House of Cards (40 page)

G
REENBERG'S MANAGEMENT STYLE
and the use of his quirky alter ego— which caused many of his partners to question his sanity—were unique on Wall Street. There was no question Wall Street was changing, and fast. The back-office crisis of the early 1970s, in which many firms failed because they were unable to process effectively the increase in trades and then bulked up their staffs to do so just in time for business to drop off a cliff—drastically altered the landscape, as did May 1, 1975, when fixed commissions evaporated. Many firms failed outright or were forcibly merged with others. Greenberg repeatedly reminded the Bear brethren how proud he was that the firm had survived those tumultuous times while also confirming to his partners how precarious a place Wall Street remained.

But the biggest change to hit the small Wall Street partnerships affected their very legal structure, changing them from shared-liability partnerships to corporate structures that spread the liability from the partners according to their capital contributions to shareholders based on their ownership. Merrill Lynch was the first to change from a partnership structure to a corporate structure, in 1968, but in early 1970 Donaldson, Lufkin & Jenrette (DLJ) was the first Wall Street partnership to take the inevitable next step and sell stock to the public in an initial public offering, or IPO. For the first time, as a result of a rash of Wall Street IPOs, firms were able to raise capital easily through public offerings of both stock and bonds, but, more important, these firms' employees—no longer technically referred to as partners—were encouraged by their bosses to use their new shareholders' capital to take vastly more risk than ever before. The men running Wall Street knew full well that any liability for
their risk taking—once borne by their partners—now fell to nameless, faceless shareholders (some of whom, of course, were their former partners). The holy grail of investment banking became increasing short-term profits and short-term bonuses at the expense of the long-term health of the firm and its shareholders.

While firms all around Bear Stearns went public—among others DLJ in 1970 and Merrill Lynch in 1971 (the latter the first to be listed on the NYSE)—Bear remained a private partnership, with an intense if quirky focus on cost and risk controls. Only those business lines that had proven an ability to make money—such as clearing, the brokerage, and the fixed-income division—were given more capital, albeit parsimoniously. “A firm philosophy was to never anticipate what businesses would be good or bad,” explained one longtime senior Bear executive, “but to give businesses that were profitable an opportunity to reinvest their revenues. Revenues as opposed to earnings, because sometimes they didn't have earnings that quickly, but they would have more and more business. So areas of the firm—let's say clearance—that were suddenly ramping up more customers would have access to more resources. The historical view of the management of the firm was that they don't plan. They don't have business plans. At one point they were proud the only thing that was planned was the executive dining room. Everything else was opportunistic. There was a view that it is an opportunistic culture, and what opportunistic meant to them was an opportunity, was something that demonstrated that it was profitable, not a theory. It was definitely a view that if you made money for the firm, you had the right to tell the firm where it should spend money. If you didn't make money for the firm, you could have all the thoughts you wanted and they may or may not listen.” This haphazard strategy, which worked well for the longest time, is key to understanding what happened in March 2008.

The lessons his father had learned in the rag trade were not lost on Alan Greenberg. Indeed, by the early 1980s, he was an inveterate proselytizer for reducing expenses and for selling off the slow-moving inventory on the firm's balance sheet. When asked once what makes a great trader, he said, “Oh, I don't know. I think the important thing in the securities business is just taking losses. Saying you are wrong. If you own securities, and if you make a mistake, you can take a loss. If you make a mistake in real estate, you have to buy a for-sale sign. And I just think the ability to take a loss and say you are wrong is something you should do.”

In truth, Greenberg had a complicated relationship with risk taking. Sometimes he encouraged his traders to take more risk and sometimes he cut them off. In the two hundred or so discretionary trading
accounts that he personally managed over the years, not surprisingly, he was very careful about taking risks, choosing—like Warren Buffett—to focus on a dozen or so stocks and holding them for the long term. In 1981, in the midst of DuPont's $7.5 billion acquisition of Conoco—then one of the largest acquisitions of all time and a bruising donnybrook between DuPont, Seagram, and Mobil—Robert Steinberg, who took over running risk arbitrage from Greenberg, had devised a trading strategy he described as “can't lose.” The problem was that Steinberg had reached the limit of the capital the firm had allocated to him for merger arbitrage investments. Greenberg would have to sign off on increasing that limit. Alan Schwartz, then head of the firm's small investment banking department, volunteered to speak to Greenberg on Steinberg's behalf. “I went to Ace, because it seemed as if we could do even better if we bought more,” Schwartz recalled years later. “Ace said to me, ‘Why do you think we have these limits? To keep people from buying too much of things they
don't
really like?’” But Steinberg said that Greenberg would also frequently tell him, “‘Bobby, you haven't lost enough money lately.' The message was ‘You're not taking
enough
risk. Are you doing everything to maximize [your gains] or are you just being careful?’” Barry Cohen, a longtime Bear executive who was also once head of risk arbitrage and of the firm's hedge fund business, explained Greenberg's business philosophy as being a simple one. “Losing money, never upset,” Cohen said. “When he hears somebody around here doesn't return a phone call, very upset.”

Greenberg also began to put his imprimatur on the firm through his philosophy of hiring people cut from cloth similar to that of his own and Cayne's: a breed of smart, tough street fighters—being from the Midwest was a plus—who did not necessarily have the pedigree, bloodlines, or education of Bear's blue-blooded, better-known competitors. On May 4, 1981,
Time
ran a cover story titled “The Money Chase: What Business Schools Are Doing to Us,” a lengthy explication of the growing demand among young people for graduate business degrees and what effect that might have on society. “There has been a lot of publicity lately about firms hiring students with MBA degrees,” Greenberg wrote his partners the next day. “I think it is important that we continue a policy that has helped us prosper while growing from 700 people [in 1973] to over 2,600 today. Our first desire is to promote from within. If somebody with an MBA degree applies for a job, we will certainly not hold it against them, but we are really looking for people with PSD degrees”—that is, those who were poor and smart, with a deep desire to become rich. “They built this firm and there are plenty around because our competition seems to be restricting themselves to MBA's.”

