Part IThe Story
The Most Unassailable Assumption
On Sunday, March 16, 2008, Alan Greenberg went to the office. For most men of eighty this would not be notable. For a man who had spent fifty-nine years at Bear Stearns arriving on time, leaving on time, answering his own phone in about ten seconds per call, and treating weekends as the property of bridge, golf, magic, and dogs, a Sunday at the firm was itself a market signal. He had come to sit with the board of directors and decide whether to sell the company he had spent most of his adult life building, to JPMorgan Chase, for two dollars a share.
The arithmetic of the preceding week reads like an obituary that someone kept revising downward. On Monday, March 10, Bear Stearns had a liquidity pool of $18.1 billion. By Thursday, March 13, it had $2 billion. On Friday the Federal Reserve Bank of New York agreed to lend the firm $25 billion for up to twenty-eight days, then changed its mind before the weekend was out. The stock had traded at $172 in January 2007 and at $93 as late as February 2008. JPMorgan's offer came to less than 7 percent of what the market had said the firm was worth two days earlier. Christopher Cox, then chairman of the SEC, would say four days later that Bear had died of a lack of confidence rather than a lack of capital. Counterparties had stopped taking its collateral, the rumors about its liquidity had fulfilled themselves, and the bank run that the clearing clerks and arbitrageurs of Greenberg's youth would have recognized had happened on screens.
Greenberg's title that Sunday was chairman of the executive committee. Part of that committee's job was overseeing the firm's financial risk. He had held the post since 2001, when he gave up the chairmanship of the board, and before that he had been chairman since 1985 and chief executive from 1978 to 1993. On Wall Street he was a byword for one kind of discipline, the kind that takes the loss early and moves on. Now the loss was the firm.
He would write about the day two years later, in a book with an unambiguous title, and one sentence from it carries the weight of everything else: "Our most unassailable assumption — that Bear Stearns, an independent investment firm with a proud eighty-five-year history, would be in business tomorrow — had been extinguished."
Tomorrow is the important word, and it recurs through his life. His father, a clothing merchant in Oklahoma City, had told him to sell bad merchandise today because tomorrow it would be worse. His trading lieutenants had built a religion around the idea that whatever else happened, the firm must open for business the next morning. On the worst day in the history of the stock market, he had stood up on the trading floor, practiced his golf swing, and announced that he might not come in tomorrow. Tomorrow was the unit of account. For half a century Ace Greenberg had been very good at making sure it arrived.
Then, on a Sunday, it did not.
By the Numbers
Ace Greenberg at Bear Stearns
$32.50Weekly salary as a Bear Stearns clerk, 1949
$46M → $1.8BFirm capital in 1978 vs. shareholders' equity in 1993, his CEO tenure
21%Average return on equity under his stewardship, as of 1999
4%Minimum share of gross income senior partners were required to give to charity
35.6 to 1Bear's leverage ratio at the end of fiscal 2007
$172 → $2Share price in January 2007 vs. JPMorgan's initial offer, March 16, 2008
59 yearsFrom clerk in 1949 to the firm's sale in 2008
Sell It Today
Theodore Greenberg sold women's clothes. He belonged to an extended Jewish family that ran clothing stores across Kansas, Oklahoma, and Missouri, and he brought his household, including a five-year-old son called Corky, from Wichita to Oklahoma City around 1932, into an upper-middle-class neighborhood during the worst of the Depression. Alan Courtney Greenberg had been born in Wichita on September 3, 1927, the eldest of three children. His brother was Maynard and his sister was DiAnne. His mother was Esther. In Jerusalem today there is a junior high school with her name on it.
The son would later describe his childhood horizons with no nostalgia at all. Asked whether he had seen much of the world growing up, he said: "If it came to Oklahoma City, I did. The circus showed up every year. Also the whale train. Very exciting. A stuffed whale and a couple of harpoons." The line is funny, and it is also accurate about the world that produced him: one where the exotic arrived by rail, was paid for, looked at, and left, and where the sensible thing was to enjoy it without confusing it with home.
From his father he took less a philosophy than a set of axioms about retail. During the Second World War, under price controls, the boy noticed that a lot of local merchants seemed to have a lot of cash. He asked his father why. "They do business away from the cash register," the elder Greenberg said. The son asked the obvious follow-up: why don't you? "Alan, I never want to end up working for my bookkeeper or my secretary." Decades later Greenberg told this story to Barbara Walters for a private video celebrating his fiftieth year at Bear Stearns, offering it as the formative episode of his childhood. A New Yorker writer watching the tape noted that the supposed revelation ended in a business axiom: if you cheat the tax man, your employees can blackmail you. There was no deeper layer. Greenberg's anecdotes tended to work like that.
The other axiom mattered more:
— Theodore Greenberg, as recalled by his sonIf you've got something bad, sell it today because tomorrow it's going to be worse.
It was a markdown rule for dresses, and it became the organizing principle of a Wall Street career.
Before that there was football. Greenberg was a blue-ribbon sprinter and a running back in Oklahoma in the mid-1940s, and he went to the University of Oklahoma on a full-tuition football scholarship. He hurt his back in his first semester, and the career that would have kept him in Norman ended there. He transferred to the University of Missouri, which he said appealed to him partly because it was farther than eighteen miles from home. He joined Zeta Beta Tau. He graduated in 1949 with a business degree.
Missouri is also where he got his name. He arrived just after the war, when returning servicemen outnumbered the women on campus about four to one, and a friend named Jay sized him up. "You're not bad looking," Jay told him, as Greenberg recounted to Steve Forbes in 2008, "but you're not going to do well on this campus with a name like Alan Greenberg." The fix was to change it, and the proposed replacement was Ace Gainsboro. For a year he was Ace Gainsboro. Then he went back to Greenberg and kept the Ace.
Read as a trade, this was his first one. A twenty-year-old from a Jewish retail family in Oklahoma tried on an invented gentile identity, judged after a year that half of it was a losing position, and sold that half. He kept the half that was working. The habit of exiting losers and letting winners run, which he would later preach on trading floors, shows up here in his own name before he ever saw a stock ticker.
A Sammy Glick Profile
He went to New York after graduation, and five of the established firms turned him down. He had no Ivy League degree, no family on the Street, and a name that the Missouri campus had already told him was a liability. Bear Stearns, which had a reputation for hiring aggressive newcomers regardless of background, hired him a couple of weeks after he arrived as a clerk at $32.50 a week.
