House of Cards (51 page)

The time had come to act. Based on a proposal made by Herb Allison, then president of Merrill Lynch, the sixteen banks that were LTCM's largest counterparties would contribute $250 million each—a total of $4 billion—into LTCM in exchange for the vast amount of the firm's equity that had been owned by the original partners. LTCM's investors would be wiped out, but Allison hoped his plan would allow for an orderly liquidation of the firm's positions and prevent a systemic crash. On the evening of September 22, Fisher and McDonough asked the heads of the sixteen banks to come to the New York Fed building on Liberty Street to discuss a Fed-orchestrated bailout of LTCM. Fisher permitted each bank to bring two representatives. Cayne brought Spector. Earlier in the day, Cayne had heightened Fisher's concern by telling him that LTCM would make it through Tuesday but not Wednesday, in his judgment. “So they got all these guys together on that Tuesday night,” Cayne said. “Get the message. We're all going to a picnic and the tickets
are $250 million each. And tomorrow morning at nine o'clock, it's ‘We'll meet again.’”

When they got back in the car, Cayne told Spector he wanted to have an executive committee meeting at eight the next morning, before the Fed meeting at nine. He also said he could not imagine Bear Stearns participating in the bailout. “It ought to last about four seconds,” Cayne told Spector about the executive committee the next morning. “Because we're out. Why are we even there? Why are we coming up with $250 million? To do what? We might lose it. I already saw their NAV [net asset value] go from $5 billion to $500 million. It was like a run on a bank.”

The next morning, Bear's executive committee met and, as Cayne predicted, voted instantly that Bear would not participate in the bailout of LTCM. “Not one person said we should be in, not one,” Cayne said. “Why would they? It's stupid.” Cayne was of course right that no one on the executive committee questioned the decision. But others did—not that their views influenced the decision. “My objection was completely based on being part of the solution in the community and not on any financial risk as such,” one senior Bear executive said. “I thought that if LTCM blew up, it would be very ugly, and it could be ugly for other parts of our portfolio, but not life-threatening. But I was just a lowly credit guy who happened to have a pretty good understanding of what was going on there in the sense of the financial or the systemic consequences. I was expressing an opinion and I think I was thanked for that opinion and excused.”

After the vote, Cayne and Spector headed downtown to the Fed. “I figure, hmm, there's somebody I know at the Fed”—Peter Fisher— “because he's been calling me every day, asking me about their position,” Cayne said. “Remember, their NAV is going down and everybody in the world knows about it. ‘Jimmy, how are you?' I tell him, ‘Worse than yesterday'—every day, I said worse than yesterday—'no salvation in sight.' I remember specifically Peter Fisher saying to me, ‘Well, you've got to protect your shareholders.' I said, ‘Thanks, Pete. Appreciate that help. I'll plan on doing that.' I remember that conversation.”

In the car, Cayne and Spector called Fisher at the Fed and told him not to proceed alphabetically through the list of banks asking them to support the plan to save LTCM. By this time, the effort by Buffett, Goldman Sachs, and Hank Greenberg, at AIG, to buy out the partners of LTCM for $250 million and then inject $4 billion into the firm while making LTCM part of Goldman's proprietary trading business had been rejected. “Now we get to the meeting,” Cayne said. “Herb Allison is running the meeting. He said, ‘All those things fell through. The things with Buffett and with Hank Greenberg and with Goldman, they all fell
through. I'd like to know where we stand with everybody. Bankers Trust, are you with us?' So now we're going alphabetically.”

Cayne's suggestion to Fisher not to proceed alphabetically had obviously been ignored. Cayne recalled, “I know our name is coming up. There's Barclays, and then there's Bear Stearns. I have no idea what I'm going to say. I only know it's not going to be received particularly well. ‘Bankers Trust?' ‘We're in.' ‘Barclays?' ‘We're in.' ‘Bear Stearns?' I said, ‘Peter, as I told you on the phone coming down here, Bear Stearns is not in.' Now, the book says pandemonium broke loose. The exact opposite occurs. You could hear a pin drop. For like thirty seconds, nobody said anything. The guy running the meeting didn't even go to the next guy. It was just quiet. Now, it might have been thirty seconds and it might have been five seconds. It felt like ten minutes. And then somebody piped up and says, ‘Well, what do you know that we don't know? You're the clearance firm.' I said, ‘I don't know anything you don't know. They are in compliance. They are not behind at all. Whatever their NAV is stated as, that's the real deal. They're not in default and they are in compliance.' Peter Fisher says, ‘Well, you said you would think about it, right?' I said, ‘Right, definitely. We'll definitely think about it.' The next guy doesn't even go. He just says, ‘In the light of Bear Stearns, I have to talk to
ze
home office.' This is a French banker. The meeting is stopped. Fisher and Bill McDonough come over to me and say, ‘We have to talk to you.’”

