House of Cards (50 page)

The Saudis' lawyers went ballistic. “This is manipulation,” they told Flexner. “This is not right. We're going to sue you. These rights can only be conferred to our site. We control this site. This is tortious interference.” At that threat, Cayne, for once, backed down. He decided to confer the air rights to the Saudis for $1 and never had to pay Lindner the $10 million. “That was viewed attractively by the Middle Eastern investors, what Jimmy did,” Flexner said. With the air rights, the Saudis could build their tower but still needed an anchor tenant to occupy it. Bear Stearns was the natural first party to talk to, since everyone in Manhattan's cozy commercial real estate world knew that the firm's lease would soon be up at 245 Park. Cayne and the Saudis kept talking. At one point, Cayne sought the advice of Steve Roth, at Vornado Realty, on the best strategy for winning over the Saudis. Remembered Flexner: “Steve said, ‘Just pop the guy another $20 and that'll do it.' I love how that's exactly what he said. I'll never forget it—'Pop the guy another $20.'” Cayne made an offer of around $60 million for the property, a quick $7 million profit to the Saudis. He thought progress was being made.

Then the Saudis stopped returning his calls. It turned out that Chase Manhattan Bank, headquartered just north of 383 Madison at 270 Park, had contacted the Saudis about buying the site. “Chase is much bigger, could maybe pay more, be a better credit, was global, so the Middle Eastern investors knew much more about them,” Flexner said. “Jimmy thought he had this great kind of rapport going with the guy. But
it looked like it was dying on the vine. Jimmy thought that he had lost the building and he was desperately afraid to tell anybody because Jimmy is like, ‘Hey, this is what I'm doing. We're going to get this new building.' He's not playing his cards close to his chest. He got exuberant. Now he's thinking, ‘Oh, I'm so embarrassed. This is huge.’”

The loss of the 383 Madison site meant that Bear Stearns would have to reengage with Brookfield about 245 Park. “In which case, they'll just nail us,” Flexner said. Then out of the blue the Saudis called Cayne and said they wanted to talk, Flexner recounted. The two sides agreed quickly on a deal whereby Bear Stearns would get a ninety-nine-year ground lease for $90 million. What had turned the tide in Bear's favor was that the Saudis had come to 270 Park Avenue to have lunch with William Harrison, then the CEO of Chase Manhattan, and, according to Flexner, “Harrison didn't show up and sent a junior guy.” That offended the Saudis, who killed the deal and came back to Bear Stearns—and also became private clients of the firm.

Cayne's outside advisor on the deal for 383 Madison was Fred Wilpon, the chairman of developer Sterling Equities and the owner of the New York Mets. Since 1993, Wilpon had been a member of the Bear Stearns board of directors. “It wouldn't occur to me to go somewhere else,” Cayne said. In 1996, Bear paid a joint venture controlled by Wilpon $225,000 for consulting services related to 383 Madison. The next year, Bear paid the Wilpon joint venture a $2 million fee and agreed to pay the developers of 383 Madison—another Wilpon-controlled joint venture—a $12 million fee for developing the project plus a potential discretionary bonus of another $20 million if all went well. Wilpon's joint venture was paid $3.8 million in 1999, $4.4 million in 2000, $5.4 million in 2001, and millions more in 2002.

Part of the reason Wilpon got the Bear assignment was that he and his partner in the deal, Houston developer Gerald Hines, had built the building at 450 Lexington Avenue—the home of law firm Davis Polk & Wardwell—over the railroad tracks leading in and out of Grand Central. The Bear Stearns building would require the same engineering skills. Cayne took a keen interest in the nuts and bolts of the project. His background in the scrap iron business gave him insight into the cost of steel; he constantly monitored whether Bear was getting the best price. He also hired a man whose job it was to inspect all the invoices on the job; the inspector couldn't get along with anybody, so Cayne had to fire him. As the project was nearing completion, the top floors of the building developed a mold problem, caused, Cayne said, by lumber left exposed to the rain. Bear rectified the problem of the mold, but Cayne was not happy.
When the building was completed, according to Cayne, Wilpon made it clear to Bill Montgoris, the firm's CFO, that he still wanted the discretionary bonus.

