House of Cards (36 page)

A few weeks later, Stayman called Cayne. Stayman told him he and
his partner were looking for another pair of players to be their partners for the Vanderbilt Knockout, which was then one of the national bridge tournaments. Cayne said Stayman told him, “I thought maybe you and Chuck”—Cayne's partner Chuck Burger, from Detroit—“would like to join us.” He recounted: “I said, ‘Let me get this straight. You want Chuck and me to join you and another pair and play as a team?' He said, ‘Yes.' I said, ‘Sam.' He said, ‘Yes.' I said, ‘You're not ready yet.' Click.” Cayne's rebuff was especially impertinent given Stayman's bridge pedigree. In short order, though, both parties reconciled. Strand became one of Cayne's accounts—“A big one,” Cayne said. “A direct-line account”—and Cayne and Burger played with Stayman in the championship (and others over the years). And Stayman paid Cayne in commissions.

E
VERYTHING WAS QUICKLY
coming together for Cayne at Bear Stearns. His lifelong flair for hucksterism was paying off for him as a Wall Street stockbroker. He finally had found a line of work where his risk-taking skills could be married with natural talent as a salesman and pay off for him financially. Within a year or two, he said, he was making between half a million and a million dollars a year, which in 1971—in the midst of the Vietnam War and Nixon's wage and price controls—was a substantial sum. He continued playing bridge regularly, of course, and his name often appeared in Alan Truscott's bridge columns in the
New York Times
as “Jim Cayne.” In April 1971, Cayne and Denner decided to get married, and the only announcement of their nuptials came in Truscott's April 21 bridge column.

His prowess in bridge was such that Cy Lewis recommended to Cayne early on in his career that he choose between Wall Street and bridge. Lewis, a modest bridge player himself, did not think Cayne could do both without each of them suffering. Cayne ignored Lewis's advice for the simple reason, according to Cayne, that “he was wrong, just like wrong all the time. Almost his entire record was perfectly wrong…. He was not a good leader. He didn't have the respect of almost everybody. He was a bully. Drunk. He had a pitcher of martinis at lunch. Not well respected in the community.”

Two years after arriving at Bear Stearns, Greenberg offered to make Cayne a partner. “I'm a big salesman, making a lot of money”—around $900,000 annually—“on commissions,” he said. “They said, ‘We're better off bringing him into the partnership.’” At that time, Bear Stearns had about thirty partners, each receiving a “draw,” or salary, of $20,000 a year and then a percentage of the firm's profits. “I looked at him and said, ‘What does that mean, partner?’” Cayne said. “Greenberg said, ‘Well, you become
a partner at a Wall Street firm.’” Cayne couldn't figure out how the math worked or how the new arrangement would be better than the current arrangement. His wife encouraged him to accept the partnership. “You've got to be a partner,” she told him. “That's just how it works.”

But Cayne said no, since he thought a partnership seemed uneconomical. “To me, they had one person that was worthwhile,” he said. “That was Greenberg. So I passed.”

Still, he was clever enough to read the handwriting on the wall. When he first started out, Cayne said, he could earn a $300,000 commission for “crossing a block of stock” for Larry Tisch, the equivalent of around 30¢ a share in commission. But the days of fixed commissions were coming to an end. A year after telling Greenberg he had no interest in becoming a partner, he decided to take the Bear Stearns partnership and tie his compensation to the commonweal rather than directly to his own production. He became a partner in May 1973. He knew that in two years, May 1, 1975, fixed commissions for brokers would end on Wall Street, a day that would become known as “May Day.” This fact changed Cayne's mind about accepting a partnership at Bear Stearns. “I take a partnership because I was concerned about my ability to maintain a high level of commission income based on my clientele saying, ‘We're not paying thirty cents a share, twenty-five cents a share. We're paying nothing, a nickel,’” he said.

