House of Cards (77 page)

One senior Bear executive put what was happening into perspective. “Jimmy being away, that was standard,” he said. “That was not a big deal. Jimmy being away maybe looked bad once the outside world focused on it, but the way this company worked, that was not a major problem. Warren being away, that was a major problem because Warren was the decision maker. Not that Jimmy wasn't. But the way it worked was ultimately we'd form a point of view. We'd go to Jimmy. We'd tell him what we wanted to do. We'd discuss the pros and cons. He'd make the call. But Warren was a key lieutenant and during that period we were in the middle of a crisis here. These funds are blowing up. We've got to make a decision about putting them into bankruptcy. We had a lot of big decisions to make that week and he was gone. Candidly, what was really in my mind is, ‘You're the fucking president of the company. This is your area. You need to be all over this stuff because these people work for you. Not for me. I'm in the middle of this because I have to be. You're in the middle of it because you are in the middle of it. What are you doing not being here?’”

B
Y THE TIME
Cayne returned to his sixth-floor lair at 383 Madison on July 30, after ten days in Nashville, he was loaded for bear. Spector's presence in Nashville irked Cayne no end. Although he did not say anything to him in Nashville, he thought Spector should have been back in New York the second week of July, leading the fire drill. “If I even saw him [in Nashville], he would scurry away,” Cayne said. At the end of the second week, both men returned to New York—on separate flights, Cayne now white hot and Spector quietly suspecting he had successfully needled his boss. Indeed, their mutual antipathy by this point was such that when they both got on the firm's elevator at the same moment, “they
did not say a word to each other for the entire ride, each staring in the opposite direction,” according to the
New York Times
.

Between Spector being in Nashville in the middle of July instead of in New York, Spector's unilateral decision to invest $25 million in the hedge funds on May 1 (which he had the written authority to do), and the growing antipathy between the two men, Cayne decided Spector had to go. He made the decision on his own and impulsively, with little forethought about what the consequences might be for firing the architect of one's home at the very moment it was crumbling. “I couldn't work with him,” Cayne said. “I didn't trust him anymore. I told Schwartz, and I told Sam, and I told Greenberg. Sam had no opinion. Sam didn't even like the guy. He treated Sam like shit. Schwartz wanted to wait thirty days, because Schwartz always loved to wait thirty days. Greenberg wasn't sure. I said, ‘Look, it almost doesn't matter because I can't work with the guy. So, if you're telling me you're not on board for him to be dismissed, you're telling me I'm dismissed. That's your choice. I'm not working with him anymore.’”

The other members of the executive committee, Spector aside, viewed Cayne's decision with concern. “Jimmy just really had had it with Warren,” explained a Bear executive, “and, I thought, rather impulsively said, ‘Warren's got to go.' Jimmy and I spent three hours going over it because I said, ‘Number one, Jimmy, now is not the right time. Number two, whether it's the right thing to do or not, I'm not even going to address it. I'm not convinced it is, nor can I sit here and look you in the eye and tell you it certainly isn't.’” Many Bear executives thought the firm's situation was precarious enough at that moment that keeping the team together was paramount.

Cayne cut his colleague off. “I can't stand seeing him,” Cayne said. “I can't stand coming in every day.” Both Schwartz and Molinaro tried to convince Cayne to keep Spector. “But it was like the onslaught,” an executive said. Other Bear executives also thought Vince Tese, the lead independent director on the board, would be sympathetic to keeping Spector around until the acute crisis passed. “But Vince was supporting Jimmy,” one of them said. “My pitch to him was, ‘We're a public corporation. We've had a problem. We've hired a law firm. I don't know what they're going to say. Why don't we get to work and get this freaking thing solved? Tell the law firm we want everything out on the table. I'm not passing judgment on whether Warren should be here long-term or not. I'm not. Given what's happened, I have an open mind, but I think the right thing to do is let the investigation finish, let's get all the information, and then let's talk about all the consequences.”

There was also the argument made to Cayne that Spector provided a buffer for Cayne against the approaching hordes. If he fired Spector now and something else occurred in the coming months, Cayne would be on the hot seat instead of Spector. “Who knows where this thing is going?” one of his partners told Cayne. “If you take Warren out now, we've lost the ability to use Warren as ‘That's how we responded.' The minute he's out, you're the target.” Toward the end of their three-hour discussion, Cayne said, “There's one thing that's getting at me here. He never once said he was sorry for the mess he made.”

The executive told Cayne he was sad to hear that news. “He understood a little better the magnitude of his emotion because this was a really serious thing—what happened to us—and whether Warren was directly responsible or not, he put it in place and he put the people in place. He was in charge,” he said.

The executive believed that, for Cayne, discovering that Spector had authorized investing the $25 million in the hedge funds was the final straw. “The $25 million was a rounding error,” this person continued. “But Ace and Jimmy went ballistic. What it implied was, ‘Hey, wait a minute. If there was trouble, forget whether you put in the $25 million or not; the fact that they thought it was important [meant that it] was something the executive committee should have known. It wasn't that you put in the $25 million; it was that you didn't even tell us there was a problem and you put in the $25 million.” Another Bear executive agreed. “The $25 million was an excuse after the fact,” he said. “Jimmy needed something to be able to tell people about why he fired Warren.”

