House of Cards (41 page)

Wayne could not quite decipher what made the firm tick. “This boldness and penchant for making money has caused some to raise questions about Bear Stearns' identity,” she continued, “whether it acts as an agent for clients by providing services for a fee or whether it is simply a trading vehicle for its partners, or both. Emphasis on the latter causes some to question the firm's devotion to its clients and this is often cited as one reason why Bear Stearns lacks blue chip corporations on its client list.” She noted that the firm found a way to make money by buying the distressed securities of Penn Central, Chrysler, International Harvester, Manville, and Revere Copper and Brass. Bear Stearns had bought almost two million shares of the struggling Revere Copper, the value of which had nearly tripled. Firm-wide revenue was around $650 million and its net income was $160 million. Although the partners' draw was only $74,000, their bonuses reached as high as $2 million. “You move up here by making money,” said Frank Martucci, the partner in charge of corporate bond trading. “The more you make, the higher you move.”

This level of financial success quite naturally raised a few eyebrows on Wall Street. “Bear, Stearns is seen as a firm of bright, sharp entrepreneurs who are more self motivated or motivated for the individual gain of people within the firm rather than building a corporate entity for the long term,” observed Samuel L. Hayes at Harvard Business School. Leslie Wayne cited a number of instances where the firm appeared to have a conflict of interest—“for instance, acting as a market maker in the shares of one company at the same time it was waging a proxy battle against that company's management”—but plowed ahead anyway. She noted that the firm happily represented corporate raiders, such as Irwin Jacobs in his
successful effort to snatch control of the moving company Bekins from the Belzberg family of Canada, another set of well-known raiders.

Wayne also let a competitor take a potshot at the firm. “Bear Stearns has done an intelligent job of seeking segments that most people found to be too small, specialized or even vaguely repellent,” said George L. Ball, president and chief executive of Prudential-Bache Securities. “Most firms will, at times, forgo profits for reasons of perception. But Bear Stearns has the idea that a legitimate transaction is one that earns a dollar—even if it's something you don't want to bring home for dinner with mother.” Greenberg apparently never forgot this slight. When Ball resigned from Prudential-Bache in 1991 after a tumultuous, loss-filled nine-year reign, Greenberg sent around a memo to the firm's partners reminding them of Ball's quotation. “As Haimchinkel Malintz Anaynikal has mentioned so often, ‘what comes around goes around.' Nookie added something that was particularly poignant—'you meet the same people on the way down that you met on the way up.' We have constantly stressed that people at Bear Stearns do not denigrate our competition. Your Executive Committee wants to reemphasize that position.
If you cannot say something nice about somebody, do not say it.”

The firm continued to perfom well financially, especially as the bull market of the 1980s began to switch into a higher gear. During May 1985—the first month of the new fiscal year—Greenberg reported that the firm “did get ten runs in the first inning” and that “I frankly cannot remember any time in the past where we ever broke even in the month of May, much less made money.” Though when asked the previous year if Bear Stearns had considered an initial public offering of its stock, Greenberg had told a reporter in no uncertain terms that the firm intended to remain private, the internal pressure was mounting for just such an event. The firm had been perfoming well, with total revenues increasing to $1.8 billion in the fiscal year ended April 1985, from $393 million at the end of April 1981. During the same five-year period, Bear Stearns's net income increased from $108 million in fiscal 1981 to $169 million in fiscal 1985. The firm's equity capital—thanks to the years of positive net income—had increased to $350 million in April 1985 from $60 million five years earlier. By any measure, Greenberg's stewardship of the company was to be lauded.

Factors cited as reasons to go public included the firm's financial performance, the positive performace of the stocks of DLJ and Merrill Lynch since they went public, and the concern of some of the younger partners that a number of the top executives were getting older—Greenberg
was fifty-seven, Cayne was fifty-one, Rosenwald was fifty-five, and Einbender was fifty-six—and that if any or all were to die, the firm's policy of having to pay out their estates in five years (as had occurred with the heirs of both Lewis and Low) could leave the firm in a difficult position from a capital standpoint. The other concern about staying a private partnership was one of shared liability. As the firm's partners were taking greater and greater risks with the firm's capital, the general partners were sharing ratably in the increased risk of a financial calamity. A public offering of stock would shift the liability from the general partners to the shareholders of the corporation.

