House of Cards (47 page)

C
AYNE ALSO DECIDED
that there was something special about Alan D. Schwartz, an athletic and rangy former professional baseball pitcher who held a variety of positions at the firm before becoming head of Bear's fledgling investment banking effort and one of its highest-profile M&A bankers. Schwartz was born in Bay Ridge, Brooklyn, the son of a Jewish
traveling salesman and a Presbyterian housewife from Kansas. When he was a toddler, the family moved out of New York City to Wantagh, on southwestern Long Island, near Levittown. When Schwartz was a teenager, his father inherited some money and started a finance company, but as interest rates soared during the Carter administration, that proved poor timing and the business failed. His mother would pick up odd jobs in the community, as a bookkeeper or the manager of the local bowling alley.

Schwartz was a highly touted high-school pitcher and thought about becoming a professional right out of high school. He ended up going to Duke on a baseball scholarship, and in the process passed up his first opportunity to go to the major leagues.

By his own admission, Schwartz wasn't much of a student, but he was an amazing pitcher with a phenomenal fastball. He could throw a ball more than 95 miles per hour. Unfortunately, he was also prone to injury. At one point, he tore the ligaments in his elbow and underwent rehab. Still, after his junior year at Duke, the Cincinnati Reds drafted him. The Reds were intoxicated by the prospect of his fastball, but to make sure he had major-league stuff, the team wanted its scouts to watch him pitch a complete nine-inning game before it would offer him a contract. At that moment, Schwartz's instinct for investment banking kicked in, and he started to negotiate with the Reds: He wanted to know how much his signing bonus would be so he could decide whether it would be worth his while to pitch the nine innings. They reached agreement on a signing bonus of around $15,000 (now that he was in college, his leverage had been reduced, since the Reds knew he wanted to start playing professionally), and Schwartz agreed to pitch the nine innings in a minor-league park about an hour from Durham, North Carolina.

He pitched beautifully into the ninth inning, when the batter hit a ball right back at him. He tried to field the ball but it ended up hitting him in the face, between the eyes. With blood splattering everywhere, he had to come out of the game. He was rushed first to the local hospital— which could do nothing for him—and then had to endure the hour's ride back to the Duke hospital to have the bones in his face repaired. Right after the incident he thought about somehow getting back out there and continuing to pitch, as a way of fulfilling his obligation to the Reds. But then he thought better of it, since he knew he wouldn't be pitching anymore that summer anyway. He came back to Duke for his senior year and resumed his pitching career, figuring he would have another chance for the big leagues after graduating.

But again he hurt his arm. The problem was that he could pitch a few innings and then his arm would swell up. If the swelling had gone
down the next day, he could have been a dazzling late-inning reliever. But the swelling would persist for four or five days at a time, and he wasn't likely to be much use to any team with that problem. On one of the rides home from the hospital, he decided that he was not meant to have a career as a professional baseball player.

While at Duke, Schwartz occasionally sold insurance policies to individuals in his spare time to make some spending money. After graduating, he thought about selling insurance full-time, but the prospect of walking into a room and having everyone immediately wonder if he was going to try to sell them insurance was not for him. For the same reason, he decided he did not want to be a retail stockbroker. He thought he would be better off selling to institutional investors rather than to individuals. He had the itch for Wall Street.

After a series of jobs at smaller firms, Schwartz agreed to join Bear Stearns in Dallas in 1976. Schwartz had a great time in Dallas, what with the oil boom filling the pockets of people he hoped would be his clients. Then Ace called him. “I want you to come back to New York,” Greenberg said. Schwartz told Greenberg that he liked Dallas. “Yeah, but I want you to come back and run research,” Greenberg replied. Schwartz had noticed that his clients appreciated a well-conceived research report on a given company or industry. The problem, Schwartz realized, was that the clients were gravitating to the research provided by other firms, not Bear Stearns. “Our research sucked,” a Bear partner said. Schwartz told Greenberg that the firm as a whole would not take research seriously until Greenberg took it seriously. Greenberg told Schwartz: “I said I'd get involved. I have. I've figured it out. You're the guy who knows what the clients want. Why don't you come up here and deliver that high-quality product to the clients.”

