House of Cards (59 page)

Again, Spector's anger with Cayne knew no bounds. He even went so far as to tell one of his colleagues he wanted “Jimmy to die.” This was one of their worst spats. “Jimmy and Warren had this thing where Jimmy felt he needed Warren, but he didn't particularly like Warren,” explained someone who knew them both well. “So every once in a while, Jimmy just smacked him way out of proportion, and that was so out of proportion. It was so stupid.”

After the public rebuke, one of Spector's colleagues found him in retreat on Martha's Vineyard. The colleague called him up and said, “Warren, I got to tell you something. Forgetting for a second anything about Jimmy or you, the only person who is suffering now from you wanting Jimmy to die is you. He's not. He's having a cocktail somewhere and he's not feeling the voodoo doll stuff. But it's eating you alive. I'm just telling you to forget it. It was an overreaction. Jimmy overreacted and now you're overreacting, but forget that for a second. Even if it's not an overreaction, what good is it doing you? For your own good you've got to get it out of you.” To cool down, Spector went and played a few rounds of golf afterward with Alan Schwartz, who was nearby at his home on Nantucket.

Another senior managing director at Bear Stearns thought Cayne's public rebuke of Spector was especially egregious. “When you look back and you see patterns, sometimes you miss things that were all there right
in front of you,” he said. “I think to myself, ‘Geez, that was such an over-reaction.' Jimmy's overreaction was much more typical of Jimmy, actually— that's just the way he is—than Warren's overreaction was typical of him. It just showed me a window into Warren. But now, as I look back, did that rebuke cause Warren to lose face with the Democrats? Was he thinking, ‘I'm this big guy. I'm the stick at Bear Stearns. And I just got spanked in front of everybody in the organization and I can't do anything about it. So I guess I'm not the top guy'? That's why he reacted so badly. It wasn't just the publicity. It was the publicity in front of these Democrats who were Warren's buddies. Whether he wanted to be Secretary of the Treasury or just an important guy in the Democratic Party, it was embarrassing to him.”

Another Bear executive often wondered about Spector's relationship with Cayne. “It was very Shakespearean,” he said. “The relationship between Ace and Jimmy was very difficult. The relationship with Jimmy and Warren was very difficult. If there's anything that I have a lot of regret about, it's that I gave a lot of credibility to the status quo. I don't mean that in a bragging kind of way at all. But I had the ability to make it look like we all got along because I got along with all of them. I knew the tension, but the way I looked at the tension at the time was to say to myself, ‘We've all been together twenty something years. We're like a family.' If you ever saw it from the inside, you'd say, ‘Holy shit!' But I'm sure that's what the Joint Chiefs of Staff is like and the Federal Reserve. What I think about in hindsight, though, is that it wasn't healthy because we were not a family, we were a corporation. There should have been more change. If you took ten investment banks and you froze their management team in place for the next twenty years, you'd have a lot of this shit repeated too. I used to say that continuity of management was a good thing. But privately, with my wife, I would say, ‘The last several years, I have to search my soul as to whether I'm just comfortable because I have my platform. I can do what I want and represent the firm. Or am I supporting the right thing?' I never can tell whether I'm rationalizing or not, because if I came to the conclusion that I'm just supporting something that doesn't work, then I've got to go. I was never going to leave. But I thought about stepping out of management partially because I wasn't really that much
in
management. I was kind of like the rest of my clients in a way. I stayed in the room keeping these guys from killing each other a lot of times.”

A
LTHOUGH
C
AYNE MAY
not have been fully cognizant of it, by humiliating Spector in public and by puncturing what Spector considered to be the heart of his financial incentives at the firm, he had struck a mortal blow
to Spector—and possibly the firm—at the very moment when Spector's expertise and attention were most needed. During the previous decade, under Spector's watchful eye, the firm had become the premier manufacturer and distributor of an alphabet soup of exotic securities: everything from mortgage-backed securities (MBSs) to CDOs, CDOs-squared, CMOs, CLOs, and on and on. The firm was making a ton of money, and the members of the executive committee—now reduced to five people— were becoming exceedingly wealthy, but they were also exceedingly dependent on the expertise of Warren Spector, who himself was becoming more imperious and distant. Spector was the architect of the strategy to bulk up the fixed-income division—not that he did anything without the approval of the executive committee—and he was also the person who had enabled Ralph Cioffi to build a hedge fund devoted to the exotic securities the fixed-income division was manufacturing. Cayne, the former broker, had only a vague understanding of all these exotic financial instruments that Spector's salesmen and traders were creating. Intimate familiarity with inventory was not his management style. Schwartz, while plenty smart, was an M&A banker who provided world-class service to his clients. By his own admission, he was happy to cede more and more power at the firm to Spector so that he could be left alone to do his own thing. Sam Molinaro, the CFO, had an accounting background and could hardly be expected to have a view about the firm's growing inventory of exotic securities. Besides, it seemed increasingly obvious that Bobby Steinberg, the firm's chief risk officer, was unable to get from Spector a full accounting of what was going on. As for Ace Greenberg, now in his late seventies, he still had his seat on the executve committee, the board of directors, and the risk committee, but his focus, once merger arbitrage, had shifted to investing his clients' money as well as his own. Besides, Cayne was not exactly open to his rival's views by the first decade of the twenty-first century. What was needed at Bear Stearns from 2003 on, as the bull market in credit stampeded to unprecedented levels and where the only asset consistently undervalued was risk, was a fully and completely engaged Warren Spector, and that is precisely what Cayne's two decisions had done most to undermine.

