House of Cards, page 57
Kelly reported that Cayne was playing bridge “during 10 critical days of this crisis” in Nashville “without a cell phone or email device.” She reported—incorrectly—that Cayne had left the “tense” August 3 conference call “after a few opening words and listeners didn't know when he returned” (the truth, of course, was much worse). She reported that Cayne had been out of the office playing golf or bridge for “10 of the 21 workdays” during the “critical month of July.” Kelly made sure to include comments that refuted the central thrust of her article. “Anyone who thinks that Jimmy Cayne isn't fired up every day and ready to get to work hasn't been living in my world,” Schwartz told the Journal. Schwartz noted that Cayne had flown to Beijing over Labor Day weekend to agree to the Citic deal. Kelly contrasted Cayne's “actions amid the turmoil” to the “hands-on roles of peers” across Wall Street. She even noted that Lloyd Blankfein, Goldman's CEO, “cancelled plans to spend the last two weeks of August at his beach house, missing a chance to spend time with his sons before they headed to college,” in order to take control of the unfolding crisis at his desk.
Kelly also reported that Cayne had rebuffed Jamie Dimon's 2002 offer to have Bank One buy Bear Stearns and would only consider it “for a significant stock price premium, a big personal payout and the use of a private jet.” She wrote that Cayne hated to travel for business and refused to meet with President Bush in Washington to discuss economic issues. If Bush wanted to talk to Cayne, they could meet in New York. But of all Kelly's zingers, the most embarrassing personally and professionally was the one that accused Cayne of being a regular consumer of marijuana. “After a day of bridge at a Doubletree hotel in Memphis, in 2004, Mr. Cayne invited a fellow player and a woman to smoke pot with him, according to someone who was there, and led the two to a lobby men's room where he intended to light up,” Kelly reported. “The other player declined, says the person who was there, but the woman followed Mr. Cayne inside and shared a joint, to the amusement of a passerby.” She also wrote that Cayne “used pot in more private settings, according to people who say they witnessed him doing so or participated with him.” In the article, Cayne “denied emphatically” the alleged pot-smoking incident at the Doubletree. “There is no chance it happened,” he said. “Zero chance.” He told the paper he would not answer questions about whether he smoked pot generally and would respond only “to a specific allegation.”
Kelly also reported on the “summertime ritual” of Cayne's $1,700 Thursday afternoon helicopter trips from New York City to the Hollywood Golf Club, followed by the rounds of golf on Friday, Saturday, and Sunday, followed by going home for “several hours of online poker and bridge and to play with his grandchildren.” Kelly and her boss, Michael Siconolfi, had had lunch with Cayne on July 12 at 383 Madison, where, Kelly reported, “Mr. Cayne seemed less interested in discussing the markets than in talking about a breakfast-cereal allergy and his stash of unlabeled Cuban cigars. On another occasion, he told a visitor he pays $140 apiece for the cigars, keeping them in a humidor under his desk.” For his part, Cayne does not deny the conversation at lunch with Siconolfi and Kelly but said it “was off the record,” which Kelly and Siconolfi violated. As for the August 3 analyst call, Kelly reported that there was silence after he was asked a question because Cayne had “been summoned out by a lawyer advising him on the pending departure of Mr. Spector, who by then was planning to resign. Mr. Cayne later returned, but the hundreds of listeners weren't told this, leaving them with the impression that the CEO had left the call altogether.” As previously noted, of course, Cayne was there, according to people in the room, but did not know how to answer the question asked about stock buybacks. “The following day, a Saturday, Mr. Cayne scored a respectable 88 at the Hollywood golf course,” Kelly reported. She concluded the article with the idea that Cayne was concerned about his legacy, and she quoted John Angelo, a former Bear professional turned hedge fund manager who was Cayne's frequent golf partner at Hollywood. “It's one thing if you're 55,” Angelo said. “It's another if you're 73.” Angelo added that after the summertime events at Bear Stearns it would take “periods of time to get your reputation back.”
CAYNE IMMEDIATELY WENT into damage control mode. He told Gasparino: “It's unbelievable, the phones are ringing off the hook, and everyone wants to play golf with me.” His assistant sent out a 108-word “Dear Colleagues” e-mail to the Bear Stearns family: “The Wall Street Journal today published an article criticizing my leadership of Bear Stearns. I stand by the record of success the firm has had over the 14 years I have had the privilege of leading this great organization. I remain, as I have been for many years, intensely focused on our business. The article also alleges I engaged in inappropriate conduct outside the firm. As I stated in the story, this is absolutely untrue. Thank you for your continued dedication to Bear Stearns, and don't be distracted by the noise. I am certainly not. Jimmy.”