The desire to hire “PSDs” was also decidedly unique on Wall Street, and Greenberg celebrated it. “There's a huge pool of bright people out there that can't get jobs and didn't even go to college because of either family problems or money problems or whatever,” he said. Welcomed at Bear Stearns were people like Ray Xerri, the son of a baker from the Bensonhurst section of Brooklyn, who was in charge of making sure the firm complied with the SEC's net capital rules, and Mark Konjevod, a scholarship linebacker on the 1990 University of Colorado championship football team. “It was very much a locker room mentality at Bear Stearns,” Konjevod said by way of explaining why he generally felt comfortable there.

This being Wall Street, all was not sweetness and light. Greenberg could be plenty pointed and ruthless, too. This came across in his memoranda and in his relationships with his senior partners. After September 1982—“the best month in the history of Bear Stearns” and the start of a historic bull market—Greenberg admonished them nonetheless. “I think we should be on our guard against negatives that go along with great success,” he wrote. “I am speaking of complacency, sloppiness, relaxing on expenses, cockiness. And just getting careless in general. This is the time to be on our guard. If the market does go our way, I want to make every dollar and leave nothing on the table. The market may turn sour again, so do not forget for a moment what the great coach Haimchinkel Malintz Anaynikal said many years ago, ‘when the going gets tough, the tough start selling.’” He also announced that the executive committee had decided that no partner could make an outside investment—other than buying publicly traded stock and bonds—unless approved by the committee, which, he said, “does not want our partners worrying or thinking about any business other than Bear Stearns. Owning an equity interest in our firm is the best investment any of us will ever see; so let us give B.S. 100% of our effort.”

He also shared his thoughts about his partners' work ethic. “Every partner is entitled to a vacation,” he wrote in August 1982, “and we have never been particularly fussy about how long the vacation is nor do we keep score on how much time is taken over the course of the year. I do feel that if a partner is not on vacation, he should treat Friday like any other day and show up for a full day of work. Haimchinkel Malintz Anaynikal never took off a Friday in his entire life.” And neither did Greenberg. For the most part, though, a culture developed at the very top of the firm— despite Greenberg's memos—of early Friday (or late Thursday) departures for the Jersey shore, Palm Beach, the Hamptons, Greenwich, Martha's Vineyard, or Nantucket. This was by no means unusual behavior on Wall Street. Nor did the senior partners' absence from the office necessarily
mean they were unreachable. Nevertheless, over the years, it was not unusual for Greenberg to be the only member of the executive committee in the office on Friday (and then he would stew over this fact).

He also shared his thoughts on his partners' occasional mistakes. “I am well aware that humans will always make errors,” he wrote in January 1983. “My irritation comes from the fact that these errors are not caught immediately. In many cases, this is because the producer is too lazy to look at his run the following day; too lazy to look at the registered representative copies of the confirms and too lazy to check the monthly statements. The firm has always been very understanding when errors are made. We will not be understanding if the error is not caught because of subsequent stupidity and laziness. Please see that the people who work with you and for you understand the rules because I do not want any crying when an associate blows a year's salary.” He could lecture them, too: In a January 1984 memo, he wrote how he was “more determined than ever to follow the simple rules laid down by the Dean of Business Philosophers, Haimchinkel Malintz Anaynikal: 1. Stick to thine own business. 2. Watch thy shop. 3. Limit thy losses. 4. Watch thy expenses like a hawk. 5. Stay humble, humble, humble. 6. When dealing with a new account, know thy customer and know thy customer's money is up.”

He belittled his partners in other, less public ways as well. One year early in his tenure as the senior partner, after he had decided upon his partners' profit points, he met with the executive committee. “You get a grade,” Cayne remembered. “We're in the room and he takes the piece of paper with the points on it, and throws it on the floor for the partners to crawl down on the floor and get it. As he did that, I basically said to myself, ‘This is the biggest asshole, prick, bully ever.' Here are grown men awaiting their award. Yeah, probably deep down they're saying to themselves, ‘I don't deserve shit. I don't deserve it,' except that it's a game where you get points. He throws it on the floor for them to go and grovel and get it.” Yet Greenberg also admonished them for feuding. “Haimchinkel Malintz Anaynikal recently brought to my attention certain intercompany feuds that have led to the downfall of firms smarter, richer and larger than ours,” he wrote in April 1984. “Watching for these signs of dissension will be a high priority of mine. Whenever you have a partnership of over 80 people, there is bound to be a person or two who is not your exact cup of yogurt. For years, the partners of this firm have gotten along remarkably well and the cooperation at this time is great. One of the things I am going to be extremely sensitive about in the future—and come down very hard on when I see or hear of it—is acrimony among partners. Honest men may differ, but when the difference becomes animosity,
you can have problems. I am not going to let personal conflicts have any effect on the net income of our golden goose.”

I
N
J
UNE 1983
, in a lengthy Sunday piece, the
Times
tried to sum up the mysterious world of Bear Stearns and its polymath senior partner. Leslie Wayne, the
Times's
reporter, noted from the outset the sign “Let's make nothing but money” that hung outside the firm's “cavernous” trading room, and then openly questioned the way the firm went about doing just that. “What really characterizes Bear Stearns is its willingess to commit capital where other houses might fear to tread,” Wayne wrote, “whether representing dissident shareholders in proxy battles that other firms shun or investing heavily in bankrupt or financially troubled companies, or in doing underwritings for corporate clients that one partner characterized as having ‘not the highest bond ratings.’”