He negotiated for himself a 2 percent share of the firm's profits. In the first few years, though, that arrangement resulted in a huge pay cut for him. “I made a horrible decision my first couple of years,” he said. “I didn't make any money. The firm didn't make any money, so my capital account didn't appreciate.” Cayne ranked about twentieth in the partnership hierarchy in terms of compensation. Greenberg ranked second, with a 5 percent stake, behind Lewis, who had a 7 percent stake.

Despite Greenberg's success and Cayne's growing prominence, there was no question that Bear Stearns was still Cy Lewis's province. In July 1973, just as the firm was readying to move its headquarters to 55 Water Street, which would double its office space, the
New York Times
took brief stock of Bear a couple of months after it celebrated its fiftieth anniversary. “Bear Stearns has 800 employees, but in a very real sense it is a one-man firm,” the
Times
reported in its first-ever profile of Bear Stearns. “That man is Salim L. Lewis, its senior partner, known as Cy to one and all.”

In its attempt to glorify Lewis, the
Times
made no mention of the accomplishments of the other Bear partners. For instance, in 1973, it turned out that the firm had leased more space at 55 Water Street than
it actually needed, and Greenberg landed upon the idea of offering that space rent-free to other, much smaller brokerage firms on the condition that they agree to allow Bear Stearns to settle their trades, a business known as “clearing”: for a fee, Bear Stearns would make sure cash and securities were in their proper accounts and properly accounted for. This was and is a mundane, unglamorous, but immensely profitable recurring business and became a major source of the firm's profitability—and occasional brushes with the law—for the next thirty-five years. For the small brokers, having Bear Stearns clear their trades allowed them to slip the Bear Stearns name onto their customer's brokerage statement, adding a measure of prestige and reliability to what otherwise might have had the appearance of a flimsier operation.

A
S FOR
C
AYNE
, he had serious ambitions. He wanted to run the firm. When he became a partner, he was one of four in the firm's retail department. But he was the only one, apparently, who had the ability to hire new brokers. One of the firm's strategic focuses at that time was to grow the brokerage business slowly as the baby boomers hit their peak earning years and the nation's wealth increased. But unlike the other large brokerage firms, Bear Stearns refused to pay brokers an up-front bonus to come to the firm. This made hiring brokers more difficult for it. “Hiring was an incredible thing,” Cayne said. “It was fun because it was (a) a challenge, (b) I didn't offer anybody anything. There was no up-front. It's just like ‘Come and play with me in my sandbox.’” Little by little, Cayne was able to lure brokers to the firm and his influence grew, especially as the brokerage division delivered growing profits.

When New York City's finances collapsed in 1975, Cayne saw an opportunity to make a killing. The city was teetering on the edge of bankruptcy, and one of his clients wanted to sell some of his New York City bonds, but no one wanted to buy them. Not even the firm's municipal bond desk would bid on his client's $200,000 worth of city bonds that were maturing in two months. This struck Cayne as risk-averse in the extreme, especially since the city had not actually defaulted. He also noticed that other municipalities' bonds were trading flat, without paying interest. Cayne decided to go see Melvin Lechner, the budget director for New York City, whom Cayne knew from the bridge table.

He called Lechner and asked him to introduce him to the purchasing manager for the City of New York, a Mr. Scott. “I go to see Mr. Scott,” Cayne said. “I go into a huge room. It's sort of like the justice in Twin Falls, Idaho. He's sitting at a desk in a massive office with one desk and one chair in front of it. And I walk in.” At first, Cayne tried to get Scott's
agreement that Bear Stearns would be hired exclusively to implement the idea he had come to discuss. But Scott balked. Cayne shared the idea anyway. “My idea was simple,” Cayne said. “I started by saying, ‘What does the city do with its overnight money?' He said, ‘Well, I send it out overnight.' I said, ‘What do you get, 2 percent, 2.5 percent? How would you like to get like a 50 percent return, annualized?' ‘Well, how do you do that?' he asked. I said, ‘By buying your own notes.' ‘Buying our own notes? Well, what price do you have to pay?' I said, ‘I think if I paid 99, I could buy a lot of notes.’” Scott liked the idea immediately, Cayne said, and agreed to give Cayne “an open order” to “buy as many as you can.”