Cayne was pissed. He believed Siconolfi and his “spawn,” Gasparino and Kelly, were out to get him. (Despite Cayne's anger at Gasparino, he would occasionally talk to him, as Cayne thought him a useful way to get information out in the market.) But he took comfort from the support he received from the Bear Stearns family. “You can get me on the phone anytime, anywhere, anytime,” he said. “There's no protocol. There's nothing. It's simple. That's how you do it. That's how you create loyalty. These people would jump off a cliff for me. That's how I feel. And whether it's true or not is almost unimportant, because the bottom line is that's what I walk around with. That's my salvation. I don't feel good about being that little piñata that gets the shit kicked out of it. But I also consider the sources. I consider Looney Tunes on the tube as being just a snake of massive proportions. But there isn't anybody that doesn't think he's a snake. The cunt at The Wall Street Journal whose capability is zero but spawned by Siconolfi.”
Cayne also saw Warren Spector's fingerprints all over the article. “Spector got some bridge player to call up the Journal, with” Sitrick & Co., Spector's “strategic communications” firm, “greasing the skids,” Cayne said. He called Michael Sitrick a “murderer” and a “pure assassin” who “planted the article in the Journal.” He said the article was “interesting because they never had a source, [it was] all bullshit.” Cayne said he told the firm's communications team he doubted whether the Journal would ever print the name of the person who accused him of smoking marijuana at the bridge tournament. At first the paper had told him it would print the name; then, he said, the paper changed its mind and called him the night before to tell him there would be no name. The firm tried to convince the Journal not to run the article since there was no named accuser. But the Journal ran the story anyway. “Then there's this story about smoking marijuana with some broad in a bathroom. What are the chances of that?” For his part, Sitrick acknowledged being hired by Spector but denied that either he or Spector had any involvement in the Journal story. “The first time I learned about that alleged incident was when I read about it in The Wall Street Journal,” he said.
At the time, Cayne said, he did not recognize what the consequences of that article would be. “It was far more serious when you look at it in retrospect than it was at the time,” he said. “It was just massively irritating.” But Cayne was in the fight of his professional life. Aside from the titillation of the pot-smoking allegation, there was genuine concern on both Wall Street and at Bear Stearns with what the fallout at the firm would be in the fourth quarter—ended November 30—from its exposure to hard-to-value “Level 3 assets,” of which Bear had $20 billion, including $2.4 billion in subprime mortgages. A write-down of even a portion of these assets could wipe out a material part of the firm's $12 billion capital account—an account that Cayne decided not to add to with outside capital, unlike most other Wall Street firms by November 2007.
Not surprisingly, Bear's board of directors was unhappy with the unflattering press coverage. “It was a particularly bad article at a bad time,” Vince Tese said. “A very unfair article, I thought. I have dealt with the press a lot, being in government. I find it particularly troubling when they use unnamed sources to slander people. I told that to Kate Kelly, and she said, ‘Well, you've gone off the record.' I said, ‘Yeah, I've done off the record. But never to say anything bad about anybody.' I think that if you're going to accuse somebody of something, you should do it on the record. One of the great things about America is you can confront your accusers. But they had a strong feeling—and probably they were told by a lot of people—that Jimmy did some of the things in those articles. They decided to print it. Whether it was germane or not for him being chief executive is something totally different. But the article hurt.
“Jimmy is a very smart guy,” Tese continued. “He's a very no-BS guy. Appearances don't mean anything to him. The things that mean stuff to him are the facts and the actual merits of doing this or not doing that. Jimmy coming up from the bridge game [during the crisis], to Jimmy wasn't that important. Because what could he have done? He was on the phone all the time. Him being there wouldn't have changed the outcome at all. That's the way he looked at it. But, you know, it's almost like George Bush not going to New Orleans the day after the hurricane. He got roundly criticized for it. But what is George Bush going to do? Fix a levee? He can do everything he can from Washington. But he should have been there, only because people wanted him there. By coming back to New York, Jimmy would have helped his own cause. I don't think he would have helped the Bear Stearns cause. But he would have helped his own cause, probably, if he would have come right back.”
Then there were the bankers and traders in fixed income who remained quite unhappy that Cayne had fired Spector unceremoniously and then brought embarrassing media attention to the firm. “Around us, firms are getting rid of the people who did things wrong,” Paul Friedman said. “What did we do? We got rid of the only guy who understood how our biggest business works, and we're being run by this idiot. So there were a whole bunch of us that went to Alan, individually and jointly, and kept saying to him, ‘You've got to do something about this.' He kept saying, ‘Don't worry. We're working on it. Jimmy's going to retire in due time. Don't worry. Don't worry.' Weeks and weeks and weeks go by and nothing. We in fixed income were probably the most arrogant about a lot of things, but we were also the angriest about losing Warren. Even as much as we blamed Warren for a lot of stuff, we were pretty angry about losing Warren. There were three of us who were particularly vocal: Dave Schoenthal, Mike Nierenberg, and myself…. Nierenberg, I think, called Alan once a day and said, ‘When are you getting rid of Jimmy? You've got to get rid of Jimmy.' To his credit, Alan said a couple of times, ‘He's not mine to fire,' but basically he said, ‘Don't worry. It's gonna happen.' We bugged Molinaro about it. We bugged Steve Begleiter about it. It was like screaming into the wilderness, ‘Somebody, do something about this guy. Won't somebody rid me of this man?’”
