House of Cards (76 page)

Cayne also did not mention that he had by this time resumed his summer Thursday afternoon ritual of taking a seventeen-minute, $1,700 helicopter ride from the East Side of Manhanttan to the Hollywood Golf Club, in Deal, New Jersey, and playing a quick round of golf. He did this on both June 14 and June 21 in the midst of the tense negotiations. Indeed, records showed that between June 9 and July 15, Cayne played about twenty rounds of golf at Hollywood. He also played Friday mornings, and spent the time after golf at his home in Elberon attending to business.

A
LL THE COMMOTION
in the Bear hedge funds was starting to make the market very nervous. Brad Hintz, a research analyst at Sanford Bernstein and a former Lehman Brothers CFO, said that the problem was “more than a Bear Stearns issue, it is an industry issue. How many other hedge funds are holding similar, illiquid, esoteric securities? What are their true prices? What will happen if more blow up?” That answer seemed to be provided by Bill Gross, the CEO of PIMCO. Defaults on subprime loans would “grow and grow like a weed in your backyard tomato patch,” he said in a June 30 interview. “There are hundreds of billions of dollars of this toxic waste, and whether or not they're CDOs or Bear Stearns's hedge funds matters only to the extent of the timing of the unwind. Alongside death and taxes you can add this to your list of inevitabilities: the subprime crises is not an isolated event and it won't be contained by a few days of headlines in the
New York Times
. And it will not remain confined to a neat little petri dish in some mad financial derivative scientist's laboratory.” There was also the small matter that the SEC had started an investigation into the collapse of the hedge funds. Despite the firm's mounting woes and negative publicity, the stock was holding up, closing on July 2 at $143.16 a share, down around 18 percent from its all-time high.

On July 17, Cayne announced the seemingly inevitable news that the hedge funds were kaput. “During June,” he wrote, “the Funds experienced significant declines in the value of their assets resulting in losses of net asset value. The Funds' reported performance, in part, reflects the
unprecedented declines in the valuations of a number of highly-rated (AA and AAA) securities.” He then lowered the boom. “The preliminary estimates show there is effectively no value left for the investors in the Enhanced Leveraged Fund and very little value left for the investors in the High-Grade Fund as of June 30, 2007. In light of these returns, we will seek an orderly wind-down of the Funds over time. This is a difficult development for investors in these Funds and it is certainly uncharacteristic of BSAM's overall strong record of performance.” In closing his letter, he tried to be upbeat and to regain the trust of the firm's clients. “Our highest priority is to continue to earn your trust and confidence each and every day, consistent with the Firm's proud history of achievement.”

N
ASHVILLE

he day after Bear announced the closing of the hedge funds, both Cayne and Spector headed to Nashville, Tennessee, to play bridge in the Spingold Knockout national tournament. They were not on the same team, of course, but each of them was out of the office for the next ten days. Not only were they hard to reach at times—as previously noted, no cell phones or BlackBerry devices are permitted during the intense tournament play—but the fact that both men were away from New York and the office at such a critical time violated Cayne's dictum to Spector that both men could not be out of the office at the same time playing bridge. Since a sponsor's team for such an event is lined up months in advance, the chance that Cayne was surprised by Spector's attendance at the event seems hard to fathom.

W
HILE
C
AYNE AND
Spector were in Nashville playing bridge, Doug Sharon flew down to New York from Boston for another segment on his lonely journey to convey the severity of the collapse of the hedge funds from his clients' perspective to any Bear Stearns senior executive who would listen to him. He had twenty or so clients who had invested around $65 million in the hedge funds and had another $670 million of assets managed by the firm. He also noted that these clients had as much as $2.6 billion in other investable assets not managed by Bear Stearns, a potential source
of new business for the firm. His message—similar to what it had been previously to Cayne, Solender, and Spector—was that the firm needed to take care of all the clients that had invested in the hedge funds. On his July 25 trip to New York, one of those steamy days when it's unbearable to be outside as soon as the sun rises, Sharon had a nine o'clock meeting with Sam Molinaro to go over the situation with his clients. In the Starbucks on Madison Avenue near 383 Madison Avenue, he ran into John Howard, the head of Bear Stearns's successful private-equity funds. Sharon started a mini-rant about how the firm didn't seem to be doing the right thing for its clients in the hedge funds and, as a result, he was beginning to lose a little faith in how the firm was being run. He told Howard he had sold a bunch of his stock and that he wouldn't be surprised to see the stock hit $60 a share before too long, even though then the stock was around $120 per share. “I hope you're wrong,” Howard told him, “because I have around 700,000 shares of stock.”