The firm in 1949 had 125 employees and $17 million in capital. Like most of the major houses of the period (Lehman Brothers, Loeb Rhoades, Kuhn Loeb, Salomon Brothers, Morgan Stanley, First Boston) it was a private partnership. Among the mostly German-Jewish establishment firms, though, Bear had what the New Yorker in 1999 called "something of a Sammy Glick profile." It was a trading shop, quick and sharp-elbowed, and not the kind of place whose partners got invited to Washington to advise the President. Founded on May 1, 1923, by Joseph Ainslie Bear, Robert B. Stearns, and Harold C. Mayer with $500,000, it had gone through the 1929 crash without laying anyone off and had kept paying bonuses. Its founders had been known to fight in public. Bear Stearns had never been polite. It had been solvent.
Greenberg's first job was in what passed for an oil-and-gas department. On the wall was a map of drilling sites in Texas and Canada marked with colored pins, and his job was to move the pins. "I didn't think it was testing me," he said. Sixty years later, describing his own career to PBS, he summarized it in a way that only someone who had become very rich would: "Came to New York after I got out of college in 1949. Got a job at Bear Stearns a couple weeks later punching pins on a map where oil wells were being drilled in Texas and Canada, and I've been there ever since. So there's nothing to it."
A spot opened in risk arbitrage, which meant trading the stocks of companies involved in announced or rumored mergers and betting on whether the deals would close. He took it, and on his first day he met John Slade.
Slade was a German émigré who ran the arbitrage desk with a manner forbidding enough that by mid-morning the new clerk from Oklahoma went to the men's room and threw up. That is the whole story, and it matters for one reason: according to Slade and everyone else at Bear Stearns, it was the last time anyone saw Ace Greenberg lose his composure. Slade himself kept going a long time. In 1999, at ninety-one, he was still a senior managing director and had only recently cut back to a four-day week. The firm valued durability and kept the people who had it.
By about twenty-five Greenberg had replaced Slade as head of risk arbitrage. Several of his early wins came from correctly betting that proposed mergers would get past the federal antitrust lawyers. For years arbitrage was Bear's main source of profit, and in lean years it was the only one. Asked how he did it, he offered little. "Common sense . . . discipline . . . I don't take ridiculous risks, I take calculated risks." The New Yorker observed that his self-confidence seemed to vary inversely with his interest in examining himself.
In May 1958 he became a partner. At thirty-one he was diagnosed with colon cancer, and, as he later put it, "the prognosis was terrible."
People who knew him repeated the folk explanation for the rest of his life. Faced with dying young, he decided to do everything he had ever wanted to do, and he never stopped. He survived. Colleagues said the illness amplified his appetite for risk. In the 1970s, during New York City's fiscal crisis, he made a market in the city's bonds. He traded distressed securities other firms avoided, sold at the first sign of a downturn, and bought in large blocks so that small moves produced large profits. "Incur no inordinate losses" was the rule, and people who incurred them didn't stay.
The man who ran Bear Stearns then was Salim "Cy" Lewis, who had started as a runner at Salomon Brothers and was hired in 1933 to build Bear's institutional bond-trading department. He became a partner in 1938, managing partner in the 1950s, and eventually the dominant figure at the firm. He was outspoken and hard-driving, and much of what made Bear Stearns distinctive on Wall Street for decades came from him. Greenberg believed he had one serious weakness: he couldn't stand to turn a paper loss into a real one.
Greenberg went at the problem with his father's rule. "People don't hesitate for a minute to take a small profit," he said. "But they don't want to take losses. Which is, of course, just the opposite of what you should do. If you're wrong, you're wrong. Sell, and buy something else." He confronted Lewis on this more than once. The confrontation he remembered best came in the early 1960s:
"I went to Cy one day and said, 'You ever heard of a company called Rudd-Melikian?' He said, 'What's Rudd-Melikian?' I said, 'We have a position in it. It's gone from twenty to five.'"
He listed several other positions like it and said that if it didn't stop, he would quit. Lewis said he would think it over. The next day he gave in: "You can do what you want. You can sell anytime you want to."
A man in his mid-thirties threatened to leave the only firm that had hired him, over a stock that had lost three-quarters of its value, and won the right to sell. Lewis kept the title until 1978, when he had a fatal stroke at a testimonial dinner held in his honor. Greenberg became chief executive. By then the actual transfer of power had happened years earlier, the day Lewis said yes.
The firm he took over had about 1,000 employees and $46 million in capital. His own story, rejected by the white-shoe houses and made rich by the scrappy one, became the firm's hiring policy. In a 1981 memo he named the type he wanted: PSD, meaning poor, smart, and with a deep desire to get rich. Explaining his own rise, he gave Frontline almost the same description of himself: "It was a meritocracy, and I worked hard, and I was very ambitious and needed the money. That's a great incentive." William Cohan, who later wrote the firm's history, put it less kindly: "He liked to gamble, he liked magic, he liked bridge, and, of course, the only way to legally gamble at that time was to go to Wall Street." In 2013, by then an old man at JPMorgan, Greenberg said that after six months at Bear he had never known whether an employee went to an Ivy League school. "They were either smart or dumb."
No Longer Purchase Paper Clips
In 1973 the stock market was in a long slump and Bear Stearns had too much office space. It leased its headquarters at 55 Water Street, and part of it sat empty. Most executives would have tried to sublet the space or written it off. Greenberg offered it rent-free to a few small brokerage firms. In return they would let Bear clear their trades, meaning handle the back-office accounting and collections.
Clearing is dull work. It is also steady: it earns transaction fees and margin interest, and it pays in bad markets as well as good ones. By 1999 Bear Stearns cleared for more than 2,600 retail brokerages, professional traders, and market makers, handling about 13 percent of the daily trades on the New York Stock Exchange, and clearing produced a large share of the firm's annual net income. The business that held up much of Bear's earnings for the next thirty years began as a way to use unrented floor space during a downturn.
The episode shows how Greenberg thought. He did not divide the world into strategy and administration. A vacant floor was a position like any other: you could carry it at a loss or you could convert it into something.
