‘James Cayne isn’t one for small talk at the bridge table,’ says Britain’s number one player Andrew Robson. ‘And after a game, you won’t see too much of him. He probably won’t stop by for a chat or a drink. That’s not really his style. When Cayne plays bridge, he’s there to win. He’s fiercely competitive.’ Others say that while Cayne certainly knows his spades from his diamonds, like many wealthy people on the bridge circuit, he tends to hire in top players to be part of his team, making him appear better than he actually is.
Cayne has played bridge his whole life. He moved to New York in 1969 to become a bridge professional, and has been a regular feature on the US bridge circuit, picking up a number of championship wins, both regional and national, along the way. To this day he is a regular player on online bridge websites. But it is fair to say that Cayne is not terribly popular in the world of bridge – not that he seems to care what people think of him.
On 19 July 2007, Cayne was playing in the Spingold KO bridge tournament in Nashville, Tennessee. His neuropsychologist wife Patricia, another bridge aficionado, accompanied him to the 10-day competition. Bridge is a logical game requiring the need to concentrate for long periods. With tournaments lasting weeks, and games up to 10 hours, it also needs stamina. It is a game that requires players to make fast decisions based on the information available. It is particularly popular with financiers and traders, people who are used to making quick judgment calls – people like James Cayne. It is also very addictive.
What was perhaps odd about Cayne’s 2007 Nashville appearance, though, was the fact that the competition took place at a time when his company, Bear Stearns, of which he was CEO, was on the brink of collapse. While he was playing cards, back in New York two of the firm’s hedge funds were in serious trouble.
Bear Stearns was finally purchased in March 2008 in an emergency rescue takeover by rival investment bank JP Morgan with the help of the US Federal Reserve. JP Morgan initially offered to buy the firm for US$236 million, or US$2 per share, but shareholder anger lead to an improved offer of US$1.1 billion, or US$10.82 per share. A year earlier, the shares had traded for more than US$170 per share. During that year, Cayne, with a 3 per cent personal stake in the business, managed to lose close to US$1 billion – a remarkable feat. Meanwhile, more than 7,500 Bear Stearns employees lost their jobs.
Bear Stearns was founded as an equity trading house in 1923 by Joseph Bear, Robert Stearns and Harold Mayer. It survived the 1929 Wall Street crash, opened a branch office in Chicago in 1933 and expanded globally, first to Amsterdam, in 1955. Headquartered in New York, it later opened offices across the United States, and throughout Europe, the Far East and China.
Over the years, Bear Stearns evolved from a company simply focused on trading securities and acting as the back office for other Wall Street firms into one with a number of interests. It served corporations, institutions, governments and individuals, and offered a range of services. These included corporate finance, mergers and acquisitions work, private client services, derivatives, foreign exchange and futures sales and trading, and asset management services. In 1985 it became a publicly traded business.
In 2005, according to Fortune magazine, Bear Stearns was one of the ‘most admired’ securities firms because of, among other things, its ‘quality of risk management and business innovation’. By November 2006 the company had total capital of approximately US$66.7 billion and total assets of US$350.4 billion, making it the seventh-largest securities firm in terms of total capital. But its phenomenal growth was built on the quicksand of the US sub-prime lending market, and it would not last.
The root of the sub-prime crisis goes back years. The US Congress established Fannie Mae, or the Federal National Mortgage Association, in 1938 to make mortgages more available to low-income families. Freddie Mac, the Federal Home Loan Mortgage Corporation, was created in 1970 to expand the secondary market for mortgages in the United States. Along with other government-sponsored enterprises, Freddie Mac bought mortgages on the secondary market, pooled them, and sold them as mortgage-backed securities to investors on the open market.
With then President Clinton talking up universal home ownership, the US mortgage industry accused of ‘predatory mortgage lending’ and interest rates at record lows, the scene was set for financial disaster. Yet with record growth and impressive balance sheets, few stopped to complain. But in order to manage the higher risk associated with big or dubious mortgages, investment banks required a means of trading the debt on. They devised a means of pooling the loans and paying a credit rating agency to rate them. The pools formed an asset base from which they could sell bonds, which were liquid and could be traded. The complexity of these mortgage-backed financial instruments meant few of those at the top of big US institutions appeared to really understand the risks involved. If they did understand, they did not let on.
