House of Cards (75 page)

In the end, Greenberg, Spector, and Schwartz overruled Cayne and Molinaro. The fateful decision to become the repo lender to the High-Grade Fund—to the tune of up to $3.2 billion at first—had been made.

A
T EIGHT O'CLOCK
on the morning of June 21, Marin made a new proposal to the creditors that it would provide $3.2 billion of financing to the High-Grade Fund, taking out all of the repo lenders if the lenders agreed to withhold margin calls on the Enhanced Leverage Fund. This proposal got little traction, and at 3
P.M.
, Marin made the offer of the $3.2 billion with no conditions. That night, Warren Spector was at a private dinner in Washington with other senior Wall Street executives to meet presidential candidate Senator Barack Obama. Spector introduced himself as working for Bear Stearns, “the current scourge of Wall Street.” At the same time that Spector was in Washington, Steve Schwarzman's Blackstone Group priced its highly anticipated $4.75 billion IPO at $31 per share. The offering, a huge success from Blackstone's perspective, briefly made Schwarzman worth close to $8 billion. The two lead managers of the deal, Morgan Stanley and Citigroup, hoovered up around $100 million of the $202 million in underwriting fees. (Bear Stearns was a co-manager on the deal.)

By the next afternoon, Spector was back at his office in New York spending hours on the phone with other Wall Street executives. His message to them was that Bear Stearns had finally decided to step up in a significant way to help the hedge funds. But it was not quite what the market expected. Spector told his Wall Street colleagues that Bear would become the new repo lender—up to a total of $3.2 billion—to the High-Grade Fund
only
and would do nothing for the Enhanced Leverage Fund, effectively signaling that the second fund would fail and be liquidated. “The uncertainty in the marketplace surrounding these funds has made an orderly de-leveraging difficult,” Cayne said in a press release on June 22, the same day the Blackstone IPO started trading and moved up 17.5 percent. “By providing the facility, we believe we stabilize financing, reduce uncertainty in the marketplace and allow for an orderly process to de-leverage the High Grade fund.” He said nothing about the decision not to support the Enhanced Leverage Fund. (When the Enhanced Leverage Fund failed and was liquidated, Barclays lost virtually all of its $400 million; a civil suit between the parties, alleging fraud and deceit, among other charges, was filed.)

The same day that Bear announced its half-baked rescue plan for the funds, the decision was quietly made—not surprisingly—to shelve the plan for Everquest's IPO, and the registration statement was withdrawn from the SEC. “The wacko Everquest deal was saved from being the dumbest idea ever in the history of the world by not being done,” Paul Friedman said. “I mean, ‘Let's take CDO equity and residuals and all this stuff, and let's package it up and do a deal, and sell it to Mom and Pop.' Nobody's ever come up with a stupider idea in history. Had the funds not blown up, I think there's a chance they would have actually tried to bring it to market. That's another indication that there were no grown-ups minding the shop.”

Asked at the time about the happenings at the Bear Stearns hedge funds, Treasury Secretary Henry Paulson said, “I tried to make clear we will be dealing with the subprime issue for some time and that there will be losses along the way. It's a natural outgrowth of what we've seen in the housing market and certain lending practices. As mortgages continue to reset, this will take time to work its way through the system. But I continue to believe that this risk is largely contained. It doesn't pose a significant risk to the economy overall.”

B
Y
J
UNE 26
, the High-Grade Fund had sold additional assets into the market, reducing to $1.6 billion Bear Stearns's repo facility to that fund. Nothing, though, was being provided to the Enhanced Leverage Fund. Bear Stearns's decision to take out the repo lenders to the High-Grade Fund created an interesting dynamic. Those firms, such as Merrill Lynch, that had seized their collateral from the funds earlier got badly burned with losses when they tried to sell the securities in the market. Merrill begged Bear to be taken out whole after the announcement, to no avail. Other firms, such as Cantor Fitzgerald and Dresdner Bank, that were slower to catch on to the seriousness of the situation got out whole. “It was astounding to me,” Friedman said. “Cantor Fitzgerald and Dresdner Bank were each lending Ralph well north of a billion dollars, neither of whom had a mortgage desk, neither of whom had any idea what the collateral was, and got their marks to make margin calls by calling Ralph up and asking him what the stuff was worth. So the true irony of this is the firm finally agrees to step in and take out the lenders because we're concerned JPMorgan and the banks and people that we cared about would hate us, and we thought we could help the investors in the funds with an orderly liquidation. In fact, those banks had already blown us out. Cantor benefits, who cares? We bailed out Cantor Fitzgerald. We bailed out
Dresdner Bank, who immediately terminated everything else they had on with us and told us to lose their phone number. We bailed out Citibank, who treated us like a leper from then on, and did everything they could to crush us, and we got saddled with a billion and a half worth of stuff.”