Three months later the memos began, or rather they had already begun. From 1978, when he took over, until 1995, Greenberg sent a stream of short notes to the partners and staff of Bear Stearns. In 1996 Workman Publishing collected them in a 156-page book priced at $14.95, Memos from the Chairman, with a foreword by Warren Buffett. The best known of them went out in August 1985, the year the firm went public:
I was just shown the results for our first quarter. They were excellent. When mortals go through a prosperous period, it seems to be human nature for expenses to balloon. We are going to be the exception. I have just informed the purchasing department that they should no longer purchase paper clips.
He proposed reusing interoffice envelopes as well. A week later came a follow-up with the subject line GETTING RICHER: "Thank you, thank you, thank you! The response to the memo on paper clips and envelopes has been overwhelming. It seems that we already have an excess of paper clips." Having won on paper clips, he moved to the next item: "Bear Stearns will no longer purchase rubber bands."
The bit had a practical effect. Lee Munson, a former Bear trader, remembered the note that came in new hires' welcome packets: "You have 50 rubber bands and a box of paper clips, and use them wisely throughout your career at Bear Stearns because you're not going to get any more." Clearly a joke. Also clearly not entirely a joke. The culture worked by keeping both readings in play.
The memos did not come from Greenberg alone, or so he claimed. He attributed his most extreme cost-cutting to an invented sage named Haimchinkel Malintz Anaynikal, "the dean of business philosophers," and sometimes to the sage's nephew, Itzhak Nanook Pumpernickanaylian. Haimchinkel issued Old Testament-style commandments about overhead. Buffett, in the foreword, played along fully. He called Haimchinkel "my kind of guy — cheap, smart, opinionated," and said he wished he had met him earlier in life, "when, in the foolishness of youth, I used to discard paper clips." Buffett opened with a line that was quoted more than anything else in the book: "Ace Greenberg does almost everything better than I do — bridge, magic tricks, dog training, arbitrage — all the important things in life."
The invented sage gave Greenberg cover. A chairman who bans rubber bands in his own voice looks petty. A chairman passing along the rulings of an ancient, absurdly named oracle looks like he's in on the joke, and the joke makes the rule go down easier. Haimchinkel also said some things Greenberg might not have wanted to say directly to his traders: "Thou will do well in commerce as long as thou does not believe thine own odor is perfume." In one memo Greenberg announced a "backward planning" committee, and invited anyone who doubted it to look at the records of companies that had employed strategic or forward planners.
Underneath the jokes the rules were simple. He listed them in one memo:
Stick to thine own business. Watch thy shop. Limit thy losses. Watch thy expenses like a hawk. Stay humble, humble, humble.
He also kept insisting that discipline mattered most when things were going well: "When things are good, you should be even more careful of expenses because it is ridiculous to leave anything on the table when you hold a royal flush."
One line deserves to be remembered longer than the paper clips. "Absolution can be granted for losing money," he wrote, "but never for lying about it." That sentence explains how he could be relaxed about losses and harsh about cover-ups. A loss was information. Hiding a loss was a breach of trust. A firm can survive a lot of the first and not much of the second.
The pay structure was spare by Wall Street standards. In 1999 Greenberg and the 412 other senior managing directors each drew a base salary of $200,000, and everything above that depended on performance. In 1998 he earned a little over $22 million. "Such numbers," the New Yorker observed, "(and they are just numbers, right?)." Around 1969 he had also proposed that every partner give at least 4 percent of gross income to charity. "Some of the partners thought it was kind of high-handed," he said. "But they came around." The rule later applied to every senior managing director. Bear Stearns was cheap about paper clips and required its partners to give money away, and Greenberg saw no tension between the two.
Why Do You Think We Have These Limits?
He did not run the firm from a corner office. In 1999 his desk was on the main trading floor at Forty-sixth Street and Park Avenue, placed so the risk-arbitrage desk sat in his direct line of sight and bank services, convertible bonds, block trading, over-the-counter, and derivatives were all within shouting distance. Barry Cohen, who then ran risk arbitrage from fifteen feet away, called it "the best seat on Wall Street."
Each morning Greenberg read an itemized report of how the firm's capital had been deployed at the previous day's close. On Monday afternoons the risk-management committee met to go over it. His rule for those meetings fit in two sentences: "If the price of something goes up, I don't care. If it goes down, we discuss it."
Warren Spector, who ran bond trading and was still in his thirties, described how the meetings worked: "There are about fifteen people in the room, and we go around and disclose our positions — 'I own three hundred and seventy-five million investment-grade corporate bonds,' or whatever. Ace keeps all that in his brain. He remembers what your position has been running, in general terms, every week for the last several months and years." It was more than positions. A trader would bring up a prospective client, and Greenberg would ask whether the firm hadn't had a problem with that person eight years earlier. Spector went on to describe the outcome:
— Warren Spector, to The New Yorker, 1999No single individual at Bear Stearns has the opportunity to take too large a risk by himself. Ace's philosophy became the culture of the firm. The first thing we think about being in business is that, no matter what, we have to be in business tomorrow.
Eight years after he said that, the firm asked Spector to resign.
The limits applied in both directions, which is the part people usually miss. In 1981, during the takeover fight for Conoco among Seagram, DuPont, and Mobil, the arbitrage head Robert Steinberg had a strategy he considered close to a sure thing, except that he had reached his buying limit. Alan Schwartz, a young investment banker, offered to ask Greenberg for more room. "I went to Ace, because it seemed as if we could do even better if we bought more," Schwartz recalled. Greenberg's answer was a question: "Why do you think we have these limits? To keep people from buying too much of things they don't really like?"
The limit existed to stop people from overloading on things they did like, because conviction is how traders get hurt. The same Greenberg would come by Steinberg's desk and say, "Bobby, you haven't lost enough money lately." Steinberg understood: "The message was 'You're not taking enough risk. Are you doing everything to maximize your gains or are you just being careful?'" Greenberg built a cap on enthusiasm and a minimum on nerve, and he expected his traders to keep both in mind at once.
This approach got its hardest test on October 19, 1987. Blue-chip stocks began falling by about a third. Bear's arbitrage positions dropped 50 to 60 percent. Steinberg, by his own account, sat frozen at his desk. "I was catatonic. I'd never lost so much money in my life. Ace says, 'Bobby? What action are you taking?' Action? I'm sitting there helpless. He says, 'I think now's the time to start buying.'"
Then, with the floor watching, Greenberg stood up and practiced his golf swing. "I think maybe I won't come in tomorrow," he said. "I think I'll play golf."