Cayne and Spector left with Fisher and McDonough for a private room so ornate that Cayne was in awe. “The little Fed room is where the mucky-mucks have their powwows,” Cayne said. “That makes the big Fed room look like chopped liver. It's like gold inlay. I mean, it's beyond.” In the side room, Cayne recalled, Fisher and McDonough said to him, ‘“Everybody is angry. Everybody is going crazy.' I said, ‘Who?' They said, ‘Well, for one, [David] Komansky [the CEO of Merrill Lynch].' I said, ‘Get him in here.' Komansky comes in. Very nice guy. But this all flew over his head. He said, ‘What the fuck are you doing, Jimmy?' I said, ‘David, number one, I didn't know we were partners, like we had to sort of do the same thing. Number two, it's very clear. I've expressed myself. We have not had any counterparty exposure to these guys. We didn't see their swaps. Everybody was invited up to Greenwich to take a look at what they are. We weren't. The bottom line is that, seriously, AT&T has as much right at being here as we do. They're a vendor. We're a vendor. We're a Wall Street vendor. They're not here. Why are we?’”

Komansky insisted that Cayne go back into the room and say something to calm everyone down. Cayne continued: “I said, ‘I already did say something.' He said, ‘Well, you got to say something more.' I said, ‘Okay,
I'll make you a deal. We'll go back in the meeting because obviously people really got upset. I will make it much clearer that they're in compliance and much clearer about their lack of jeopardy. But I'm not doing that unless you announce who I am, what's your relationship with Bear Stearns, what's your feeling about Bear Stearns, what's your feeling about me. Because I don't want to walk in and sort of be like this whipping boy who has got to like now be called out. I want to be introduced as a standup guy and standup firm.’”

When they walked back into the larger meeting, according to Cayne, “all eyes are on us. Who knows what took place? These guys are all in these fucking bonds. We walk back in. Komansky gets up. Does exactly what he said he would do. ‘Known Jimmy for years, solid. Bear Stearns, solid.' I said to them, ‘I said it the first time. I'll say it again. They're in compliance. Meaning that their NAV is still above zero. They have paid everything on time. We paid everything for them on time. I don't see any chink in the armor. I don't see anything at all. But I also don't see a responsibility on our part to participate in something that we had nothing to do with.' They don't take that well. ‘Yeah, well, you're Wall Street.' I said, ‘Hold it, guys. You all had something in common. Number one, you all gave them no initial margin requirements. Number two, you all piggybacked. Who's kidding who? … You're all in the same boat and you're stuck in the exit door. And that's why we're not in this $250 million that you wanted.' They literally went nuts because they were a little nervous since I'm the clearance guy and I'm telling them, ‘We're not in.' Well, what does that mean? Is that like their money's down the drain if they do go in?”

Cayne also told them: “The meetings that have taken place so far where you all agreed that you're going to stand still on those positions because whoever jumps the gun has got to get a better price. So you're probably antitrusting it right away by agreeing not to sell anything, which is your business. I would probably do the same thing. I'm not in your category. Bear Stearns is not where you are. As a matter of fact, we took, as it turns out, the worst clearance deal in the history of clearance deals.”

For four more hours, the group beat up Cayne, exhorting him and Bear Stearns to participate. For one thing, if Bear failed to contribute, each of the other firms would have to pony up another $50 million each, or $300 million. And then there was the matter of not presenting a unified front in the battle to stem the possible systemic damage.