By the start of fiscal 1986 (May 1985), many of the ten members of the firm's executive committee were thinking an IPO was looking like a better and better idea. Greenberg remained steadfastly against it, but soon the executive committee met to take up the question of selling stock in Bear Stearns to the public. Greenberg was in Albany and missed the meeting. “The executive committee [meeting] takes place,” Cayne said, “and they say, ‘Well, we have had this discussion already. We think we should go public. We're going to vote.' The vote is nine to nothing. Greenberg isn't there…. Greenberg always used to say, ‘It's not a one-man thing. Whatever you guys do whenever I'm not around doesn't matter.’” The committee also agreed on the executive structure, with Cayne slated to be president and John Rosenwald vice chairman.

At this time, Cayne was still driving Greenberg downtown to 55 Water Street. “The next morning I pick him up, as I usually do,” Cayne said. “He says, ‘Did anything happen last night?' I said, ‘Not much, except we voted to go public.' He said, ‘What? You let them do that?' I said, ‘Alan, it's stupid not to, and who cares?' He said, ‘Well, I'm very surprised. I really am very surprised.’” Greenberg wanted to know what the management slate would be. “You'll be the chairman,” Cayne told him. “Johnny [Rosenwald] will be the vice chairman. I'll be the president.” Cayne said Greenberg just sat in the car without saying anything.

Two days later, Greenberg called Cayne into his office, under the pretext of wanting to talk about something to do with a commodity trade. “He calls me into his office and he's got some goofy beef about a commodity thing,” Cayne said. “I know him, this has nothing to do with commodities. He's pissed off about this slate.” That Saturday night, Alfred Lerner—a Brooklyn-born billionaire and longtime Greenberg friend— called Cayne at home. Lerner had also become friendly with Cayne over the years. “He was a street guy,” Cayne said. “He calls me. ‘You're not going to be the president.' I said, ‘Bullshit.' He said, ‘Greenberg is definitely not going to let that happen.' I said, ‘Well, he has no choice. He's
fucked. We got the agreement of the executive committee.' He says, ‘Well, Jimmy, I'm just telling you. You're not going to be the president.’”

On Monday morning, Greenberg called Cayne. “The commodity thing again, and ‘By the way, Johnny never agreed to be vice chairman,’” Cayne said. “I said, ‘Really? I think it's a good idea.’” Cayne found himself wondering how and why this situation could have been turned around in just four days. On Wednesday, Cayne was told he would not be getting the presidency. “I'm told I have to make up my mind by Friday whether I'm going or not,” Cayne said. “I'm so angry that I can't see straight. This is not only a renege. This is the big renege. This is like my entire base has reneged.”

In the end, Cayne voted for the firm to go public. He capitulated to being a co-president of the firm with Rosenwald even though he felt betrayed. He was not happy. True, he had around $8 million of capital in the firm at that point, which would be worth two or three times that much after a public offering of stock. But this wasn't about money; this was about power.

On July 23, the
Wall Street Journal
broke the story that Bear Stearns appeared to have decided to “convert to public ownership two to three months from now.” The
Journal
called Greenberg “taciturn” and described how he conducted his business from a raised desk on the firm's trading floor and how he “embodies Bear Stearns' opportunistic trading philosophy” by planning no further ahead than the next trade. “What our trading positions look like at the end of the day is long-range planning as far as I'm concerned.” The article also mentioned that Greenberg had an office near the trading floor, where he kept a large oak desk given to him by Cy Lewis.

