Wall Street Law Blog

Jimmy Cayne loves to talk (greatest hits volume 2)

EX-CEO OF BEAR STEARNS CONCEDES HE WAS CLUELESS IN 2007

In mid-July 2007, Bear Stearns CEO Jimmy Cayne wrote to Bear investors.  In early August, he was quoted at length in a Bear Stearns press release.  Cayne's mission (when he wasn't playing bridge) that July and August was critically important, and he knew it.  In the wake of the shocking failure of two leveraged  Bear Stearns hedge funds with heavy ties to the subprime mortgage market, the CEO need to find a tournequette to keep his company from bleeding to death.  

Cayne cooly reassured investors and the markets that Bear's conservative tradition, strong risk management culture, and plan to pare its mortgage backed securities portfolio would assure Bear Stearns a speedy and full recovery from the summer's disasterous fund collapses.  The balance sheet was strong.  Bear Stearns was fine.  The future, he claimed, was bright.  

The CEO lied and lied.  It didn't bother him one bit.   As many people have observed, when push comes to shove, Jimmy Cayne was concerned only with the welfare of Jimmy Cayne.  

***

Cayne never minded elbowing his "friends" aside as he rumbled his way up the Bear Stearns chain of command.   In truth, he had only one true friend, a man with an enornous ego that masked tremendous insecurities.  Cayne saw his one friend in the mirror each morning as he shaved.  

The best evidence of Cayne's coldblooded, uttlerly selfish nature is an infamous incident that took place iin 1993.  That year, Cayne thanked Ace Greenberg, Bear's long-time leader and the man who had hired Cayne in the first place, by carefully plotting a coup to steal Greenberg's job.   Ever calculating, Cayne waited until he was sure he had enough board members in his pocket before he struck.   When he did, the legendary Greenberg had no choice.  He yielded to James E. Cayne.

   ***

*"YOU CAN COUNT ON US..." * (Then Bear Stearns CEO James E. Cayne to hedge fund clients, July 17, 2007)

  Five months after the August 2007 press release, Cayne was forced from his position as Bear's Chief Executive.   By March 2008, the company you can count on was out of business.  

A few months later, Cayne - who seems to have a desperate need to hang on to a quickly fading spotlight for as long as he possibly can - gave an ill-advised interview to Fortune Magazine. See "The Rise and Fall of Jimmy Cayne," August 2008. 

 In the article, the ex-CEO of Bear Stearns revealed to journalist and author William Cohan (House of Cards) that the strength he projected in the summer of 2007 was in fact false strength. 

Fortune reported that Cayne "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 ... when two hedge funds that contained those same toxic assets collapsed and further poisoned the company's balance sheet."   Id., Emphasis added.

The truth according to Jimmy Cayne himself is that Bear's all-powerful dictator was paralyzed by indecision in the wake of Bear's hedge fund troubles. Cayne had absolutely no idea how to cope with the company's financial troubles.  

In the CEO's own words (a fact which he has never publicly disputed), Cayne told Fortune that he was paralyzed by the growing crisis: "It was not knowing what to do," Cayne explained. 

***

He was frozen.  The control freak had no control.  Cayne continued: 

"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." 

***

Then, in just a few words, Jimmy Cayne made his most revealing, and most damning concession. "I didn't stop it. I didn't reign in the leverage."

  Id., Emphasis added.  

  

Breakingviews.com made this insightful comment about the Fortune article.

 "Cayne’s admission that he didn’t know what to do, even last summer, is extraordinary. If that was the case, [Cayne] should have handed the reins to someone else with more ideas – or been forced to do so by Bear's board. But no-one seems to have challenged his leadership until too late." 

***

  Jimmy Cayne was still the all powerful Oz at Bear Stearns in the summer of 2007.  Yet, the former CEO admitted that he was a deer in the headlights following the collapse of Bear's subprime hedge funds. Cayne misled the public by writing letters, issuing press releases, and participating in conference calls designed to sure up the shaken confidence of investors, banks, and journalists in Bear Stearns.  

  Cayne's concession that he did nothing to right the foundering ship his company had become means that he was in no position to assure the public that things would be fine when he, himself, was so worried about the future that he was frozen by his own doubts.  Cayne could not make decisions, and he could not take actions (aside from firing people, which he always did during crises). 

Jimmy Cayne withheld material information regarding his own fears that Bear Stearns was on thin ice.   He misled shareholders and the public many times in the late summer and fall.  Cayne's material misrepresentations and omissions are securities fraud.  

The CEO was not doing a thing to fix the numerous problems at Bear Stearns following the collapse of the subprime hedge funds (nor, apparently, was anyone else).  Jimmy Cayne did not even bother to address the only real issue - how to restore Bear's health for the long-term. Cayne, in his own words, "didn't reign in the leverage."  He could have. 

WALL STREET LAW BLOG, GREATEST HITS VOLUME 2

BY BRETT SHERMAN, THE SHERMAN LAW FIRM

Wall Street Rationale Reviewed...

Wall Street deception revealed by a basic analogy:

The housing market has never collapsed is to 

The housing market cannot collapse                                               

-AS-

I have never been dead is to

I am immortal

By Brett Sherman

Thanks to Nassim Nicholas Taleb and Jim Grant for inspiration.

 

High Risk Strategies Fail In the Long Run - See, for example, Bear Stearns

1.      The definition of risk is the chance of loss.  If an action carries a chance of loss, it is risky.  The greater the chance of loss, the greater the risk. Risk magnitude refers to the size of potential loss. If the potential loss from a given risk could wipe you out, the magnitude is very high.

2.      Why do high risk strategies threaten long-term survival?  Think of betting your life savings on a game of Russian Roulette.[1] Once a year,  on New Year’s Eve, you hold a cold steel pistol to your temple.  The gun has six chambers, but only one holds a bullet.  You say a little prayer and squeeze the trigger.  Each year your luck holds, you exhale with relief. You have drawn one of the five lucky chambers. Then you jump for joy.  You not only get to live, but you’ve just doubled your money.

3.      Unfortunately, each year that you win the laws of probability and statistics stack up higher and higher against you.  Luck doesn’t last forever, and math never lies. Next year, your luck may run out.  In any event, if you play for too long, you are almost guaranteed to lose.

 

4.      Of course, losing at Russian Roulette means losing everything you’ve ever had and everything you ever will have.[2]  Therefore, “prudent risk management” (to use the words of former Bear Stearns CEO Jimmy Cayne)  dictates that you shouldn’t be playing the game at all.  The bet is far too risky.  But it is also quite lucrative, and you really like money.  You understand the chance you are taking.  You take it anyway.  You are just like the Executive Committee at Bear Stearns.

5.      The point is this - Frequency of success does not mean anything if the cost of even one failure is too high. Bear Stearns reported record revenues for 5 straight years.  And when the company collapsed, those record years didn’t matter to public shareholders at all (except for those lucky enough to have had a reason to sell BSC long before March 2008).

 

6.      The individuals who truly benefitted from each of those five record years were the Executive Committee members. They received windfall bonuses, including many millions in cash payments, for generating positive short-term performance during an unprecedented bull market. 

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[1] The idea of the Russian Roulette analogy comes from the trader and author Nassim Nicholas Taleb. 

[2] Rough paraphrase of Clint Eastwodd from the film The Unforgiven.