The Weekend That Changed Wall Street

Bear, although some of his executives defended him as being unconventional yet brilliant.
The most destructive legacy of Cayne’s reign would be the way he allowed individuals at Bear to construct their own unsupervised fiefdoms. One of these was Ralph Cioffi, who ran a fund backed by home mortgages. In 2007, as the mortgage market tanked, Cioffi found himself stuck with billions of dollars of mortgage-backed securities that nobody would buy. What to do? Cioffi came up with a scheme to repackage them, using a new public company called Everquest Financial. Through his new company, Cioffi hoped to unload his bad securities.
But the scheme was outed by the business press, and Bear Stearns was forced to withdraw the offering. It would later mean a federal indictment for Cioffi, but he was ultimately acquitted of all charges. However, the chief effect of the failed offering was to turn a floodlight on Bear’s problems—in particular, weak, inattentive leadership.
One person growing disillusioned with Cayne’s performance was Bear’s eighty-one-year-old chairman, Alan “Ace” Greenberg. A Bear lifer who started as a clerk in 1949 and was CEO from 1978 to 1993, Greenberg was notorious as an administrative tightwad, recycling paper clips and rubber bands to hold expenses down. He had a reputation for being a man of integrity—an example being his dictate that company officers give 4 percent of their gross salary to charity. In many respects, Greenberg was an old-fashioned banker who didn’t appreciate the fast-and-loose climate of Cayne’s regime. He and Cayne had always been very close, but now their relationship was feeling the strain. In 2010 Greenberg would write a book, The Rise and Fall of Bear Stearns, detailing his many grievances against Cayne. Among them was Cayne’s unabashed striving for prestige. “In Jimmy’s case, that hunger for money and status, and the gamesmanship that went with it, indicated an insecurity that was no blessing at all,” he wrote.
When I asked Greenberg what went wrong, he seemed pained by his falling out with Cayne, although the end was inevitable in light of Cayne’s behavior. “His relationship with me certainly changed over the years,” Greenberg told me. “If I said something was white, he said it was black.”
On November 1, 2007, the Wall Street Journal published a scathing critique of Cayne, portraying him as a modern-day Nero, playing bridge while Bear Stearns burned. In particular, the article cited Cayne’s absence during the summer meltdown of two of Bear’s hedge funds. He was at a bridge tournament in Tennessee where there was no cell phone or e-mail access. The article also mentioned reports that Cayne smoked pot in his Bear Stearns office, which, combined with everything else, made him look sloppy and irresponsible.
With Bear’s stock falling, the article could not have come at a worse time for Cayne. After the company announced in December that it would write down $1.9 billion in mortgage-related securities and suffer the first quarterly loss in its history, the board demanded Cayne’s resignation. He agreed to go quietly. He was replaced by Bear president Alan Schwartz, a Brooklyn-born financier who had been with the company for thirty-two years. Schwartz was a Cayne loyalist, but he couldn’t have been more different. He was a skilled and experienced manager, and given a bit more time, he might have pulled Bear out of the hole. But Schwartz didn’t realize when he took over as CEO that the firm had just about run out of time. Throughout January and February things only grew worse as Bear was assaulted by a constant drumbeat in the media about its problems. Schwartz was outraged by the reports—especially those made by Charlie Gasparino, then a reporter for CNBC. Gasparino was amping up the rhetoric to a fever pitch, saying that Bear Stearns was worried about a run on the bank, not by short-sellers but by its prime customers. Schwartz fought back as best he could. He claimed that Bear’s problems were being wildly overstated, as part of a media-fueled feeding frenzy. Bear Stearns, he insisted, was solid.
On Wednesday, March 12, 2008, the headlines were focused on the shocking downfall of New York governor Eliot Spitzer, who resigned that day in the wake of revelations that he’d regularly had sex with prostitutes. It was a big story for those of us in the business media. When he was attorney general, Spitzer had been the self-appointed avenging angel of Wall Street who seemed to relish the perp walk for high-profile financiers—even though he didn’t always have the goods on them before he brought them down. There was no small glee on Wall Street at Spitzer’s fall into the tabloid muck in light of the purity tests he imposed upon the financial community, although some people had a classier response. “I don’t get any joy out of anyone’s pain,” Larry Fink of BlackRock told me, adding that “the market always gets overjoyed with other people’s pain, whether it’s other firms losing money or other executives falling down.” He didn’t share the excitement, calling it nothing more than an ugly moment in New York.
A secondary story we had been tracking all week also involved pain on many levels—pain for employees and stockholders of the venerable Bear Stearns. Rumors had been intensifying that Bear was running out of cash, and those rumors had a paralyzing effect on cash flow to the struggling investment bank.
On that Wednesday, Schwartz reluctantly appeared on CNBC to try to stop the rumors. He insisted once again that Bear was healthy and claimed not to know where the rumors originated. “Part of the problem is that when speculation starts in a market that has a lot of emotion in it, and people are concerned about the volatility, then people will sell first and ask questions later, and that creates its own momentum,” he said plaintively.
His point was well taken, but was it accurate to say that Bear Stearns was merely a victim of the rumor mill? Granted, the financial press has a key role to play and must play