Bear Stearns' James Cayne Declares He Was Innocent

I didn't see all of yesterday's FCIC hearings, but I did hear/see the beginning of former Bear Stearns Chairman James Cayne's testimony.

This morning, I read the Wall Street Journal's recap of his remarks. It makes for rather sad reading, as the article noted that not one of the defunct investment bank's five former executives admitted responsibility for the firm's demise.

According to the Journal, Cayne said,

"Bear Stearns's collapse was not the result of any actions or decisions unique to Bear Stearns. Instead, it was due to overwhelming market forces that Bear Stearns, as the smallest of the independent investment banks, could not resist."

So, after admitting that Bear's 42:1 leverage was "too high," Cayne never the less avoided and evaded taking any blame for knowing that, and allowing it.

Instead, he and his crew of former high-fliers at the firm blamed the market.

It reminds me of a lesson I learned years ago at Chase Manhattan Bank.

We were investigating, at the direction of our CEO, the productivity and profitability of the bank's securities trading business. This necessitated a few meetings with the unit's manager, an SVP. At the time, this was a fairly lofty and unassailable position at the bank.

My partner and I asked what were evidently off-putting and potentially embarrassing questions of the SVP in question, who, for this post, shall remain nameless.

In particular, when we examined the relationship between the unit's trading volumes, bonuses, profits and operations costs and requirements, it became clear what was going on. The unit required expensive facilities capacity from its IT group, but felt it should pay the lowest estimated IT costs in the industry for that type of trading.

When comparing volumes and profits, it was clear that the unit's traders and managers enjoyed outsized bonuses, but didn't take any serious losses in calm or unprofitable markets.

The SVP's response was, laughably, that in good markets, he and his traders added a lot of value but, when markets were bearish, well, that was not something they could control, so losses weren't their fault.

Sound familiar? It's like all of these large bank trading execs read the same business management manual full of aphorisms designed to let them share in gains but always avoid 'market-related losses.'

This is neither a new, nor surprising contention. It's just that Cayne's and his fellow former Bear Stearns executives' explicit statement of it is particularly nauseating, in light of events.