House of Cards (31 page)

he demise of Bear Stearns and the financial calamities it set off in the world cannot be explained just by the events of March 2008. The roots of the firm's problems are found deep in its unique corporate culture, which developed over decades, largely defined by the actions of three larger-than-life personalities: Cy Lewis, Ace Greenberg, and Jimmy Cayne.

Just after the start of a historic six-year bull market, Joseph Ainslie Bear, then forty-four, along with two younger partners—Robert B. Stearns, thirty-five, and Harold C. Mayer, twenty-eight—founded Bear, Stearns & Co. on May Day 1923. While the firm's business dropped off substantially after the Crash of 1929, it was carefully managed during these lean years and remained profitable. Small bonuses could still be paid and layoffs were avoided. By 1933, Bear Stearns had survived sufficiently to have grown to seventy-five employees, from the original seven, and increased its capital by 60 percent, to $800,000, from $500,000.

In 1933, with the hope of starting and building a corporate bond business, one of the firm's new partners, Teddy Low (born Theodore Lowenstein), recommended that they hire Salim L. Lewis, then all of about twenty-four years old and a former professional football player and shoe salesman, to run it. Until then, most firms traded only government bonds for the simple reason that very few corporations at the time—especially during the difficult economic years of the Depression—issued bonds. Bear Stearns's decision to hire Lewis to start this new business portended that changes were afoot. The brilliant and aggressive “Cy” Lewis, as he was known, was “a huge man with a powerful voice,” according to a later description in the
Times,
standing six feet two inches tall, “weighing more than 250 pounds, with an uncommonly large head … and a jolting temper.” In short order, Cy Lewis became the driving force behind Bear Stearns's transformation from a sleepy backwater on Wall Street to a serious and scrappy player in the growing securities industry.

He was born on October 5, 1908, in Brookline, Massachusetts, to Max Lewis and Hattie Lissner Lewis, two Orthodox and somewhat religious immigrant Jews from “either Russia or Poland, depending on where you pick the border,” according to his oldest son, Sandy Lewis.

Growing up, Lewis “had asthma, and he got it so bad he used to have to crawl up the stairs to get into his house,” his son said. He attended Boston University for three semesters but had to drop out because his parents did not have enough money to pay the tuition. To earn some extra money, Lewis became a professional football player in Boston—perhaps playing for the Boston Badgers, although no one alive is certain. “Professional football in those days wasn't the New York Giants and Larry Tisch,” Sandy Lewis said. “It was fifty and seventy-five bucks a game per player, paid from the gate. He was very tough and needed the money. On one occasion, and I've seen the result of this, he actually broke his wrist. It was a compound fracture with the bone showing. He went to the sidelines. They didn't have a substitute. There wasn't any question of what was going to happen next. They simply taped it up and he finished the game.”

With his football career not leading anywhere, in 1927 Lewis decided to move to Philadelphia. He followed a girlfriend down there and soon got a job working in a shoe store. Although he loathed it, he wasn't a half-bad salesman. “In those days, shoe stores were shoe stores, and this happened to be a shoe store which sold men's shoes,” his son explained. “And in comes a woman who's clearly in mourning. She had a black veil … over her face. She comes into the store, and it was understood that she was going to be his customer. She walks up and he says, ‘Well, now, what can we do for you?' She says, ‘Well, my husband's died and I would really like to be able to buy a pair of shoes for him that look terrific because we're going to have a funeral.' My father said, ‘Well, probably the best-looking pair of shoes we have in the store for this occasion would be black alligator shoes. Let me show you a pair.' He shows her a pair. She says, ‘Perfect.’”

After some confusion because the wife apparently did not know the husband's shoe size, Lewis suggested that since she needed the shoes immediately to give to the undertaker, she might consider buying two pairs of the alligator shoes. “Now, it happens that the owner of the store was desperate to get rid of the alligator shoes,” Sandy recalled. “They just weren't moving. The reason they weren't moving was very clear. They looked great. They didn't feel so good. Until you walked, they were fine. But after you walked, these shoes were anything but terrific. My father understood from the owner that if he were able to sell these shoes in quantity, he would make more money. So the commission on one pair might be X. The commission on two pairs wasn't 2X. It was 3X. So he said to her, ‘You know, if you could just estimate, what I'll do is I'll sell you a pair that's in that range and then maybe I'll sell you one that's just a tiny bit larger so you'll be covered no matter what. I might be able to give you
a little discount under the circumstances that your husband died and you are buying two pairs.’”

After a quick consultation with the owner, Lewis made the widow the offer. “Of course, that was all wonderful for the owner,” he continued. “Dad gets his premium. She gets the shoes. She got a little discount. The owner moved two pairs instead of one. Everybody was happy. So he sold two pairs of shoes to a dead man. This is a great story and he told it often.” The story became a parable for the questionable ethical and moral behavior that Cy Lewis encountered all too often in his highly successful Wall Street career. “The reason he told it,” Sandy said, “is because as far as he was concerned, the sales in Wall Street, the whole idea is to move product. It's not a particularly interesting question whether or not it fits. Just get the product out the door.”

But Lewis could not stand selling shoes. His only ambition was to get a job on Wall Street. He did that through a carefully planned encounter at the North Shore County Club, on Long Island. “He got to Wall Street through a parking lot,” his son said. “He got to Wall Street because he went to the North Shore Country Club, which was a Jewish country club on the North Shore of Long Island. Herbert Salomon [the president of Salomon Brothers, the Wall Street partnership founded in 1910] had something to do with getting him there. Cy Lewis stuck to Herbert Salomon because he was hoping to get himself a job at Salomon Brothers. He ended up getting Herbert Salomon's car for him in the parking lot of the country club, which is pretty remarkable because he didn't know how to drive. That didn't bother him any. He got the car over to him. Salomon said to my father, ‘Come in on Monday morning, son. We'll have a talk.' Dad showed up bright and early on Monday morning and got himself a job as a runner.”

