A Heavy Heart

A Heavy Heart

How does a man of conscience grapple with his own failures in an era of increasing pragmatism? It’s not a rhetorical question. It is a question I face this morning and have faced on several other mornings. The story begins with a business failure twelve years ago. The length of time is important because it highlights that some things never go away, and we must all ask ourselves if that is helpful or hurtful.

I was the CEO of Bear Stearns Asset Management. The CEO title is an interesting issue unto itself. We were wholly owned by Bear Stearns and as such I reported to one of the Co-Presidents of the parent company. That made me a senior, but not independent manager. I had a Board, but I reported to a boss (a real boss, not a titular boss). The Board provided little or no guidance to my running of the business, where the co-president did so on a weekly if not daily basis. Was I really a CEO or was that just a nice title? The answer is, a little of both. Yes, I had that reporting relationship to a superior officer, but the nature of the investment practice held within an investment bank (technically a broker/dealer), there was a natural buy-side versus sell-side conflict that required (for regulatory purposes) that BSAM be independent. We were a fiduciary that were responsible for people’s money, and as such, we needed to be independent from the broker/dealer who might try to sell us stuff for our clients. That was not an overwhelming concern, but still needed to be watched nonetheless.

I could go on and on about that organizational set-up, but it is only so relevant to my heavy-heartedness. The relevant issue relates to two hedge funds that ran into serious trouble. The interesting facts are that these funds were run by people with long-term Bear Stearns pedigrees and the fund was strongly promoted by the parent organization (they had seeded the fund) and it was strongly recommended that we bring them into BSAM. I did my own diligence and determined that was appropriate, so I did so. The instruments they invested in were very esoteric and were a specialty of Bear Stearns, both in terms of structuring/origination and in terms of trading. The firm was clearly expert in these instruments and the two managers were students and veterans of that expertise. Other firms (a few top firms) traded in those instruments. They launched their fund with full disclosure on all of this. They were very successful in raising money ($1.5 billion) and proceeded to have a rock-solid four years of steady performance at attractive returns.

Needless to say, then there was a problem in the market. For reasons far beyond anything related to Bear Stearns, the market that underlay these esoteric instruments hit the fan. The hedge funds in question went into rigor mortis over the span of four months with many contrasting views about whether the market would correct of further plummet. All very normal (if extreme) market action. The biggest problem was that as the biggest investor in that market, these funds were outsized and vulnerable and that vulnerability caused massive illiquidity and need to unwind the fund in an unfavorable manner. The counterparties consisted of seventeen of the biggest Wall Street shops, most of whom were also both holders and originators of the offending instruments. It was complicated and a fascinating exercise in “cutting off of one’s nose to spit one’s face”. It was also a painful 24×7 managerial exercise with all-hands-on-deck, first for us in BSAM, and then for all of Bear Stearns. I believe we managed through honorably (though there was less than honorable stuff going on all around us and often suggested to us for us to do). I am proud that we fought it out in the trenches and did so without censure (no one challenged how we exited) even though the outcome was highly negative for us personally (I had to step down afterwards) and for the firm (there were significant losses, but it was hard to parse what was due to us and what was due to their outsized position in that particular market as a broker/dealer, which I believe was the core problem for them).

I spent the better part of two years bearing witness with the U.S. attorneys investigating the events. Some was general investigation, and some was specific to an indictment of the two fund managers. Those managers were soundly acquitted (I was one of three defense witnesses and the only unpaid non-expert witness). There were over 300 criminal, civil, regulatory and arbitration actions filed against BSAM. I, as CEO, was named in none of them. The NASD, which virtually never does this, published an opinion that I had comported myself as a manager well and with no failure to supervise. That all gave me some comfort that I had been vindicated and absolved. However, as I always say, there is little comfort for the ship’s captain whose ship lies at the bottom of the ocean. My heart is at peace with that reality because I can weep only so much over “just money”.

The heaviness comes from the fact that here, twelve years later, the issue has yet again come up in regard to my current activities (I have been a CEO for four other entities since the BSAM days). It is a simple diligence inquiry, but it must be answered, as I have done. But it saddens me. Why?

I am forced to remember my failure and mentally relive my painful experience. Meanwhile, I watch our President lie, deny and deflect rather than face his accusers and honestly adjudicate the outcome. The value I get from my memories is in the humility it forces on me. We are, none of us, as good as we think we are. Meanwhile, our president, when asked if he got help in the election from the Russians said, “You know who is responsible for my winning the election? I am responsible for my winning the election.” Oh, and by the way, there was no collusion and he was not involved with the Russians as they helped him win the election.

I could easily say that if it’s a good enough tactic for the president then it should be good enough for me. But it simply isn’t. I am proud that I have the backbone to stand up (even twelve years later) to my failings. I have a heavy heart that others are learning the lesson from a supposed role model like our president that they can say anything and do anything and it is all fair game. I am even heavier of heart that others around me think that is OK.