It was a performance, aimed at the room as much as at the market. The chairman was signaling that the firm would be fine tomorrow and that he could afford to be on a golf course. Bear lost $50 million in the first days of the crash. When the fiscal year closed six months later, it reported record profits. Greenberg also sent a memo saying there would be no layoffs at Bear Stearns, and that the firm intended to hire the good people other firms were letting go. The firm had kept its staff in 1929, and he did the same.
He later explained the crash without drama: "Nothing happened afterward to justify that drop. There was no recession, no war, no anything — just a bunch of people running to get out the door at the same time." He paid no attention to market forecasting. When reporters called after a big move, he said: "Markets fluctuate. Next question." The broker Steve Sheresky contrasted him with Abby Joseph Cohen, Goldman's market strategist, who would revise S&P forecasts with complete confidence. "Ace will tell you he doesn't know or care," Sheresky said. "He knows that the market will open tomorrow at nine-thirty and close at four o'clock."
He also ran about two hundred discretionary accounts holding more than $1 billion, apparently as a hobby. "People ask me how I have time to do this on top of everything else," he said. "The answer is it's not very complicated. The discretionary accounts all hold the same eight to twelve stocks." He took clients only if he knew them, only with cash ("I don't believe in buying stock on margin"), and only "if I thought he wouldn't bother me." After the market dropped in the fall of 1998, the Dow down five hundred points, he got two calls from clients the next day. Both were buy orders. He called it one of the biggest thrills of his life.
By 1999 Bear's average return on equity under Greenberg was 21 percent, and the list of competitors that had disappeared was long: Salomon Brothers, Lehman Brothers, Loeb Rhoades, Drexel Burnham, E. F. Hutton, Bache. Each had overreached and then either failed or been forced into a merger. Bear Stearns had lasted. That was the claim Greenberg cared about.
The only thing that reliably made him angry was not a loss. Cohen said: "Losing money, never upset. When he hears somebody around here doesn't return a phone call, very upset."
A Very Limited Career
James E. Cayne came to Bear Stearns in 1969 as a retail stockbroker, and Greenberg hired him. Cayne was a bridge player first. He became a life master of the American Contract Bridge League five years before he became a Bear partner, and in 1973 he played in the world championships. Afterward he told Greenberg he was giving up tournament bridge because there was too much cheating.
Greenberg, who called himself "a country-club player," made an offer. "Don't quit. Teach me the game and I'll become your partner." Cayne's answer was quick: "I'll have a very limited career here if you're my bridge partner."
Four years later, in 1977, they were both on a five-man team that won the Reisinger Board-a-Match Teams, a national championship. In 1981 Greenberg won the teams event at the Maccabiah Games in Israel and finished second in the Reisinger. Three afternoons a week after the close (never Mondays, which were for management meetings), he played in a high-stakes game at the Regency Whist Club on East Sixty-seventh Street, with Laurence Tisch of Loews and Jack Dreyfus, the mutual-fund founder, among the regulars. Cayne used to play there too. Cohan later said that bridge "was the Facebook of their time." The friendship between the two men was built at a card table, where their personal and professional standing shifted against each other constantly.
Cayne's joke contained the arrangement the two would live with for the next forty years. Partners at bridge, a boss and a subordinate at work, each holding something over the other. Cayne knew the game better, and Greenberg controlled the firm.
When Bear went public in 1985, one of the first Wall Street partnerships to do so, Cayne became president. Greenberg had opposed the offering. "I wanted to incorporate but I didn't want to go public," he said. "I didn't want the scrutiny that goes with it. I didn't want to disclose how much money we were making. But a lot of the partners wanted to cash out, and if we'd stayed a partnership they'd only have gotten the book value. So we went public. They were right. I was wrong." His share of the proceeds came to $53 million, and the firm's capital rose to half a billion dollars.
That "I was wrong" was the same rule he applied to stocks, applied to his own opinion. It was a habit he practiced often enough to make it look easy.
He also made himself useful to the raiders of the 1980s, for whom discretion was worth a lot. Donald Trump, Henry Kravis's KKR, and Irwin Jacobs all used him to accumulate stakes in target companies quietly. In 1986 he helped Trump build a 9.6 percent position in Bally during an unsuccessful takeover attempt. "I put my children's accounts with him," Trump said in 2006. "That should tell you how much I trust him." He sat on Viacom's board. Wall Street was changing around him, and he took its business without adopting its manners.
In 1993, the year he turned sixty-six, Greenberg gave Cayne the chief executive title. How you describe that depends on who you ask. The New Yorker in 1999 said it happened upon his turning sixty-five and described it as a reshuffle that "neither diminished his authority nor altered his habits." He kept the board chairmanship, the chairmanship of the five-member executive committee, and the chairmanship of the risk committee, and he kept his trading-floor desk with arbitrage in view. Other accounts say he was pushed out. When he left, the firm had about 6,300 employees and $1.8 billion in shareholders' equity.
The founders of Bear Stearns had once fought each other in public. The partnership running it now did the same thing more slowly.
On June 26, 2001, a press release announced that Cayne, sixty-seven, would also become chairman of the board, succeeding Greenberg, seventy-three. Greenberg's statement was gracious. "Several months ago I suggested this step to Jimmy and left the timing up to him," he said, and added that he had "no doubt that this move will lead the firm to even greater heights in the coming years." Cayne's statement was also gracious: Greenberg "has been a valued friend, mentor, and business colleague for decades." The same release named Alan Schwartz, fifty-one, and Warren Spector, forty-three, co-presidents. Both were the young men from the Conoco story and the Monday risk meetings, now running the firm. To his clients Greenberg said they "should not see any change in my work habits. I will still be here for them."
Not everyone admired the Greenberg-Cayne approach. Brad Hintz, a Bernstein analyst and former Wall Street executive, said in 2006 that the two men "underinvested in new businesses and international expansion in the past and focused on maximizing return on equity." The criticism was fair. The firm had stayed lean by passing on things, and in the years to come it would mostly pass on caution instead.
Things That Survive
His son Ted has had an unusual career: comedy writer for Late Night with David Letterman, playwright, Wall Street clerk, risk arbitrageur at a German bank, weekend cab driver, and later a coordinator for a teen suicide prevention program. He went to Harvard. In 1999 the New Yorker called him "a discerning student of his father's behavior," and what he said that year is the most useful description of Ace Greenberg in the record.
