House of Cards (42 page)

B
Y THIS TIME
Greenberg had implemented at the firm a requirement that partners donate at least 4 percent of their compensation to charity. This requirement made Bear Stearns one of the most consistently charitable firms on Wall Street year in and year out. Greenberg himself became known as “the biggest giver on Wall Street.” He gave millions of dollars to the United Jewish Appeal. In November 1986, he donated $1 million to the Oklahoma Medical Research Foundation to establish the Esther Greenberg Honors Chair in Biomedical Research, in honor of his mother. Greenberg has also made sizable contributions to the Johns Hopkins Medical Center, the New York Public Library, the American Museum of Natural History, and several other institutions and charities.

But Greenberg's “narcissism,” as Cayne called it, led the Bear chairman to make several large donations that seemed eccentric at best. He once donated money to renovate the bathrooms at the Israel Museum, in Jerusalem, and commemorated the gift by putting up a plaque in honor of his brother, Maynard, who lived in Oklahoma City. Some wondered whether the gift meant he hated his brother or liked him. His donations to Johns Hopkins have totaled around $3 million and helped to create the Kathryn and Alan C. Greenberg Center for Skeletal Dysplasias—focusing on the study and treatment of dwarfism—and he has been honored at
the annual convention of the Little People of America. Cayne made odd donations, too. For example, in March 1989, he agreed to be a financial sponsor of Gata Kamsky, then a fourteen-year-old Soviet chess prodigy, after reading a brief article in the
New York Times
about Kamsky's defection to the United States. For five years, Cayne helped to underwrite the boy's chess career—at $40,000 a year—until Kamsky abruptly quit the game after losing to Anatoly Karpov in the championship of the World Chess Federation. (Kamsky resumed playing chess full-time in 2004 and is now one of four men in contention to become world champion in 2009.)

Greenberg's most peculiar donation was his $1 million gift, in June 1998, to pay for Viagra prescriptions for men who could not otherwise afford them. Most people couldn't resist thinking that Greenberg had donated a million dollars for homeless men to have sex. He defended the gift despite the criticism. “I own stock in Pfizer,” he told the
New York Times,
referring to the drug's manufacturer. “So it's not altruistic. You can quote me on that…. If you ask me how long I've been interested in the subject, I guess you can say I've been interested in it since I was 13 or 14.” Asked the “indelicate” question of whether he used Viagra himself, he told the paper, “I'm not answering that.” Cayne was livid. “It came up at the executive committee,” Cayne remembered, “and I said to him, ‘How dare you do this and not tell your partners? We're the laughingstock of Wall Street. It's not because it's Viagra. It's not because it's the homeless. It's because we're on the front pages being the highest-paid management team and you make so much money you give a million dollars so that people get laid, homeless people.' I told him, ‘That's a decision that you should have shared.’”

T
HERE WAS NO
doubting the firm's performance, though. For the eleven months ended March 27, 1986, the firm had revenues of close to $2 billion and net income of $118 million, compared to $1.6 billion in revenues and $79 million in net income for the previous eleven-month period. Shortly after the end of the firm's fiscal year in May 1986, Bear Stearns's managing directors decided to take advantage of the firm's success and agreed to sell 4.6 million shares in a secondary offering of stock, priced at $35 per share. The May 1986 secondary sale was the last time the partners of the firm sold stock in an underwritten offering. On July 15, 1986, the firm authorized a three-for-two stock split, the last in its history.

In the weeks leading up to the sale, Greenberg's memo writing was positively manic and focused almost exclusively on his favorite theme, reducing expenses. He even bemoaned the firm's increasing cost of using Scotch tape on the interoffice envelopes. “From this day on,” he wrote on
April 18, “instruct your secretary to lick only the left side of the flap when sending the envelope. The reason for this will amaze you, and make you wonder why you didn't think of this yourself. If the envelope is gently opened by the recipient, it can be used again and sealed, without using scotch tape, by your secretary licking the right side of the flap and then sealing it. After all of us have become accustomed to accurate and precise licking, a further extension of this will be to lick only the left third, and then the middle for the next trip, and the right side for the penultimate voyage. If one has a small tongue and good coordination, an envelope could be opened and resealed ten times.”

Greenberg also opaquely commented on the firm's good fortune in the wake of the widening insider-trading scandal that exploded on Wall Street with the November 1986 arrest of Ivan Boesky and the exposure of a ring that included competitors at Drexel Burnham, Goldman Sachs, Kidder Peabody, and Lazard, among others. “I have never been more optimistic about the future of Bear Stearns than I am now,” he wrote the firm's senior executives in February 1987, shortly after the end of the firm's third quarter. “There is only one reason for my optimism,” he continued. “It has become perfectly clear to me that several of our departments have been profitable during the past few years, despite the fact that they were not exactly competing on a ‘level playing field.' Certain competitors have had big advantages over our group; recent events make it clear that this inequity is coming to an end. I congratulate those departments for the job they have done against unethical competition.” In closing, he warned against all the success leading to the employees “becoming complacent” and that “every con man is or will be heading for the securities industry. Stay alert!” Indeed, Greenberg encouraged Bear employees to rat out those among them committing “fraud” or “waste.” He said employees would be rewarded with cash bonuses “if a suspicion is substantiated” and added, “We will also
never
criticize anyone for calling ‘wolf’ too often. We
are
different from other corporations. Let us stay that way.”

