In one of his last public appearances before investors in March, Bear StearnsCo-president Warren Spector assured them the investment bank had a strong culture of "no surprises."
But late last week it was his turn to be surprised, as Bear Stearns Chairman and Chief Executive Jimmy Cayne told Spector he was on the way out after a 24-year career at the brokerage. Bear made it official over the weekend, ousting Spector, one of Cayne's top lieutenants and a leading contender to become Bear Stearns' next leader.
Cayne's attempt at housecleaning seemed to do little to reassure investors Monday, who sent Bear's shares another 7 percent lower. About $10 billion in market capitalization has been erased since mid-January.
The firm's continued struggles have some investors wondering if Cayne, who owns about 5 percent of the company, could be next out the door.
"If there are more problems, there may be a desire for more blood to be let," said Ken Crawford, a portfolio manager at Argent Capital. His company does not own Bear shares, but has exposure to other Wall Street investment banks.
Bear Stearns was not available for comment.
Being Held Accountable
Cayne, who played multiple rounds of golf during the early days of the company's current crisis, held Spector accountable for the collapse of two Bear-run hedge funds and for not doing a better job of evaluating the risk of the company's mortgage-related investments.
But he and Spector are longtime allies. Despite the company's troubles, Cayne and Spector turned their attention to the North American Bridge Championships in Nashville, Tennessee, where both men played in late July, according to daily bulletins from the event.
And between June 9 and July 15, Cayne played about 20 rounds of golf at the Hollywood Golf Club in New Jersey, according to a Web site that records scores entered by golfers.
The collapse of the hedge funds, which made bad bets on investments tied to subprime loans, embarrassed Bear Stearns, seen as savvy assessor of mortgage-related risk. Analysts and investors now question the company's ability to weather a meltdown among a number of U.S. mortgage lenders and a downturn in credit markets.
James Ellman, hedge fund portfolio manager at Seacliff Capital in San Francisco, which has about $200 million under management, questioned whether Cayne can survive. Bear's lack of disclosure about its exposure to mortgages and his concerns about the subprime sector are why Ellman stayed away from Bear shares.
"When a CEO has to say ... he has no desire to leave, it means people are talking about him leaving," Ellman said. "We'll find out more in September, when the company opens its kimono and releases earnings. It all comes down to, Did Spector leave because a few hedge funds went down, or is the rot deeper? I'm concerned there is more rot than what they're telling us now."
Going forward, a big issue for investors is the size and number of contingent financing commitments Bear Stearns has made and how much could wind up on its books, said Brad Hintz, an analyst at Bernstein Research.
He said in worst-case scenario that he called "highly doubtful" Bear Stearns could take a $940 million hit to its 2007 profits, or 49 percent of estimated earnings, if nearly $21 billion of its bridge loan commitments are drawn down and its hedges prove ineffective."
"We expect the current market environment will result in an earnings and (return on equity) issue for Bear Stearns and not a credit, capital or liquidity issue," Hintz said in a research note.
'Risk Management' Culture
On Bear Stearns' March 29 investor day, Spector and other top executives provided repeated assurances that problems gripping the subprime lending industry would not have a major impact on the company. Yet the company's stock is down 29 percent since then.
Bear Stearns is a leading U.S. underwriter of mortgage-backed bonds. The company packages pools of home loans into billions of dollars of securities sold to investors.
"We're very proud of the way we do risk management. It's an integral part of our culture," Spector said during his presentation. He later added: "We have a strong culture of no surprises."
When asked whether problems with subprime mortgages, or loans to people with weak credit, would spread to loan products with less risk, Spector downplayed the risk.
"The big question is will it have a broad impact on the housing market," Spector said. "... I don't see it."
In the months after its investor day, other top executives at Bear Stearns downplayed the subprime lending crisis. In May, at a Mortgage Bankers Association conference in New York, Alan "Ace" Greenberg, chairman of Bear Stearns' executive committee, said subprime problems had been "completely blown out of proportion."
For a growing number of investors, that analysis does not ring true today.