On August 5, the firm's executive committee formally voted for the IPO filing and set the wheels in motion for a first filing with the SEC in mid-September 1985. But Greenberg was careful not to appear to bask in the glow of the fact that his Bear Stearns stock would, after the offering, be worth around $50 million and that his annual compensation of a salary of $150,000 plus a bonus of around another $5 million would make him—for a time—the highest-paid CEO on Wall Street. (Cayne and Rosenwald were set to have around $35 million in Bear Stearns stock.) Instead, he made only passing mention of the coming IPO in an August 9 memo to his partners—a memo that would become famous in the annals of Wall Street for its parsimonious spirit. “I was just shown the results for our first quarter,” he wrote. “They were excellent. When mortals go through a prosperous period, it seems to be human nature for expenses to balloon. We are going to be the exception. I have just informed
the purchasing department that they should no longer purchase paper clips. All of us receive documents every day with paper clips on them. If we save these paper clips, not only will we have enough for our own use, but we will also, in a short time, be awash in the little critters. Periodically, we will collect excess paper clips and sell them (since the cost to us is zero, the Arbitrage Department tell me the return on capital will be above average). This action may seem a little petty, but anything we can do to make our people conscious of expenses is worthwhile.” Greenberg also decided to no longer authorize the purchase of both “blue envelopes used for interoffice mail” and rubber bands. “If we can save paper clips from incoming mail, we can save rubber bands, and my hope is that we can become awash in these little stretchies also.”

To some extent, these missives were tongue-in-cheek, except for the fact that Bear Stearns actually did what Greenberg outlined. It became a bit of a standing joke on Wall Street that the firm would give every new employee a small bag of rubber bands and paper clips for use on the job.

As with every company that sells stock to public investors, Bear's IPO prospectus was chock full of revelatory information about the firm, the vast majority of which had never before been public. The filing revealed that the firm was primarily a fixed-income shop—involved in the buying, selling, trading, and underwriting of debt securities issued by the U.S. Treasury, affiliated government agencies, municipalities, and corporations—but also had a retail brokerage business, a clearing business, an arbitrage business dating back “more than 25 years” that had been profitable for “each of the last 15 years,” and a fledgling but profitable and growing investment banking business with 287 employees. Of the firm's $1.8 billion in revenue for the year ended April 1985, some $109 million, or 6 percent, came from investment banking, and two-thirds of that from advising on mergers and acquisitions. In two years, the advisory business had doubled to $73 million in revenues from $36 million.

The prospectus also described how Bear Stearns began its “mortgage-related securities department” in 1981 and that it “makes markets and trades” in the securities of the government mortgage agencies, known colloquially as Ginnie Mae, Fannie Mae, and Freddie Mac. Bear also traded “pools of whole mortgages”—mortgages originated by mortgage brokers that had not been securitized and that were not as easily traded as securitized mortgages. Since Bear Stearns did not originate the underlying mortgages, “a staff of mortgage underwriting specialists analyzes and performs procedures to verify the authenticity of the loans before they are bought for the Company's own account,” according to the prospectus. The company also conceded that all of its “principal transactions
and brokerage activities” exposed the firm to risks “because securities positions are subject to fluctuations in market value and liquidity.” Management monitored the “market risks” by reviewing many different reports on a daily basis as well as through the weekly meeting of the Bear Stearns Risk Committee, headed by Greenberg.

The company further revealed that “in connection with its trading activities in United States government and agency securities, [it] also enters into repurchase and reverse repurchase agreements pursuant to which it sells securities to or purchases securities from another dealer or other party which agrees to resell or repurchase them at a specified date and price”—the very financing activity that would continue through the week of March 10, 2008, until the overnight repo lenders decided to stop funding the firm. But even twenty-three years earlier, Bear Stearns knew this kind of financing was a risky proposition. Thus a prescient warning found its way into print: “While the Company takes steps to insure that these transactions are adequately collateralized, the large dollar amounts of these transactions could subject the Company to significant losses if parties entering into such agreements with the Company fail to meet their obligations and the Company incurs losses in liquidating its positions in the open market.”