House of Cards (84 page)

C
AYNE SPENT THE
last week of November and the first two days of December playing bridge in San Francisco at the Reisinger Board-a-Match Teams, the premier event of the fall North American Championships. Cayne and his team won the championship by a wide margin. When he came back to the office on December 3, Schwartz and Tese came to see him and told him that Greenberg wanted to quit Bear Stearns and work somewhere else. Schwartz and Tese asked Cayne to talk to Greenberg. “First of all, I didn't give a shit if he left or not,” Cayne said. “He's eighty years old. Who cares? But I said I would attempt to talk sense into him. His leaving would have been another straw. They thought. I didn't.”

Cayne went to Greenberg's office on the fifth floor. “I sit down with him,” Cayne said. “He says, ‘I'm not respected here. I've just decided to move.' I said, ‘Well, okay, let's go through the paces. Let's start with a couple of thoughts. Number one, it wasn't any longer than three weeks ago that we had a dinner, an
Institutional Investor
all-star dinner for the analysts. We have it every year. You go to it every year. I go to it every year. There are eighty to a hundred people in the room. It's a Bear Stearns feel-good.'… I stand up. I said, Well, let's not forget who started this whole thing, Alan Greenberg.' He said, ‘Yes, that was nice. I remember that.' I said, ‘So the idea that you're not getting respect, I challenge, number one.’”

Cayne continued, “I said, ‘Number two, I know you very well. I know why this is happening. I know why you're angry. A month ago, I went to your eightieth-birthday party. Your wife was standing in the middle of the room at the Harmonie Club. And I go back a long way with her, where I was instrumental in her getting a job. I was instrumental in a lot of things for her. I support her goofy governmental, liberal causes. I went up to your wife. I went up to do the kiss-kiss. She iced me, just walked away, purposefully walked away.' He said, ‘Let's keep the wives out of this.' I said, ‘Alan, they're not in it. I'm giving you a thought. The thought is this: She poisons you every single day about me, and how could you not resent me? Every article that's been written in the last four months, which is shit, talks derogatorily about me. Also, by the way, you got ousted, and the
Barron's
picture of you getting kicked in the ass and her status as the queen bee since 1993 has deteriorated to the point where you can't handle it anymore because she's on you all the time. “It's no longer your firm,” she says to you, “it's his firm.”’” Cayne convinced Greenberg to stay at Bear Stearns.

But between Kathryn Greenberg icing him at her husband's eightieth-birthday party and his convincing Greenberg to stay at the firm
a month later, Cayne was thoroughy disgusted with the man who had hired him. “One of us is a giver,” he said. “One of us is not a giver. One of us is a taker. One of us reneged forty times. One of us reneged not once, not once. One of us has got the ability to sit and have a conversation, meaningful conversation, and it isn't about him. It's not about ‘What can you do for me?' That's all he thinks about…. He and Spector were like two fucking cocks in a barnyard hating each other because they both knew they were both the same. One of them was a little smarter than the other. One was a little more clever than the other. They were both basically pricks, bully pricks. Couldn't care less about the other fifteen thousand people. Couldn't care less. Pieces of meat, all of them.”

On December 6, Joe Lewis revealed that he had been buying more shares of Bear Stearns between October 19 and December 5, at prices ranging between $110 and $120 per share. His largest purchase was for 1.569 million shares, on October 19, for $118.80 per share. Lewis's SEC filing indicated he owned nearly 9.3 million Bear shares, or 8 percent of the total outstanding shares, worth just over $1 billion. The filing revealed that Lewis had made the purchases out of the “working capital” of his investment companies. He was the second-largest Bear Stearns shareholder, after Dallas money manager Barrow, Hanley, Mewhinney, & Strauss, which had more than tripled its stake in Bear Stearns during the previous three months. “Value managers like us buy the stocks when the news is iffy,” James Barrow, the president of Barrow, Hanley, told the
Financial Times
on December 10. “It's selling at book value and expected to earn $10 a share next year. So this is a good deal if you ask me.” Barrow added: “I've met Jimmy Cayne and I know how he operates. If I didn't trust in his management, I wouldn't be buying the stock.” Brad Hintz, the Sanford Bernstein research analyst, said of the purchases by Barrow and Lewis, “You're getting the bottom-feeders buying into the company. Lewis is saying, ‘I can look through this cycle.' He's not worried about the leadership because there's nothing wrong with the current management. Remember, you're investing in them, not adopting them.”

A
ROUND THIS TIME
in December, after the fourth quarter had ended but before the firm's results were announced on December 20, Cayne—by his account—decided to begin a discussion with the board of directors about the possibility he would step aside and appoint Alan Schwartz the new CEO. Even though, whenever asked, Cayne had always insisted he would stay at the helm of Bear Stearns for years and years, in truth, by the end of 2007, Cayne no longer had the fire in the belly. He also had no idea what to do to return the firm to profitability. “There was a period of
not seeing the light at the end of the tunnel,” he said. “It's not knowing what to do. It's not being able to make a definitive decision one way or the other because I wasn't good enough. I wasn't good enough to tell you what was going to happen.”

At the fateful December board meeting, Cayne asked Molinaro, Schwartz, and Greenberg to leave the meeting so he could speak to the board alone. “I asked for a non-executive session, which means everybody else leaves except me and the board,” Cayne said. “I sit down with the board and I said, ‘Look, I think we need a fresh pair of eyes. I think that we need somebody to come in and take a look at our position and tell us what we're doing wrong. That person isn't going to be an incidental person.’” Among the people Cayne was considering bringing into the position—essentially replacing Spector—were Thomas Montag, then a senior fixed-income partner at Goldman Sachs who ended up at Merrill Lynch, and Tommy Maheras, a senior fixed-income executive at Citi-group who had been fired. “I don't know who it is that's going to come in,” Cayne said, “but I'm going to have to offer him a big position. It's going to be unfair to Alan Schwartz if I bring the guy in as a co-president because we just had a co-president. My motivation was simple: I wanted the board's permission to pull the trigger on making Schwartz the CEO.”

