House of Cards (57 page)

The first Bear Stearns—related phone call Marin received on his first day at the firm—even before he had made it to his office—came when Barry Cohen called his cell phone. Cohen had run the merger arbitrage fund at the firm for many years and made himself and his partners a bunch of money. Cohen had also been a protege of Bobby Steinberg, who oversaw the firm's risk function. Cohen was on the board of directors of Bear Stearns & Co., the firm's broker-dealer (as opposed to the Bear Stearns Companies, the public parent company). It was considered an
honor in the firm to be a member of the board of the broker-dealer. Cohen was ostensibly in charge of the firm's hedge fund business, but since he was part of the broker-dealer and not part of BSAM, where many of the firm's hedge funds actually were, this was all a bit confusing, made all the more so because Spector had earlier tried to make Cohen a co-head of BSAM with Fordyce, who successfully opposed that appointment.

On that first morning, Cohen, who knew Marin slightly, called and told him, “This is gonna be great.” A few days later, Spector called Marin and told him, “You know, I've got this guy, Barry Cohen, who the firm really likes and is really good on risk, [and who] has run his own hedge fund. You might want to take a very serious look at bringing Barry Cohen over the wall” and into asset management to run the hedge fund business, reporting to Marin. Cohen did not want to give up his board seat at the broker-dealer, but in the end he did so to join the asset management business. Soon after Marin and Spector had decided on the 10-in-10 strategy, Cohen said to him, “We've got this great guy coming off the floor. Warren had seeded this fund for him six months ago. He's done really well with it. His name's Ralph Cioffi. He's got a great strategy. I want you to meet him. This is exactly the kind of thing that we want to bring in here.”

The intense and solidly built Cioffi, then forty-seven, had joined Bear Stearns in 1985 as an institutional fixed-income salesman, specializing in structured finance products, after stints at Merrill Lynch, Dean Witter Reynolds, and Institutional Direct. He grew up in South Burlington, Vermont, near Lake Champlain. From 1989 to 1991, Cioffi was the New York head of fixed-income sales and then, for the next three years, served as global product and sales manager for high-grade credit products. “He was involved in the creation of the structured credit effort at Bear Stearns and was a principal force behind Bear Stearns' position as a leading underwriter and secondary trader of structured finance securities, specifically collateralized debt obligations and esoteric asset-backed securities,” according to a description of him on file with the SEC.

“We all grew up with Ralph here,” explained Paul Friedman. “Ralph is one of the smartest guys I've ever met and was absolutely the best salesman I've ever met. When I was a trader, he was a salesman, a fabulous salesman. He was incredibly personable, incredibly smart, creative, and could get things done.” As a salesman, Cioffi covered the Ohio Public Employees Retirement System account. “It was a wonderful account,” Friedman said. “We had a great relationship, and they loved us, and they did a lot of business with us, and whoever covered that account got really rich.” Cioffi was making around $4 million, year after year, as a salesman. “He was the top fixed-income salesman in a firm where fixed income was
king,” said one senior managing director. Then Cioffi got promoted to the job of institutional sales manager. He was a disaster. “He had adult ADD,” Friedman said. “In sales and trading, you work on something, you get it done, you move on to the next thing. The day ends, you've written some tickets, and you move on. In management, you come in in the morning and you're working on what you worked on yesterday, and you're trying to hire this guy, or build this business. And you're going to work on it again tomorrow, and probably the next day. Ralph didn't do well with that stuff. He would hire salespeople, and we'd get to the end of the year and find out that he'd cut deals and forgot to write them down. He couldn't remember exactly what the guy's guarantee was. He was just not a really good manager.” Cioffi then moved into Bear's structured products group, where he was a “quasi-asset-backed banker,” according to Friedman. “Again, he was incredibly creative but a challenge to manage. It would be the same thing, where he'd have a conversation with the rating agency about some deal he was working on and he'd forget to tell everybody about it. So, you'd have a team working down one path and Ralph's working down the other path, and they'd get to here and find out that he'd already changed it.”

Like Barry Cohen, Cioffi was on the board of directors of the broker-dealer and much loved inside the firm. Spector, Friedman, and others were trying to find a role for Cioffi that would match his skills. Cioffi volunteered his interest in being a hedge fund manager. To accommodate that desire, Spector decided, in March 2003, to stake Cioffi to $10 million of the firm's money in a hedge fund that invested in mortgage-backed securities. His fund, known on Wall Street as a “carry fund,” invested in securities of various credit quality, using a sliver of equity and a whole lot of debt. The interest the securities paid less the interest on the money borrowed to buy the securities created the “carry,” or returns to the equity investors. “Spector gave him a little money and it grew,” Friedman said. “There was a fair number of skeptics internally who couldn't figure out how this guy—who was bright but had never managed money—was now going to be running money. He knew nothing about risk management, had never written a ticket in his life that wasn't someone else's money. But we did it. I sure as hell wouldn't have given him my money. But he starts out and he's reasonably successful.”

Cioffi's initial success obviated the question internally about whether he could continue to be part of the broker-dealer or whether he should be seconded to BSAM. The compliance officers decided Cioffi needed to be transferred into BSAM and report to Marin, who in turn reported to Spector. “We put him over in BSAM, where you had a guy,
Rich Marin, running an asset management division that was the traditional asset management business—long only, primarily equities with a trace of fixed income—who suddenly inherits this high-octane mortgage guy and doesn't have any idea what to make of him,” Friedman explained. “Every time Marin and the risk guys in BSAM would have a question with Ralph, Ralph would get Warren involved, and they'd all have this big meeting in Warren's office, and Warren would say to the BSAM, ‘You don't know what you're talking about. Leave Ralph alone. He's doing fine,' and eventually they came to largely ignore him. And that's a little harsh, but not entirely wrong, because none of them really understood what he did.” Explained Marin to the
New York Times
about Cioffi: “He had come up with an approach to trading those assets”—among others, mortgage-backed securities and collateralized debt obligations—“that people who are experts in that arena thought was a sound and interesting approach.”

