathogen into an inhalable powder.

“I don’t think a vaccine specialist could do it,” said Dr. Alan P. Zelicoff, a physician who aided the F.B.I. investigation when he worked at the Sandia National Laboratories in Albuquerque.

“This is aerosol physics, not biology,” Dr. Zelicoff added. “There are very few people who have their feet in both camps.”

Mr. Ezzell said Dr. Ivins had worked on many projects involving anthrax spores and the toxin they produce, including experiments in which animals were exposed to anthrax to test vaccines. But he said the experiments, to his knowledge, involved anthrax spores in liquid and not in the dry powder form used in the letter attacks.

By their own admission, the F.B.I. and the Postal Inspection Service had little expertise in biological weapons in 2001, when they first loosed hundreds of agents on the investigation. Since then, at least 19 government and university laboratories have worked on the investigation, using clues like the genetic fingerprints of the anthrax, and radioactive isotopes in the water used to grow it, to try to trace it to a source.

The source, several officials said, was the infectious diseases institute, where the trail led to just a handful of vials in a single lab.

But the scientific evidence, some of it found using new methods, now may never be tested in a criminal trial, leaving questions about just how compelling it is.

“I would urge the bureau to publish its evidence if it declares the case solved and closed,” said Dr. Claire Fraser-Liggett, the former director of the Institute for Genomic Research, where the anthrax genome was decoded.

On Capitol Hill, where anthrax contamination in 2001 led to the evacuation of many offices, several members of Congress voiced skepticism about reports that the hunt for the anthrax killer might be over.

Representative Rush Holt, a Democrat whose district includes the Princeton, N.J., mailbox where investigators believe the letters were mailed, said the F.B.I. should provide a full briefing.

“What we learn,” Mr. Holt said, “will not change the fact that this has been a poorly handled investigation that has lasted six years and already has resulted in a trail of embarrassment and personal tragedy.”

William J. Broad and Nicholas Wade contributed reporting, and Jack Begg, Kitty Bennett and Barclay Walsh contributed research.

This article has been revised to reflect the following correction:

Correction: August 6, 2008
Because of an editing error, an article on Saturday about the death of Bruce E. Ivins, a microbiologist who was being investigated in connection with the 2001 anthrax attacks, misidentified, in some copies, the party affiliation of Tom Daschle, a former Senate majority leader, and the state he represented. Mr. Daschle, who received a letter containing anthrax in 2001, is a Democrat who represented South Dakota; he is not a Republican of Texas.