Cayne was ecstatic. Armed with all the bad press about New York's finances, an open order to buy New York City notes from Scott, and the further insight that other municipal bond houses around New York, like Lebenthal, could no longer go to a bank to finance their inventory of municipal bonds, Cayne decided that Bear Stearns should make the market in the city's bonds and notes. These small municipal bond brokerages “weren't getting 99¢ on the dollar from Chase anymore,” Cayne said. “You talk about a credit crunch, you talk about a locked market. Nobody can sell. Nobody can buy. And the city is still not in default. And there's no price.”

He took the idea to Bob Tighe, head of Bear's bond department. “I tell him that I think Bear Stearns has money,” Cayne said. “And that we can inventory [bonds]. ‘Put out an ad saying we're buying New York City securities. There is a market after all. I will not use the sales force to sell them. I'll do it myself. And I'll do it with all the little houses, cash and carry. Like you want to buy $20,000 worth of bonds, let's say face value is $20,000 and let's say they cost 50¢ on the dollar. You give me $10,000 and I'll give you twenty bonds. No credit. Can't lose.' Tighe says, ‘That's the dumbest idea I've ever heard.’” Undeterred, Cayne went to Greenberg. “Little too racy,” Cayne said Greenberg told him. “Little too out there. He says no.” The partners of the firm were concerned that Bear Stearns already had its share of municipal bonds in inventory that were not paying interest, and they could not imagine adding to that supply at the very moment when the city seemed on the verge of default. A very sensible argument, and in keeping with what Greenberg's father had taught him about slow-moving inventory.

But Cayne was more of a gambler than Greenberg. He saw a chance for a contrarian bet, and knew just the man who might be simpatico: Cy Lewis. “Okay, I got one stop left,” Cayne said. “And that's with the guy who, remember, screamed at me about Larry Tisch. But by then, I was
his
guy. I belonged to his club”—Hollywood Country Club, in Deal, New
Jersey. “He was very proud of me. Liked me a lot. I said, ‘Cy, you were responsible for Bear Stearns going from here to here,' because he dealt with railroad reorganization bonds in the 1940s or 1950s. And if you want to know the truth, it looked a little like the New York City thing, where you have to have a little set of balls and you go out and do something. And I said, ‘Cy, I know it's bad to say you can't lose. But you can't lose.' He had one question: ‘What did Greenberg say?' I said, ‘Greenberg said no.' He said, ‘Do it.’”

Lewis asked Cayne what he needed. Cayne replied: “I need a calculator. I need to remove myself a little bit from being full-time sales manager of the retail department. And I need $5 million.” With Lewis's endorsement, Cayne placed an ad in the
New York Times
offering to buy New York City debt with a face value greater than $50,000. The ad listed Cayne's name and phone number. “On Monday morning, I'm ready to go,” Cayne said. “I've cleared my desk. I've got my calculator. I've got the equivalent of Suzette”—Suzette Fasano, his current longtime assistant— “sitting there waiting for the phone to go off the hook. Nine o'clock, I get a call. It's from a trust officer in Denver, Colorado, working at one of the banks. ‘Mr. Cayne, I read your ad. It seems very interesting. I've got one of my clients who'd like to know more about it.’” Cayne confirmed the client had $300,000 of New York City bonds, due 2002, for which the fellow had paid par, but now he was very nervous about getting paid his money back because of the rampant speculation about the city's bankruptcy. Cayne figured he could sell the bonds to his network of small municipal bond brokerages for somewhere around 35¢ on the dollar. The small brokerages had no inventory of bonds but were anxious to have an attractive investment to show potential clients. To make money, he figured he could offer the Denver banker around 30¢ for the bonds—for which his client had paid 100¢.