"He's always had an interest in animal behavior," Ted said. "He has a nearly encyclopedic knowledge of zoology." After his father joined the board of the American Museum of Natural History, he noticed at one of his first meetings that an exhibit label calling a Central Asian horse extinct was out of date, since the horse had been reintroduced into Mongolia from captive herds. "He's very intrigued by what has allowed one species to survive and why others don't. And it's very tied to his attachment to Israel and what it means to be a Jew."
"When he looks at animals, he doesn't see them second-guessing themselves. He lives through action, and that's what he sees in them and thinks is appropriate."
Survival interested him as a subject, and he pursued it in several directions at once. He trained dogs: a Doberman, a poodle the American Kennel Club recognized as a tracking dog, a Canaan, and later two papillons named Tiger and Brutus. He hunted big game in Africa with a bow and arrow, and over the fireplace in his Fifth Avenue apartment hung a waterbuck, a greater kudu, and a nyala. A cobra-shaped piece of horn from a water buffalo stood alone on a pedestal on the bar. Asked about it, he said, "It wasn't a clean kill. So I felt it wouldn't have been right to mount the entire head." He was strict about the ethics of killing an animal with an arrow, and the one shot he got wrong was represented by a single piece of horn.
He applied the same interest in survival, at much larger scale, to Jewish institutions. In 1984 Queen Margrethe of Denmark knighted him for funding scholarships for Scandinavian students at the University of Oklahoma, which he did out of gratitude for Denmark's rescue of its Jews during the war. In Gilo, a Jerusalem suburb, the Esther Greenberg Junior High School stands next to the Ted Greenberg Sports Center, named for his father. Every September the UJA-Federation of New York started its annual campaign in his living room. About 120 guests, who knew exactly why they were there, heard a pitch from Greenberg and professional fundraisers and then announced their pledges more or less in public. Greenberg's own pledge was never under a million dollars, and one year the evening raised $28 million.
Dina Markson, who ran special gifts for the federation, met with him monthly to go over prospects most likely to give to him personally. In 1997, when it came out that Secretary of State Madeleine Albright had Jewish ancestry, Markson heard from him the next day. "Dina, you're falling asleep at the switch. It came out yesterday that Madeleine Albright's Jewish, and you haven't called me yet about hitting her up for a donation."
His giving often had an odd edge. Around 1969 he read a Times story about a young girl, a dwarf, being treated for seizures at Johns Hopkins. He sent a check for $150 to the hospital's coordinator of dwarfism studies, with a note asking her to buy the girl something that would make her happy. The administrator, Kay Smith, later called what followed "a beautiful friendship." His gifts to Hopkins eventually exceeded $3 million and established the Kathryn and Alan C. Greenberg Center for Skeletal Dysplasias, and in 1993 the Little People of America honored the couple at its convention. He paid to renovate the bathrooms at the Israel Museum in Jerusalem, each with a plaque honoring his brother Maynard. In 1998 he gave $1 million to New York's Hospital for Special Surgery to pay for Viagra prescriptions for men who couldn't afford them. Kathryn, his second wife, summarized it: "You do some nutty things, you've made your money, and you can spend it any way you want."
Kathryn Olson was a lawyer at Shea & Gould. She was forty when they married in 1987, eleven years after his first marriage, to Ann, ended in divorce. She founded the New York Legal Assistance Group, a privately funded pro bono law firm, and later chaired the board of Cardozo School of Law. She shows up throughout the twenty-one scrapbooks the Greenbergs assembled, now held at the New-York Historical Society. Greenberg's daughter Lynne became the youngest person to own a seat on the American Stock Exchange, then sold it in 1992 to raise her children. After her first marriage ended, Greenberg sued her ex-husband, Jonathan Frey, over unpaid interest on a loan for the couple's first home. The case was public, and Greenberg lost. The man who said nobody should leave anything on the table had applied that rule to his son-in-law, and in that case it cost him.
The Canaan was named Herzl, after the founder of modern Zionism, and Greenberg had helped persuade the American Kennel Club to recognize the Israeli breed. Herzl bit people. When the dog was old enough, in Greenberg's phrase, to have been bar mitzvahed, he bit someone in Central Park, and Greenberg decided to put him down. He left him at the vet, said goodbye, and went to work and told everyone the dog was dead. A few hours later the vet called to apologize: under New York law, a dog that bites someone has to be kept alive for ten days. Greenberg would have to come get him.
"Then I figured it out," Greenberg said. "If Herzl bites someone every nine days, he'll live to be about twenty, right?"
He made a loss decision, then a technicality forced him to keep holding the position, and he immediately worked out the arbitrage. That joke is about as close as he came to explaining himself.
Make a Ball Disappear
On a weekday morning in 1999 he was in Central Park, in an area he used as a backyard, working with Brutus. Brutus was a black-and-white papillon of about five pounds. Tiger was home with a respiratory problem. Greenberg was in wing-tip loafers. The dog marched, stopped, heeled, circled his feet tightly, and fetched a small wooden dumbbell. Three Rhodesian Ridgebacks got too close and Brutus held still. Then Greenberg walked fifteen paces away, took ten metal dumbbells from a nylon bag, set them out at random on the path, and rubbed one with his hands to put his scent on it.
"Brutus! Take!"
In under twenty seconds the dog had found the right one among ten that looked identical, by smell. The reporter asked whether Greenberg had bribed him. "Hell, no. Little bastard. He's lucky to be alive." On the way out of the park he slipped Brutus a liver treat anyway. "There are about thirty more things Brutus does. He's really good. He loves his work, he loves to do it." The reporter thought it could have been Greenberg describing himself.
Back at the apartment, before leaving for the office in a green-and-black houndstooth jacket, a monogrammed yellow shirt, and a navy bow tie with green dots, he sat down at a card table by the bar and took six half-dollars out of a velvet pouch. He put three in each hand, opened and closed his fists to show they were still there, put his left hand under the table, and had his visitor hold his wrist. He tapped the table twice with his right fist and opened it. All six coins were in it.
