BEAR CEO'S HANDLING OF CRISIS RAISES ISSUES

Cayne on Golf Links, 10-Day Bridge Trip Amid Summer Turmoil

A crisis at Bear Stearns Cos. this summer came to a head in July. Two
Bear hedge funds were hemorrhaging value.

Investors were clamoring to get their money back. Lenders to the funds
were demanding more collateral. Eventually, both funds collapsed.
During 10 critical days of this crisis -- one of the worst in the
securities firm's 84-year history -- Bear's chief executive wasn't
near his Wall Street office. James Cayne was playing in a bridge
tournament in Nashville, Tenn., without a cellphone or an email device.

In one closely watched competition, his team placed in the top
third.

As Bear's fund meltdown was helping spark this year's mortgage-market
and credit convulsions, Mr. Cayne at times missed key events.

At a tense August conference call with investors, he left after a few
opening words and listeners didn't know when he returned.

In summer weeks, he typically left the office on Thursday afternoon
and spent Friday at his New Jersey golf club, out of touch for
stretches, according to associates and golf records. In the critical
month of July, he spent 10 of the 21 workdays out of the office,
either at the bridge event or golfing, according to golf, bridge and
hotel records. Mr. Cayne evidently didn't court business on the links,
as some CEOs do. "The golf course for him was an escape," says John
Angelo, a hedge-fund client and frequent golf partner.

Another golf partner, talk-show host Maury Povich, says: "Believe it
or not, many words are not exchanged about business." During the
bridge event, at a time when Bear's executive committee in New York
was meeting almost daily, Mr. Cayne took part by phone, then played
bridge most of the afternoon. In a short interview, Mr. Cayne declined
to address his performance or his focus on Bear's summer crisis.

Other Bear executives scoff at any notion that Mr. Cayne, 73 years
old, isn't fully engaged.

They say he reached out to clients this summer and has led by
effectively delegating responsibilities to deputies. "Anyone who
thinks that Jimmy Cayne isn't fired up every day and ready to get to
work hasn't been living in my world," says Alan Schwartz, Bear's
president. He notes that over Labor Day weekend, Mr. Cayne flew to
China to help seal a partnership with a Beijing investment bank.
Still, Mr. Cayne's actions amid the turmoil contrast with the hands-on
roles of peers such as James Dimon of J.P. Morgan Chase & Co., Richard
Fuld Jr. of Lehman Brothers Holdings Inc. and Lloyd Blankfein of
Goldman Sachs Group Inc. In August, Messrs. Dimon and Fuld got
personally involved in negotiations for new financing terms on the
sale of a Home Depot Inc. unit that had lost value amid the squeeze.

Mr. Blankfein canceled plans to spend the last two weeks of August at
his beach house, missing a chance to spend time with his sons before
they headed to college.

Through the summer's market gyrations, Mr. Blankfein frequently
visited Goldman mortgage desks. The fund trouble was a shock for Bear,
which was known as one of the Street's savviest risk managers.

For years the firm relied on a system of "ferrets," or managers who
monitored trades, to spot problems.

Potential issues were reviewed in weekly meetings, at which Alan "Ace"
Greenberg, the 80-year-old executive-committee chairman who led Bear
until 1993, was an active participant. Nowadays, say people with
knowledge of the gatherings, the firm's risk-review meetings are held
more than once a week, and after years of spotty attendance, Mr. Cayne
is a more-regular participant. The tough-talking Mr. Cayne personifies
Bear's aggressiveness. A onetime scrap-iron salesman, he joined Bear
in 1969 and rose quickly in the brokerage division, catering to
wealthy individuals. He developed a rapport with Mr. Greenberg, who
shared his love of bridge, and the two frequently played after hours
at the Regency Whist Club in New York. In 1993, Mr. Cayne unseated Mr.
Greenberg to become Bear's CEO. Mr. Greenberg referred questions to a
Bear spokeswoman. Over the next 14 years, Bear expanded and its stock
price rose nearly 600%. Mr. Cayne made some progress in turning the
firm, a trading powerhouse, into more of an investment bank that helps
companies with financing and mergers. Colleagues say he has been good
at developing young talent, such as Chinese-born Donald Tang, who
eventually became a vice chairman and chief of Bear's Asian
operations. Mr. Cayne's management style at Bear headquarters in
Manhattan is to strategize in small groups in his private sixth-floor
office, often wielding a lit cigar.