By 2007/08, Bear Stearns had notional contract amounts of approximately US$13.4 trillion in derivative financial instruments. But it had only US$11.1 billion in tangible equity capital supporting US$395 billion in assets, a leverage ratio of more than 35 to one. And that was not good, because when the whatsit hit the fan, and investors started to want their money back, it simply was not there. The inevitable happened.
They say that the young James Cayne’s ideal job would have been a bookmaker. Growing up in Evanston, Illinois, he certainly was not too interested in education, dropping out of university before he graduated and ‘spending more time playing bridge at his fraternity house and on intramural sports than studying’. He once explained that ‘I don’t read and absorb, I hear and I absorb.’ His early jobs included driving a cab in Chicago, selling photocopiers and working for his father-in-law’s scrap-iron business.
But backwater Illinois was not for Cayne. He headed for New York with aspirations to be a professional bridge player. He again drove a cab, sold adding machines, and worked at Lebenthal & Co selling municipal bonds. It was while in New York he met his now wife Patricia, who told him he had to get ‘a proper job’. He went off to Bear Stearns.
It was 1969, and Cayne had an interview at the firm with Harold Mayer Jr, the son of one of three founders of the firm. It did not go well, by all accounts, but on the way out he spoke with Alan Greenberg, then a senior manager at the company. In an effort to make small talk, Greenberg asked Cayne if he had any hobbies. ‘And I said, “Yes, I play bridge”,’ Cayne recalled. Greenberg, also a keen player, asked him if he was any good, to which Cayne responded, ‘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’.
Greenberg was impressed, and Cayne got a job working for him in the brokerage division at Bear Stearns, catering to wealthy individuals. While there he developed a rapport with Greenberg, with the pair often playing bridge after hours at the Regency Whist Club in New York. Other players at the club included Laurence Tisch, chief executive of CBS, and Milton Petrie, chairman of Petrie Stores. There was a bridge set of people, almost Masonic in terms of their contacts and friendships. It was to become an enduring theme for Cayne.
Cayne rose through the ranks at Bear Stearns, but he really earned his stripes during New York City’s 1975 financial crisis. The city was teetering on the edge of bankruptcy, and one of Cayne’s clients wanted to sell some of his New York City bonds. The trouble was, no one wanted them. Cayne decided that Bear Stearns should make the market (that is, purchase the bonds itself as an interim measure), at a cost of US$5 million. While Greenberg said no, Cayne went over his head. Bear Stearns bought the bonds, and was able to find buyers for them at small brokerages around the city for prices higher than he had paid. It was quite a coup.
In 1978 Cayne joined the company’s powerful executive committee, and not long after the firm went public in 1985, he became president. He became CEO in 1993, and (while continuing as CEO) chairman of the board in 2001. It was certainly a period that the business flourished: its stock price rose nearly 600 per cent. In 2006, Cayne took home US$34 million and became the first Wall Street chief to own a company stake worth more than US$1 billion. Throughout it all, Cayne played bridge.
But the richer he got, and more senior he became, the more Cayne’s hands-on involvement with the firm lessened. While he was lauded by colleagues as a ‘great captain’ and someone good at delegating authority, the fact was that increasingly, Cayne was not in the office. During the summer, he typically left the office on Thursday afternoon, taking a 17-minute, US$1,700 trip by helicopter, to play a game of late-afternoon golf at the exclusive Hollywood Golf Club in New Jersey. He would usually play Friday and all weekend. In the evenings, he would play bridge online. The policy at the Hollywood Club is that players cannot use mobile phones or other electronic devices, although Cayne apparently used to check in with the office via the course’s ninth-hole land line.
