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MARCH : THE FALL OF BEAR STEARNS
port was meant to provide a road map of what “the gold standard” in risk manage-
ment would be.
In January , before the report was completed, Cayne resigned as CEO, after
receiving . million in compensation from through . He remained as
non-executive chairman of the board. Some senior executives sharply criticized him
and the board. Thomas Marano told the FCIC that Cayne played a lot of golf and
bridge. Speaking of the board, Paul Friedman, a former senior managing director at
Bear Stearns, said, “I guess because I’d never worked at a firm with a real board, it
never dawned on me that at some point somebody would have or should have gotten
the board involved in all of this,” although he told the FCIC that he made these com-
ments in anger and frustration in the wake of Bear’s failure. In its final report on
Bear, the Corporate Library, which researches and rates firms for corporate gover-
nance, gave the company a “D,” reflecting “a high degree of governance risk” resulting
from “high levels of concern related to the board and compensation.” When asked if
he had made mistakes while at Bear Stearns, Cayne told the FCIC, “I take responsi-
bility for what happened. I’m not going to walk away from the responsibility.”
At Bear, compensation was based largely on the return on equity in a given year.
For senior executives, about half of each bonus was paid in cash, and about half in re-
stricted stock that vested over three years and had to be held for five. The formula for
the size of each year’s compensation pool was determined by a subcommittee of the
board. Stockholders approved the performance compensation plan and capital accu-
mulation plan for senior managing directors. Cayne told the FCIC he set his own
compensation and the compensation for all five members of the Executive Commit-
tee. According to Cayne, no one, including the board, questioned his decisions.
For , even with its losses, Bear Stearns paid out of revenues in compensa-
tion. Alix, who sat on the Compensation Committee, told FCIC staff the firm typically
paid but that the percentage increased in because revenues fell—if manage-
ment had lowered compensation proportionately, he said, many employees might
have quit. Base salaries for senior managers were capped at ,, with the re-
mainder of compensation a discretionary mix of cash, restricted stock, and options.
From through , the top five executives at Bear Stearns took home over
. million in cash and over . billion from stock sales, for more than a total of
. billion. This exceeded the annual budget for the SEC. Alan Schwartz, who took
over as CEO after Cayne and had been a leading proponent of investing in the mort-
gage sector, earned more than million from to . Warren Spector, the
co-president responsible for overseeing the two hedge funds that had failed, received
more than million during the same period. Although Spector was asked to re-
sign, Bear never asked him to return any money. In , Cayne, Schwartz, and Spec-
tor each earned more than times as much as Alix, the chief risk officer.
Cayne was out, Schwartz was in, and Bear Stearns continued hanging on in early
. Bear was still able to fund its balance sheet through repo loans, though the
interest rates the firm had to pay had increased. Marano said he worried this in-
creased cost would signal to the market that Bear was distressed, which could “make
our problems turn into a death spiral. ”
