House of Cards (45 page)

B
Y THE END
of 1990, Wall Street was convulsed by the credit crunch that had started after the 1987 crash and then accelerated two years later after the failure to complete the financing for the $6 billion effort to take United Airlines private in a so-called employee buyout. Firms such as Drexel Burnham, Salomon Brothers, and First Boston that had used their own balance sheets to make expensive but lucrative bridge loans to leveraged-buyout firms to finance buyouts now found themselves in a struggle for their survival. Not Bear Stearns. Bear had eschewed the whole bridge loan craze. And its 1990 financial results reflected the wisdom of that decision.

Bear Stearns, at that time, also was one of the most profitable firms on the Street. The top executives, in particular Greenberg and Cayne, were making eye-popping amounts of money. In the fiscal year ended June 1991 (Bear kept changing its fiscal year end over time), the thirteen top Bear Stearns executives received an average compensation of $2.8 million, up 25 percent from the year before. Greenberg's cash compensation for the year increased to $5.3 million, from $4.2 million the year before. During 1991, the firm's stock price had more than doubled, to around $15.50 per share, and many of the executives sold some of their shares in the market. Greenberg sold around 18 percent of his holdings, for $9.2 million. Cayne sold no stock. “The people who sold still have an awful lot of stock, and all they're doing is diversifying,” he said. “The stock, at roughly one and a half times book value, is very cheap and I think it's going to go higher.”

The next fiscal year would be even better. The firm reported record earnings of $275 million in the year ended June 30. “It was a record breaker and all of us should feel proud,” Greenberg wrote. “Bear Stearns has never been stronger or positioned as beautifully as we are at this moment…. This place is rocking and our job is to keep it rolling. Everything is going our way.” He made no mention of the astronomical compensation he and Cayne were about to receive, of $15.8 million and $14.7 million, respectively, putting them on a par with the co-CEOs of Goldman Sachs and some 25 percent above the pay of Merrill Lynch CEO William Schreyer. The difference, of course, was that both Goldman and Merrill Lynch had made more than $1 billion in net income that year. Graef Crystal, an executive compensation expert, said that while he liked Greenberg personally, his 1992 pay was “way too much. When they take these monster pay packages, they're draining huge amounts of profits from the firm.” But Greenberg was unapologetic, citing the firm's formula
for the compensation for the senior executives. “I can't make any apologies,” he told
USA Today
. “The deal was laid out. What do you want me to do? Take dumb pills and not make money for the firm?”

A few months later, after ongoing criticism of their pay packages, Greenberg and Cayne decided to revise the formula for paying the executive committee, effectively reducing their pay by about 15 percent if the firm's earnings continued to increase. “We felt it was the fair thing to do,” Greenberg said. Cayne called the change “fine-tuning” because “it looks like the compensation might have been higher than it should be.” But the change didn't matter. In 1993, Cayne and Greenberg made even more money—$15.8 million each—despite the revised formula. The reason? The firm had net income of $362.4 million, 23 percent higher than the record profits of the year before. “We lowered the bonus formula because we wanted to do the right thing,” Greenberg said. “But we have a problem—we keep making money.”

B
Y THE SUMMER
of 1993, Greenberg was sixty-five years old and Bear Stearns was making money hand over fist. Although the firm had no mandatory retirment age—Greenberg said once that it was “ninety-two years old”—Cayne, then fifty-nine, decided the time had come for Greenberg to relinquish the title of CEO to him. A major battle ensued between the two men. Cayne said Greenberg knew that both the board of directors and the executive committee were unanimous that the time had come for Cayne to take over. According to Cayne, “I said, ‘Look, I'm supposed to go to Thailand, trying to get a deal. I'm not going until you give me your decision. If your decision is not stepping down, then, of course, we have a different deal. We have war. My suggestion is just do it.' He ended up doing it, not particularly gracefully, but he did it.”

On July 13, Bear announced that Cayne would become CEO. The
Times
noted that his company biography “devotes 10 lines to his achievements at Bear Stearns [and] 13 lines to his achievements at the bridge table.” But the succession plan was very unusual by Wall Street standards, since the old king, Greenberg, would still be around as a member of the executive committee, as head of the risk committee, and as chairman of the board of the company. The
Times
noted that Greenberg ruled “with a growl and a smile” and “would remain the final authority at Bear Stearns.”

The first rule of thumb on Wall Street is that if you are planning a coup d'état, above all else be sure to complete the job. Like George H. W. Bush's fateful decision not to invade Baghdad and take out Saddam Hussein during the first Gulf War, Cayne's decision not to take off Greenberg's
head when he had the chance would have consequences, too. Cayne chalked up the reason Greenberg remained to the “synergy” that existed between the two men—the ultimate opportunistic salesman needed the ruthless trader. “I don't take cred for what happened,” he said of the years of Bear's increasing profitability. “I think synergistically the combination of him being a merchant—like a midwestern storekeeper, which he was, which his dad was—and of him having a discipline that on paper doesn't make much sense, but in reality it's pretty much a good way to go, which is take your losses. But there isn't anybody that will tell you he's an honest guy. There isn't anybody who will tell you that he's sincere. There isn't anybody that would tell you they choose him as their best man, or best friend, or one who they would have lunch with or go on a trip with, or socialize with, or whatever. They don't exist. He had one friend—me.”