He often seeks consensus, after consulting associates. Mr. Cayne is "a
great captain" who's made a "tremendous contribution to growing a very
significant franchise" over many years, says David Winters, a former
chief of mutual-fund firm Franklin Mutual Advisers LLC, long one of
Bear's larger institutional shareholders. For the year 2006, Mr. Cayne
took home $34 million in pay and became the first Wall Street chief to
own a company stake worth more than $1 billion. Although the value of
his stake has since fallen, along with Bear's share price, he remains
one of the firm's single biggest investors, according to public
records. He has resisted overtures to sell Bear. In 2002, when Mr.
Dimon, then head of Bank One Corp., raised the possibility of buying
Bear, Mr. Cayne didn't give the idea much consideration, according to
people to whom he spoke.

Mr. Cayne told members of Bear's executive committee he would do a
deal only for a significant stock price premium, a big personal payout
and the use of a private jet, say people familiar with the
conversation. The takeover idea ultimately faded away. Mr. Cayne
revels in being a Wall Street maverick.

He has described his disinclination to travel for business matters,
saying privately he wouldn't meet with President Bush about economic
issues unless the president came to Bear's New York offices. He is
blunt.

Investment-firm chief Alexandra Lebenthal brought her 11-year-old son
to visit Bear a few years back. She says she introduced him to Mr.
Cayne, who pulled her aside and said, "That kid's got a rotten
handshake. He's going nowhere in life." Ms. Lebenthal, chief of a unit
of Israel Discount Bank of New York, says she instructed her son on
the importance of a firmer handshake. Mr. Cayne, who has also used
bridge to help recruit clients, considers tournaments a welcome break,
say people who've spent time with him at the events. He has played in
at least three so far this year, staying from a few days to over a
week at each. Attendees say Mr. Cayne has sometimes smoked marijuana
at the end of the day during bridge tournaments. He also has used pot
in more private settings, according to people who say they witnessed
him doing so or participated with him. After a day of bridge at a
Doubletree hotel in Memphis, in 2004, Mr. Cayne invited a fellow
player and a woman to smoke pot with him, according to someone who was
there, and led the two to a lobby men's room where he intended to
light up. The other player declined, says the person who was there,
but the woman followed Mr. Cayne inside and shared a joint, to the
amusement of a passerby. Mr. Cayne denied emphatically that such an
incident occurred. "There is no chance that it happened," he said.
"Zero chance." Asked more generally whether he smoked pot during
bridge tournaments or on other occasions, Mr. Cayne said he would
respond only "to a specific allegation," not to general questions.
Bear's travails began early this year with signs of trouble in the
mortgage market. Home prices were slipping, while delinquencies on
loans to the weakest borrowers, called subprime loans, were up. Late
February brought a swoon in an index that tracks packages of subprime
loans that have been sliced up and resold to investors in the form of
complex securities. Two Bear Stearns hedge funds -- investment
partnerships for rich people and institutions -- were heavily invested
in such securities. The funds used leverage, or borrowed money, to
amplify their bets, magnifying both gains and losses.

Reflecting their holdings, one fund was called the Bear Stearns
High-Grade Structured Credit Strategies Fund. The other had the same
name plus the words "Enhanced Leverage." That one had $638 million in
investor cash and at least $6 billion in borrowed capital.

So for every dollar of investor money, it borrowed roughly $10. Mr.
Cayne showed little sign of concern about the mortgage market at a
dinner with analysts in late March, according to one attendee.

But soon that market took a turn for the worse.

The values of some holdings in both hedge funds sank. The more
leveraged fund told its investors in early June that it was down 23%
for the year through April, prompting demands by many to get their
money back. To raise cash, both funds began selling billions of
dollars of the assets they'd acquired with borrowed money.

