The rise and fall of Jimmy Cayne
Last summer he was worth $1.6 billion on paper. Then he nearly died and Bear Stearns collapsed.
NEW YORK (Fortune) -- In the early morning hours last Sept. 11, a black Town Car pulled up to the entrance of New York-Presbyterian Hospital in Manhattan. Inside the sedan Jimmy Cayne, the CEO of Bear Stearns, was close to death. At dawn Cayne's wife had placed an emergency call to his physician, Dr. Jay Meltzer, and when Meltzer arrived at the couple's Park Avenue apartment, Cayne, then 73, was drowsy and desperately weak and had no appetite. His blood pressure was dangerously low. He was breathing very rapidly and deeply. Meltzer suspected sepsis. Rather than call an ambulance, Cayne asked for a car, in part because he feared that a public disclosure about his health could further damage the firm - a firm whose stock price had already dropped close to 27% (from $143 to $105 a share) since two of its highly leveraged hedge funds had imploded in June.
Once he arrived at the hospital, doctors discovered that the infection was in the prostate, which meant that his chances of survival were about fifty-fifty. They pumped him with 22 gallons of saline and antibiotics and inserted a Foley catheter. He would try to sleep, wake up refreshed, and discover that he had been out for all of 17 minutes. He was in the hospital for the next ten days and shed some 30 pounds.
Cayne survived, but Bear Stearns would not. Six months later a panic among the firm's trading partners, lenders, and customers prompted the Federal Reserve and the U.S. Treasury to step in and negotiate its emergency sale to J.P. Morgan Chase, which acquired it for the fire-sale price of $10 a share on May 30. The 85-year-old firm's demise cost Cayne $1 billion - trimming his net worth to around $600 million. It also marked the end of an era on Wall Street, for Cayne is typical of the breed of street-smart salesmen who elbowed their way to the top of brokerage houses back when those institutions were still private partnerships. He had not changed; the world around him had. During his almost 40 years at the firm (the last 15 as CEO), Bear Stearns went from making its money with bread-and-butter businesses - trading securities and acting as the back office for other Wall Street firms - to a publicly traded financial supermarket that was increasingly inflating its balance sheet with exotic securities. Once a fiscally conservative brokerage, Bear had become a house of cards. Worse, its leaders did not fully appreciate how vulnerable they had made themselves by using a disproportionate amount of money borrowed cheaply in the overnight-financing markets to fund the firm's day-to-day operations.
Through it all, Cayne remained the same raffish scrap-metal salesman who left behind a broken marriage in Chicago and arrived in Manhattan in 1964 with the sole ambition of becoming a professional bridge player. Once in New York, he was able to finesse relationships he made at the card table to become a power-house on Wall Street. But by the summer of 2007 this creature of instinct was out of his element. He did not know how to deal with the devaluation of the firm's mortgage-backed securities and other illiquid assets. Nor did he know what to do after the situation worsened when two hedge funds that contained those same toxic assets collapsed and further poisoned the company's balance sheet. "That was a period of not seeing the light at the end of the tunnel," he told Fortune recently. "It was not knowing what to do. It's not being able to make a definitive decision one way or the other, because I just couldn't tell you what was going to happen."
As a result, his career at Bear Stearns ended with his legacy in tatters. He alone among the very top men at "the Bear" (as insiders called the firm) has not been offered a face-saving senior-level job at J.P. Morgan Chase (JPM, Fortune 500) (although Cayne claims it is because he is retired). Alan "Ace" Greenberg, 80, who preceded Cayne as CEO, is now vice chairman emeritus at the merged firm and gets to keep 40% of any trading commissions he generates. Alan Schwartz, 57, who took over as CEO when Cayne stepped down in January, was offered a senior investment-banking post there (instead, he is planning to leave the firm at the end of August). Not Cayne. Perhaps unfairly, he will probably go down in the annals of finance as the Nero of the credit crisis. Instead of fiddling while Bear Stearns burned, his detractors say he was golfing a little too regularly at the Hollywood Golf Club in Deal, N.J., and playing championship-level bridge in Nashville, San Francisco, and Detroit.
Many Bear Stearns employees, who watched their retirement savings and children's college money vaporize last winter, revile Cayne. "It's just incredible to me that this could happen to the fifth-largest securities firm in the United States," says Alex Manos, who started working in the firm's Brooklyn back office not long after emigrating from Haiti in 1970. He watched his nest egg shrink from $325,693 to $19,000. "The firm always had a good reputation. Ace Greenberg was all about that. He always said he would rather make $2 a day than risk losing more. Then this turkey," he says, referring to Cayne, "chose not to do that and put all his eggs in one basket."
This notion that Ace stood for financial prudence while Jimmy was risk incarnate is, to Cayne, revisionist history. In a series of lengthy interviews with Fortune, he spoke out for the first time since the death of Bear Stearns, presenting his version of how things went wrong, how his and Ace's relationship changed over the years, and how a man who prided himself on making fast, intuitive decisions - about people, risk, and opportunity - in the end did not know how to save the firm that once flourished under his leadership.