Greenberg was a member of the Society of American Magicians. With Richard Kaufman he financed a small publisher of magic books, Kaufman and Greenberg. He kept a deck of cards on his desk at work. He did tricks for children at fundraisers, for the Jerusalem Foundation and the Parkinson's Disease Foundation, and during interviews. On a Saturday night in February 1999, he and Kathryn drove to Starrett City in Brooklyn for a Purim party at the Be'er Hagolah Institutes, a school serving recent Russian immigrants that he had already given money to. In an auditorium apart from the noisy gym party, he did fifteen minutes: silk handkerchiefs, ropes, linking rings, and a finale in which an Orthodox rabbi from the audience tied his thumbs together.
It's tempting to read the magic as a metaphor for Wall Street, and the reporter watching the coin trick did, noting that the magician was about to ride downtown and "spend the next several hours doing considerably better than breaking even." Ted Greenberg saw it more practically:
"One mistake he never makes is speaking out of school to anybody. I've never seen him lapse. Where you or I might feel impelled to make conversation, he doesn't suffer from that. He knows a lot and can speak objectively about a lot of things, and he has all these props — magic, bridge, golf — that make it easy, at times, not to have a conversation. If things get dangerous, he'll whip out a magic wand and make a ball disappear. It's extremely handy in the way he operates."
In this reading the tricks weren't a sign of hidden depth. They were a way of not showing any. Barbara Walters tried for the fiftieth-anniversary video, "fresh from her excruciating encounter with Monica Lewinsky," and got nowhere. What came through, in the New Yorker's words, was that "deep down, he's freakishly normal." Small talk and eye contact were not his strengths. Telling a caller, who happened to be Warren Buffett, how he felt, he said: "It's amazing. If I feel any better I'm gonna call a doctor."
The most telling item in the apartment wasn't a trophy. It was a yellowed clipping from the Wichita Beacon in 1933, framed and hung near the plaque from the Danish knighthood. It reported that a boy named Corky Greenberg had lost his fox terrier, Skippy, and had offered to "trade my tricycle, my skates, my wagon, just anything" to get him back.
Skippy came home. Corky kept all his toys.
A Locomotive Going Sixty Miles per Hour
The firm's record of surviving ended slowly at first, then all at once.
On June 22, 2007, Bear Stearns committed up to $3.2 billion in a collateralized loan to rescue one of its own hedge funds, the High-Grade Structured Credit Fund, while trying to arrange bank financing for a second, more leveraged fund. Bear had put just $25 million of its own money into the funds, and executives hesitated over a rescue that size. Concern for the firm's reputation decided it. The funds held thinly traded collateralized debt obligations. Merrill Lynch seized $850 million of the collateral and could only auction about $100 million. In the week of July 16, Bear disclosed that the two funds had lost almost all their value. On August 5, Warren Spector, the man who once said the firm must be in business tomorrow no matter what, was asked to resign. During that period, according to Cohan, Jimmy Cayne was hard to reach because he was at a bridge tournament.
On November 15, 2007, the chief financial officer, Samuel Molinaro, announced another $1.2 billion write-down of mortgage securities and the firm's first quarterly loss in eighty-three years. S&P downgraded Bear from AA to A. At the end of the 2007 fiscal year, Bear held more than $28 billion of "level 3" assets, which are valued by models because no market price exists, against net equity of $11.1 billion. That equity supported $395 billion in assets, a leverage ratio of 35.6 to 1. In January 2008 Cayne gave up the chief executive job to Schwartz, the banker who had once asked Greenberg to raise Steinberg's limit on Conoco.
Then came the week in March.
Greenberg's version was clear and, in its way, defensive. In the book he wrote with Mark Singer, The Rise and Fall of Bear Stearns, published in 2010, he said the run came from "a groundless rumor" about liquidity at a time when the firm had $18 billion in cash reserves. He also said the fixed-income division had used too much leverage to build its mortgage book. He blamed Cayne by name and in detail. He described his successor, according to press accounts of the book, as a megalomaniac more interested in bridge than in representing the firm, who became "more aloof and full of himself" as the stock rose in 2007, which "couldn't help but impair certain business judgments." He called the collapse "our man-made disaster." He told Bloomberg Businessweek in 2011: "I didn't think Jimmy was going to turn into somebody you couldn't talk to, or an absolute demagogue. Meetings were horrible. Whatever I said, Jimmy Cayne would say the opposite, no matter what it was."
Cayne had already given his own version, to Cohan for House of Cards in 2009: "There isn't anybody that will tell you he's an honest guy. There isn't anybody who will tell you that he's sincere. There isn't anybody that would tell you they choose him as their best man, or best friend, or one who they would have lunch with, or go on a trip with, or socialize with, or whatever. They don't exist. He had one friend — me."
The partnership that began at a card table with a joke about how a bad bridge partner would limit a career ended with each man saying, in print, that the other had wrecked something.
The reviews of Greenberg's book were tough. Henny Sender wrote in the Financial Times that its purpose seemed to be blaming Cayne and called it "memoir as revenge." Norman Pearlstine, in Bloomberg BusinessWeek, found it "long on diatribe and gossip" and read it as a reply to Cohan's book, which "portrays Ace as sometimes ruthless and small-minded." Cohan's own verdict was a single sentence: blaming Cayne "of course, ignores Ace's role in it because Ace was part of the firm's DNA."
Greenberg's defense, when he gave one, was that he no longer had the authority. "I did what I could. I tried as hard as I could," he told Marketplace in 2010. "Kai, you have to understand that I was a very very small shareholder of Bear Stearns during this period." The New-York Historical Society's finding aid for his papers adds a fact that is hard to ignore: Greenberg "did well, having sold off much of his Bear stock before the crash." The man who taught the firm to sell losers early had, for the most part, sold early. After the deal he joined JPMorgan Chase as vice chairman emeritus and kept the title for the rest of his life.
The best admission came in the Frontline interview recorded December 15, 2008, nine months after the sale:
— Alan Greenberg, to FRONTLINE, December 15, 2008I wasn't as vociferous as I should have been, maybe. It's very hard to stop a locomotive going 60 miles per hour.
The "maybe" carries a lot of weight. Greenberg had threatened to quit over Rudd-Melikian, a stock that had fallen from twenty to five. He had questioned a junior banker over a buying limit on Conoco. He had remembered every desk's positions for years. The vacillation in that sentence, coming from him, is the clearest admission he made.
In that same interview he gave a eulogy for the business he grew up in: "There is no Wall Street. It's gone. There is no Wall Street. It's a street just like Broadway or Madison Avenue now. There are no firms on it. The model of the investment banking firm is gone forever."
