It's A Deal

January 8, 2008

That's One Way To Lower A Handicap

Jimmy Cayne is out of the top job at Bear Stearns, but how much will actually change at the embattled firm?

The contrast in overhaul styles of Bear and its brethren like Merrill and Citi is interesting, and has already opened a can of worms for the smaller shop. Bear is putting in place Alan Schwartz, a long-time (more than 30 years) company executive who, while highly regarded, may find it difficult to noticeably change its direction. And how does one look past the fact that he was president of the firm while its near-implosion was in high gear?

Merrill and Citi, meanwhile, have gone in opposite directions, bringing in outsiders – albeit heavy hitters on Wall Street – to turn things around. It’s too soon to tell if that strategy will work, but at least they can make a stronger argument that they are “agents of change.” (Hey, we’re told that’s what the voters want, right? In fact, if Hillary loses maybe she can run an investment bank. After all, she has probably visited one once or twice.)

Punk Ziegel analyst Dick Bove has been a long-time critic of Cayne (and supporter of Schwartz), calling for the CEO’s ouster for some time. “His maintaining the post of chairman is totally inappropriate and an indication that this company’s board has no intention of placing the shareholder first,” Bove says. “As chairman, Mr. Cayne may be entitled to receive compensation of $20 million-plus per year. What is the justification for this? Bear Stearns stock is almost back to the high that it sold at in late 2000. What has the shareholder received from Mr. Cayne’s policies?”

Well, without Cayne we wouldn’t have been treated to the detailed stories of his golf (the news should do wonders for his handicap) and bridge games, and his time management skills in general, nor would we have read the cheap shot by the Wall Street Journal alleging he is a pot smoker.

What did in Cayne – along with some of his peers – is a phenomenon as old as investing itself: greed. From here, it looks like he and his firm made outsized bets on the mortgage and credit derivatives market without a corresponding focus on what would happen when the party came to an end. Plenty of others have done the same; they’re just larger and more diverse.

Schwartz is walking into a most difficult spot. His days as a stud pitcher for Duke may have offered some good tests, but didn’t necessarily prepare him for the hornets nest he’s stepping into now: the legal troubles connected to the firm’s failed hedge funds aren’t going away anytime soon, and if he really is to turn things around at Bear he’ll likely have to do things he and his management team have refused to do in the past. All the while he may be fending off advances by would-be suitors who see a bargain in Bear.  (The stock is down by about 50% in the past year, though it edged up by close to 2% Tuesday.)

We wish him well.