After this chance encounter, Sharon called up Ace Greenberg, told him he was in town, and wanted to see if he could stop by. He told Greenberg he had a nine o'clock meeting with Molinaro. Greenberg told him to stop by fifteen minutes before. Sharon respected Greenberg. “After meeting with him,” he said, “you always walked out of there and felt, ‘Man, this guy is just a mensch!’” In a previous meeting with Greenberg a month or so before, he'd introduced him to one of his clients with money in the hedge fund. “Let me just tell you something,” Sharon's client told Greenberg. “I have the utmost respect for you as a businessman, but I have to tell you the communication with the clients has been pathetic.” Remembered Sharon: “That's the word he used, ‘pathetic.' Ace told him, ‘Look, the problem we have is the lawyers are telling us what to do and what not to do.'… [The client is] about the same age as Ace, maybe a few years younger. He said, ‘I run a business. I have hundreds and hundreds of employees. We do billions of dollars' worth of transactions a year. I have lots of lawyers that give me a lot of advice. Sometimes I listen to them. Sometimes I don't. Sometimes you have to just make the tough calls and do the right thing, and I think that you guys are just frozen here, and I think it's really hurting your credibility.’”

In July, when Sharon saw Greenberg, he asked him if he had seen the monthly statements from “Ralph's Funds,” as they were known inside the firm, and how the statements implied Cioffi was investing one way when he was actually investing another. Greenberg said he had not seen the statements but wanted to know what Spector had said when Sharon told him about them and made his case for taking care of the clients. When Sharon related what Spector had told him—“What was it that Ace
once said? ‘Hey, you can't fly like the eagles and poop like a canary'”— Greenberg couldn't believe it. He was red hot. He called up Molinaro on the phone, right in front of Sharon, and demanded that he push his meeting with Sharon until later. “We have to have an executive committee meeting right now!” Greenberg screamed into the phone.

Sharon has no idea what the outcome of that meeting was, but at eleven o'clock he did meet with Molinaro, Solender, and Begleiter to discuss the situation with his clients. “What do you think it would take for these guys to settle?” Molinaro asked him.

“I think you've got to give these guys fifty or sixty cents on the dollar,” Sharon said. “The rest will be a tax deduction and they'll feel treated fairly.”

“How much business do we do with these accounts?” Molinaro asked.

“I don't know,” Sharon answered. “Probably $5 million a year.”

“And how much did they lose in the fund collectively, this group you're showing me?” Molinaro asked.

“About $35 million,” Sharon said.

“You think they'd settle for half to two-thirds?” Molinaro said. “I don't think I would pay $20 million for a $5 million book of business.”

Sharon was incredulous. “Sammy, you're missing the point,” he said. “You may end up paying them $20 million anyway. These guys aren't going to go away. These guys are absolutely, positively going to sue Bear Stearns for their money. They feel like they've been misled. I've shown you all the documentation they've received—which they're going to put in the courtroom—that shows that Ralph misled them for eighteen months. He led them in the correct direction and then invested in a different way and basically lulled them into a sense of false security.”

While Cayne and Spector were in Nashville playing bridge, the rapidly deteriorating condition of the hedge funds forced the firm into having to decide whether the funds should file for bankruptcy. The decision was complicated legally, since the funds were domiciled in the Cayman Islands for tax purposes, while most of the assets, the investors, and the people who worked at the funds were in the New York area. At one point, the decision was made to convene a special executive committee meeting to discuss the bankruptcy filing of the funds. Cayne made himself available for the meeting. But Spector was not so accommodating. He called Molinaro, who had arranged for the special meeting, from Nashville. “I thought he was going to kill me,” Molinaro said. “He was ripping my head off. He said, ‘I can't be available. I'm not available then. What do we have to talk about?' I said, ‘Warren, we have to make a decision
about putting this thing in bankruptcy. There are a ton of issues. We have to discuss this.' So I got a hold of Jimmy. He's available. I told Warren, ‘If you're not available, we'll try to figure out how to make it work, but you need to be on this call.' He must have been playing or something. I don't know what the hell was going on. He ultimately joined the call in progress.” On July 30, the hedge funds' boards of directors authorized the funds to file petitions for liquidation under the Cayman Islands' Companies Law under the supervision of the Cayman Grand Court. Subsequently, both a U.S. bankruptcy court and a U.S. district court of appeals struck down the legitimacy of the Cayman Islands venue for the filing. As a consequence of the filing, Bear Stearns seized $1.3 billion of underlying collateral—Cioffi's panoply of illiquid mortgage-backed securities— that it had been financing for all of one month and absorbed it onto the firm's balance sheet.