House of Cards (54 page)

“Three times book,” Moszkowski replied.

“Well, four,” Cayne said. (“I don't think there was any science to the four,” Moszkowski said later.)

“I'm going to go back and I'm going to write this meeting up,” Moszkowski told Cayne. “Can I say that?”

“You can, sure,” Cayne replied.

Moszkowski wrote a report, in July 2000, explaining what Cayne had told him: that for the first time Bear Stearns would consider selling the firm if Cayne could get four times book value. Cayne “had signaled something of a change of attitude,” Moszkowski wrote in his report about the possibility of a sale of Bear Stearns, making “it quite clear that an acquisition is not out of the question.” Then Cayne added some fuel to the brushfire he had started. “The world is changing, and we recognize that a synergistic combination might be in the interest of shareholders,” he told the
Wall Street Journal.
But since at that time the firm's book value was around $30 per share, Cayne had essentially put a price of $120 per share on the firm, $19 billion in total, far above the $46 per share the stock had been trading at. The obvious dichotomy put Cayne's comment more in the vein of idle chatter, a bid mentioned in passing on the off chance that someone might hit it. If that happened, Cayne's 7.7 million shares would be worth just shy of $1 billion, and who was he to turn down such a deal if offered?

In his report, Moszkowski speculated that HSBC Holdings, AIG, BNP Paribas, Société Genérale, or one of several German banks could be a suitor for Bear Stearns. “We do not believe any particular deal is on the near-term horizon, and Cayne noted that to date most talks have ended relatively quickly,” he wrote. But one consequence of the report was to
drive Bear's stock higher. The stock went from $40 to $70 per share, Moszkowski said, well past its all-time high of $64 per share, reached two years before.

When Moszkowski's research note appeared, Cayne was in California—“I don't think it was a bridge tournament,” he said—and on a Tuesday morning he got a call telling him he needed to go down to the hotel's business center and address live on closed-circuit TV the firm's seven hundred senior managing directors, who had assembled in the firm's auditorium, to explain his comments about considering a sale of the company. “I said, ‘You're fucking kidding.' I had to do it. I went down to the business center. There's this screen. And I'm sitting there looking at a screen. And you don't get any feedback. I don't know if people are laughing or they're screaming. I have no idea. I just said, ‘Hey, guys and gals, let's just all go back to work. It was a nonconversation with an analyst who took from it that we were selling at $30 and wanted $120 a share. Anybody who believes that that's a real story is wasting his time and I'm wasting my time. Good-bye.’”

As it turned out, the merger wave in the banking industry would soon crest with Credit Suisse First Boston's $11.5 billion acquisition of Donaldson, Lufkin & Jenrette in August and Chase Manhattan's $33 billion all-stock acquisition of J. P. Morgan in September after J. P. Morgan failed to reach a deal with Goldman Sachs. The rash of deals prompted Cayne to go see John Mack, then the president of Morgan Stanley Dean Witter, in order to learn more about potential deals for Bear Stearns. “I told him, ‘Bear Stearns is not hiring you,’” Cayne said. ‘“Bear Stearns is coming to you and saying, “Jimmy wants to know what's out there.” I'll go anywhere you want but I'm not going to pay a fee.' In the event anything did happen, he had my word that he would get the M&A assignment.”

Mack introduced Cayne to Gary Parr, then the leading financial institutions banker at Morgan Stanley. They all got together again two weeks later. “They have this little outline,” Cayne said. “They've done their M&A work. There are three potential buyers: Dresdner Bank, AIG, and Warren Buffett.” Cayne laughed. “I don't need them to go to Warren Buffett,” his old bridge partner. “And I don't need them to go to Hank Greenberg,” he said. “And Dresdner is a German bank.” Cayne had no intention of selling his Jewish firm to one of the German banks that had helped to finance Auschwitz. Mack realized quickly that Morgan Stanley wouldn't be getting an M&A fee out of Cayne anytime soon.

