House of cards, p.58
House of Cards, page 58
But between Kathryn Greenberg icing him at her husband's eightieth-birthday party and his convincing Greenberg to stay at the firm a month later, Cayne was thoroughy disgusted with the man who had hired him. “One of us is a giver,” he said. “One of us is not a giver. One of us is a taker. One of us reneged forty times. One of us reneged not once, not once. One of us has got the ability to sit and have a conversation, meaningful conversation, and it isn't about him. It's not about ‘What can you do for me?' That's all he thinks about…. He and Spector were like two fucking cocks in a barnyard hating each other because they both knew they were both the same. One of them was a little smarter than the other. One was a little more clever than the other. They were both basically pricks, bully pricks. Couldn't care less about the other fifteen thousand people. Couldn't care less. Pieces of meat, all of them.”
On December 6, Joe Lewis revealed that he had been buying more shares of Bear Stearns between October 19 and December 5, at prices ranging between $110 and $120 per share. His largest purchase was for 1.569 million shares, on October 19, for $118.80 per share. Lewis's SEC filing indicated he owned nearly 9.3 million Bear shares, or 8 percent of the total outstanding shares, worth just over $1 billion. The filing revealed that Lewis had made the purchases out of the “working capital” of his investment companies. He was the second-largest Bear Stearns shareholder, after Dallas money manager Barrow, Hanley, Mewhinney, & Strauss, which had more than tripled its stake in Bear Stearns during the previous three months. “Value managers like us buy the stocks when the news is iffy,” James Barrow, the president of Barrow, Hanley, told the Financial Times on December 10. “It's selling at book value and expected to earn $10 a share next year. So this is a good deal if you ask me.” Barrow added: “I've met Jimmy Cayne and I know how he operates. If I didn't trust in his management, I wouldn't be buying the stock.” Brad Hintz, the Sanford Bernstein research analyst, said of the purchases by Barrow and Lewis, “You're getting the bottom-feeders buying into the company. Lewis is saying, ‘I can look through this cycle.' He's not worried about the leadership because there's nothing wrong with the current management. Remember, you're investing in them, not adopting them.”
AROUND THIS TIME in December, after the fourth quarter had ended but before the firm's results were announced on December 20, Cayne—by his account—decided to begin a discussion with the board of directors about the possibility he would step aside and appoint Alan Schwartz the new CEO. Even though, whenever asked, Cayne had always insisted he would stay at the helm of Bear Stearns for years and years, in truth, by the end of 2007, Cayne no longer had the fire in the belly. He also had no idea what to do to return the firm to profitability. “There was a period of not seeing the light at the end of the tunnel,” he said. “It's not knowing what to do. It's not being able to make a definitive decision one way or the other because I wasn't good enough. I wasn't good enough to tell you what was going to happen.”
At the fateful December board meeting, Cayne asked Molinaro, Schwartz, and Greenberg to leave the meeting so he could speak to the board alone. “I asked for a non-executive session, which means everybody else leaves except me and the board,” Cayne said. “I sit down with the board and I said, ‘Look, I think we need a fresh pair of eyes. I think that we need somebody to come in and take a look at our position and tell us what we're doing wrong. That person isn't going to be an incidental person.’” Among the people Cayne was considering bringing into the position—essentially replacing Spector—were Thomas Montag, then a senior fixed-income partner at Goldman Sachs who ended up at Merrill Lynch, and Tommy Maheras, a senior fixed-income executive at Citi-group who had been fired. “I don't know who it is that's going to come in,” Cayne said, “but I'm going to have to offer him a big position. It's going to be unfair to Alan Schwartz if I bring the guy in as a co-president because we just had a co-president. My motivation was simple: I wanted the board's permission to pull the trigger on making Schwartz the CEO.”
At first, Cayne said, the board did not see things his way. “They debated it,” he said. “They had a discussion. They finally said, ‘Okay.' Now, nobody at Bear Stearns knew that. They didn't know that I went to the board and asked for permission to pull the trigger myself. I wanted to be able to say at some point, ‘I'm done,' and I didn't know when it was going to be. Little did I know that it was going to be January.”
