‘HIGHS’ AND LOWS
Lessons of Jimmy Cayne’s Bear Stearns
JIMMY Cayne is no longer a household name on Wall Street, his fame darkened by the last couple of years as CEO of the ill-fated investment bank Bear Stearns. But Cayne’s story is far more complex. It’s one of incredible achievement as well, and even more, it should be studied by business schools as a parable of how business leaders can get stuff so right for so long, only to be defined by a couple of bad and avoidable mistakes.
By shining a light on what Cayne did right and wrong, maybe we can teach not just the new class of CEOs, but all these know-it-all meme-stock traders — who think they’re infallible because they’ve made a few bucks during this long bull market — that failure is always lurking around the corner.
Cayne died Tuesday at the age of 87. Do a Google search and you will find countless stories blaming him for the risk-taking that doomed Bear Stearns in the initial stages of the 2008 financial crisis. His bridge playing while Bear was burning; his more-than-occasional penchant to smoke some pot.
All of this, based on my knowledge, was true to some extent, but shouldn’t be defining. Responsibility for Bear’s risk-taking ultimately falls on his shoulders, but the doomed strategies were also carried out by people who also were part of Bear’s management team.
Bailouts galore in 2008
Bear was certainly not the only firm to succumb to risk. Every one of them, except maybe JPMorgan under the steady hand of Jamie Dimon, needed a bailout in 2008. And yes, Jimmy played bridge and smoked some weed, but I don’t recall any CEO being chained to his desk except when the proverbial crap was hitting the fan. As for the marijuana, a close friend of Cayne’s told me it was to soften the symptoms of a medical condition. I never saw it impact his ability to work and I knew him better than anyone on the beat.
Amid all these titillating snippets, it’s easy to understand why history has been unkind and unfair to Cayne’s legacy. He was a college dropout who sold sheet metal and took a turn as a professional bridge player and then went on to sell municipal bonds. His love of bridge and vaulting ambition got Cayne a meeting with Ace Greenberg, a stock trader and risk manager of enormous skill, and soon-to-be CEO of Bear Steans.
Greenberg was also a manager who looked for recruits that had what he called “PSD” — they were Poor (by Wall Street standards), Smart and deeply Determined. Cayne became the template for the term.
Of course, it didn’t hurt that Greenberg was also an avid bridge player, though not at Cayne’s level. That skill of strategy and reading people’s intentions soon brought Cayne both success and advancement at Bear Stearns. He reeled in some of the firm’s biggest clients. In the mid1970s, when NYC was on the verge of bankruptcy, big banks avoid city debt. Cayne rolled the dice adroitly that NYC, home of Wall Street and international finance, would recover no matter how bad its leadership had become.
He began making markets in city bonds. Leadership changed; the city’s budget improved. Cayne made a fortune for Bear and himself.
He was also on the fast track to becoming CEO, which he did in 1993, replacing Ace, who remained as chairman. Their relationship, which started out as almost paternal, had frayed. But the Cayne-Greenberg team produced a juggernaut; Bear Stearns’ stock exploded. It was one of Wall Street’s smallest firms, but regularly bested the biggest in earnings power.
Remarkable, considering the way it ended for Bear, that the firm stayed out of trouble. I credit the bridge player in Cayne. When the hedge fund LongTerm Capital imploded in 1998, Bear was the only major trading shop untouched. Cayne didn’t like its esoteric investments in weird bonds. Bear also avoided the excesses of the dotcom era because Cayne didn’t want to spend big bucks on analysts touting stuff like Pets.com.
Reign as an oracle
By 2006, Cayne was a billionaire based on his holdings of Bear Stearns stock. He had assumed an exalted status on Wall Street. Rival CEOs began seeking his advice as he dispensed snarky bon mots as if they were pearls of Wall Street wisdom.
But he also began to believe his own BS that his past performance guaranteed future success. That Greenberg had traded through some rough markets was increasingly ignored by the new regime.
Cayne rebuffed attempts by Dimon to look into buying Bear. Cayne’s rationale to me at the time: Dimon couldn’t afford what Bear was really worth.
Cayne was always one of the highest paid execs on Wall Street, but his pay reached an astronomical $40 million for 2006, the check delivered in 2007. That’s when the firm’s excruciating descent began, with the implosion of two of its hedge funds tied to the deteriorating mortgage-bond market.
By early 2008, Cayne was out as CEO, and by March of that year, Bear was forced to sell out to JPM at a final price of $10 per share. When Dimon was snooping around years earlier, its shares traded around $150 or more.
It might sound trite, but the best CEOs learn from their failures small and large. Jamie Dimon being booted by Sandy Weill at Citigroup undoubtedly made him a better CEO years later. Larry Fink, as a young bond trader in the 1980s, lost a ton of money but went on to become maybe Wall Street’s best risk managers as CEO of the BlackRock money-management empire.
Both were laid low by failures enough to understand they were fallible, and knew they were one trade away from ignominy. I never got that sense from Jimmy, which was his undoing. Memestock investors should take note.