In August 2000,
Barron's
reporter Erin Arvedlund wrote a three-thousand-word article wondering who would buy Bear Stearns since “dull businesses and scandal taint this old Wall Street firm.” She noted that
since Moszkowski's research note, Bear stock had “roared ahead” more than 60 percent, but $120 a share seemed much too far. “Given the merger mania that prevails on Wall Street these days, someone might come along and pay that price, but don't bet on it,” she wrote. “In fact, it might be unwise to bet on Bear Stearns being acquired at all.” Her point was that Bear had made little headway in the businesses—asset management and investment banking—that seemed to appeal to acquirers at the moment. “Perhaps part of the problem,” she wrote, “is that Greenberg and Cayne have such passion for the kind of operations that have been stalwarts at Bear Stearns for decades: executing securities trades for wealthy clients and for its own account. Greenberg made his reputation as a canny trader, and to this day it is said that he regularly grills traders on the company's Park Avenue trading floor about why they are holding a position in this stock or that.” Yet, she argued, “investors dislike firms that are overly dependent on trading because it is a difficult business in which to make steady returns. Some liken it to gambling.”

Barron's
also noted the increasing concern among investors about who the next generation of leaders at the firm would be, now that Cayne was sixty-six years old and Greenberg was seventy-three. The obvious candidates to lead the firm—Spector, then forty-one, and Schwartz, then forty-nine—were of course mentioned. “In the shadow of Greenberg and Cayne,” Arvedlund wrote, “it's hard to get a clear picture of what kind of leaders Spector and Schwartz would be. Among the initiatives they are credited with are hiring top talent from outside the firm, making use of stock options to reward outside performers, pushing into Europe and modernizing the firm's processes in an effort to cut costs.” She concluded the article by remarking on the “gleaming new office tower” being built on “a full square block just west of Grand Central Station” at a cost of what would eventually rise to around $500 million. “One investing rule of thumb is to sell the stock of any financial company building a huge new headquarters,” Arvedlund concluded. “And in the short run that may be good advice, especially if it becomes apparent that no one is interested in buying Bear Stearns. Longer-term, the firm has lots of potential if it can guard against future scandals, break more forcefully into the Street's most promising businesses and move the icons aside to give the younger generation a chance to shine.”

At this time, notwithstanding the avuncular charm of Greenberg's cost-cutting memos, Bear had decided to hire McKinsey & Co. at a cost of around $50 million, even though Greenberg used to question the value of outside consultants. The firm asked Paul Friedman to work with McKinsey on “Project Excel,” a chunk of time he does not recall fondly. “I
view it as the lost two years of my life,” he said. The focus of the McKinsey study was “to try to invigorate certain of our businesses, to invigorate their growth, and to cut costs,” Molinaro explained. “So it was a two-prong strategy. Invigorate growth and cut costs.” But, Friedman said, there were few recommendations to increase revenues. “They come in and all they do is cut costs,” he said, “and we did almost nothing on the revenue side. They cut the IT budget by hundreds of millions of dollars, some of which was needed, because it had swelled after the whole fear over Y2K. We fired a thousand people, and at the same time we were building this beautiful building. We cut a lot of costs, which just meant that when you cut your IT investment, you're mortgaging the future, which we did. We cut hundreds of clerks. We took nothing out of the executive committee compensation pool. We did nothing to the way we run the place. We did nothing to the management structure. We did nothing to the executive compensation structure. All of which, I think, set the stage for true lack of growth at the firm because it was right after that that we stopped bragging about our ROE because we went from leading the pack to trailing the pack, and milking the businesses that we had.” In March 2001, after the firm announced four hundred firings from its information technology group, Molinaro said, “This is part of a cost rationalization program that we've had going on for the past six months.” But even after the 1987 crash, Bear Stearns had always boasted of “hiring instead of firing,” in Greenberg's words, and so the layoffs were a momentous indicator of how the firm had changed.

Just as Cayne had predicted, after the bursting of the Internet and emerging telecom bubbles in 2000 and 2001, the businesses that were important again on Wall Street were fixed-income sales and trading and clearing—Bear's two stalwarts—rather than investment banking. While the firm's revenue from its capital markets businesses stayed flat from 1999 to 2001, its revenues from investment banking as a percentage declined dramatically from 29 percent of the capital markets revenue in 1999 to 20 percent of the capital markets revenue in 2001. “Bear went through a metamorphosis in the markets,” Bear banker Jeremy Sillem said. “Suddenly instead of being the laggard, it became the darling. All these other firms' valuations came rattling down. They went from four times back to one and a half times book value. Suddenly Bear was the best-performing stock of the investment bankers on Wall Street. And what did that do? It reinforced, in the minds of these guys, that the old Bear verities were right: Strategy is stupid. People who have strategic plans are dumb. The Bear way was always right.”

