• English Site
• > Business
• > Economic and Financial Crisis

The Bank Robbers

Finance CEOs in Freefall as Subprime Losses Mount

By Frank Hornig

The subprime crisis has dealt a huge blow to the financial industry. As a nervous Wall Street waits to see the full extent of the damage, CEOs are under pressure to explain what went wrong -- and to justify their plump salaries.

A man like James Cayne, 74, could easily double as the star of a Hollywood movie about a rough-and-ready, macho Wall Street honcho. Cayne, the chairman of investment bank Bear Stearns, comes across as very authentic.

On the other hand, Cayne's image is so cliché-ridden that it becomes hard to believe the persona he has developed for himself. He smokes cigars in his office, despite a strict no-smoking policy. He isn't interested in normal working hours. Often on Thursdays, he boards a helicopter to escape from the skyscrapers of Manhattan to play golf at his favorite country club in New Jersey. The trip takes just 17 minutes but costs $1,700.

In Cayne's world, everything is much bigger and more expensive -- but also crazier.

Even during major crises, Cayne doesn't neglect his hobbies. While two of his hedge funds were collapsing last July, when he was still CEO of the bank, he nonchalantly traveled to a bridge tournament in Nashville, Tennessee that lasted several days. His staff were fighting to survive but Cayne, who has won several North American bridge championships, was unreachable; he had switched off his mobile phone. After all, it would have disturbed the bridge ace with the trademark blow-dried blonde hair if his phone had rung at the bridge table.

He was also one of the biggest players in the casino of global finance. Hardly anything, from falling prices to plunging profits to panic attacks on the markets, could bother the banker, not even claims that he smoked marijuana a little too often.

"Don't let the noise bother you," he wrote to his colleagues in a November memo, "I don't." In addition, he announced self-confidently that his 14-year term in office was a "record success." A short time later he resigned as CEO but remained chairman of the board.

The "record success" came to an abrupt halt on the weekend before last. The fact that Cayne left a bridge tournament in Detroit early and hurried back to Manhattan for crisis meetings didn't help the company. Bear Stearns, the fifth-largest investment bank in the United States and one that was famous for its respectability, arrogance and carefully cultivated air of exclusivity, was on the verge of collapse.

Only a $30-billion infusion from the US Federal Reserve Bank could save the traditional investment bank from ruin. Now it has ended up in the hands of the competition, at a fire-sale price -- on March 16, J.P. Morgan Chase said it would buy Bear Stearns for a mere $240 million (€154 million).

The price of Bear Stearns stock plunged by more than 80 percent in one day. Compared with the stock's value at the beginning of the year, there is nothing but ashes left of the company's former glory. The losses are on a similar scale to those of the many Internet bubble companies during the worst phase of the New Economy bloodbaths.

The case is symptomatic of the worldview, self-image and the day-to-day reality of many top bankers, especially in the mecca of high finance, Manhattan. They were once the kings of the world, the bonus gods and rainmakers, the super-rich in the cosmos of big money -- simultaneously employees and kings.

Their equity capital was ultimately nothing but a promise: the promise of reputable financial transactions and the pledge that everything would go well in the debits-and-credits world of global finance. But nothing went well. For a long time -- far too long -- the public was appeased, the industry was glorified and promises were made, and the underlying problems were covered up with lies.

Since last summer, however, the entire industry has increasingly proved to be little more than a gambling den. Part of what was being gambled away was the trust that customers and small investors invested along with their money. Many bets were lost. So was a lot of money -- and even more trust.

The world economy has been shaken by a series of increasingly dramatic revelations. At first the losses were limited to a handful of banks, but then they began piling up to dizzying heights throughout the entire financial sector, as companies were forced to take ever-larger write-offs, first $200 billion, then $400 billion, and then $600 billion.

The gentlemen in their pinstriped suits proved to be bank robbers. Record sums went up in smoke. In the second half of 2007, Citigroup alone had to write off more than $24 billion (€15.4 billion) in bad debt as a result of its speculative ventures. No gang of thieves could ever steal that much money from a bank vault.

The sense of the magnitude of their own actions was completely lost in the process. French stock trader Jérôme Kerviel, for example, gambled away €4.9 billion ($7.6 billion) of his employer Société Générale's money. "You lose your sense of the sums involved when you are in this kind of work," he told the news agency AFP in an interview. "You get a bit carried away."

Investment bank Goldman Sachs now expects a total loss for the entire industry of more than $1.1 trillion (€705 billion). But even that won't be the end of it. "This has become the new bird flu," Barry Ritholtz of New York research firm Fusion IQ told the Wall Street Journal. "It's infected everybody."

Only the caste of chief executives and their senior executives has proven to be relatively resistant so far. In the United States, only two major financial institutions, Citigroup and Merrill Lynch, have replaced their management to date. But as despised as they were, the CEOs left with enormous settlements in their pockets. Stan O'Neal, the former CEO of Merrill Lynch, received a severance package worth $161 million (€103 million), even though the company under his leadership lost about $9 billion (€5.8 billion) in the last year.

But now that trust is in such short supply, so is fresh capital. The banks have already stopped lending each other money for fear that they will not get it back.

Senior executives at all the major investment banks are now in an unusual situation. For years, they were the superstars of capitalism, accustomed to success. They were the architects of globalization whose job was to boost performance worldwide, financial wizards who could manage, seemingly without effort, to achieve returns of 20, 30 or 40 percent. But they owed part of their success to those "innovative" mortgage products that would later infect banks from New York to Hong Kong.

Now they have to struggle with decline and figure out how the excesses came about in the first place, as well as accept their personal failure -- a bit like Britney Spears in a detox program. The casualties are everywhere, as a consternated global public looks on.

The Wall Street Journal, a traditional admirer of the investment banks which is now making caustic remarks about their performance, wrote recently that J.P. Morgan's shares have outperformed those of its competitors this year -- after all, they only lost 13 percent.