How Pot Helped Destroy Bear Stearns

In his new book House of Cards, William D. Cohan gets inside the company’s spectacular collapse—and details how a shocking newspaper story about the CEO’s pot-smoking triggered chaos inside the company. Read an excerpt.

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spectacular collapse—and details how a shocking newspaper story about the CEO’s pot-smoking triggered chaos inside the company. Read an excerpt.

By the fall of 2007, the two Bear Stearns hedge funds had imploded. Jimmy Cayne, the CEO of Bear Stearns, had undertaken a secret mission to try to put together a joint venture with the leading Chinese investment bank and he had almost died from septic shock during the week or so after he returned to New York City. He had also unceremoniously fired Warren Spector, the firm’s co-president along with Alan Schwartz. The relationship between Cayne and Spector, a wunderkind, had been deteriorating for years but reached the breaking point after the collapse of the hedge funds, which Spector oversaw—and after both he and Spector had been at a national bridge tournament in Nashville, after Cayne thought he had a deal with Spector that they both would not be playing bridge outside the office at the same time. By the end of September, a much-reduced Cayne, both physically and emotionally, had returned to his lair on the sixth floor of 383 Madison Ave. On the morning of November 1, Cayne woke up to a front-page article in the Wall Street Journal, written by Kate Kelly. Cayne had always had a love-hate relationship with the press and the Journal especially. Michael Siconolfi had covered Bear Stearns for years at the Journal. He then became an editor and turned the beat over to Charlie Gasparino, now a CNBC on-air editor. Now the Bear beat belonged to Kate Kelly. When he read the Journal story that morning about him, he was not happy to say the least…

“Then there’s this story about smoking marijuana with some broad in a bathroom. What are the chances of that?”…

Cayne was pissed. He believed Siconolfi and his “spawn” Gasparino and Kelly, were out to get him. (Despite Cayne’s anger at Gasparino, he would occasionally talk to him, as Cayne thought him a useful way to get information out into the market.) But he took comfort from the support he received from the Bear Stearns family. “You can get me on the phone anytime, anywhere, anytime,” he said. “There’s no protocol. There’s nothing. It’s simple. That’s how you do it. That’s how you create loyalty. These people would jump off a cliff for me. That’s how I feel. And whether it’s true or not it’s almost unimportant, because the bottom line is that’s what I walk around with. That’s my salvation. I don’t feel good about being that little piñata that gets the shit kicked out of it. But I also consider the sources. I consider Looney Tunes on the tube as being just a snake of massive proportions. But there isn’t anybody that doesn’t think he’s a snake. The cunt at the Wall Street Journal whose capability is zero but Spawned by Siconolfi.”

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street. By William D. Cohan. 480 pages. Doubleday. $27.95. ()

Cayne also saw Warren Spector’s fingerprints all over the article. “Spector got some bridge player to call up the Journal, with Sitrick & Co., Spector’s “strategic communications” firm, “greasing the skids,” Cayne said. He called Michael Sitrick a “murderer” and a “pure assassin” who “planted the article in the Journal.” He said the article was “interesting because they never had a source, [it was] all bullshit.” Cayne said he told the firm’s communications team he doubted whether the Journal would ever print the name of the person who accused him of smoking marijuana at the bridge tournament… The firm tried to convince the Journal not to run the article since there was no named accuser. But the Journal ran the story anyway. “Then there’s this story about smoking marijuana with some broad in a bathroom. What are the chances of that?”…

At the time, Cayne said, he did not recognize what the consequences of that article would be. “It was far more serious when you look at it in retrospect than it was at the time,” he said. “It was just massively irritating.” But Cayne was in the fight of his professional life. Aside from the titillation of the pot-smoking allegation, there was genuine concern on both Wall Street and at Bear Stearns with what the fallout of the firm would be in the fourth quarter—ended November 30—from its exposure to hard-to-value “Level 3 assets,” of which Bear had $20 billion, including $2.4 billion in subprime mortgages…

Not surprisingly, Bear’s board of directors was unhappy with the unflattering press coverage. “It was a particularly bad article at a bad time,” [board member] Vince Tese said…

Then there were the bankers and traders in fixed income who remained quite unhappy that Cayne had fired Spector unceremoniously and then brought embarrassing media attention to the firm. “Around us, firms are getting rid of people who did things wrong,” Paul Friedman said. “What did we do? We got rid of the only guy who understood how our business works, and we’re being run by this idiot. So there were a whole bunch of us that went to Alan, individually and jointly, and kept saying to him, ‘You’ve got to do something about this.’ He kept saying, ‘Don’t worry. We’re working on it. Jimmy’s going to retire in due time. Don’t worry. Don’t worry.’ Weeks and weeks and weeks go by and nothing. We in fixed income were probably the most arrogant about a lot of things, but we were also the angriest about losing Warren. Even as much as we blamed Warren for a lot of stuff, we were pretty angry about losing Warren. There were three of us who were particularly vocal: Dave Schoenthal, Mike Nierenberg, and myself… Nierenberg, I think, called Alan once a day and said, ‘When are you getting rid of Jimmy? You’ve got to get rid of Jimmy.’ To his credit, Alan said a couple of times, 'He’s not mine to fire,’ but basically he said, ‘Don’t worry. It’s gonna happen.’ We bugged Sam [Molinaro, Bear’s CFO] about it. We bugged Steve Begleiter [Bear’s head of strategy] about it. It was like screaming into the wilderness, ‘Somebody, do something about this guy. Won’t somebody rid me of this man?’”

The firm’s pride had been wounded…

Were these the seeds of the Cayne mutiny? “Yeah,” Friedman said, "except that we didn’t do it. We talked about it… we could have gotten 20 guys among the most senior to go up to Alan’s office. We talked about staging a sit-in: 'Let’s go tell them we’re quitting if they don’t do it. Yeah, yeah, we should do that. We should do that,’ and we all went back to our day jobs. We never did it.”

By the end of December 2007, Cayne decided he could no longer lead Bear Stearns and sought to get the approval of his board to retire and to appoint president Alan Schwartz as the new CEO. These events—Cayne’s retirement and Schwartz’s appointment as CEO—took place in the first week of January 2008. Two months later, Schwartz and Molinaro would be engaged in hand-to-hand combat against rumors that were pervading the market about Bear’s perceived lack of financial muscle. On the night of March 16, 2008, Schwartz, Molinaro, and the Bear Stearns’ board, including Cayne, Tese, and Ace Greenberg, the firm’s CEO before Cayne and still a member of both its board and its executive committee, voted to sell the firm to JPMorganChase for $2 per share rather than file for bankruptcy. The rest is now history.

Excerpted from House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan. © 2009. Extracted with permission from the publisher, DoubleDay, an imprint of the Doubleday Publishing Group, a division of Random House Inc.

William D. Cohan, a former senior-level M&A banker on Wall Street, is the author of The Last Tycoons: The Secret History of Lazard Freres & Co. Cohan's House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, will be published by Doubleday on March 10.