All this selling put still more pressure on the values of such
securities. About this time, Mr. Cayne began his summertime ritual of
taking a helicopter from New York City to Deal, N.J., on Thursdays to
make a late-afternoon golf game at the exclusive Hollywood Golf Club,
associates say. (He pays for the 17-minute, $1,700 trips himself, one
person says.) After spending the night in his vacation home nearby,
associates add, Mr. Cayne generally hits the golf course again Friday
morning for another 18 holes, followed by 8 a.m. tee-offs on Saturday
and Sunday. Friends say that after his Saturday game, he often heads
back to his local home for several hours of online poker and bridge
and to play with his grandchildren. Samuel Molinaro Jr., Bear's chief
operating and financial officer, says, "I've never had a problem
reaching him." In the first week of June, the more leveraged fund told
investors who wanted out that it couldn't immediately return their
money.

Wall Street creditors that had lent the fund money reacted sharply to
this news, making margin calls, or requests for additional collateral.
One creditor, Merrill Lynch & Co., which was owed $400 million, seized
the assets that backed its loan on June 15. Mr. Cayne was on the golf
course in New Jersey part of that day, a Friday, having left the
office Thursday afternoon, according to a Web site that tracks
individuals' golf scores. Mr. Angelo says Mr. Cayne doesn't carry a
cellphone or email device while golfing, in accordance with a policy
at the Hollywood club. Mr. Povich says that on Fridays, Mr. Cayne
would occasionally use a land line near the course's ninth hole to
check in with the office.

Associates of Mr. Cayne say top Bear executives often didn't try to
contact him between 8 a.m. and 1 p.m. on Fridays, preferring to leave
messages with his assistants at Bear to call the office when he was
free. Even when he wasn't there in person, Mr. Cayne was hands-on, say
other associates. Mortgage-division head Tom Marano, who temporarily
left his post over the summer to help stabilize the two flailing funds
in the firm's asset-management division, says Mr. Cayne offered some
helpful advice on handling irascible creditors during a critical
period in July. Mr. Marano says the CEO told him in a phone call to
"keep your Irish down," or cool his temper and try to negotiate
calmly. (Mr. Marano is of Irish and Italian descent.) Late in June, as
the outcry from investors in Bear's hedge funds grew, Bear authorized
an 11th-hour loan of up to $3.2 billion to the less-risky of the two
beleaguered funds.

The fund ultimately borrowed about half that amount from its parent
company. On July 12, chatting with visitors over lunch, Mr. Cayne
seemed less interested in discussing the markets than in talking about
a breakfast-cereal allergy and his stash of unlabeled Cuban cigars.

On another occasion, he told a visitor he pays $140 apiece for the
cigars, keeping them in a humidor under his desk. Five days later
managers of both funds informed investors their holdings were
virtually worthless. The next day, July 18, Mr. Cayne left for
Nashville to play in the bridge tournament, accompanied by his wife,
Patricia, who is a neuropsychologist and another avid bridge player.

Mr. Cayne took part in a prestigious event called Spingold KO. He was
in Nashville all or parts of 10 days, according to bridge and hotel
records.

For most of that time, Warren Spector -- then co-president of Bear and
also a competitive bridge player -- was in Nashville as well. Mr.
Spector was in charge of asset management at Bear, along with all of
its trading operations and its prime-brokerage unit, which handles
trades for big clients such as hedge funds as well as lending them
money. Amid the hedge-fund crisis, Bear's five-member executive
committee gathered almost daily.

Mr. Cayne and Mr. Spector dialed in from Nashville in the hours before
the afternoon games began. On the calls, Mr. Cayne rarely dictated
orders, participants say. When fingers were pointed, he urged others
not to "worry about who got us here." The funds reached an impasse on
July 26. Fretting over a margin call that hadn't been met, Bear took
the painful step of seizing most of the remaining collateral in the
less-leveraged fund, to which Bear had extended $1.6 billion in credit.

Although the fund had paid back $300 million of the loan, it couldn't
come up with any more cash, essentially forcing its own parent company
to shut it down. Days later, Mr. Marano, who had been unable to avert
the seizure, initiated bankruptcy proceedings for both funds. The
following day, Mr. Cayne left Nashville to return to New York. By
then, new troubles were brewing at Bear Stearns Asset Management, the
umbrella division for the two troubled hedge funds.