There were other interpretations of what happened in December. For instance, one board member said that while Cayne did approach the board in December about choosing Schwartz as his successor and one day giving up his post, there seemed to be a different interpretation of Cayne's assessment that the board did not want him to leave anytime soon. “The ‘Don't panic now, we've got to have you stay on' line was not entirely accurate,” this board member said. “Jimmy, at this point, was very, very not all there. He wanted to hear that he needed to stay on.”
Before the Christmas break, Schwartz called together the senior executives of fixed income, equities, and banking and, according to one of the participants, gave them a pep talk. He did not want all the bankers and traders going on vacation pissed off and worried about their bonuses. He also wanted them to stay in their chairs for another year. He preferred a direct discussion about the situation rather than rumor and innuendo. “Look, guys,” Schwartz told them, “let's get through year-end, compensation pressures, all that shit. We had a really bad fourth quarter. I consider it a failure of management. We let you guys down and we've got to suck it up and get it done.”
But to his surprise, after each meeting with the various business leaders, there was a recurring theme, which was: “It's nice for you to say we all have to come back, but what's going on with management? Are you taking over?”
Schwartz said, “Guys, what's the difference? That's not important. We're all here. We're all a team. We screwed up as a team. We'll fix this as a team.” But the executives told him they wanted to know.
Schwartz said, “Don't make that a big issue.” At each meeting, the first question was “Is Jimmy staying on?” which was quickly followed by “We're not coming back for another year of this shit. The Wall Street Journal says our CEO smokes pot. Who needs this shit? We're getting ridiculed by clients. We're out there on the firing line with people saying, ‘Nice firm you work for! You guys look ridiculous! You guys are a laughingstock!’”
After these meetings, a small group of the firm's most senior executives approached Schwartz with a crystalline message: “If before bonuses are paid on January 20, there is not a change in management, then you're going to lose a ton of people. Just know that.” Now Schwartz had a serious dilemma. If he didn't approach Cayne with this news, the fact that he did not would be known inside the firm and give its best people cover to leave Bear Stearns for other places on Wall Street. “It would give people an excuse for being disloyal,” one of them said. “They don't have to say, ‘I'm being disloyal'; they just say, ‘I told you, I was ready to stay but you called my bluff.’” From time to time over the years, Schwartz had thought about giving up his management position at the firm and assuming the mantle of eminence grise in the M&A world, not unlike a Felix Rohatyn or Jack Levy, who were well-regarded senior M&A bankers without a management role. He and Cayne used to joke that when Cayne left the firm, Schwartz would be a free agent to go wherever he wanted. But over the years, as Cayne stayed on and on, Schwartz began to think that he would leave the firm before Cayne. Schwartz would tell Cayne: “You're going to stay on for fucking ever. I don't even know if I can last as long as you can.”
Now Schwartz was in the uncomfortable position of having to tell Cayne the time had come. Schwartz had never planned for this moment. He had always taken the position that he would leave rather than get into a fight with Spector about the leadership of the firm. But now, with Spector gone and the firm reeling, he did not feel he could just walk out the door. Nor did he feel Cayne could any longer run the firm. He spoke with a few board members about what to do. Over Christmas break, a number of directors remembered that Schwartz had said to them: “You guys had better figure out what's going on here. You need to be aware of what's going on and make the decision.”
On December 18, Gasparino, at CNBC, reported that “for the first time in years, the board of Bear Stearns is actively talking about succession for Jimmy Cayne.” Gasparino could not put a timetable on Cayne's prospective departure, but he said that as the longest-serving CEO on Wall Street, Cayne “has run into a number of problems that is making the board a little anxious about his tenure going forward.” As “problems,” Gasparino cited Cayne's age, his health, the two investigations into what happened at the hedge funds—both by the SEC and by the U.S. Attorney in the Eastern District of New York—and the firm's prospects for the future. He said his sources told him the firm's fixed-income business, long the driver of Bear's growth and profitability, was “gone for the next year or so.” Gasparino predicted Schwartz would be the next CEO of Bear Stearns, although, he said, some board members were worried he was not ready for the job and would need some seasoning, a development that might keep Cayne in his seat longer. While Gasparino was breaking this news, the firm's stock was falling to around $91.35. That same day, the Wall Street Journal reported that Cayne and the rest of the executive committee had decided to forgo their 2007 bonuses.
