Kicking back in his swivel chair, James E. Cayne surveyed the bond futures and currency quotes on the flickering Bloomberg screen at the center of his sweeping, half-moon desk. The US was on the verge of attacking Iraq, and the dollar was being sold down by investors.
Cayne, the chairman and chief executive of Bear Stearns, could see that his stock was holding steady, as it had for more than a year. But he was thinking about his traders just down the hall, making big bets on the markets.
PHOTO: NY TIMES
"I'll tell you what worries me," he said, "that we might be doing something stupid."
By any standard, Cayne and his top executives at Bear Stearns have accomplished too much this year for their actions to be called stupid.
In what will probably be one of the worst years ever for Wall Street, Bear Stearns reported that its earnings rose 55 percent for its quarter ended Feb. 2. Its return on equity of 19 percent is the street's highest, and the firm has emerged nearly unscathed by last year's banking scandals.
A dominant bond division and the firm's relatively modest presence in the imploding stock market has set Bear Stearns apart from most of its banking peers. Indeed, Bear Stearns is one of the few Wall Street firms that is hiring bankers, and hardly a day goes by when Cayne, better known as "Jimmy," does not get a call from a senior-level banker at a rival firm seeking to make a move.
Life has been good for Cayne -- so much so that he was able to duck out of the office for a weeklong vacation earlier this month to participate in a world-class bridge tournament in Philadelphia.
Still there is a restlessness to Cayne, who is 69, during what should be the time of his life.
Jjust about right
"We are hitting on all 99 cylinders, so you have to ask yourself: What can we do better? And I just can't decide what that might be."
Analysts, while complimentary of the firm's performance, warn that when the equity markets do recover, Bear Stearns will once again lag behind the competition. "They are a great fixed-income house," said Brad Hintz, a brokerage stocks analyst at Sanford C. Bernstein. "But they have been losing market share in investment banking for three years now."
Cayne remains buoyant. "Everyone says that when the markets turn around, we will suffer," he said. "But let me tell you, we are going to surprise some people this time around. Bear Stearns is a great place to be.
Such words of confidence coming from a Wall Street executive seem unusual these days.
Eliot Spitzer, the New York State attorney general, will wind up his investigation into banking practices within weeks by releasing a stream of findings that will chronicle the banking excesses of the bull market. Lawyers are preparing to file class action suits for billions of dollars, and investment banks all across the street are laying off senior dealmakers.
But at Bear Stearns, everyone seems to be happy. The stock is near its 52-week high, Moody's recently upgraded the bank's credit outlook from neutral to positive, and in a bit of a surprise, Fortune magazine recently ranked Bear Stearns as the best financial firm to work for.
To a large extent, Bear's success today is the direct result of its weaknesses during the stock market boom in the late 1990s.
Where firms like Morgan Stanley and Goldman Sachs dominated in all facets of issuing stocks, Bear Stearns was a laggard. Its core fixed-income business suffered as investors piled into stocks and ignored bonds.
Indiscrete
On the positive side, the bank did not have the larger-than-life characters like Jack Grubman, the telecommunications analyst at Salomon Smith Barney, or Frank Quattrone of Credit Suisse First Boston, who attracted the eyes of the regulators.
For a firm that had been investigated by the Securities and Exchange Commission for having done back office work for some notorious bucket shop brokerage houses in the mid-1990s, being out of the scandal spotlight was a nice change for bank executives.
As has been the case throughout its history, Bear Stearns' top officials have not been shy in rewarding themselves for a job well done. Last year, Cayne took home US$18 million in compensation -- US$10 million of it in cash -- more than any other Wall Street chief. His co-presidents, Alan D. Schwartz and Warren J. Spector, made US$17 million each.
Cayne makes no apologies for the pay scale. "This is not an ordinary business," he said. "My father was a patent attorney, and he never made more than 75 grand in his whole life. But if I don't pay my guy US$1 million, nine of my competitors are willing to pay him four times that."
Who's laughing now?
Bear Stearns' time in the wilderness during the bull market was a frustrating period for the company's top management: the stock price suffered compared to those of their peers and a number of high-level bankers defected, seduced by piles of money from competing firms.
Although Bear Stearns has been a public company since 1985, it is still run very much like a partnership. The executive committee, which includes Cayne, Spector, Schwartz and Alan C. Greenberg, the firm's previous chairman and chief executive officer, meets every Monday to discuss strategic issues.
For much of 1999 and 2000, Bear Stearns executives debated various solutions that would enable them to compete more effectively. The firm inaugurated a stock options plan, to provide more financial lure for its midlevel bankers. It also initiated a somewhat frantic expansion of the European business.
But as the markets soared, the firm seemed in danger of being left behind.
Cayne, Schwartz and Spector, who together own more than US$700 million in stock, began to discuss the possibility of finding a suitor for Bear, say a number of former Bear Stearns bankers who were privy to these discussions.
When Donald B. Marron, the chief executive of PaineWebber, sold out to Union Bank of Switzerland for US$12 billion in 2000, that was the last straw for Cayne, say the bankers. Cayne, with his top executives, began to entertain offers more enthusiastically. Schwartz traveled to Europe and met with a number of banks. Cayne said publicly that he might consider a sale.
Neither an appropriate buyer nor price materialized. Instead, bank management took a different tack: Unable to find a match and unwilling to spend the vast sums to compete in the market bubble, Bear Stearns retrenched. Expenses were slashed, and the firm laid off close to 1,300 employees, becoming one of the first Wall Street firms to cut back on staff.
The timing was perfect. As the stock market crashed, interest rates continued to sink, and investors pulled out of the stock market and plowed their money into Treasury bonds and real estate. Bear Stearns' core mortgage businesses thrived, and the firm's absence from the elite group of stock underwriters was no longer a problem.
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