Another, unrelated fund was also facing investor demands for their
money back. Amid the turmoil, Mr. Cayne on Aug. 1 called in Mr.
Spector, the co-president who had been with him at Nashville. Mr.
Cayne was annoyed that Mr. Spector had been away from the office
during the fund crisis, according to people familiar with his thinking.

He told Mr. Spector he had lost Mr. Cayne's confidence and should
resign, these people say. Mr. Spector left his boss's office without
committing to do so. On Friday, Aug. 3, with investors in Bear's stock
worried about how solid its financing was, executives convened a
conference call to reassure people. Mr. Cayne opened it by saying the
firm was "taking the situation seriously" and addressing the market
issues.

He turned over the call to Mr. Molinaro, the CFO. Mr. Molinaro called
the bond market's condition "about as bad as I've seen it" in a
22-year career. An analyst asked Mr. Cayne a question, but there was
silence.

Mr. Cayne had left, say two people who were with him in a Bear
conference room at the start of the call. One says Mr. Cayne had been
summoned out by a lawyer advising him on the pending departure of Mr.
Spector, who by then was planning to resign.

Mr. Cayne later returned, but the hundreds of listeners weren't told
this, leaving them with the impression that the CEO had left the call
altogether. As word spread about the call and Mr. Molinaro's grim
assessment, the financial markets began to sink. The Dow Jones
Industrial Average fell more than 300 points, before recovering
slightly to end the day down 2%. Later that day, WSJ.com reported the
anticipated resignation of Mr. Spector. The co-president, a
49-year-old former mortgage trader, had been seen as a likely heir to
Mr. Cayne. The move left Bear with no apparent succession plan, though
in a recent interview Bear's lead director, Vincent Tese, said that
"the front-runner is clearly Alan," meaning Mr. Schwartz. The
following day, a Saturday, Mr. Cayne scored a respectable 88 at the
Hollywood golf course, according to the golf Web site. But for Bear,
things seemed to be falling apart that weekend.

Major clients of the firm's prime brokerage division were threatening
to pull their business. Bear executives scrambled to reassure them in
phone calls Sunday, Aug. 5, saying that Bear's financing was secure
and its risks contained.

Yet Bear did lose some prime-brokerage business -- from, among others,
Brahman Capital Corp. and a fund connected to Mariner Investment
Group, say people familiar with the matter. Although Mr. Cayne didn't
take part in the Aug. 5 calls to clients, according to people familiar
with the calls, he spent a rare Sunday at the office leading a hastily
called board meeting to accept Mr. Spector's resignation. Late the
Friday of Labor Day weekend, Mr. Cayne flew to Beijing with Mr. Tang,
the Chinese-born executive, for a series of meetings that would
culminate in a deal. On Sept. 20, Bear reported earnings for its Aug.
31 quarter: a 61% year-over-year drop -- reflecting an 88% fall in
bond revenue and $200 million in costs linked to the closing of the
two hedge funds.

Bear shook up its mortgage unit, laying off more than 500
people.

It has just laid off 300 more people throughout the firm, though the
head count remains at about 15,000. Bear faces reviews of the
hedge-fund collapses by the Securities and Exchange Commission, the
Justice Department and Massachusetts state regulators. Bear's board
has retained attorney Robert Fiske Jr. to sort out what went wrong.

On Oct. 22, Bear and Citic Securities Co., a Chinese investment bank,
announced a deal in which each will invest about $1 billion in the
other.

In sealing that deal, Mr. Cayne's long-term relationship with the
Chinese bank's officials "had gone a long way," says Mr. Tang. Bear's
stock edged up on the news but remains down about 30% for the year,
the worst performance of any major brokerage firm. Bear's travails
have of late taken a back seat to those of competitors like Merrill
Lynch, where a write-down of $8.4 billion cost chief executive Stan
O'Neal his job. Many of Bear's rivals continue to grapple with the
fallout of the summer's credit crunch, and when conditions will
improve remains unclear. Friends of Mr. Cayne say he is troubled by
the summer's events and concerned about his legacy. "It's one thing if
you're 55," says Mr. Angelo, the hedge-fund manager and golf partner.
"It's another if you're 73," he says, adding that amid turmoil such as
this year's, it can take "periods of time to get your reputation back."