On December 21, the New York Times ran a story, by Landon Thomas Jr., comparing Cayne to John Mack, the CEO of Morgan Stanley. Both men had presided over firms that had suffered major losses as a result of the financial crisis—for Bear Stearns, there was the $1.9 billion write-down; for Morgan Stanley, it was an $11 billion write-down—and both had agreed to give up their year-end bonuses. The difference between the two men, though, was that people were calling for Cayne's head and not Mack's. The reasoning seemed to be the two investigations into the Bear hedge funds and Cayne's penchant for playing golf and bridge as the walls of the temple were crumbling.
THE DAY BEFORE, on December 20, Bear Stearns reported its fourth-quarter results. As predicted, the firm suffered the first quarterly loss in its history. But what had been on November 15 an expected $1.2 billion write-down of its mortgage portfolio had morphed into a $1.9 billion write-down a month later. As a result, the firm posted a pretax loss of nearly $1.4 billion in the fourth quarter and a net loss for the quarter (after a tax benefit) of $859 million. For the year, the firm had net income of $233 million, down 89 percent from net income of $2 billion from the year before. The massive fourth-quarter loss stemmed from two fateful decisions: First was the mistake the firm made by becoming the repo lender to the hedge funds in June. As the assets Bear Stearns had financed continued to lose value during the fall, the firm rode them down to close to zero. Then there was the decision to continue betting against sub-prime mortgages by buying theoretically higher-quality Alt-A mortgages. “We told investors over and over that we were short the subprime sector, and we were,” Paul Friedman said. “Our trade was to be long the Alt-A sector and short the subprime, and we did it in size all along. Conceptually, it made sense, but when the market started to look beyond subprime we found that we couldn't hedge Alt-A securities—you still can't—and no one would buy them. So we had a huge position that just kept going against us.”
As was leaked in the fourth-quarter results, the executive committee decided not to receive any bonuses for the year. As a Christmas present of sorts to himself, Cayne sold 172,621 shares of stock that had vested in the CAP plan for $89.01 per share, a payday of $15.4 million. Ironically, as Cayne was selling, Lewis was buying even more Bear Stearns stock. In the month of December, Lewis had purchased another 2.2 million shares, he disclosed in an SEC filing the day after Christmas. He now owned 11.1 million shares, or 9.57 percent of the company's stock, making him again the largest shareholder and proving definitively that even some of the world's most highly regarded investors make bad investments.
On the morning of December 20, Molinaro hosted the obligatory analyst conference call. It was a sober affair. During the question period, Guy Moszkowski, at Merrill Lynch, asked Molinaro if the firm felt capital-constrained or needed to raise capital. Molinaro said the firm had sufficient capital. “We have historically had very strong capital ratios [and] significant excess capital,” he said. “Obviously the [fourth-quarter losses] will reduce that somewhat, but our capital ratios, we believe, are still very strong. We don't see a particular need to address that. Of course, we do expect that the closing of the $1 billion convertible security we sold to Citic will happen during the first half of the year and that will add to the equity capital base. So with that, capital ratios should move back to levels that we had been running at.”
By the time of the December 20 call, the firm had decided to hire Gary Parr, the Lazard banker, to add a patina of professionalism to the seemingly random efforts to either raise capital or sell the company. In the wake of the Citic deal, the thought occurred that perhaps there were other strategic deals out there for Bear Stearns to consider. Parr was not involved with the Citic deal or the Fortress deal or any of the previous failed attempts to raise capital. “They were thinking that perhaps there was another thing to do that would involve advancing their business strategy and capital,” Parr said. “It was more around the business strategy than around capital. We knocked around ideas. We talked about how to think about it. What sorts of things might make sense? What parts of the world might be the logical places to approach?” One idea that Parr and Bear's management was kicking around was whether a Middle Eastern investor would invest in Bear's prime brokerage business. At one point, Cayne had suggested to Parr that HSBC might be interested in a deal for Bear Stearns. Cayne also talked to Joe Lewis about that possibility. “Actually, Joe Lewis went and met with [the] Hong Kong [and] Shanghai Bank,” Tese said. “But they had no interest. Gary Parr canvassed around several of the banks. They didn't have an interest.”