While this approach to his work was wholly acceptable during the good times, finding that Cayne was busy teeing off or playing cards when the firm began to wobble towards the brink was not. But before Bear Stearns reached crisis point, Cayne himself came close to the edge. Although it was not reported at the time, in September 2007 Cayne, then aged 73, nearly died. Rushed to hospital, he was drowsy, weak and had no appetite. Cayne insisted on being driven to hospital in a car rather than call an ambulance, fearing the impact of a public disclosure about his health on the firm. As it was, Bear Stearns was starting to feel the pinch of the markets, and a health scare to its CEO might just add to the problems.
Diagnosed with an infection in the prostate, his chances of survival were 50:50. The hospital reportedly pumped him with 22 gallons of saline and antibiotics. He was in the hospital for 10 days and shed 30 pounds. It was a close thing.
At the same time, there were increasing problems at Bear Stearns. In 2007 US home prices began to fall, and mortgage defaults were rising. In February, an index that tracked packages of sub-prime loans that had been sliced up and resold to investors in the form of complex securities started to fall. The problem for Bear Stearns was that two of its hedge funds, investment partnerships for rich people and institutions, were heavily invested in such securities. The funds used borrowed money to amplify their bets, magnifying both gains and losses. One was called the Bear Stearns High-Grade Structured Credit Strategies Fund, the other had the same name plus the words ‘Enhanced Leverage’.
The bottom line was that when the market took a turn for the worse, the values of the funds dropped, meaning investors suddenly got very jumpy and started demanding their money back. The knock-on effect was that confidence in Bear Stearns started to waver. The writing was on the wall.
‘Bear Stearns was the most innovative, and by innovative I mean “worst”, at creating these complex instruments,’ said Joseph Mason, associate professor of finance at Drexel University. ‘They had a cradle to grave mortgage structure. They originated it, pooled it and sold it on’. Not only that, they managed to find increasingly innovative – or risky – methods of slicing up the worst parts of the mortgage pool and selling that on. They created a way to sell on high-risk debt, but the bubble would not last. The problem with all these complex structures was that they were designed to provide high returns. Normally the higher the risk, the higher the return, so some risk could be expected, but the methods of analysis used turned out not to reflect the risk accurately for these financial instruments.
Cayne attempted to solve the bank’s liquidity problems, first by approaching a Chinese investment bank, Citic, then by approaching the likes of Bahamas-based billionaire commodities investor, Joe Lewis. Incredibly, Cayne and Lewis reportedly bonded over a shared love of gin rummy. The relationship ended up costing Lewis a staggering US$1 billion when Bear Stearns collapsed after Cayne had somehow persuaded him to make a huge investment. ‘He’s an adult, not a whiner,’ Cayne apparently said of the way Lewis reacted.
Goodness knows how Lewis would describe the debacle. It is remarkable that a successful businessman and supposedly shrewd global investor managed to make such a catastrophic investment decision, but he is not the first person to make a mistake of that magnitude: for instance, in 1997/98, US investor George Soros lost a massive fortune investing in Russia. At this point neither Lewis nor anyone else could save Bear Stearns.
Despite the collapse and US$10-per-share deal, Cayne reportedly remained calm. And on 25 March, the day after JP Morgan revised its bid upward, he and his wife dumped their 5.66 million Bear Stearns shares, at US$10.84 each, for US$61.3 million, so at least they would not have to worry too much about the demise of the firm. They had also recently closed on the US$27.4 million purchase of two adjacent apartments on the 14th floor of the recently renovated Plaza Hotel at the corner of Fifth Avenue and 59th Street in New York. This might explain how Cayne remained calm throughout. Despite the disaster all around him, he managed to slip away with close to US$100 million net.
No wonder the general public is getting increasingly irate in the United States. In speeches leading up to Barack Obama’s election to US president, he attacked the ‘ethic of greed’ culture in the financial services and banking industries. He pointed the finger at ‘lobbyists, greedy businessmen and complacent Washington politicians’. No one, it seems, neither the business people themselves nor the politicians charged with running the country, came away from the financial disaster unscathed.
At the final Bear Stearns shareholders meeting, Cayne commandeered the microphone. ‘That which doesn’t kill you makes you stronger,’ he said. ‘And at this point we all look like Hercules. Life goes on’. He went on to complain about a ‘conspiracy’ of unnamed financial sharks who were responsible for the firm’s downfall, adding that he hoped that the authorities would ‘nail the guys who did it’. Cayne, the bespectacled CEO of Bear Stearns for the past 15 years, certainly was not accepting any blame.