Schwartz put himself in charge of writing about portfolio strategy— for instance, what investors should do when interest rates go up or down, or inflation is high or low. Then, in 1984, he hired Larry Kudlow, a former economist at the Office of Management and Budget during the first Reagan administration. Together, Schwartz and Kudlow traversed the country talking about the economy and how to profit from it. They were a big hit with clients. They were constantly in demand, especially since they provided their insights for free. One of their partners noticed and told Greenberg: “Boy, Alan and Larry are being run ragged. They're being asked to be everywhere and it's really hard.” Greenberg called Schwartz and Kudlow into his office for what they thought would be his praise and sympathy. “Gee, I hear you guys are really in demand,” he told them. His partners beamed. “Well, of course you are,” he continued. “You're free. Start charging
them for you to show up. Then you'll see who really wants you.” They did what they were told. But all the travel took its toll on both men: Kudlow developed a high-profile addiction to drugs and alcohol (later, after Bear fired Kudlow for missing an important meeting with institutional investors, he admitted to his weaknesses in a weepy interview with the
New York Times
and then successfully overcame his addictions), and Schwartz got bored of all the travel and repeating the same ideas over and over again.

Then Schwartz got another brainstorm. A few months before the firm decided to go public in the summer of 1985, Schwartz suggested to Cayne and Greenberg that he join the investment banking department, which Rosenwald was running at the time. The two senior partners thought that was a great idea, and when another partner, Glenn Tobias, decided to retire, Cayne and Greenberg asked Schwartz to
run
the investment banking effort by himself. The firm's effort was minuscule on a relative basis, but Schwartz was determined to build it up. His first deal was to supervise the Bear Stearns IPO. Soon, though, he was captivated by the excitement of M&A deals.

Based on his experience in the research department, he believed he could study an industry and predict where future deals might happen. Schwartz knew that at other firms such as Goldman Sachs, Morgan Stanley, Lazard, and First Boston, the M&A bankers flitted from deal to deal and industry to industry using their knowledge of M&A tactics and valuation as their entrée. He decided that even though Bear Stearns was a mere blip in the M&A market and had very few clients with enough financial heft to carry off such deals, the firm could make inroads by focusing on a few industries, such as health care, media, telecom, technology, and defense, and meeting with the executives in those industries on a regular basis to present them with clever, insightful ideas about what companies they might want to think about buying and why. Schwartz was onto something long before the competition realized it. Slowly but surely, his business thrived.

Schwartz's first breakthrough came when he recognized in late 1986 that the drug company A. H. Robins, which had declared bankruptcy because of lawsuits related to a contraceptive product it manufactured, would be an excellent takeover candidate for American Home Products, another drug and consumer products company. Schwartz advised American Home Products on how a rescue of Robins might work and introduced one CEO to the other. In the end, American Home Products pulled away from the deal at the time and released Schwartz to represent a different client. Unfortunately for Schwartz, a year later American
Home Products returned and bought Robins. He lost out on that deal, but he'd so impressed the management of American Home Products that it hired him to represent the company on its attempted acquisition of Sterling Drug, which ultimately was purchased by Kodak.

In 1987, just after the crash, Schwartz organized at the Ritz-Carlton Hotel in Laguna Niguel, California, the first of what became twenty-one annual media industry conferences where he would bring together the CEOs of the major and not-so-major media conglomerates. Schwartz would interview them, Charlie Rose—style, or put them on panels together and let them all talk about the state of the industry, all for the benefit of Bear's clients, bankers, and investors. This was before it was common for Wall Street to host industry research conferences for investors. Obviously, the idea for the conference grew out of his time running Bear's research department as well as from his strategy for winning M&A mandates. The closest comparison to what Schwartz was doing with the conference was the famous Allen & Co. week-long retreat for moguls that the firm has held every summer in Sun Valley, Idaho, since 1983. Because of the similarities between the two shindigs, Schwartz became known by the nickname of “Alan and Co.” Eventually, Schwartz moved the Bear Stearns media conference to the Breakers, in Palm Beach.