But as the fall dragged on and none of Parr's efforts materialized into something substantive, pressure kept on building and building. “Jimmy was getting pressure from some of the shareholders, particularly Bruce Sherman,” Tese said. “Not so much Joe Lewis. But Bruce was calling Joe Lewis. We were also getting some pressure internally because Jimmy had been sick. Maybe we needed a change of direction. Everybody knew he was sick. At first, it didn't get out for about a week. But then when he didn't come in for a week, people were starting to say he had cancer. I said to the guys, ‘You know, he's sick but he doesn't have cancer.' The illness took a lot out of him physically. A couple of months after that, he was weaker, a lot weaker. The other side of it was, there was no business. We went from being busy as hell up until the summer, and then all of a sudden the mortgage business ended, which was 40 percent of our profits. The leverage lending business was over. Trading slowed down, with the exception of customer trading. But that's not a big driver of the business. Prime brokerage business was starting to show some strength. Jimmy knew exactly what the business was doing. He got a daily sheet and a weekly sheet and a monthly sheet. So he knew business was really bad. He knew that. It wasn't just us. You'd feel okay if it was just us. If everybody else was doing okay, then you could get some of that action. But business was bad all over. Your profit and loss, to a great extent, depended upon the marks on your balance sheet, which is a scary proposition, considering that a good part of your inventory is not selling particularly well. So pressure started to mount internally and externally. It became obvious Jimmy had to move out.”
AFTER THE HOLIDAYS, the tide started to turn against Cayne. “Everything was sort of rolling along, except that I was getting shit,” he said. When he walked back into his sixth-floor office after New Year's he was getting singed by the incessant glare of publicity focused on whether or not he would be the next CEO victim of the spreading crisis. “I think I made the papers forty days in a row,” he said.
Cayne knew that Bruce Sherman, the CEO of money management firm Private Capital Management and, with 6.43 million shares, Bear's fourth-largest shareholder, had been talking to the board and the press about whether it might be time for the longtime CEO to move on. Although Sherman did not know it, Cayne was even aware of the trip that Spector—when he was still at the firm—had made from his weekend home in Palm Beach to see Sherman in Naples to try to convince Sherman to fire Cayne and make Spector the CEO. “He doesn't know that I know that Spector came to see him,” Cayne explained, “and said, ‘Get rid of Jimmy. I want to be the CEO.' That's pretty nifty when a guy working for you does that, right? But he doesn't know that I know.” Sherman had also called Schwartz, as had Barrow, and told him: “You guys better do something because I'm hearing rumblings. You've got to take over or your good people are going to leave.” Schwartz did his best to deflect the shareholders' calls. Then Cayne called Sherman when he heard about the new Journal and Times articles. Sherman had been a longtime Bear shareholder, unlike both Lewis and Barrow, and had been euphoric in his praise of Cayne when the stock was steaming toward its all-time high a year earlier. Sherman's sentiment had changed. Cayne said he had decided, on January 4, the time had come. “This seemed to me to be a very good time to make a deal with Bear Stearns,” Cayne said, “where I would say to Alan, ‘I'm going to give up the CEO. I will stay as non-executive chairman.” He delivered this news to Schwartz before lunch on January 4. Cayne said he simply told Schwartz the time had come for Cayne to go. “I told him, ‘This is what's happening,’” Cayne said. “I also told him that I had a meeting and I was authorized to offer him the position. This isn't just ‘Let's do this and go to the board for approval.' I'd already got the board. The board has already told me and they didn't tell him. They didn't tell anybody. I had it in my pocket; I asked for permission to pull the trigger. They gave it to me. What's more clear-cut than that?”
