Lessons from the historic rise and fall of Bear Stearns by Jimmy Cayne

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Jimmy Cayne is no longer a household name on Wall Street, his fame having darkened in recent years as the CEO of ill-fated investment bank Bear Stearns.

But Cayne’s story is much more complex. It is also an incredible achievement, and more so, it should be studied by business schools as a parable of how business leaders can do things so well for so long, only to be defined by a few. bad and preventable mistakes.

By shedding light on what Cayne has done right and wrong, perhaps we can teach not only the new class of CEOs, but all those know-it-all stock traders – who think they’re infallible because that they made a few. dollars during this long bull market – this failure is still lurking around the corner.

Cayne died Tuesday at the age of 87. Do a Google search and you’ll find countless stories blaming him for the risk-taking that doomed Bear Stearns at the start of the 2008 financial crisis. His deck was playing while Bear was on fire; his more than occasional penchant for smoking weed.

All of this, as far as I know, was true to some extent, but should not be decisive. The responsibility for Bear’s risk-taking ultimately falls on his shoulders, but the doomed strategies were also implemented by people who were also part of Bear’s leadership team.

Bailouts galore in 2008

Bear was certainly not the only company to succumb to the risk. All of them, except maybe JPMorgan under the firm hand of Jamie Dimon, needed a bailout in 2008. And yes, Jimmy played bridge and smoked weed, but I can’t remember that a CEO was chained to his desk, except when the proverbial shit hit the fan. As for marijuana, a close friend of Cayne’s told me it was to alleviate symptoms of an illness. I never saw that it had an impact on his ability to work and I knew him better than anyone in the field.

Amidst all of these titillating clips, it’s easy to see why the story has been mean and unfair to Cayne’s legacy. He was a college dropout who sold sheet metal and became a professional bridge player, then sold municipal bonds. His love of bridge and the ambition of aerobatics allowed Cayne to meet Ace Greenberg, a stock trader and risk manager with enormous skills, and who will soon be the CEO of Bear Steans.

James "Jimmy" Cayne, former President and CEO of Bear Stearns Cos.,
Jimmy Cayne has always gained media attention for his habit of smoking marijuana.
Bloomberg via Getty Images

Greenberg was also a manager who looked for rookies who had what he called “PSD” – they were poor (by Wall Street standards), smart, and deeply determined. Cayne has become the model for the term.

Of course, it didn’t hurt that Greenberg was also an avid bridge player, but not at Cayne’s level. This skill of strategy and reading people’s intentions quickly brought Cayne success and advancement at Bear Stearns. It has attracted some of the company’s biggest clients. In the mid-1970s, when New York City was on the verge of bankruptcy, the big banks avoided going into debt. Cayne deftly rolled the dice that NYC, the home of Wall Street and international finance, would recover no matter how bad his leadership got.

He began to market in city bonds. Leadership has changed; the city’s budget is improving. Cayne made a fortune for Bear and himself.

He was also on track to become CEO, which he did in 1993, replacing Ace, who remained chairman. Their relationship, which at first was almost fatherly, had frayed. But the Cayne-Greenberg team produced a juggernaut; Bear Stearns stock has exploded. It was one of the smallest companies on Wall Street, but it consistently beat the biggest in terms of profit power.

Remarkable, considering how it turned out for Bear, that the company has remained out of trouble. I credit the bridge player to Cayne. When the Long-Term Capital hedge fund imploded in 1998, Bear was the only major trading store that was untouched. Cayne didn’t like his esoteric investments in weird bonds. Bear also avoided the excesses of the dotcom era because Cayne didn’t want to spend a lot of money on analysts touting things like Pets.com.

Reign like an oracle

In 2006, Cayne was a billionaire based on his holdings of Bear Stearns shares. He had assumed exalted status on Wall Street. Rival CEOs began to seek his advice as he handed out sarcastic nods as if they were Wall Street’s pearls of wisdom.

But he also began to believe his own BS ​​that his past performance guaranteed future success. The fact that Greenberg traded in certain crude markets was increasingly ignored by the new regime.

Jamie Dimon, CEO of JP Morgan
JP Morgan CEO Jamie Dimon has attempted to buy the distressed Bear Stearns company remnants of Jimmy Cayne until it is too late.
AP Photo / Michel Euler, Swimming pool, File

Cayne repelled Dimon’s attempts to buy Bear. Cayne’s reasoning for me at the time: Dimon couldn’t afford what Bear was really worth.

Cayne has always been one of Wall Street’s highest paid executives, but his salary rose to an astronomical $ 40 million for 2006, the check handed over in 2007. It was then that the company’s atrocious descent. began, with the implosion of two of its hedge funds linked to the deterioration of the mortgage bond market.

By early 2008 Cayne had become CEO, and in March of that year Bear was forced to sell to JPM at a final price of $ 10 per share. When Dimon nosed around years earlier, his shares were trading at around $ 150 or more.

It might sound trite, but the best CEOs learn from their failures, big and small. Jamie Dimon started 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 became perhaps the best risk manager on Wall Street as CEO of the BlackRock money management empire.

Both were brought down by failures enough to understand that they were fallible and knew they were at a trade of ignominy. I never had that feeling of Jimmy, which was his downfall. Even stock investors should take note.

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