On March 24, 2008, after shareholders sued and lawyers found a gap in a hastily drafted guarantee, JPMorgan raised its offer to $10 a share. Shareholders approved the sale on May 29. JPMorgan dropped the Bear Stearns name in January 2010. Time put Cayne on its list of people to blame for the crisis and said that "none seemed more asleep at the switch." When Marketplace asked Greenberg what he regretted most, he said it was the Bear employees who lost their jobs. This was a man who had issued a no-layoffs memo the week after the 1987 crash.
He kept trading. In 2013, at eighty-five, he told a trade magazine that he liked the modern market: high-frequency trading, fragmented exchanges, and liquidity good enough that he could move a large block "within 3 cents of the last sale." He was dismissive of people who worried about it. "If somebody wants to buy a stock on Monday and sell it on Thursday, they are going to go broke anyway." He still answered his own phone. The MarketWatch columnist David Weidner wrote when he died: "He was always business, but Ace Greenberg always picked up the phone."
Except Probably One
Alan Greenberg died of complications from cancer on July 25, 2014, at Mount Sinai Hospital in Manhattan. He was eighty-six. More than fifty years earlier, at thirty-one, doctors had told him his cancer prognosis was terrible.
Jamie Dimon and Mary Erdoes sent a memo to JPMorgan employees: "It's hard to imagine a financial services industry without Ace." It praised his intelligence, wit, and generosity, and his habit of "wowing the trading floor with his penchant for magic."
The funeral was at Temple Emanu-El on the Upper East Side on Tuesday morning. It began on time at eleven and lasted about an hour, which mourners took as a final tribute to his dislike of long meetings. The pews filled with former Bear Stearns people in dark suits. Samuel Molinaro, the CFO when the firm failed, greeted old colleagues. John Paulson, who had made a fortune betting against the mortgages that sank Bear, was there. Alan Schwartz, the last chief executive, put his arm around Leslie Moonves and, after the casket passed, saluted Nelson Peltz from across the room. "It's great you're here," he told Peltz. "He would have loved it."
Rabbi Ronald B. Sobel compared him to Hemingway: "Both were intrigued by bulls — Hemingway by the bulls of Spain and Alan by the bulls of Wall Street." John Catsimatidis, the grocery owner who had run for mayor the year before, called him "the last of his kind" and said "you could shake hands with Ace, and know you didn't have to have anything in writing." JPMorgan provided buses to take mourners from the temple to its Park Avenue headquarters, where Greenberg had kept an office in the bank that bought his firm for almost nothing.
Elliot Wolk, seventy-nine, a longtime Bear trader, looked around the room. "I think 98 percent of the people who knew him are here," he said. "Except probably one."
He meant Jimmy Cayne. Schwartz, asked about the feud, would not discuss it. "When something like Bear happens, there's always going to be some disagreements. Don't go there."
The scrapbooks went to the New-York Historical Society: twenty-one oversize volumes of laminated pages covering 1978, the year he became chief executive, through 2014, along with an oral history transcript, a consultant's report on Bear, and drafts of a corporate history. They hold the clippings, awards, and photographs of a man who rarely explained himself.
Near the end of the service, a representative of the Society of American Magicians came forward, as the society does for its members, took Ace Greenberg's magic wand, and broke it in two.
Part IIThe Playbook
What follows comes from the career described above. It includes the rules Greenberg wrote down, the rules he followed without writing them down, and one rule his own story shows he failed to follow. Most of his memos were jokes with a serious purpose, and most of his principles sound obvious until you try to apply them, which is where they get hard. The useful lessons are less in any single rule than in how strictly he enforced them, and in the one case where he didn't enforce them strictly enough.
The principles
- 1.Treat a loss as inventory, not a verdict.
- 2.Make "in business tomorrow" the first line of every plan.
- 3.Cap conviction and set a minimum for nerve.
- 4.Ignore what's going up; interrogate what's going down.
- 5.Cut costs hardest when you're winning.
- 6.Hire for hunger, not pedigree.
- 7.Turn idle assets into boring, durable businesses.
- 8.Buy and hire while everyone else is running for the exit.
- 9.Make access the most visible part of the culture.
- 10.Deliver discipline through a persona.
- 11.Forgive losses; never forgive concealment, including your own.
- 12.Apply your stop-loss to people, especially successors.
Principle 1
Treat a loss as inventory, not a verdict
Greenberg's starting point came from his father's store: bad merchandise doesn't get better by sitting on the shelf. In markets, people hold losers because selling makes the mistake official. "People don't hesitate for a minute to take a small profit," he said. "But they don't want to take losses. Which is, of course, just the opposite of what you should do." Once a decline is treated as something to sell rather than a judgment on the person who bought it, selling stops being a matter of ego and becomes routine.
The Rudd-Melikian confrontation shows what it took to put that into practice. Cy Lewis was a legendary trader and the most powerful man at the firm, and he still couldn't bring himself to turn paper losses into real ones. Greenberg didn't win by arguing better. He threatened to leave. Getting an organization to cut losses can require someone willing to put their own position on the line to force the cut. Rules about stop-losses mean nothing until someone with standing insists they be followed.
His own name was the first example. He tried "Ace Gainsboro" for a year, kept the part that worked, and dropped the rest. The same thinking applies to brands, product lines, hires, and reorganizations.
Tactic: For each position, product, or initiative, write down in advance the price or metric at which you will sell it, and treat reaching that point as a scheduled sale rather than an emergency.
Principle 2
Spector said it directly: "The first thing we think about being in business is that, no matter what, we have to be in business tomorrow." Bear Stearns under Greenberg was built to survive rather than to maximize returns, and the 21 percent average return on equity came mostly from not blowing up. The competitors that disappeared (Salomon, Drexel, Hutton, Bache, and others) were not less talented. They overreached once, at the wrong time.
Survival is the one requirement that allows you to keep making every other bet. A firm that survives can try again. A firm that doesn't loses everything it built. This is why Greenberg was relaxed during the 1987 crash: he had set up the firm's exposure in advance so that the crash would hurt badly without being fatal.
The way Bear ended is the strongest evidence for the principle. Leverage of 35.6 to 1, with $28 billion in hard-to-value assets against $11.1 billion of equity, was a structure that couldn't survive a single bad week, and it got one.