As a runner, Lewis would carry bond certificates from one Wall Street firm to another, from one client to another, through the system of underground tunnels all around the Wall Street area that kept these messengers from having to deal with inclement weather. The brilliant and ambitious Lewis quickly graduated from his delivery boy role and joined Salomon Brothers' impressive sales and trading department.

Soon enough, though, Lewis got fired from Salomon Brothers. He then moved on to Barr, Cohen & Co. He worked for three years in the sales department but got fired again. He worked at two more firms and got fired from them, too. “Dad was the kind of guy who would have ideas and want to carry them through,” his son said. “He wouldn't have done anything wrong. It would have been because he was impetuous. It would have been because he had terrific ideas and he wanted to get stuff done
and he would have said, ‘Well, for Christ's sake, why don't we do this and this and this?' And some old partner would say, ‘I don't need this nonsense. Get him out of here.' Because at the end of the day, if you were making decent money, it was a carriage trade business. The last thing this man could live with, under any circumstances, was boredom. And you'd sit in these firms and wait until the phone rings and be told, ‘Buy as agent a hundred bonds or maybe a hundred shares of stock.' You're not going to get rich on that. He didn't have any money. The only way he was going to make money—and he knew this from day one, this is something that drove the whole process—you had to make money with money and it had to be other people's money. He didn't have any. You couldn't raise it. You didn't go to the bank and borrow it and then speculate on it. You had all kinds of margin requirements and structure in these firms. These firms, with the exception of Salomon Brothers, never used their own capital, including Bear Stearns.”

When he was hired at Bear Stearns, Lewis's mandate was to slowly and profitably dip the firm's toe into the water of making money judiciously using a tiny slice of the firm's $800,000 in capital. At the time, very few—if any—Wall Street firms were making a market, as principal, in corporate bonds—acting as an agent, yes, but not as a principal. “Bear Stearns's capital would have increased with these things because he made money,” his son said. “This guy knew how to make money.”

Five years after he landed at the firm, on May 2, 1938, he became a partner. His capital contribution to the partnership was $20,000, and this he got from his wife, who received the money as part of her second divorce settlement. This was a very slow period on Wall Street. The Depression was arguably at its worst. Trading volume on the stock market was often fewer than a million shares a day. Bear Stearns's clients in those days were said to be “mainly rich Park Avenue German Jewish widows.” “People think 1932 was bad,” Sandy Lewis said. “My dad told me 1938 was the worst of it. They never thought they would ever get out of this goddamn Depression. And his knowledge of that was profound.” Still, the firm made slow and steady progress. In December 1940, Bear Stearns announced that it was buying the Chicago firm Stein, Brennan Co., which had acted as Bear's correspondent in Chicago since 1932.

Ironically, Lewis's big break at Bear Stearns came after the bombing of Pearl Harbor, when the United States decided the time had come to enter World War II. Cy Lewis was the father of four children, and fathers were exempted from war service. Instead, Lewis dedicated himself to making money for Bear Stearns and for his family. “The war came and Roosevelt needed to arm the nation and deliver whatever he needed to
the factories and then take the product to the ports and get it out of here,” his son said. “He was trying to produce airplanes, tanks, trucks, millions of things. They had to seize the railroads and force traffic over the railroads and make sure that the railroads were working just for the government to move product. You had to make sure you got it when you needed it. This was war. They broke the railroads. They put credit controls on. You couldn't borrow money.”

Lewis noticed that before Roosevelt commandeered the railroads for the war effort, railroad bonds were trading at par because interest payments were still being made. “But, all of a sudden, they can't pay the coupon,” Sandy Lewis said. “So they start trading what is called ‘flat.' You can buy and sell a rail bond any way you please, but the coupon's not accruing. It's dead…. If you buy it, you can call it a future and maybe it'll be worth something someday.” With these railroad bonds no longer paying interest, they were trading as low as 5¢ on the dollar. Lewis started to think about whether to buy the bonds at these severely depressed prices. He figured either Armageddon was imminent—in which case nothing much would matter—or the United States would end up winning the war and the country would desperately need its railroads back to rebuild and to supply the victorious nation. In the latter instance, railroad bonds bought at a steep discount during the war would be worth a fortune.

To implement his idea, Lewis knew he would need someone else's money, since Joe Bear would never give him what he needed from the firm's capital. So he contacted Harrie T. Shea, a loan officer at Marine Midland Bank, which had its offices near Bear Stearns at 140 Broadway. Lewis convinced Marine Midland to lend Bear Stearns the money to buy the railroad bonds. Although the rate of interest Marine Midland could charge Bear Stearns was fixed at a low level because of the war effort— lending to Wall Street was a permitted use of capital—the interest on the loan still had to be paid while Lewis was accumulating his inventory of non-interest-paying railroad bonds. To generate the needed cash to do so, Lewis became one of the largest sellers of war bonds to individual investors.

The risk of owning railroad bonds that were paying no interest heightened the fear in the Lewis home. “We had guys coming to our house and asking my father, ‘How are my accounts doing with all these rail bonds?’” Sandy recalled. “And my father would tell them, ‘They're trading flat, but someday they're going to be fine.' The tension in the house rose and rose and rose, because you had to pay interest on that money. Even though the interest was capped, there still was some interest, and you had to pay that interest. There was enormous emotional
pressure: many cigarettes, lots of scotch, lots of talk, and lots of anxiety. It was enough to turn everybody into a nervous wreck.”