A number of Bear's senior executives are still not sure Spector understood the extent to which the hedge fund debacle hurt the firm. “The screw-up in hedge funds was a pretty big screw-up,” one of them said. “He didn't seem to get that…. I think to this day Warren thinks, in the scheme of what we were doing, in the scheme of all his responsibilities, something like that's going to happen to anybody. Jimmy jumped on it to get rid of him. It's unbelievable, but I think that's true. He did not seem contrite. He did not feel bad that it happened. He felt like, ‘What's the big deal, guys?' What he didn't get was it made us the poster child for a problem in the whole industry. It's like walking into Disney and saying, ‘Someone's having sex with an underage minor on your ride. It was only one kid. What's the big deal? It was only a blowjob.’”

By Wednesday, August 1, Cayne had all his ducks in a row. He called Spector down one floor to his office, which was especially dark that day because all the shades were drawn, and told him, “I think it's in the best interests of the firm for you to resign. I have to do this. I can't
work with you anymore.” Spector said he was stunned and thought he had been working hard to repair the problems in BSAM and in fixed income. Every time Spector tried to engage Cayne in a discussion, Cayne just reiterated that he had “lost confidence in” Spector. Cayne was in HR overdrive.

A
S ALL THIS
was being hashed out on the sixth floor of 383 Madison after Cayne and Spector returned from Nashville, Robert Upton, Bear Stearns's treasurer, was in Nantucket, taking a few days off. On the afternoon of July 31, from Nantucket, Upton started calling around to the ratings agencies in New York to tell them Bear Stearns was about to suspend redemptions from
another
hedge fund, The Bear Stearns Asset-Backed Securities Fund, with about $900 million in assets. Even though the fund supposedly had less than 1 percent of those assets invested in sub-prime mortgages and mostly was in credit card receivables and consumer auto loans, investors suspected the fund had lost money in July and had been concerned enough about potential future losses that they started to take their money out. That's when the firm stopped the redemptions. Upton wanted the rating agencies to know. “Of course, the other funds had just declared bankruptcy, and it was like this massive scrutiny and concern about Bear,” he said. He flew back to New York City that night. He returned to the office the next morning, August 1.

On the agenda that day was a call with Standard & Poor's, the ratings agency, which was “seriously evaluating putting [Bear Stearns's senior debt rating] on negative outlook,” Upton said. “Not the end of the world, but in the market environment we were in, [it] certainly sends a bad signal. Real fucking problem, especially when no one else had to face that same action yet. We were very concerned, and pushing really hard” to convince Standard & Poor's to change its mind. The discussions with the ratings agency had continued Wednesday and Thursday. “All the senior guys at the firm knew this was potentially imminent,” Upton said. “We were all kind of collecting our wits about us to figure out how we would deal with it. We knew it was going to be a problem. And everyone was looking to me to answer, ‘Is this going to happen tomorrow, Friday the third?’” Late Thursday afternoon, Upton spoke to Scott Sprinzen, an S&P managing director, about the potential change in Bear Stearns's ratings outlook. Sprinzen was on his way out the door for the day. “We're going to hold off on making that decision until early next week,” Upton recalled Sprinzen telling him. “I said, ‘Okay, that's great. We'll provide you some more information. We'll talk next week.’” Upton thought for sure the firm had dodged a bullet.

The next morning, Upton was at his desk at 6:30
A.M.
Ten minutes later, Sprinzen called. “Yep,” Sprinzen said, “you're going on negative outlook today.” Upton was shocked—“That was a shit show,” he said—and said to Sprinzen, “But you told me yesterday you were going to wait till next week.”

“Yeah, well, no one was on the call,” Sprinzen told him.

“What he was basically saying was, ‘Yeah, that's what I told you, but there's no proof that that's what I fucking said, so you're fucked,’” Upton said. “I scramble. I call Friedman. I e-mail Molinaro. I say, ‘Get ahold of me. S&P's going negative this morning.’” By 7:30, S&P had sent over a copy of the press release to Upton. An hour later, Upton said, “Schwartz and Molinaro are in my office and we're fighting with this guy Sprinzen, trying to get him to clean up the press release, telling him that when they send this out, it's going to be a bad signal to the market. The market's going to think we have a massive hole in our balance sheet and we're about to fucking blow our brains out,” Upton said. “He says, ‘Oh, no, no, no. I'm a weasel dick,' then sends the fucking thing out anyway.”

The S&P statement on August 3 sent a shock wave through the markets by questioning publicly whether the problems in the firm's hedge funds could have longer-term implications for the financial health of the firm. After revising the outlook on the firm's credit to “negative” from “stable,” S&P explained that the change, according to analyst Diane Hinton (Sprinzen's colleague), “reflects our concerns about recent developments and their potential to hurt Bear Stearns' performance for an extended period. We believe Bear Stearns' reputation has suffered from the widely publicized problems of its managed hedge funds, leaving the company a potential target of litigation from investors who have suffered substantial losses.” The ratings agency also noted Bear Stearns's “material exposure” to mortgages and mortgage-backed securities—not helped by taking $1.3 billion of Cioffi's securities—as well as unsold leveraged finance loans and high-yield underwritings. “The ratings could be lowered if large losses were to be incurred over the next few quarters or if earnings failed to stabilize as a satisfactory level beyond the next few quarters, which we expect will be—at best—difficult ones for the company,” Hinton wrote.

The credit ratings of any company are crucial semaphores of financial health and well-being, but are especially important to firms—such as those on Wall Street—that rely not only on borrowing from others to survive but also on their confidence. “The stock drops like a stone,” Upton said. “CDS [credit default swap] spreads start blowing out again. Everyone's concerned. Our fixed-income investors and repo counterparties and
banks are calling in. Molinaro comes racing down to my office at like ten-thirty and says, ‘We've got to do something.’”