The firm was doing so well and growing so quickly—head count had increased to 5,700 employees worldwide, 30 percent higher than when it went public—that it had outgrown its headquarters at 55 Water Street. In March 1987, Bear announced that it was moving its headquarters to 245 Park Avenue, at 46th Street, and that half of its employees would be housed there. On July 13, Greenberg announced that the firm had a “record year” while its competitors had suffered. “We may be entitled to some degree of pride in our performance,” he wrote his managing directors, “but certainly not smug self-satisfaction.” He reminded everyone that head count at the firm had increased by 800 during the year and
that the move to 245 Park Avenue would significantly increase the firm's expenses. “Our industry is cyclical, and we are in the midst of the longest bull market in history,” he wrote. “A sharp downturn could be painful if we are not lean and mean…. In addition, I am newly married, and I am in no mood to take a pay cut. Regardless of what your experience has been, I am finding that two cannot live as cheaply as one.”

Greenberg had married the former Kathryn A. Olson, then forty— “a strikingly attractive lawyer, with long auburn hair,” the
Times
reported— in June 1987. “Friends say that the marriage has done much to temper Greenberg's blunt ways,” the
Times
continued, and then quoted Cayne: “I can see her influence on him. He's softer, more willing to listen.” Greenberg didn't have to worry about a pay cut in 1987: He was the highest-paid executive on Wall Street, earning $5.7 million. Indeed, the top five highest-paid executives on Wall Street in 1987 all worked at Bear Stearns, with Cayne and Rosenwald each getting paid $3.9 million and Thomas Anderson and Denis Coleman Jr. each making $3.4 million.

T
HE
J
OY OF
M
ORTGAGE
-
B
ACKED
S
ECURITIES

ne of the ways Bear Stearns began to increase its return on equity was through the growth of its mortgage-backed securities department. Tommy Marano started full-time at Bear Stearns in May 1983, after graduating from Columbia College. A history major, Marano started at the firm on the equity syndicate desk, working on the basic underwriting of equity offerings for Fannie Mae, Freddie Mac, and Ginnie Mae. He liked reading and writing the boring prospectuses. Then fate intervened. “I got paid a really lousy bonus one year by the head of the syndicate at that point, and I talked to my immediate boss and he said, ‘You ought to go talk to John Sites'”—who founded the mortgage department at Bear Stearns in 1981 and later became co-head of fixed income— “‘and ask John Sites if he has a role for you in the mortgage area because you like to read these books and they're complicated deals.’”

Bear's mortgage-backed securities business rose from the ashes of
the savings-and-loans crisis of the mid to late 1980s, when failed thrifts were desperately trying to get illiquid assets off their balance sheets. At that time, the margins on trading the bonds of Fannie Mae and Freddie Mac were huge, generally $2 to $3 on a trade and sometimes $5. In other words, the difference between what a bond was bought for and what it could be sold for could be as much as five points. (Today that spread is calculated in thirty-seconds of a point.) “There were very few types of securities trading,” Marano said. “You didn't have the technology or analytics we have today.” Bear Stearns followed the lead of Salomon Brothers in trying to help the thrifts solve their balance sheet problems, with all those nonperforming mortgages. “The play we made in that area was following what Salomon was trying to do with the thrifts,” he continued. “That was the birth of securitization, really, and what you were trying to do was get the assets off the thrifts' balance sheets to basically get them some liquidity to keep operating. And it was Bear, through John Sites, that really got the market to change in 1987 by allowing Fannie and Freddie to issue these REMICs”—real estate mortgage investment contracts— “directly, as opposed to only issuing pass-throughs or mortgage-backed bonds. Bear Stearns and Sites were key to that, as was Lehman. I actually priced and traded the very first REMIC Fannie Maes 87-1 (for $500 million). It was a new market. It was a growing market. You had none of the technology we had today, and you had [a] very wide bid-offered spread. That's really why the firm went after it, and we spent a lot of money on risk analytics and banking. We did deals for all the failed thrifts, among them American Savings and Loan and California Federal.” The business took off. “It became kind of a real race between us, Salomon Brothers, Merrill, First Boston, Lehman Brothers, and DLJ,” Marano said, “with Bear Stearns and Lehman taking the lead.”

While Sites, with the help of Marano and others, had been building a powerful engine in the firm's mortgage securities department, the rocket fuel for it came in November 1987 when the firm hired a well-known trader named Howie Rubin. Rubin was plenty controversial. Until 1985, he had been a mortgage trader at Salomon Brothers, working for Lew Ranieri, who is generally acknowledged to be the godfather of the mortgage-backed securities business on Wall Steet and the man who coined the word “securitization” to describe buying bundles of home mortgages, slicing and dicing them into different tranches, and selling them off to investors around the world. He realized mortgages were nothing more than “math” and hired a team of Ph.D.'s to do the structuring. Ranieri once called Rubin, a Harvard MBA and onetime professional gambler, “the most gifted trader I have ever seen.” In 1985, Merrill Lynch hired Rubin
away from Salomon Brothers by tripling his compensation to $1 million. A year later, Rubin supposedly “exceeded his trading limits” in his mortgage-backed securities portfolio, causing Merrill to lose $37 million. As his punishment, he was promoted to chief mortgage securities trader. On April 29, 1987, the
Wall Street Journal
reported Merrill had lost $250 million—later increased to $275 million and then $337 million, and then reduced to $85 million—as a result of unauthorized trading in mortgage securities. Merrill blamed Rubin, then thirty-six, for the loss, which at the time was the largest on a single trade in Wall Street history. Merrill executives told the
Journal
that Rubin “had far exceeded his limits in acquiring mortgages that were packaged into a particularly risky form of securities. The package involves splitting off the interest payments on the mortgages from the principal and selling each separately.”