House of Cards (55 page)

T
HE
E
ND OF THE
S
ECOND
G
ILDED
A
GE

T
HE
10
-IN
-10 S
TRATEGY

hen the first jet hit the World Trade Center towers on the morning of September 11, 2001, Cayne was in a compensation commiteee meeting in a conference room down the hall from his office at 245 Park. “The phone rings,” Cayne said, “and Sam [Molinaro] gets the phone and says, ‘Oh, my God, there's been an accident. A plane flew into the World Trade Center.' We had no idea it was a terrorist attack.” The meeting ended quickly, and Cayne went back to his office, turned on the small television in his office, and, as so many others did, watched in disbelief as the second jet hit the south tower. The firm lost none of its employees that day, unlike other firms. Later in the day, Cayne got a call from Richard Grasso, then CEO of the New York Stock Exchange, telling him that it was important to the United States government that the exchange reopen as quickly as possible. To that end, Grasso said there would be a meeting the next morning at the stock exchange among the heads of all the Wall Street firms to discuss how best to accomplish that task.

When Cayne woke up the next morning, he saw on the news that New York City had closed off access to lower Manhattan below 15th Street, including the New York Stock Exchange. Cayne called Grasso at home and offered to host the meeting at Bear Stearns. Grasso quickly agreed to Cayne's suggestion, and the meeting was held in the seventh-floor boardroom on Wednesday at two o'clock. “Everybody in the world was there,” Cayne said. “Everybody. This was heavy cake.” The room was so crowded that some of the executives had to stand. Cayne asked everyone to observe a moment of silence. Two hours later, a bleak picture had emerged of damaged infrastructure, demoralized employees, and inadequate communication systems. The decision was made to commence trading in U.S. government bonds the next day and to hold off stock trading for another day. “I've never seen all these people, the heads of every major firm, sit in a room and not hate each other,” Cayne said.

Within weeks of the attack, Cayne was doing all he could to return to business as usual. For instance, given that the firm's move to its new headquarters at 383 Madison Avenue was imminent, Cayne was—at least according to the
Wall Street Journal
—busy deciding whether to move his
burgundy Ek-Chor motorcycle from his old office to his new office, which he did, and trying to figure out who should be allowed to use the gym in the new building. “Don't scoff,” the paper wrote. “Demand is so strong that Chief Executive Jimmy Cayne has to personally approve each applicant.”

Cayne also struck a more sober tone in announcing the firm's third-quarter 2001 financial results, released September 26. “We would like to continue to express our sincere condolences to all those affected by the tragic events of September 11, 2001,” he said. “Our focus over the past weeks has been to help our clients, our employees and our industry cope with this tragedy. We are extremely grateful to all those who came to the aid of the City and the industry during its time of need.” The results, for the three months ended August 30, revealed a firm undergoing a transformation. The performance of every one of the firm's major divisions— investment banking, clearing, asset management, and institutional equities—was down meaningfully from the third quarter of the year before, with one exception: fixed income. Net revenues for fixed income were $416.1 million, up 78.4 percent from $233.3 million in the previous year's third quarter. “Although down from last quarter's record results, fixed income revenues remained strong year-over-year, with solid performances in the mortgage-backed securities, high yield and credit derivatives areas,” the firm announced. In short order, Bear Stearns's fixed-income division accounted for one-third of the firm's revenues in the first nine months of 2001, up from 18 percent in the first nine months of 2000.

On October 18, the
Wall Street Journal
reported that Bear Stearns would be joining the ranks of other Wall Street firms in cutting 830 jobs, or 7.5 percent of its workforce of 11,147 employees. The move reflected the increasingly difficult market conditions on Wall Street and followed the firm's decision six months earlier to cut four hundred back-office employees. Bear Stearns had joined the rest of the pack in cutting employees during tough times. More and more, what made Bear Stearns such an unusual firm was being lost in the inexorable march of progress. “This workforce reduction will generate approximately $120 million in annualized savings,” the firm predicted in an SEC filing. Cayne agreed that the five-member executive committee would cut their 2001 bonuses in half. “This has been a challenging year for all of us,” he wrote in an e-mail to the firm. “Accordingly the Executive Committee has voluntarily elected to forfeit 50 percent of the bonuses we would otherwise be entitled to receive this year. Based on current earnings levels, this election is equivalent to an approximate 70 percent reduction year over year.” For Cayne, who received $31.6 million in compensation in 2000, his reduction for 2001 meant he was paid $15.2 million.