Not that anyone outside the firm—or most people inside, for that matter—had the slightest inkling that the seeds of the firm's destruction had been sown. Rather, the exact opposite seemed to be occurring. To outsiders, Bear Stearns was humming along and deserving of recognition and stature beyond anything it had ever experienced in its history. Cayne, a man of considerable ego, was more than game to play along with, and even encourage, the quickly improving opinion of his firm.

In August 2004,
Barron's
observed in a cover story that Bear's stock had doubled since the stock market peaked in March 2000, while the stocks of industry leaders Morgan Stanley and Goldman Sachs had endured losses of 42 percent and 20 percent, respectively. “Consistently performing makes believers of people,” Sam Molinaro explained. While the article touched on the typical tropes about the firm's lack of breadth and depth and its “reputation as a sharp-elbowed mercenary trading house that associates with dubious characters,” there was also the acknowledgment that the firm's fixed-income engine was firing on all cylinders, with revenue tripling in the past three years.

The most interesting revelation in the article was not about Bear Stearns per se but rather a quote from Spector, apparently from an interview he gave to National Public Radio, about Senator John Edwards, who had just accepted the nomination for vice president on Senator John Kerry's presidential ticket. Spector supposedly told NPR, “The Republican Party is painting him as some sort of extremist. But in my dealings with him, I found him to be very open-minded and willing to listen to all sorts of business issues, concerns about legal reform, concerns about healthcare not only from a personal point of view, but also from a business point of view.” Despite Cayne's public rebuke of him, Spector had decided he was not going to be so easily stifled by his boss.

The praise for the firm continued in
Investment Dealers' Digest,
a trade publication, in a January 2005 article once again touting the firm's savvy. Bear's stock had closed out 2004 at $102.31, up 29.2 percent for the year, well ahead of all of its competitors. The secret, Cayne told the magazine, was avoiding the mistakes other firms had made. “So you miss Russia, Big Bang, the Asia Crisis,” he said. “The culture of the company has saved us from doing something rash.” Two months later,
Fortune
named Bear Stearns the most-admired securities firm for 2004 (after being the second-most-admired securities firm in 2003). And
On Wall Street,
a trade publication, noted in a long article about the firm's brokerage business that the company had “never missed a quarterly profit,” in part due to the firm's “stability,” with “top management … running the company for nearly three decades.”

C
IOFFI'S
B
UBBLE

ut there were storm clouds brewing on the distant horizon. In a February 2005 speech at Stanford University little noticed at the time, former Fed Chairman Paul Volcker, then seventy-seven years old, made a plea of sorts for politicians and regulators to begin to take action (though he did not specify what) to let some of the air out of the balloon. “There has been a lot of good news in the past couple of years,” he said, but “I have to tell you my old central banking blood still flows. Under the placid surface, at least the way I see it, there are really disturbing trends: huge imbalances, disequilibria, risks—call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it.” Volcker's observations came some four months after Greenspan gave a speech in Washington where he allowed that although “pockets of severe stress within the household sector … remain a concern,” the likelihood of “housing price bubbles” appeared small.

Volcker voiced his concern about Americans' low rate of savings and acknowledged the growing danger of the inflating housing bubble, although he did not explicitly refer to it as one. “We are buying a lot of housing at rising prices, but home ownership has become a vehicle for borrowing as much as a source of financial security,” he said. “I will suggest to you big adjustments will inevitably come, and they will come long before the Social Security surpluses disappear or even before we cut the federal budget in half. And as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change…. I think we are skating on increasingly thin ice.” A month later, Fed Governor Bernanke proclaimed there was a “global savings glut,” especially in China and other developing countries where consumption was low, helping to fuel a high global demand for the debt of the United States, keeping interest rates low. “In retrospect, we didn't have a global savings glut,” explained Stephen Roach, the chairman of Morgan Stanley Asia, “we had an American consumption glut. In both of these cases, Bernanke was complicit in massive policy blunders on the part of the Fed.”