KEY POINTS:
The departure of the man dubbed the "Harry Houdini of the boardroom" may have opened up investment bank Bear Stearns to the risk of a takeover.
Bear Stearns' James "Jimmy" Cayne yesterday joined the former heads of Citigroup and Merrill Lynch as casualties of the US sub-prime mortgage
crisis.
Cayne has handed over the role of chief executive officer of the securities firm to his hand-picked successor, staying on as chairman as Bear Stearns tries to recover from the collapse of the sub-prime mortgage market.
Alan Schwartz, the firm's 57-year-old president, will take over as CEO immediately, the New York-based firm said in a statement yesterday.
Some say it's amazing Cayne hung on as long as he did.
"CEOs at other financial institutions who were less impacted than Bear Stearns by the sub-prime crisis have been forced out, yet Jimmy Cayne has managed to cling on and will even continue as chairman," said Octavio Marenzi, chief executive officer at Boston-based consulting firm Celent. "He is truly the Harry Houdini of the boardroom."
Cayne's departure follows that of former Citigroup CEO Charles Prince and Merrill Lynch's Stan O'Neal, who have also left as the slump in mortgage-related securities erodes earnings.
Bear Stearns' fourth-quarter loss of US$854 million ($1.1 billion) was the first in its history and the company's market value plummeted 57 per cent in New York trading during the past year, more than any rival firm.
"This is quite a radical change for Bear," said Brad Hintz, an analyst at Sanford C. Bernstein & Co in New York. "This is a company which has had only two chairmen/CEOs in the last 18 years."
Bear Stearns, the fifth-biggest US securities firm by market value, fell US$5.08, or 6.7 per cent, to US$71.17 on the New York Stock Exchange.
Analysts said yesterday that Bear Stearns' management shake-up could make the investment bank a takeover target, but the possibility of more write-downs and chance of legal entanglements from the sub-prime mortgage crisis could sideline suitors for now.
Bear Stearns, with market capitalisation of about US$9.1 billion, trades at about 8.5 times fiscal 2008 earnings estimates, less than half the financial sector average of 17.4 times earnings.
"Outsiders may now be attempting to take control of the company. He [Alan Schwartz] must fight this off," said Richard Bove, an analyst with Punk Ziegel & Co.
A Brooklyn native and graduate of Duke University in Durham, North Carolina, Schwartz was drafted as a pitcher by the Cincinnati Reds baseball club but injured his elbow and never reported to the team. He started at Bear Stearns' Dallas office in 1976 as an institutional stock salesman.
Alan "Ace" Greenberg, who became Bear Stearns CEO in 1978, took notice after Schwartz called him with ideas for improving the stock-research department. Schwartz moved to New York and in 1979 became head of research and investment strategy.
He was named executive vice-president in 1985 and promoted to co-president, with Warren Spector, six years later.
"We're much better positioned for difficult markets than we were six months ago," Schwartz said. "But there is a lot of noise out in the market, we need to keep our strong focus on serving our clients and managing our way through."
Cayne is turning over day-to-day control amid a crisis his firm helped create. The company spurred last year's crash in the market for home loans to people with poor credit when two of its hedge funds, which invested in securities tied to the mortgages, collapsed in July, prompting investors to shun the debts.
About 30 per cent of Bear Stearns' fixed-income revenue comes from mortgages and related securities, according to estimates from Hintz at Sanford Bernstein. The company's US$1.9 billion mortgage writedown wiped out revenue in the three months ended November 30.
Bear Stearns shuttered the two failed hedge funds and Cayne ousted Spector, whom investors considered the heir-apparent.
Ralph Cioffi, the manager of the two funds, left last month amid probes by the US Securities and Exchange Commission and the US Attorney in Brooklyn. The Government investigators haven't accused Cioffi or Bear Stearns of any wrongdoing.
Cayne told board members at a meeting last month that he was considering stepping down, and the board didn't push him, Bear Stearns director Henry Bienen said yesterday.
The world's largest banks and securities firms have reported at least $97 billion of writedowns and credit losses stemming from the collapse of the sub-prime mortgage market and ensuing credit-market contraction, according to Bloomberg data.
WALL ST'S RICHEST CEO
James Cayne, 73, appointed as CEO of Bear Stearns in 1993, was the longest-serving chief executive on Wall St.
He holds 4.9 per cent of Bear Stearns shares, making him the firm's second-largest individual investor after billionaire Joseph Lewis, data compiled by Bloomberg show.
Cayne ranked as Wall St's richest CEO, with US$1.3 billion ($1.7 billion) of assets, according to Forbes magazine's 2007 billionaire survey.
He left Purdue University before graduating to join the United States Army and was hired 38 years ago by Bear Stearns.
A world-class bridge player, Cayne was first promoted to president by Alan Greenberg in 1988.
- BLOOMBERG AND REUTERS