"I didn't stop it. I didn't rein in the leverage," he says by way of a mea culpa. He would like people to remember, though, that the firm's stock rose from $16.61 per share when he took over as CEO on Bastille Day 1993 to its dizzying height of $172.69 nearly 14 years later, in January 2007. Until it crashed, the stock -including dividends - provided its holders a compound annualized growth rate of 21%. Or as Fares Noujaim, a former Bear vice chairman and longtime Cayne partisan, puts it, "The thing I just would leave you with on Jimmy is that from the outside, Ace had this reputation of being this lovable CEO and Jimmy this tough guy. It's ironic when I see Jimmy being billed that way, because we all have such admiration for him, although that opinion is not 100% uniform."
If you had stopped an 18-year-old Jimmy Cayne on the streets of his hometown of Evanston, Ill., and asked him what he wanted to be when he grew up, he would have answered, "A bookie." He was an indifferent student at Purdue University, spending more time playing bridge at his fraternity house and on intramural sports than studying. He left college one semester shy of his degree and joined the Army. ("I don't read and absorb," Cayne explained of one of the differences between him and his father, a patent attorney. "I hear and I absorb.")
Before heading to New York, Cayne drove a cab in Chicago, sold photocopiers in the Mountain States, and worked for his father-in-law's scrap-iron business. To make some money while playing bridge in Manhattan, he again drove a cab, sold adding machines, and worked at Lebenthal & Co. selling municipal bonds. When he met Patricia Denner, who would become his second wife, at a bridge club, she quickly gave him an ultimatum: Either get a serious job, or get a new girlfriend. (They married in 1971 and still attend bridge tournaments together, but not as teammates. They have a grown daughter, Alison, who is married to former hedge fund manager Jack Schneider, and seven grandchildren.)
His skill at cards would pave the way for him at Bear Stearns. During his 1969 interview with Harold C. Mayer Jr., the son of one of three founders of the firm, he felt there was no chemistry between them. As he got up to leave, Mayer Jr. suggested he say hello to Ace Greenberg, "the man who is going to run this place." Again there seemed to be no connection between the two men, but in an effort to make a little small talk, Greenberg asked Cayne if he had any hobbies. Along with magic and yo-yos, bridge was a serious interest of Greenberg's. "And I said, 'Yes, I play bridge,'" Cayne recalled. "You could see the electric light bulb. He says, 'How well do you play?' I said, 'Mr. Greenberg, if you study bridge the rest of your life, if you play with the best partners and you achieve your potential, you will never play bridge like I play bridge.'"
Unbeknownst to Greenberg, Cayne had won his first national bridge tournament in 1966, and George Rapee, the late legendary bridge champion, had invited him to play as a professional in bi-weekly rubber bridge games at the now defunct Cavendish Club, on East 73rd Street. Rapee told Cayne the rules for the pros sitting across the table from some of New York's leading financiers were simple: no frowning, no berating your partners for dumb moves, and no soliciting the other players for business. Greenberg guaranteed Cayne $70,000 a year if he joined Bear Stearns. He took the job and his first cold call, with Rapee's permission, was to an acquaintance from the Cavendish Club, the late Laurence Tisch, a self-made billionaire who would come to own CBS. Tisch agreed to let Cayne handle his brokerage account but initially neglected to tell Cayne he was already the client of Salim "Cy" Lewis, the imposing senior partner of Bear -Stearns and a bridge player himself. A row of biblical proportions ensued, but in the end Tisch chose Cayne.
Again making effective use of his bridge connections and his own wiles, Cayne quickly became an immensely successful broker. "People, for whatever reason, think if you're a good bridge player you've got a good brain, so I might as well do business with you," Cayne said. Together with Greenberg, Tisch, and Milton Petrie, the former CEO of Petrie Stores, Cayne played bridge after work at the Regency Whist Club on Manhattan's East Side. Warren Buffett and Malcolm Forbes occasionally played on the same team as those four, and together they called themselves Corporate America's Six Honchos, or "CASH" for short.
Greenberg became Cayne's mentor at the firm. "Greenberg had very few friends," Cayne remembers of those years when he was Ace's protege. "And I was one of them." Cayne used to pick up Greenberg at his Fifth Avenue apartment every day and drive him in his Pontiac back and forth down the slow-moving FDR Drive to the Bear Stearns office at 55 Water Street. "It's like the Mafia, where the driver becomes the No. 2, except I insisted he sit in the front," he said. "He couldn't sit in the back." But Greenberg rarely spoke to his younger partner during these rides. "If you understand the makeup of the man, he can't carry a conversation," Cayne says. Nevertheless Cayne managed to turn these awkward trips to his advantage, using the 25 minutes to occasionally lampoon his colleagues to his boss.
One day Greenberg told Cayne a story about his personal life that Cayne never forgot. At that time Greenberg was between marriages and had been dating regularly, but was growing increasingly concerned about the risk of contracting AIDS. "He decides he's going to get married," Cayne says. "And he's one of the guys that's dating Barbara Walters.... He says to me, 'I've decided I'm going to marry Barbara Walters.' The very next day in the papers she's engaged to Merv Adelson. I never said a word. Now normally - you know, if it was one of my buddies - I'd say, you know, 'Pretty good call there, pal. You're marrying her, except that she's marrying somebody else.... That's called bigamy.'"