Anniversaries often spark ruminations of past events, particularly those that have left a lasting mark on the world. This is especially true of calamities like the financial crisis, where musings serve the dual purposes of increasing understanding, and serving as a blueprint to prevent future, similar catastrophes.
Such is the case of Bear Stearns, the venerable investment bank whose spectacular flame-out prompted its sale to JPMorgan Chase (NYSE:JPM).
Five years have passed since this harbinger of the worldwide financial meltdown occurred, and trying to pin the blame on any one person is, of course, an exercise in futility. In taking a look back to that time, however, one name stands out: James "Jimmy" Cayne, the card-playing risk-taker who held the position of CEO at the time of Bear's demise.
While Cayne has had the lion's share of vitriol heaped upon him since that dark time in Bear's history, he was also a creature of his times, when incongruous financial products were being churned out at a frenzied pace, and increasing leverage was all the rage. Was Cayne, in fact, the cause of the firm's implosion, or merely a casualty of those heady days?
A little history
Bear Stearns had a long and storied history, a focal point of which was its survival after the 1929 stock market crash, and ensuing Great Depression. Founded as an equity trading firm by Joseph Bear, Robert Stearns, and Harold Mayer in 1923, the bank had been successful in that business during the 1920s, and had amassed a comfortable cash cushion when hard times hit, enabling it to thrive without laying off employees or cutting bonuses. Roosevelt's New Deal was a boon to the firm, and it brought in grand sums selling government and corporate bonds to other banks. When private utility companies were disbanded and made public in 1935 after the passage of the Public Utilities Holding Act, Bear raked in even more profits selling the securities that made that changeover possible.
The next few decades saw Bear grow expansively, as its risk-taking attitude prompted it to take advantage of opportunities such as the near-failure of New York City in the 1970s. Scarfing up those dicey securities issued by the city was a risky bet, but the bank made a tidy profit on the transaction.
Leadership changes pushed up the risk factor
For most of this time, the bank had been led by Salim Lewis, who had come on board in 1933 to head up the bank's institutional bond trading department. When Lewis passed away in 1978, Alan Greenberg took over as chair, and his emphasis on short-term gains led the bank to become a takeover powerhouse. It was under his leadership that the company went public in 1985, as the Bear Stearns Companies.
In 1992, Bear had its best year ever, with earnings topping $295 million. The next year, James Cayne took over as CEO, displacing Greenberg, who stayed on as chair. With Cayne at the top, Bear accelerated its risk-taking, quite possibly setting the stage for its later collapse.
A gambler at heart
When Cayne first arrived in New York he likely wanted to pursue his longtime dream: turning his love of bridge into a professional career. Meeting his second wife squelched that plan, however, as she demanded he seek gainful employment. Doubtless, the personality traits that fueled Cayne's interest in card-playing made him a perfect fit for the highest position at Bear.
Indeed, it was Cayne's prowess at cards that impressed Greenberg, who also had a soft spot in his heart for the game of bridge. Cayne's first conquest for the company was winning over Laurence Tisch, later the owner of CBS, who was a client of Lewis' -- another bridge aficionado. Despite that relationship, Tisch moved his business to Cayne.
Cayne displayed the same pluckiness during the near bankruptcy of NYC, as he moved heaven and earth to get the go-ahead to buy the city's risky bonds. His daring in bypassing Greenberg to work on Lewis to get approval for the transaction likely presaged his overthrow of Greenberg in 1993, after Cayne had rallied the board against the former leader.
With Cayne at the helm, Bear got even more aggressive about involving itself in precarious positions. In 1997, the firm was a pioneer in securitizing Community Reinvestment Act loans, which were predominately subprime mortgages. Two years later, Bear paid $42 million to settle fraud charges tied to the collapse of brokerage A.R. Baron.
The salad days begin to wilt
In 2001, Cayne took over as board chair, though Greenberg stayed on as a board member. For the first part of the decade, Bear did well, though Cayne was rumored to have helped prop up share prices on occasion by condoning chatter regarding a takeover of the firm. The company set up two hedge funds through a subsidiary, one of which was packed with derivatives composed of shaky mortgages. Called the High-Grade Structured Strategies Fund, it was quite lucrative -- until 2006.
As storm clouds began to gather, Bear management scurried around trying to bolster that fund, as well as the Credit Enhanced Leverage Fund. But losses were piling up, and investors began to leave. By the time Merrill Lynch snatched $850 million in collateral from Bear, it was unable to unload the assets on the open market. Other creditors seized assets as well and found themselves holding the short end of the stick, just like Merrill.
What was Cayne doing during this crisis? Playing cards. He participated in a championship bridge tournament in Nashville, returning to New York after two weeks. Cayne declared the failure of both the funds, and the fate of Bear Stearns was sealed.
Bear limped along until the following spring, as losses mounted and its reputation lay in tatters. By March, management was at each other's throats , and Cayne, with a new board he personally packed with allies, cooked up a scheme to raise desperately needed cash by hiding the mortal wounds of the company. Putting on a happy face did not fly, however, as the rumor mill churned out whispers that Bear was on its last legs.
Soon, talk turned to a purchase of the firm by JPMorgan. First, a last-ditch effort was made to float Bear for 28 days, through money funneled by the Fed through JPMorgan. Since the Fed didn't oversee investment banks, nor loan to banks teetering on the edge of bankruptcy, this was seen as the best way to keep Bear going until a buyer stepped up. Of course, this only made things worse, and Bear was forced to accept a buyout by JPMorgan -- for a bargain price of $2 per share, later raised to $10 per share.
Was Cayne to blame?
It's no surprise that, as the guy at the top of the management pyramid, Cayne would be denounced as the cause of Bear's failure. When Cayne testified before Congress in the spring of 2010 regarding the firm's meltdown, he attributed much of the blame to a loss of market confidence, putting the onus on short-sellers and rumors -- but also admitted that leverage was too high.
Indeed, it was. Cayne testified to a 40:1 leverage ratio at the time of Bear's collapse, though he wasn't wrong about this being the norm at the time. According to Fool analyst Ilan Moscovitz, by the end of 2007, leverage at Goldman Sachs (NYSE:GS) was 26:1, and 33:1 at Morgan Stanley (NYSE:MS). Still, it was Cayne's aggressiveness that led to Bear taking on ever higher levels of debt, which was ultimately the company's undoing.
After the firm's collapse, many other big players in Bears' fall from grace were scooped up by other banks. Michael B. Nierenberg, in charge of adjustable rate debt products, moved to Bank of America's (NYSE:BAC) securitized financial products division, where he has buffed B of A's underwriting of agency-backed mortgage bonds to a high shine.
Jeffrey L. Verschleiser, a former Bear executive whose duties included overseeing subprime loans, now resides at Goldman, where he buys up mortgage-backed securities. Even Greenberg, though nearly 80 at the time, was given a token vice-chair position at JPMorgan after the takeover.
But not Cayne, whose unpopularity after the sale of Bear to JPMorgan ended his career in finance. For the man who clawed his way to the top only to steer the firm toward disaster, the ruination of Bear Stearns was too much for even Wall Street to forgive.