Sunday, September 12, 2010
The NotMakingThisUp Book Review: What Ace Said About Jimmy
I hadn’t finished reading the Journal story [describing supposed personal peccadilloes of Jimmy Cayne, the then-beleaguered CEO of Bear Stearns] myself when I knew that this was the end…. Did I discuss it with anybody? No. Did I go running around the firm saying he had to go? No, because I don’t do those things…
But I knew that nobody believed his denials. Did I actually care whether or not he smoked pot? Here’s what I cared about: Bear Stearns, its employees, and its shareholders. I knew that he’d been smoking pot for years. At bridge tournaments I’d seen it myself. Did I ever see him do it in the office? No. Had I heard that he did that? Yes.
—Alan C. (“Ace”) Greenberg, The Rise and Fall of Bear Stearns.
Wall Street guys, especially traders, love nicknames.
Nobody on the trading floor wants to be called “James,” as in James E. Cayne, the former Bear Stearns CEO whose downfall coincided with the firm he helped build.
And it’s not “Jerome” Kohlberg, the LBO pioneer who appears briefly in this book as co-head of Bear Stearns’ corporate finance department: it’s “Jerry.”
Nor did the late “Bernard” Lasker, arbitrage pioneer, mentor to the author of this book, and NYSE chairman during the vicious 1970s bear market, go by “Bernard” any more than Curtis James Jackson III performs as, well, Curtis James Jackson III.
Bernard was “Bunny,” and Curtis James Jackson III is “50 Cent.”
And nobody but nobody calls Alan C. Greenberg, the author of the The Rise and Fall of Bear Stearns and the man most closely associated with that firm in its prime, “Alan.”
The reason traders on Wall Street go by nicknames, of course, is the same reason Cordozar Calvin Broadus began calling himself Snoop Dogg. It gives them credibility within their profession.
And for Ace Greenberg, that credibility was established early in life, when, like a lot of his peers on Wall Street, he learned the craft of buying and selling not from formal Wall Street training programs: he learned it from his father, who ran clothing stores in Oklahoma.
Indeed, so important was his father’s experience in shaping Ace’s rise to power in the meritocracy of Wall Street that Greenberg lists five of his father’s “truisms” at the end of this book, the very first one being “If you own something you think is bad, sell it today because tomorrow it will be worse”—which applies to stocks and bonds just as well as trousers.
But this book is not merely an instructive look at the humble origins of one of the great individual success stories on Wall Street, nor is it merely an insider’s view of one of the most spectacular corporate failures in American financial history.
It is payback.
Not, however, payback against a harsh and uncaring group of rumor-mongering hedge funds that some believe brought down Bear Stearns (“wolf-packs,” ex-Treasury Secretary Hank Paulson called them.) Indeed, readers will find no mention of the conspiracy theories that swirled in the days and weeks following Bear’s collapse—theories picked up and run with, in the main, by ignorant Senators and Congresspersons during the worst of the financial crisis.
In fact, Greenberg accepts the ending of Bear with an almost eerie equanimity throughout the book. He even calls it “our man-made disaster.”
But this quality becomes not so eerie as the reader comes to realize that Greenberg had wisely pulled millions, and millions, and millions of dollars out of the firm over the years by selling his shares as its stock kept rising. Indeed, Greenberg’s stock selling became a sore point with Jimmy Cayne, who took to ridiculing Greenberg in meetings for “not owning any.”
More fool Jimmy Cayne, of course: when Bear Stearns’ stock plummeted, Jimmy watched billions evaporate thanks to his lack of foresight.
And Ace delights in detailing that lack of foresight to the nearest million:
One shareholder who didn’t wait around for the merger [with JP Morgan] to be consummated was Jimmy, who sold his shares at $10.83, yielding $61.3 million. This outcome entitled him to membership in a rather exclusive club—consisting of individuals who have personally managed to lose more than $1 billion, not on paper but right in the wallet.
Since “Jimmy” was, by then, no longer a Bear Stearns employee, Ace rubs salt in the wound by charging a nickel a share rather than the low flat rate usually offered to insiders:
The trade cost $77,000, rather than the $2,500 maximum commission for employees. As always, I did what I felt was in the best interests of the firm. Nothing personal.
“Nothing personal,” writes Ace, when in fact the book is quite personal.
Indeed, the payback here—and Ace begins to detail his displeasure with Jimmy’s behavior, both personal and professional, starting around page 100, roughly halfway through the book—is the only thing that drags down the otherwise easy flow of Ace’s storytelling.
Invariably, Jimmy ranked very high [in the partnership rankings]. He was a producer, by all means, in a place with a lot of producers….
He could be charming when he wanted to—the technical term would be kissing ass—and he certainly worked hard at cultivating a friendship with me. Not that that ever stopped him when the percentages were announced from complaining that I’d somehow screwed him…
And, there’s the infamous “the elevator thing,” long a sore point with ex-Bear employees:
Why was it that a single elevator in the lobby had to be reserved for one person [Jimmy Cayne] when we had thousands of employees coming and going all day long?
And the cigar thing:
We had a rule that you couldn’t smoke in the building. I used to smoke an after-lunch cigar myself but quit when the city made it illegal. Jimmy kept right at it…
And the golf thing:
The hour of the Hilton financing discussion, it seemed, didn’t work for him. And that was why? Because it conflicted with his golf date.
More serious, of course, was the leverage thing, which Ace attributes to Warren Spector’s mortgage trading business rather than Jimmy himself:
If we were long $60 billion in mortgages and had $40 billion in short positions, I assumed our exposure was $20 billion. But what if we were long apples and short oranges? Then we weren’t necessarily hedged at all, were we? That, alas, to a painful extent proved to be the case.
There are many other such things that set the author’s teeth on edge—he delights in rebutting details from William Cohan’s book House of Cards, a major source for which appears to have been Jimmy himself—but our favorite is the infamous “China deal” that Jimmy trumpeted in the waning days of Bear’s public existence as a sure-fire saving grace for the firm.
The “China deal” was, on the surface, a $1 billion transaction with China CITIC Group, and it was pursued single-mindedly by Jimmy (at least, as Ace tells the story) and announced with much ballyhoo as the answer to the Bear’s shrinking cash reserves, despite much skepticism on Wall Street.
And Ace clearly sides with the skeptics:
China CITIC, according to the deal terms, would make a billion-dollar equity investment in us and…[sic] we would make a billion-dollar convertible-debt investment in China CITIC. If the math on that has you stumped, let me help you out. The net dollars headed our way: zero. For many of us, Jimmy’s characterization of this as “a groundbreaking alliance” had the unmistakable emperor’s-new-clothes ring.
Thus one of Wall Street’s oldest and most accomplished veterans makes it clear that corporate CEOs can be just as promotional and self-serving as any of the “rumor-mongering hedge funds” those same CEOs would rather blame for their crisis.
For that alone—and the stories of Wall Street’s earlier days, as well as the remarkably dispassionate, clear-eyed and un-misty account of the remarkable demise of a Wall Street firm—the book is worth reading.
I Am Not Making This Up
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The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.
Posted by Jeff Matthews at 4:04 PM