In one final effort to convince Cayne to go along, Komansky threatened that Bear would lose LTCM's clearing business. That set Cayne off. “I said, ‘David, I just did. You've got it. We don't want it,’” Cayne recalled.
“Now, what do I know? It'll take six months to [get all the data] on disks [and] moved from one firm to another. I tripled the rates on the spot. I said, ‘We're not clearing anymore. You told me that we wouldn't clear. I agree. We're not. By the way, if you want to hire us back, it's triple the rate.' It's not like I was exactly a retiring fellow. But for four hours when people are telling you, ‘You're a pariah, you're going to be this, you're going to be that,' there was a certain unfairness to it.”

I
N THE END
, Bear Stearns was the only firm not to participate in the bailout of Long-Term Capital Management, which was eventually liquidated. (Lehman Brothers contributed only $100 million, creating, some have argued, almost as much resentment against it as existed for Bear Stearns.) But the consortium of banks had put their collective finger in the dike and prevented the collapse of the financial system. (A few years later, Meriwether resurfaced with a new hedge fund, which again got hammered during the credit crisis of 2007 and 2008.) Alan Greenspan, the chairman of the Federal Reserve at the time, defended the Fed-orchestrated bailout. “Had the failure of LTCM triggered the seizing up of the markets,” he told the House Banking Committee on October 1, “substantial damage could have been inflicted on many market participants and could have potentially impaired the economies of many nations, including our own.” When Representative Barney Frank, of Massachusetts, criticized Greenspan for having the Fed organize the bailout that left “some of the richest people in the country better off than if you didn't intervene,” Greenspan countered, “No Federal Reserve funds were put at risk, no promises were made by the Federal Reserve and no individual firms were pressured to participate.”

Cayne obviously disagreed with Greenspan's definition of the word “pressured.” Understandably, given what happened to Bear Stearns, Cayne is hypersensitive to the suggestion that the collapse of his firm nearly ten years later was “payback” by his fellow Wall Streeters for his intransigence on participating in the rescue of LTCM. “When they talk about payback,” Cayne said, “because I had heard this now, like from these talking bubbleheads [on TV]: ‘Yeah, Jimmy irritated this guy. And Paulson is getting even with him, and blah blah.' Bullshit, pure bullshit. All those people are gone. They don't exist anymore. There's no corporate memory of somebody fucking you. Paulson? This was good for Paulson. This was probably how Corzine got kicked out [of Goldman Sachs]. Paulson always wanted to be the guy. And he got to be the guy because Corzine got fired because of Long-Term.” Cayne's characterization of Paulson was, “He was a sharp-elbowed guy and a ferocious competitor.”

Some senior executives of Bear Stearns believe that Cayne's dramatic showdown with the Wall Street cartel over LTCM didn't do the firm or him any favors. In the summer of 1998, “the trading business for all these firms got hammered,” said a former Bear Stearns trading executive. “We were wondering how we were going to pay people. We kept losing money. You've got to understand how upside down the world was. You're bleeding money every single day and you're doing everything a little bit by the seat of your pants. Because none of the models that you've had in your head or on a piece of paper or in a computer are working. Then you go to a meeting and Jimmy's talking about LTCM and what the hell's going on and how everybody's going to bail it out and Goldman's leading the charge and these guys were out of their fucking minds and who the hell wants to put money in this thing? By the way, you already got a bloody nose, cauliflower ear, and a black eye from the markets before you even go to the meeting with Jimmy. He says, ‘Do you want to bail LTCM out?' You say, ‘Well, we don't want anybody to hate us because we got enough of that shit already.' Who wants to argue with him? We're hanging on by a thread every day down there. That was pretty much the attitude. Like pick your battles. If he's dead wrong and the Street hates us, we'll have to figure it out later. There were so many opportunities, though, in the following ten years to make things better, both on the Street and as a firm. You could decide not to participate in the LTCM bailout and be magnanimous about it post facto instead of bragging about it for ten years. There would have been a very different perception of him. If two or three years later when he was interviewed for the eighty-second time about why he wasn't in it and if he had said, ‘Listen, I was very worried about my firm at the time. We, like everyone else, think it was great that the Fed and the other Wall Street firms put money in. Obviously, we couldn't afford it at the time. And we're very thankful that everyone did.' How about that? Being a little magnanimous, a little humble, makes a difference. A big difference.”