In reality, Cayne’s legacy is in pieces. He was one of the few very senior people at Bear Stearns not offered a position at JP Morgan Chase. Greenberg, now 80-odd, was made vice chairman emeritus at the merged firm, and got to keep 40 per cent of any trading commissions he generates. Alan Schwartz, who took over as CEO when Cayne stepped down in January, was offered a senior investment-banking post. But Cayne did not take a role.
Cayne was widely pilloried in the press, and among former Bear Stearns employees, for his bridge-playing antics at the end. While he helped create the growth and wealth of the business, he also created a huge fortune for himself. And perhaps he was insulated from the day-to-day reality of the firm’s risky business ventures.
Cayne actually joined Bear Sterns in the same year, 1969, that Dick Fuld joined Lehman Brothers. While their collapsing legacy and widespread media derision may have given both men the odd sleepless night, are they destined to remain tortured souls? It is doubtful. Months later, sat in his luxury apartment with all the comforts money can buy, does Cayne look in the mirror in anguish? Did he set out to create a fantastic reputation in the investment banking community, or did he set out to make himself very rich? The smart money is on the latter. And as he said, life – and bridge playing – goes on.
SOURCES
Bawden, T (2008) James Cayne risks lawsuit as he seeks counter-offer for Bear Stearns, The Times, 20 March [online] http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3587260.ece (accessed 23 February 2010)
Cohan, W D (2008) The rise and fall of Jimmy Cayne, CNN Money, 25 August [online] http://money.cnn.com/2008/07/31/magazines/fortune/rise_and_fall_Cayne_cohan.fortune/index.htm?postversion=2008080410 (accessed 23 February 2010)
Doran, J (2006) Big shot, The Times, 10 May [online] http://business.timesonline.co.uk/tol/business/article1069736.ece (accessed 23 February 2010)
Forbes 400 List, 2005
Fortune, 25 August 2008
Kelly, K (2007) Bear CEO’s handling of crisis raises issues, Wall St Journal, 1 November [online] http://online.wsj.com/article/SB119387369474078336.html?mod=home_whats_news_us (accessed 23 February 2010)
Kelly, K (2008) Where in the world is Bear’s Jimmy Cayne? Playing bridge, Wall St Journal Deal Journal [online] http://blogs.wsj.com/deals/2008/03/14/where-in-the-world-is-bears-jimmy-cayne-playing-bridge/tab/article/ (accessed 23 February 2010)
Jagger, S (2008a) Sub-prime and banking crisis: who caused this nightmare, The Times, 19 March [online] http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3579171.ece (accessed 23 February 2010)
Jagger, S (2008b) Hopes of counter bid for Bear Stearns hit by James Cayne’s share sale, The Times, 28 March [online] http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3636577.ece (accessed 23 February 2010)
Smith, D (2006) Cayne loves London, Sunday Times, 12 March [online] http://business.timesonline.co.uk/tol/business/markets/united_states/article740002.ece (accessed 23 February 2010)
Stiff, P (2008) Bear Stearns: timeline to disaster, The Times, 14 March
Thomas, L (2008a) Down $900 million or more, the chairman of Bear sells, New York Times, 28 March
Thomas, L (2008b) Apology is met with silence, New York Times, 30 May
The Times, 10 May 2006
The Times, 28 March 2008
The Times (2008) Credit crunch: timeline of events, Times Online, 8 August
Wikipedia (nd a) Bear Stearns [online] http://en.wikipedia.org/wiki/Bear_Stearns (accessed 23 February 2010)
Wikipedia (nd b) James Cayne [online] http://en.wikipedia.org/wiki/James_Cayne (accessed 23 February 2010)
American Contract Bridge League, www.acbl.org
Bear Stearns, www.bearstearns.com
CNNMoney.com, March 27, 2008
JP Morgan, www.jpmorgan.com
Purdue University, www.purdue.edu
US Federal Reserve, www.federalreserve.gov