At first, Cayne said, the board did not see things his way. “They debated it,” he said. “They had a discussion. They finally said, ‘Okay.' Now, nobody at Bear Stearns knew that. They didn't know that I went to the board and asked for permission to pull the trigger myself. I wanted to be able to say at some point, ‘I'm done,' and I didn't know when it was going to be. Little did I know that it was going to be January.”

There were other interpretations of what happened in December. For instance, one board member said that while Cayne did approach the board in December about choosing Schwartz as his successor and one day giving up his post, there seemed to be a different interpretation of Cayne's assessment that the board did not want him to leave anytime soon. “The ‘Don't panic now, we've got to have you stay on' line was not entirely accurate,” this board member said. “Jimmy, at this point, was very, very not all there. He wanted to hear that he needed to stay on.”

Before the Christmas break, Schwartz called together the senior executives of fixed income, equities, and banking and, according to one of the participants, gave them a pep talk. He did not want all the bankers and traders going on vacation pissed off and worried about their bonuses. He also wanted them to stay in their chairs for another year. He preferred a direct discussion about the situation rather than rumor and innuendo. “Look, guys,” Schwartz told them, “let's get through year-end, compensation
pressures, all that shit. We had a really bad fourth quarter. I consider it a failure of management. We let you guys down and we've got to suck it up and get it done.”

But to his surprise, after each meeting with the various business leaders, there was a recurring theme, which was: “It's nice for you to say we all have to come back, but what's going on with management? Are you taking over?”

Schwartz said, “Guys, what's the difference? That's not important. We're all here. We're all a team. We screwed up as a team. We'll fix this as a team.” But the executives told him they wanted to know.

Schwartz said, “Don't make that a big issue.” At each meeting, the first question was “Is Jimmy staying on?” which was quickly followed by “We're not coming back for another year of this shit. The
Wall Street Journal
says our CEO smokes pot. Who needs this shit? We're getting ridiculed by clients. We're out there on the firing line with people saying, ‘Nice firm you work for! You guys look ridiculous! You guys are a laughingstock!’”

After these meetings, a small group of the firm's most senior executives approached Schwartz with a crystalline message: “If before bonuses are paid on January 20, there is not a change in management, then you're going to lose a ton of people. Just know that.” Now Schwartz had a serious dilemma. If he didn't approach Cayne with this news, the fact that he did not would be known inside the firm and give its best people cover to leave Bear Stearns for other places on Wall Street. “It would give people an excuse for being disloyal,” one of them said. “They don't have to say, ‘I'm being disloyal'; they just say, ‘I told you, I was ready to stay but you called my bluff.’” From time to time over the years, Schwartz had thought about giving up his management position at the firm and assuming the mantle of
eminence grise
in the M&A world, not unlike a Felix Rohatyn or Jack Levy, who were well-regarded senior M&A bankers without a management role. He and Cayne used to joke that when Cayne left the firm, Schwartz would be a free agent to go wherever he wanted. But over the years, as Cayne stayed on and on, Schwartz began to think that he would leave the firm before Cayne. Schwartz would tell Cayne: “You're going to stay on for fucking ever. I don't even know if I can last as long as you can.”

Now Schwartz was in the uncomfortable position of having to tell Cayne the time had come. Schwartz had never planned for this moment. He had always taken the position that he would leave rather than get into a fight with Spector about the leadership of the firm. But now, with Spector gone and the firm reeling, he did not feel he could just walk out the door. Nor did he feel Cayne could any longer run the firm. He spoke with
a few board members about what to do. Over Christmas break, a number of directors remembered that Schwartz had said to them: “You guys had better figure out what's going on here. You need to be aware of what's going on and make the decision.”

On December 18, Gasparino, at CNBC, reported that “for the first time in years, the board of Bear Stearns is actively talking about succession for Jimmy Cayne.” Gasparino could not put a timetable on Cayne's prospective departure, but he said that as the longest-serving CEO on Wall Street, Cayne “has run into a number of problems that is making the board a little anxious about his tenure going forward.” As “problems,” Gasparino cited Cayne's age, his health, the two investigations into what happened at the hedge funds—both by the SEC and by the U.S. Attorney in the Eastern District of New York—and the firm's prospects for the future. He said his sources told him the firm's fixed-income business, long the driver of Bear's growth and profitability, was “gone for the next year or so.” Gasparino predicted Schwartz would be the next CEO of Bear Stearns, although, he said, some board members were worried he was not ready for the job and would need some seasoning, a development that might keep Cayne in his seat longer. While Gasparino was breaking this news, the firm's stock was falling to around $91.35. That same day, the
Wall Street Journal
reported that Cayne and the rest of the executive committee had decided to forgo their 2007 bonuses.

On December 21, the
New York Times
ran a story, by Landon Thomas Jr., comparing Cayne to John Mack, the CEO of Morgan Stanley. Both men had presided over firms that had suffered major losses as a result of the financial crisis—for Bear Stearns, there was the $1.9 billion write-down; for Morgan Stanley, it was an $11 billion write-down—and both had agreed to give up their year-end bonuses. The difference between the two men, though, was that people were calling for Cayne's head and not Mack's. The reasoning seemed to be the two investigations into the Bear hedge funds and Cayne's penchant for playing golf and bridge as the walls of the temple were crumbling.