One thing Bear Stearns was all about by 2001 was Jimmy Cayne.
And on June 26, the firm made official what was already de facto: Cayne added the title of chairman of the board of directors to that of CEO, completing—finally—the transfer of power from Greenberg that had begun some ten years earlier. Once again, though, Greenberg, seventy-three, remained at the firm as a full-time trader and chairman of the executive committee. At such a cosmetically important moment in the firm's history, it was not surprising that both Cayne and Greenberg heaped accolades upon each other and failed to mention anything about the ongoing tension between them. In an interview with
BusinessWeek,
Cayne was both truthful, saying, “It was the most seamless transition in the history of Wall Street,” and somewhat deceitful: “I haven't had a contentious moment with Alan Greenberg in 32 years. We're like good friends. I'm his biggest booster.” At the same time as Cayne took full control of the reins of the firm, he also announced that Spector and Schwartz would be named co-presidents and co—chief operating officers. “This is a natural transition,” Cayne explained to the
Wall Street Journal
before adding that “nobody has the inside track” to succeed him when he stepped down in the distant future. When asked about the likelihood of conflict between Schwartz and Spector as one of them emerged as the new leader, Cayne dismissed that idea. Charlie Gasparino, the
Journal
reporter, speculated for the first time in print that Spector had the edge in the race to succeed Cayne because of his “all-important role as head of the firm's powerful bond group” and because he “pioneered the firm's derivatives business.”

Every Wall Street succession produces its casualties. In the case of Bear Stearns, the surprise departure from the firm came in the person of Donald Mullen, then forty-two, who had been head of the firm's high-yield sales and trading operation. He left to join Goldman Sachs, where his former Bear colleague David Solomon had been since leaving Bear Stearns in 1997. Mullen and Solomon had worked together at Drexel Burnham, Salomon Brothers, and Bear Stearns, so in that sense Mullen's departure was not surprising. But it was still a major blow to the firm, and one of the very few times that Cayne expressed genuine disappointment with a departure of a senior managing director.

Observers familiar with Goldman Sachs and Bear Stearns believe the quality of the people at each is similar but that the
language
of the two firms could not be more different. “The difference between Bear people and Goldman Sachs people was one of vocabulary,” explained one person who knows both firms well. “It's almost like a piece of conceptual art or symbiotics. It was like reading Umberto Eco—language begets culture. At Goldman Sachs, the language is very specifically less aggressive and less hostile. So as an example, if a salesman and trader are talking
about how they did a trade with a customer and they think there's a significant business opportunity that came out of that trade, at Bear Stearns they might say, ‘I just ripped that fucker's head off. I'm going to make a lot of money on this trade. That's fucking crazy.' But at Goldman Sachs a salesman and a trader would talk about, ‘That's a great opportunity. That was a very attractive and commercial price you purchased those securities at and I think we'll have a very interesting economic opportunity in the near future.' They just said the same thing. But the manifestation of the culture comes out of the different use of language. One protects the reputation of the firm. One presents the firm as a far more intelligent being, puts the firm in a position to be much more sought after for its thought processes, and protects it obviously legally. The other one might not do anything wrong, but the language puts us in a position that people suspect it. Don't trust it. That issue was very pervasive at Bear Stearns. The firm was never as aggressive as its reputation. But its language, its culture, and its swagger put it more at risk than its actual actions.”

Bear's swashbuckling, siloed culture also put it at risk for the occasional quirky crime. For instance, in August 2001, Anamarie Giambrone, then thirty-four and secretary to Eli Wachtel, a longtime Bear Stearns senior executive, and her husband, Salvatore, were indicted on thirteen counts of grand larceny, forgery and other crimes in connection with their theft of $800,000 from Wachtel. Anamarie Giambrone pleaded guilty to the scheme, whereby she wrote checks requested by Wachtel in disappearing ink while Wachtel signed the checks in permanent ink. After the ink on the checks faded, Giambrone rewrote the checks out to “cash” and cashed them. During the eight months Giambrone worked for Wachtel, she stole the $800,000, which she used to take a vacation and to buy her husband a pizza parlor in Flushing, Queens. She served several years in prison.