Cayne told Montgoris to tell Wilpon to forget it. “This isn't like ‘I delivered a building, I delivered it on time, I delivered it better than anybody who's ever delivered anything before,'” Cayne told his CFO. “Under those circumstances, there was probably going to be a bonus, even though he had a no-bid contract with a guy that caused us a fucking insane mold issue. I hold the general contractor responsible. That's not my job to go up there and put a tarp over wood. You go back to Wilpon and tell him if he writes us a letter that his company for the rest of its life—not his life, but the life of his company—indemnifies us against any action under the mold, then he gets the bonus.” Cayne believed that the letter would be easy for Wilpon to write since the mold supposedly had been eliminated. But Wilpon never wrote the letter. “So there was no special bonus,” Cayne said. “We're talking about twenty million bucks, and I wasn't fucking around.” On July 1, 2003, Wilpon resigned from the Bear Stearns board. He and Cayne were no longer speaking.

When Wilpon completed 383 Madison in 2001 at a cost of around $500 million for the building itself and another $200 million for the inner technology and furnishings, it was a forty-seven-floor, 755-foot, octagonal building clad in granite panels and glass. At its top was a seventy-foot-tall glass crown that was illuminated at night. The building was named one of the best new skyscrapers of 2001. Some critics, though, panned it. “This is a building you wouldn't want to get anywhere near at a cocktail party,”
New York
magazine said. “Dressed nearly head to toe in dour granite, and geometrically proper, it's stiff to the point of pass-out boredom. Out of character with SOM's [Skidmore, Owings & Merrill's] current work, the design recalls the firm's unfortunate postmodern interlude a decade ago.” But Cayne loved it. To him, it was a playground and the culmination of his years of leading Bear Stearns to higher and higher profitability. It had become his monument to himself. “It's the nuts,” Cayne said of the building. “It's the best site in the world. It was the best building in the world. It was a city within a city.” And it was only thirteen blocks from his Manhattan apartment.

B
Y THE END
of 1997, Cayne had announced the deal for 383 Madison and knew that the firm would soon break ground on its soaring new world headquarters. Closer to earth, though, Cayne found himself in the thick of a meltdown occurring at Long-Term Capital Management, his other baby. In September, even though LTCM had earned $300 million in one
of its best months ever, “the firm's prospects were steadily dimming,” according to Roger Lowenstein, because it was having trouble finding profitable trades in the shifting markets. On September 22, Meriwether wrote investors that the fund “had excess capital” and intended to return to investors all the profits made on the money invested in 1994 and all the money invested in the fund after that date. This amounted to a return of about half the fund's $7 billion in capital. The LTCM partners and employees kept all of their money in the fund. Investors saw this not as a lucky windfall—an idea hard to imagine today—but rather as if they were being deprived of water in Death Valley. They clamored to stay fully invested in LTCM, since the geniuses who'd founded the firm were minting money. But the firm turned them down. Of course, some exceptions were made for “big strategic investors” such as the Bank of Taiwan—and for Jimmy Cayne, the boss of LTCM's clearing broker. In 1997, LTCM earned a respectable 17 percent return for its investors, after fees. The performance was the worst of the firm's short life but hardly fatal. As promised, LTCM returned to its investors $1.82 for every dollar they'd invested, although their original investment stayed in the fund.