B
Y 2003, HEDGE
funds were the rage of global finance, much as private equity funds had been a decade or so earlier. Whereas the best and the brightest bankers on Wall Street left to become private equity dons, the best and the brightest traders on Wall Street left to become hedge fund managers. As hedge funds were making money hand over fist, a number of Wall Street firms started to take large equity stakes in hedge fund management companies as a way to reap a percentage of those profits and as a way to give their talented and ambitious traders a place to go without necessarily having them leave the fold. Firms such as JPMorgan Chase, Lehman Brothers, and Morgan Stanley took equity stakes in hedge fund management companies. Many believed that Goldman Sachs—which many of the most successful hedge fund managers had left in search of even greater fame and fortune—had become nothing more than a big hedge fund itself.

Nearly alone, Bear Stearns took a different approach. The firm had numerous chances to do so but never bought a hedge fund management company or took an equity stake in one. Instead, the firm decided to try to grow its own hedge fund managers. Internally respected professionals, such as Cioffi, who expressed an interest in being hedge fund managers were occasionally given the chance to fulfill their dreams. For Bear Stearns, taking this chance kept talented salesmen, traders, and bankers at the firm at little additional cost. The same could not be said of either investing in a hedge fund or buying one outright.

In October 2003, Barry Cohen recommended to Marin that Cioffi move over to BSAM and set up a hedge fund with money from outside investors. Under the circumstances—Marin being new to the firm and
having the clear recommendation of his boss—Marin agreed to bring Cioffi into BSAM to set up the High-Grade Structured Credit Fund. “He was considered extremely expert in structured trades,” one of his colleagues said. “There were certainly some people who thought, ‘Hey, what's he doing trading? He's a salesman.' Warren, who knew him the best, and Barry Cohen, for that matter, all said, ‘You know what? It doesn't matter. He knows the market. And he's good. That's not going to be an issue.’” Helping Cioffi run the hedge fund was Matthew Tannin, six years his junior. Tannin, born in New Jersey, was a graduate of the University of San Francisco law school. He joined Bear Stearns in 1994 and spent seven years structuring collateralized debt obligations. In 2001, he moved over to research, where he studied the trading and value of CDOs.

The High-Grade Fund opened to outside investors in October 2003. Cioffi and Tannin told investors that the fund would invest in low-risk, high-grade debt securities, such as tranches of CDOs, which the ratings agencies had rated either AAA or AA. The fund would focus on using leverage to generate returns by borrowing money in the low-cost, short-term repo markets to buy higher-yielding, long-term CDOs. The difference between the interest received and the interest paid, enhanced by the use of borrowed money, would yield the fund's profits.

For the next forty months, Cioffi's hedge fund never had a losing month. During that time the High-Grade Fund achieved a 50 percent cumulative return. “Ralph was one of the biggest customers on Wall Street,” Cayne said. “He was everybody's best client. I tell you, for forty months in a row it was fine.” Bloomberg reported that Cioffi earned an “eight-figure compensation.” In typical hedge fund fashion, BSAM kept 20 percent of the profits generated by the fund plus a 2 percent fee on the net assets under management; fees from the High-Grade Fund alone accounted for 75 percent of BSAM's total revenues in 2004 and 2005. Bear Stearns, in turn, rewarded Cioffi with many millions in compensation. He certainly lived very well. In 2000, he and his wife, Phyllis, purchased a home for $815,000 in Tenafly, New Jersey, that in 2007 was assessed for $2.6 million. He owned a home in Naples, Florida, valued at $933,000, and a home in Ludlow, Vermont, valued at $2.2 million. He bought some land in Portsmouth, Rhode Island, that he then sold for a small profit. He owned an apartment at the Stanhope, on Fifth Avenue, in Manhattan, and a $10.7 million, 6,500-square-foot home in Southampton, Long Island, that had six bedrooms, seven baths, a pool, a tennis court, and a separate guesthouse on two and a half acres. “Ralph liked to live large,” one of his friends said about him.

But Cioffi's real passion was for Ferraris. At one point, he owned
two of them: a $250,000 F430 convertible Spider and a $300,000 front-engine V-12 Superamerica. One day, his Ferrari dealer in Spring Valley, New York—in Rockland County—called him up and told him he had one low-mileage Ferrari Enzo for sale. Was Cioffi interested in a trade of his two Ferraris plus some cash for the Enzo? Only 399 of the Enzos were built from 2002 to 2004, and they originally cost $650,000 each. Nowadays, if you can find one, it will cost around $1.2 million. After getting the call from the dealer, Cioffi called up Doug Sharon, a longtime Bear broker and car aficionado who ran the firm's Boston office.

“Do you think I should do the trade?” Cioffi asked Sharon. “The dealer wants me to do this trade.”

“Ralph, as far as I'm concerned, it's a no-brainer,” Sharon told him. “You gotta do it. Your two cars and some cash for an Enzo? Enzos are hard to find.”

“It's not exactly the kind of car I'm gonna drive down to the golf club with,” Cioffi responded. For Sharon, the conversation with Cioffi about the Enzo “was probably the beginning of the end, when Ralph's thinking about buying million-dollar Ferraris.” He contemplated buying a partnership stake in a Gulfstream jet and was the executive producer of the 2006 independent film
Just Like My Son,
starring Rosie Perez.

C
AYNE
C
APS
S
PECTOR