In a January 2002 interview with
Chief Executive
magazine, Cayne revisited his impolitic comments to Guy Moszkowski about his willingness to consider selling Bear Stearns for four times book value, or $120 per share. Lehman Brothers was mentioned as having had discussions with Bear Stearns in November 2000, stemming from Lehman's interest in Bear's clearing business. “That was all nonsense,” he said in January 2002. “There isn't anybody I talked to who had an interest in hooking up with Bear Stearns who really looked at that as a serious comment. And I wouldn't negotiate with anyone who did.” He brushed aside the question of how much longer the firm could remain independent. “Since I've been around, 95 percent of the people who've competed with this company are no longer competing with this company. That's an unusual statistic.” Cayne's speech was a variation on one that Greenberg had been giving for years that pointed to a tombstone advertisement listing Bear's competitors who were no longer in business. “That's the beauty of this thing,” Cayne said of Wall Street. “Nobody ever knows what's going to happen.”

Not mentioned in the article was the fact that Jamie Dimon, since March 2000 the CEO of Bank One, in Chicago, had been to 383 Madison to talk with Cayne about buying Bear Stearns. Dimon had suggested an all-stock acquisition of Bear Stearns by Bank One at a significant premium to the market price of the stock, then in the mid-$60 per share range. But Cayne rebuffed Dimon's offer because he feared that any premium offered would be lost in the post-announcement trading of the stock as arbitrageurs drove down the price of Bank One's stock. “It couldn't be done,” Cayne said, “and he knew it. It had nothing to do with anything. There was no ego involved. Whatever premium he would have paid would have been eaten up by the arbs in one second. All I would have done was give him the keys, which I should have done. That's the mistake I made.”

In February 2002,
American Banker
wrote a brief article about the rumor that Bank One was considering buying Bear Stearns. The idea had originated with Sean Ryan, a former Bear Stearns financial services analyst who left the firm after being pressured by senior management to write reports about banks he did not want to cover. “This rumor probably is as baseless as most,” Paul Muolo wrote, “but the idea may not be a bad one. Although we are highly skeptical about the wisdom of merging commercial and investment banks, a Bank One/Bear Stearns marriage may not be a bad idea.”

What made the combination palatable, the newspaper thought, was that Dimon had an investment banking mentality, having been in charge of Salomon Smith Barney and Citigroup's investment banking business, as well as having been the right-hand man of wheeler-dealer
Sandy Weill before Weill fired Dimon in November 1998. “Bear Stearns is a scrappy, highly profitable player that keeps its eye on costs, very much the style of Weill and presumably of Dimon,” Muolo wrote. “Bear Stearns could also make an especially good fit with a commercial bank because it is well-known for its fixed-income business, and its highly lucrative clearing business.” (In the end, Dimon sold Bank One to JPMorgan Chase in 2004 for $58 billion in stock; by January 2005, Dimon was the CEO of the combined firm.)

O
N
A
PRIL 4
, Cayne and a group of dignitaries, including New York Governor George Pataki and Senator Charles Schumer, as well as eight hundred Bear Stearns employees and clients, officially opened the new building at 383 Madison. “Bear Stearns and its impressive new headquarters are fitting symbols of the strength, permanence and grandeur of New York,” Pataki said, with September 11 still reverberating. “It is successful companies like Bear Stearns that have helped to make New York the financial capital it is today.” Cayne, too, sought to equate the new building with Bear Stearns's solidity. “We are confident that the Bear Stearns crown”—the seven-story structure at the top of the building that was lit up as part of the ceremony—“will serve as a reminder that our firm was established here and will always be committed to this great city.” The building, billed as one of the most technologically advanced in New York City, had the largest installation of cable of any in North America and contained 18,000 tons of steel, making it one of the heaviest buildings in New York. The building also had four emergency generators, a water tank “big enough for a Sea World show,” and an independent phone network, all of which served not only as a monument to Cayne but also as a bulwark against any future water, phone, and power outages.