With Cayne at the helm, Bear got even more aggressive about involving itself in precarious positions. In 1997, the firm was a pioneer in securitizing Community Reinvestment Act loans, which were predominately subprime mortgages. Two years later, Bear paid $42 million to settle fraud charges tied to the collapse of brokerage A.R. Baron.
The salad days begin to wilt
In 2001, Cayne took over as board chair, though Greenberg stayed on as a board member. For the first part of the decade, Bear did well, though Cayne was rumored to have helped prop up share prices on occasion by condoning chatter regarding a takeover of the firm. The company set up two hedge funds through a subsidiary, one of which was packed with derivatives composed of shaky mortgages. Called the High-Grade Structured Strategies Fund, it was quite lucrative — until 2006.
As storm clouds began to gather, Bear management scurried around trying to bolster that fund, as well as the Credit Enhanced Leverage Fund. But losses were piling up, and investors began to leave. By the time Merrill Lynch snatched $850 million in collateral from Bear, it was unable to unload the assets on the open market. Other creditors seized assets as well and found themselves holding the short end of the stick, just like Merrill.
What was Cayne doing during this crisis? Playing cards. He participated in a championship bridge tournament in Nashville, returning to New York after two weeks. Cayne declared the failure of both the funds, and the fate of Bear Stearns was sealed.
Bear limped along until the following spring, as losses mounted and its reputation lay in tatters. By March, management was at each other’s throats , and Cayne, with a new board he personally packed with allies, cooked up a scheme to raise desperately needed cash by hiding the mortal wounds of the company. Putting on a happy face did not fly, however, as the rumor mill churned out whispers that Bear was on its last legs.
Soon, talk turned to a purchase of the firm by JPMorgan Chase & Co. (NYSE:JPM). First, a last-ditch effort was made to float Bear for 28 days, through money funneled by the Fed through JPMorgan. Since the Fed didn’t oversee investment banks, nor loan to banks teetering on the edge of bankruptcy, this was seen as the best way to keep Bear going until a buyer stepped up. Of course, this only made things worse, and Bear was forced to accept a buyout by JPMorgan — for a bargain price of $2 per share, later raised to $10 per share.
Was Cayne to blame?
It’s no surprise that, as the guy at the top of the management pyramid, Cayne would be denounced as the cause of Bear’s failure. When Cayne testified before Congress in the spring of 2010 regarding the firm’s meltdown, he attributed much of the blame to a loss of market confidence, putting the onus on short-sellers and rumors — but also admitted that leverage was too high.
Indeed, it was. Cayne testified to a 40:1 leverage ratio at the time of Bear’s collapse, though he wasn’t wrong about this being the norm at the time. According to Fool analyst Ilan Moscovitz, by the end of 2007, leverage at Goldman Sachs Group, Inc. (NYSE:GS) was 26:1, and 33:1 at Morgan Stanley (NYSE:MS) . Still, it was Cayne’s aggressiveness that led to Bear taking on ever higher levels of debt, which was ultimately the company’s undoing.
After the firm’s collapse, many other big players in Bears’ fall from grace were scooped up by other banks. Michael B. Nierenberg, in charge of adjustable rate debt products, moved to Bank of America Corp (NYSE:BAC)‘s securitized financial products division, where he has buffed B of A’s underwriting of agency-backed mortgage bonds to a high shine.
Jeffrey L. Verschleiser, a former Bear executive whose duties included overseeing subprime loans, now resides at Goldman, where he buys up mortgage-backed securities. Even Greenberg, though nearly 80 at the time, was given a token vice-chair position at JPMorgan Chase & Co. (NYSE:JPM) after the takeover.
But not Cayne, whose unpopularity after the sale of Bear to JPMorgan Chase & Co. (NYSE:JPM) ended his career in finance. For the man who clawed his way to the top only to steer the firm toward disaster, the ruination of Bear Stearns was too much for even Wall Street to forgive.
The article Jimmy Cayne: Architect or Victim of the Bear Stearns Debacle? originally appeared on Fool.com.
Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs (NYSE:GS). The Motley Fool owns shares of Bank of America and JPMorgan Chase.
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