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 & Co. (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.