Cayne's promotion to CEO came and went without any of Green-berg's internal memoranda mentioning it. But Greenberg remained a ubiquitous presence at the firm, in the way that Deng Xiaoping remained powerfully behind the scenes in China following his supposed relinquishing of power in 1989. “Every time there was a monthly meeting of the senior executives of the firm, the senior managing directors, Jimmy would get up in front of everybody and talk and Ace would get up and sit next to him,” explained one former Bear executive. “Just the two of them. The same way that he did when he was chairman and CEO. He wouldn't give it up. At one point, Jimmy had him not go up onstage and Ace got very upset and he insisted on going up.” Someone who knew both Cayne and Greenberg well found them to be nearly perfect opposites of each other. “Ace is a very peculiar character,” he said. “He's extremely good at formalities—addressing people properly, opening doors for ladies, returning calls promptly—but he's the opposite of a warm guy. He's very good at formalities in the same way that the president of the United States is very good at formalities. But people who really knew him knew that he was not a very warm guy, not even a nice guy. But it didn't matter. He was reliable in a business context. He always showed up to work at the same time. He had lunch at the same time. He returned phone calls promptly. He didn't like to listen but he'd go through some of the formalities. Jimmy was the opposite. He could be extraordinarily engaging if he tried to be and always listened and was very smart politically. Ace could be brutal. He was condescending in private and brilliant in public.”

A
S
C
AYNE MANEUVERED
—a word he detests to describe his rise; he prefers “ascended”—his way to the top of the firm, he began to reshape it
more and more in his image. Understandably, Cayne's appointment as CEO also thwarted the dreams—or expectations—of the younger members of the executive committee who hoped, as the
Times
had implied in its 1989 profile of Greenberg, that the firm's politburo would reach down to one of them to find a new leader for the firm, instead of choosing either Cayne or Rosenwald, who were just a few years younger than Greenberg. It was akin to the hope that many in England have that Prince William—and not his father, Prince Charles, will become king upon the death of Queen Elizabeth II. Many of these men left the firm in the years leading up to Cayne's appoinment as CEO or in the years just after. Denis Coleman Jr., Bill Michaelcheck, and John Sites at one time or another ran the firm's powerful fixed-income division, where by far the bulk of the firm's revenues were generated. As a result, whoever was at the top of that division no doubt thought he had a clear shot at—or deserved—the chance to run the firm. There is little question that Cayne, a retail broker, felt threatened by these younger executives who were responsible for the bulk of the firm's revenues and profits and were making that money in a language and in a way Cayne barely understood. “It was very tightly controlled at the executive committee level,” a longtime Bear executive said. “The number of people that were admitted to the inner circle of the firm were very, very small and they had to have a very similar mind-set about what it took to be named a very senior member. There were people who felt that they would not advance quickly enough. A contrasting model might be a Goldman model where people's careers developed, they become senior people, and they leave the firm and they go into government or service and they make room for people. The Bear model was that when people achieved executive committee membership—with an override on 20 percent of the firm's profits—they defended that position as strongly as they could. One of the ways that they defended that position was by making it difficult for very talented, slightly less senior people to succeed.” Coleman left in 1989 to become a vice chairman of a discount brokerage. Michaelcheck left in 1992 to start Mariner Capital, a multibillion-dollar hedge fund. Sites left in 1995 to “spend more time wth his family.” When Michaelcheck left, Cayne appointed Sites the co-head of fixed income with a young superstar trader named Warren Spector. When Sites left, Spector became the sole head of fixed income. Whether these talented executives were pushed or jumped is not clear. Cayne said he forced none of them out.

Others have a more nuanced explanation for the evisceration of those coming up fast in the Bear hierarchy. “Jimmy and Ace's view was there was always going to be another guy,” explained a former Bear executive.
“There always was another guy. There was Denis Coleman, then Bill Michaelcheck, then John Sites, then Warren Spector…. Neither one of them ever believed that any individual person mattered or anyone who left mattered, or that they even made a mistake when someone left or when they passed on an opportunity.” Added another former partner: “We all got rich. Was Ace—who I loved—greedy? Sure. He was greedy. And Jimmy. Right? And the third guy? There was never a third guy. They always got rid of the third guy.”

Paul Friedman had a ringside seat for Cayne's seriatim and ruthless eviscerations of Friedman's bosses in the fixed-income division. “He forced out over the years a list of extraordinarily bright people—who could have provided big amounts of leadership—because they threatened him,” said Friedman, who now works for Michaelcheck at Mariner Capital. “My first boss, Denis Coleman, who when I got there was head of fixed income, was viewed by many as the ultimate successor to what was then Ace and Jimmy, but Jimmy was already taking command. He was forced out for getting in Jimmy's way. I was young enough at this time [that] I never quite understood it, other than I worked for Denis, and he walked in one morning and said, ‘I'm retiring,' and I said, ‘How come?' And he said, ‘I'm not talking about it,' and he left the same day. Following him was Bill Michaelcheck, forced out by Jimmy in a to-do over compensation, partnership points, hierarchy, succession, who knows? Eased out. Whoever was the head of fixed income, he always took the number two and strengthened them, and used him to push out the head. Then the number two would become the number one, and he'd find somebody else to use them to push out the one ahead. The last before the end was John Sites. He used Warren to push John out. Ultimately, John quit. Warren then became head of the place, and somehow he and Jimmy worked out a truce, because Warren must have told Jimmy he was willing to be the number two until Jimmy was ready to leave, and that they were going to work on this together. And right up until the end he did nothing other than strengthen Warren. Jimmy was a big advocate of Warren—until he wasn't.”