The firm's pride had been wounded. “All of us had been there forever,” he continued. “Rookies at the firm had been there fifteen years and took a lot of pride in this place. It was killing us to get laughed at publicly. Charlie Gasparino on an hourly basis making fun of Jimmy. Just on and on. In addition to feeling insecure from a business standpoint, he really wasn't doing anything. He had no impact on our business. It's not like they were going to get rid of Jimmy and bring back Warren. It wasn't going to solve any of our problems. But we were just tired of being humiliated. That seems kind of petty at this point, but we were already in a bunker, backs to each other, firing out at the enemy, and then we've got this thing. We've got this Uncle Fester guy who is running the firm.”
Were these the seeds of the Cayne mutiny? “Yeah,” Friedman said, “except that we didn't do it. We talked about it…. We could have gotten twenty guys among the most senior to go up to Alan's office. We talked about staging a sit-in: ‘Let's go have a mutiny. Let's go tell them we're quitting if they don't do it. Yeah, yeah, we should do that. We should do that,' and we all went back to our day jobs. We never did it.”
ON NOVEMBER 14, Molinaro gave a presentation to investors at a Merrill Lynch conference, and if they squinted hard, they could have left the meeting feeling that Bear Stearns's prospects were as good as ever. He spoke about the firm's thriving energy business—Bear had just completed the acquisition of all the power assets of Williams Power Company—its booming international business and equity businesses, and its restored global clearing and prime brokerage businesses. In investment banking, the firm's revenues were expected to grow at a 12 percent annualized compounded rate. It was just the kind of upbeat presentation one would expect the CFO of a large Wall Street firm to deliver. Of course, he did share with investors a slide that updated the firm's “risk exposure” to November 9, from August 31, the end of the previous quarter. Since the end of August, Molinaro noted, the firm had “gone through an exhaustive process of revaluing [its] mortgage and CDO portfolios” and had “materially reduced” its exposure to those assets. He then dropped a bombshell. “As a result,” he said, “the company will be taking a net write-down of approximately $1.2 billion on these positions and others in our mortgage inventory…. The vast majority of these losses are attributable to writedowns on the CDO and CDO warehouse portfolio.”
Molinaro also announced that the firm's write-downs in its mortgage portfolio would “suffice” and that it had “significantly increased” its short position on subprime mortgages since August 31. Now the firm had a net negative position of $52 million from what had been a net positive position of $1.1 billion. In a statement filed with the SEC the next day, the firm announced that for the first time in its eighty-four-year history, it expected to have a quarterly loss as a result of the $1.2 billion writedown. The firm's stock closed that day at $103.45, up $2.58, after having traded as high as $111.01. That same day, Moody's, the rating agency, announced it “may cut” Bear's A1 debt rating, which would affect approximately $87.3 billion of debt. “Bear's performance through the market inflection and dislocation has been more challenged than at some competitors, and reflects not only tough markets, but certain risk and strategic decisions made by the firm,” Blaine Frantz, Moody's senior vice president, said in the statement. “This includes the decision to extend financing to one of its in-house structured products hedge funds, which increased Bear's on-balance sheet exposure to these problematic assets and ultimately contributed to the writedowns.”
A week after Thanksgiving, on November 29, the firm announced a third round of job cuts, some 650 people, or 4 percent of the global workforce of 15,500. The previous month Bear had cut 300 jobs. Before that, the firm had cut 600 jobs from its mortgage origination business, which obviously had slowed considerably. In a memo to all employees, the firm said the new cuts were part of “an ongoing review to best position Bear Stearns for 2008 and beyond.” On the news, Bear's stock increased $4.07 per share, to close at $99.50.
By this time, Cayne had already decided unilaterally that the executive committee would not get bonuses for 2007. Cayne did not consult Greenberg about this decision. He just announced it at an executive committee meeting. “He didn't like not getting paid,” Cayne said of Greenberg. “I said the executive committee isn't getting paid and didn't discuss it. Everybody agreed. But he didn't say anything. But it's about him. You're a piece of meat. I'm a piece of meat. His kid's a piece of meat. His everything is a piece of meat. His dogs are pieces of meat. I guess he couldn't imagine that that would happen. Without him being told. Or have it discussed. But it was so automatic.”
Cayne did not fully appreciate how upset this decision had made Greenberg until he went to Greenberg's eightieth-birthday party dinner at the Harmonie Club in November. He went by himself because his wife was at Bible class—she is a born-again Hasidic Jew—and he went up to Kathryn Greenberg to kiss her on both cheeks. “And this ice came out of nowhere,” Cayne said. “Have you ever been iced before? Really iced? I would bet against it. She was standing there by herself. I walked over and I went to kiss her, and ice.”
CAYNE 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.