Meriwether's concern about the markets and LTCM's prospects proved prescient as 1998 unfolded. On August 17, Russia announced a devaluation of the ruble and a moratorium on the payment of $13.5 billion of its Treasury debt. Four days later, the full import of this decision hit world markets, and a massive flight out of risky investments, such as the debt and equity of emerging markets, into the supposedly less risky Treasury securities of the United States and Germany began immediately. “Minute by minute, Long-Term was losing millions,” Lowenstein wrote. That Friday, LTCM lost $553 million in a single day, or 15 percent of its capital. At the start of the year, LTCM had had $4.67 billion in capital, but after the losses suffered on August 21, the firm's capital had been reduced to $2.9 billion. Mike Alix, who had recently joined Bear Stearns in December from Merrill Lynch and had helped to raise money from Asian investors for LTCM when he was at Merrill, was in charge of monitoring LTCM's credit at Bear. “The one name that came up in every conversation he had when he first got to the firm was Long-Term Capital,” explained one of Alix's colleagues. “It wasn't that we were concerned about any risk that we knew about, but we were concerned that LTCM was gigantic, it was a big clearing client, and we didn't have any one person in the organization focused on understanding the risk that Bear Stearns bore from dealing with Long-Term Capital.” Alix's first task was to put a team in place at Bear that would monitor the firm's interactions with LTCM. “We are the traffic cop in this gigantic, very busy intersection,”
this Bear executive continued. “We want to put some armor on.” By August 1998, with the losses at LTCM mounting daily, Alix became increasingly concerned about the whole operation and called the fund's CFO, who reassured Alix that all was fine and that the securities that had declined in value were now actually a good buying opportunity. Alix was skeptical. “There was a point in August that we were having daily meetings with the executive committee looking at all of the various positions that we had with them and understanding what the cash flows were going to be and collateral flows were going to be,” the executive said.

As the losses mounted through August—sometimes hundreds of millions of dollars in a single day—Meriwether called his old friend Vinnie Mattone at home. By this time, Cayne had forced Mattone out of the firm.

“Where are you?” Mattone asked Meriwether, referring to the fund's capital.

“We're down by half,” he replied.

“You're finished,” Mattone said.

Meriwether was incredulous. “What are you talking about? We still have $2 billion. We have half.” He also mentioned to Mattone that he had been speaking with potential investors, including billionaire George Soros, about investing fresh capital in LTCM. “When you're down by half, people figure you can go down all the way,” Mattone replied. “They're going to push the market against you. They're not going to roll”—refinance—“your trades. You're
finished
.”

Although it would take a few weeks more, Mattone was right. By mid-September word of LTCM's losses had leaked into the market, and the laws of self-fulfilling prophecies took over. Late in the day on September 10, the assets that LTCM had “in the box” at Bear Stearns fell below $500 million for the first time, triggering Cayne's low threshold. Warren Spector called Meriwether and told him Bear would send a team to LTCM's offices in Greenwich that Sunday to examine the books and make a decision about whether to stop clearing for the firm, which would put LTCM out of business.

Out of desperation, Meriwether went to see Cayne. “I asked if he had any assets at all, and he said, ‘I've got a $500 million line [of credit] at Chase,'” Cayne said. “I said, ‘Well, take it down.' He said, ‘It expires in ten days and they know we're not going to be able to pay it back.' I said, ‘I know, but you can take it down.' He said, ‘How do you know that?' I said, ‘I don't know that. Go talk to a lawyer. But to me, if you've got a line take it down and let them go whistle or do something, but that's salvation.” LTCM took Cayne's advice after letting its banker at Chase know
what was happening. Chase had little choice but to let LTCM draw down the committed money and ultimately received all but $25 million. “That precipitated Chase going to the Feds and saying, ‘Fuck, we had to give them $500 million and we want a meeting,'” Cayne said.

By this time, Meriwether had been scrambling for weeks to raise additional capital. He had spoken with Soros, Warren Buffett, and Jon Corzine, at Goldman Sachs, among others. And even though his hedge fund was largely unregulated, he had let the New York Federal Reserve know what was going on, specifically William McDonough, its president, and Peter Fisher, his deputy. LTCM was in a death spiral, losing money hand over fist. The potential new investors, wary to begin with, became increasingly spooked. McDonough and Fisher, meanwhile, after examining LTCM's trading positions, became increasingly concerned about the interconnectedness of all of LTCM's trades and the leading firms on Wall Street. Not only had Wall Street invested in LTCM, but many of the firms piggybacked on LTCM's trades, as Cayne had noted. They were also counterparties with one another. The Fed was not concerned about the potential losses that investors would suffer—they were big boys—but was worried about a failure of the system. “[I]f Long-Term failed, and if its creditors forced a hasty and disorderly liquidation, [McDonough] feared that it would harm the entire financial system, not just some of its big participants,” Lowenstein wrote. “McDonough evoked a parallel fear—that losses in so many markets and to so many players would spark a vicious circle of liquidations, extreme fluctuations in interest rates, and then further losses: ‘Markets would … probably cease to function for a period of one or more days and maybe longer.’”