At one of those Allen & Co. Sun Valley affairs, the deal that ultimately made Schwartz's career was hatched—Walt Disney Company's $19 billion blockbuster acquisition of Capital Cities/ABC in August 1995. Although the bankers involved—Bear Stearns, Allen & Co., and Wolfensohn & Co.—did little negotiating and only provided fairness opinions after the fact, the prestige of being involved in the deal was momentous. More incredible was the fact that none of the big M&A powerhouses at the time were hired as advisors on the deal.

Schwartz had made it to the big time. Soon enough he and his team found themselves with a role in some of the biggest and most important mergers of all time. He would become a key advisor to TimeWarner and Verizon. “When he started with the strategy, he couldn't get anybody to believe in it,” one of Schwartz's colleagues said. “So none of the senior guys he inherited wanted to spend any time on large-cap companies, because they thought it was a waste of time. From the [perspective of the] historical Bear Stearns franchise, it was. His powers of persuasion were not great. But we started seeing that we were accepted as an M&A advisor on big transactions, because we'd been around the media industry and the health care industry and had a reputation in it.” Schwartz joined the firm's executive committee in 1989.

I
N
N
OVEMBER 1993
, Michael Siconolfi wrote an anecdote-filled 2,700-word front-page article in the
Wall Street Journal
peeling back the curtain on the firm's quirky, results-oriented culture. He was one of the paper's Wall Street reporters and would later—much to Cayne's chagrin and infuriation—influence a new generation of
Journal
reporters, such as Charlie Gasparino and Kate Kelly, in their highly critical coverage of Bear Stearns. In this article, Siconolfi compared Bear Stearns's opportunistic scrappiness to that of the Oakland Raiders, the bad boys of the NFL. Front and center was Howie Rubin, who, despite having been fired from Merrill Lynch for losing what Siconolfi pegged as $377 million, had been snatched up by the firm. “Its bet paid off,” Siconolfi wrote. Rubin's mortgage bond trading desk supposedly made some $150 million in profit in the fiscal year that ended in June 1993 and helped the firm make a record $362 million profit, allowing Cayne and Greenberg to take home $15.9 million each and Spector to get $11.7 million. “He's a superstar,” Cayne told the paper. Siconolfi explained that making such contrarian bets was part of the firm's DNA. That explained the hirings of Rubin, of Don Mullen, a former junk-bond salesman at the defunct Drexel Burn-ham, of Mustafa Chike-Obi, a mortgage trader fired from Kidder Pea-body because of a sexual harassment charge, and of investment bankers such as Curt Welling, from First Boston, and Dennis Bovin and Mike Urfirer, from Salomon Brothers and First Boston, respectively. Urfirer brought with him a $2 billion assignment to represent Martin Marietta on its attempted acquisition of Grumman, Bovin, and Urfirer then teamed up on Raytheon's $2.3 billion acquisition of E-Systems, earning a $14 million fee. Then Martin Marietta hired the duo to advise on its $10 billion merger with Lockheed, earning a $17 million fee. William Mayer, the former CEO of First Boston, observed that Bear Stearns “has been willing to take more risk on people and not let reputation or image be as much of a factor as other firms. Bear has been doing it quite successfully, as the Raiders have done over the years.”

Much was made in the article about the firm's zealous and elaborate risk management apparatus. There were the weekly Monday afternoon risk committee meetings, chaired by Greenberg, where traders were put through a “cold sweat” about how big their positions were and why they still held them on the firm's books. Greenberg received reports that showed the firm's inventory of securities that remained unsold after ninety days—a clear violation of his father's dictum about merchandise and one that Greenberg himself was supposedly adamant about not permitting. “You can come in and announce you've had the best week of your
life,” Spector said, “and Ace will say, ‘You've got $50 million of bonds that are four months old—that's terrible. It's out of control…. You don't get to gloat.'” Even Rubin conceded he “felt like more of an island” at Merrill, but that at Bear, “if I take a larger position, I can grab” members of senior management to discuss it. “At no time do they not know what risks I'm taking on.” Mullen, the former Drexel trader, was head of the high-yield and distressed securities business. “They gave me what I always wanted— my own business,” he said. “If you make money, you can run your business any way you want to.” Concluded Schwartz about the Monday risk committee meeting: “You've got to go there every Monday and have these guys look you in the eyes. This isn't other people's money.”