Now the hard work of figuring out what the firm had just agreed to buy had to begin. “Between June and July, we were getting our arms around what the collateral was,” Friedman said. This was no easy task. “It took two or three weeks to mark,” he explained. “They had about a third of the hedge fund position marked in a week. They had the rest of it marked in another two or three weeks. It literally took a dozen people on the mortgage desk night and day, and a bunch of our research people night and day and weekends, three weeks to value this stuff, which tells you just how illiquid it was.”

By the time they did figure out what most of it was worth, the firm had miscalculated badly. “The trading desk was marking it to where it really belonged, which was getting lower and lower,” Friedman said. “Our beliefs that there was equity in both the position and the fund were both wrong. We thought there was $400 million-ish of cushion, and in fact, as it turned out, we missed by like $1 billion out of $1.5 billion. It was not even close. You would think you could get it to the nearest billion, and a lot of it was the market deteriorating dramatically in that five or six weeks. But it was just a guess to begin with.”

I
T WAS AT
this unfortunate moment, in the midst of the ongoing round-the-clock valuation of the High-Grade Fund's assets, that the
New York Times
revealed, on June 28, that for the previous two and a half years, Rich Marin had been writing a personal blog about his love of cross-country motorcycle trips, his family, and movies. There were also a bunch of pictures from his early June 2007 trip to the Middle East—Saudi Arabia, Jordan, and Israel—for what appeared to be a business trip to meet the local businessmen who were involved in a joint venture with BSAM. There were photos of Marin and his colleagues flying on the private jet of one of their partners—“We hitched a ride,” he wrote—and a description of some leisure activities. “Late afternoon brought a much needed nap and a visit to the health club and the best Indonesian/Swedish massage of my life,” he wrote. “I staggered back to my room and off we went for dinner at the home of one of our partners.” On June 23, he summed up the past few weeks at the office as “trying to defend Sparta against the Persian hordes of Wall Street. Nothing like a good dogfight 24×7 for a few weeks to remind you why you chose the life you chose.
The good news is that after two embattled weeks both I and my loyal staff are still standing to fight another day.”

Marin warned Spector the
Times
article was imminent. The
Times
article appeared that morning, and when Marin arrived at Spector's office he was informed that he had been relieved of his duties as head of BSAM. The ill-timed publicity about Marin's personal blog served as useful cover for a decision that was all but inevitable. Spector asked him to stay on as an advisor to the firm, which he did until the end of 2007. He continued to receive his salary, but the firm did not pay him a bonus. His U-5 form indicates he was not fired for cause.

T
HAT SAME DAY
, the firm announced that Marin's replacement would be Jeffrey B. Lane, sixty-five, a longtime Wall Street executive and chairman of Neuberger Berman and then vice chairman of Lehman Brothers after Lehman bought Neuberger. “I am proud to be joining Bear Stearns,” he said, “and I look forward to working with the BSAM team. I believe in the integrity of the franchise and I am excited about the prospect of continuing to build the BSAM organization.” Spector had been thinking about hiring Lane, his occasional doubles partner on the tennis court, for some time, and the hedge fund blowup brought the decision to a head. (He had also tried to hire Marc Lasry, the CEO of Avenue Capital, to run the asset management business, but that did not materialize.) Lane told the
Wall Street Journal
that turning around BSAM would be a slow process. “It's like painting the Verrazano Bridge,” he said. “You start painting and you keep going.” Cayne said the reason for hiring Lane was to restore “investor confidence in BSAM.” Lane spent a few days debriefing Marin about what had been transpiring at the hedge funds but quickly found he had little use for him.

Then Landon Thomas Jr., at the
New York Times,
interviewed Cayne to get his reaction to the hedge fund debacle. “James E. Cayne has a bellyache,” he wrote. “And it is not from the crash diet that has caused Mr. Cayne … to shed 20 pounds over the last year.” The weight loss, Cayne told Thomas, came from cutting out “red wine, bacon and salmon for breakfast and late-night deliveries from Bobby Van's steakhouse.” Cayne told Thomas the hedge fund losses were a “body blow of massive proportion.” He added, “I'm angry. When you walk around with a reputation for being the most rigorous risk analyzer, assessor, controller and that is trashed, well, you have got to feel bad. This is personal.” He seemed to be taking it personally, as if the chink in the firm's armor was also a chink in his self-esteem. “In the last 15 years, I have never walked into a room
or been at a dinner party where I did not feel that when people looked at me they thought I was O.K., successful, agile,” he said. “That might have changed. I feel like people now look at me with a question mark.” Cayne did not mention that Marin had been summarily demoted and Cioffi relieved of his day-to-day management of the fund or say anything about the fate of Spector, who of course was in charge of BSAM. (Cayne had invited Spector to the interview with Thomas but Spector did not show, much to Cayne's irritation.)