Tactic: Before approving any major commitment, describe the worst plausible week for it and confirm in writing that the organization would still be open the following Monday.
Principle 3
Cap conviction and set a minimum for nerve
The Conoco exchange is the core of Greenberg's risk thinking. When Schwartz asked for more room on a trade Steinberg loved, Greenberg asked what the limits were for if not to stop people from buying too much of what they liked. Losses he could handle. Excess conviction was what concerned him, because conviction is what leads people to concentrate positions, borrow against them, and ignore the exit.
He also told Steinberg, "Bobby, you haven't lost enough money lately." A firm that only sets ceilings ends up too cautious to earn anything. Greenberg also set an expectation of minimum risk-taking, because a trader with no losses probably isn't taking real positions. The two limits work together: the ceiling stops ruin, and the floor stops timidity.
A
Greenberg's Two-Sided Risk Discipline
Both limits were enforced by the same man, often on the same trader.
| Conventional wisdom | Greenberg's approach | Category |
|---|---|---|
| Loosen limits when you're confident. | Limits exist precisely for high-conviction trades. | Ceiling |
| A trader with no losses is doing well. | "You haven't lost enough money lately." | Floor |
| Celebrate gains in risk meetings. | "If it goes up, I don't care. If it goes down, we discuss it." | Attention |
| Concentrate capital in your best people. | "No single individual... has the opportunity to take too large a risk by himself." | Ceiling |
| Freeze in a crash. | "I think now's the time to start buying." | Nerve |
Tactic: For each risk-taker, set a maximum position size and a minimum level of activity, and review anyone who hits either one.
Principle 4
Greenberg's Monday meetings were organized around what was going wrong. Positions that had gained got little discussion, and positions that had lost got scrutiny. This is the reverse of how most review meetings work, where winners present their wins and losers try not to be noticed.
The approach depended on his memory. Spector said Greenberg could recall the general size of every desk's positions "every week for the last several months and years," and could remember a counterparty problem from eight years earlier. That memory made it hard to hide anything. A risk committee is only as good as its history of what has happened before, and Greenberg kept that history himself.
There's another benefit. Spending attention on losses where the damage happens, rather than on gains, makes the organization's attention match its actual risk. Winners don't need managing. Losers do.
Tactic: Start every performance review with the three worst-performing items since the last review, and leave the wins for the end if time remains.
Principle 5
Cut costs hardest when you're winning
The paper-clip memo went out in August 1985 because the quarter had been excellent. "When mortals go through a prosperous period, it seems to be human nature for expenses to balloon. We are going to be the exception." Most companies cut costs when they have to, which means when it hurts most and does the least good. Greenberg cut costs when they were easiest to cut and when the habits formed in good years were most likely to become permanent.
His reasoning, through Haimchinkel, was "it is ridiculous to leave anything on the table when you hold a royal flush." Paper clips and rubber bands weren't meaningful savings for a firm worth half a billion dollars. They were a visible signal from the top that good results didn't loosen the rules. The welcome note giving each new hire fifty rubber bands for their whole career made the point to people on their first day.
The structure supported the signal: $200,000 base salaries for senior managing directors and bonuses tied to performance. Fixed costs stayed low so that compensation could move with results.
Tactic: After your best quarter, announce one specific and visible cost cut, preferably small and a little ridiculous, so everyone understands that good results don't relax the rules.
Principle 6
Hire for hunger, not pedigree
Five established firms turned Greenberg down. Bear hired him, and he spent the next fifty years repaying that by hiring people like himself. The 1981 PSD memo (poor, smart, deep desire to get rich) made his background into hiring criteria. He wasn't being sentimental. He understood that Ivy League credentials mostly reflect where someone started, while hunger reflects how hard they'll push.
His 2013 comment explains the reasoning: after six months he had no idea whether an employee had gone to an Ivy League school; "they were either smart or dumb." Performance on the job replaced credentials within months, so paying extra for credentials was a waste. A firm that hires from a broader pool also has less competition for talent.
He also saw how the principle could fade. In 2013 he complained that young talent was coming from a handful of colleges because there were fewer firms hiring. When an industry consolidates, its hiring narrows too.
Tactic: Remove school names from the first round of résumé screening and replace them with one question: what has this person done that they weren't required to do?
Principle 7
Turn idle assets into boring, durable businesses
In 1973, during a slump, Greenberg had too much space at 55 Water Street. He offered small brokers free rent in exchange for their clearing business. By 1999 Bear cleared for more than 2,600 firms, handled about 13 percent of NYSE daily volume, and clearing produced a large part of the firm's net income.
Clearing earned steady fees and margin interest regardless of the market's direction. That steadiness paid for everything else. It let the arbitrage desk take risk and helped the firm get through downturns that took out more glamorous competitors. Greenberg saw a vacant floor as raw material for a business.
The general idea is to look for assets you're already paying for that you aren't using, and to favor businesses whose income doesn't depend on being right about the market.
Tactic: List every asset you're paying for but not fully using, such as space, data, relationships, or back-office capacity, and ask which one could be traded for recurring revenue.
Principle 8
Buy and hire while everyone else is running for the exit
On October 19, 1987, with the arbitrage book down 50 to 60 percent and his top arbitrageur frozen, Greenberg said it was time to buy and then practiced his golf swing in front of the trading floor. Afterward he sent the no-layoffs memo and told the firm it would hire people other firms were dropping. Bear lost $50 million early in the crash and reported a record year six months later.
His explanation of the crash, "just a bunch of people running to get out the door at the same time," is what made the response possible. If a decline comes from panic rather than from a real change in value, the people still buying are getting a discount. Crashes also free up talent. A firm that keeps its staff while others cut can hire the best people let go by competitors.
This only works if you've followed Principle 2 beforehand. Greenberg could buy in 1987 because he'd limited exposure in the years before it. You can only be calm in a crash if you prepared before the crash.
Tactic: Keep a written list of the people you'd hire and the assets you'd buy in a downturn, and fund that list during good years.
Principle 9
Make access the most visible part of the culture
Barry Cohen said losing money never bothered Greenberg but an unreturned phone call did. Greenberg answered his own phone, usually in about ten seconds per call. Twice a week he walked through the retail brokerage floor saying "Hi!" and anyone could stop him with a problem that took under forty-five seconds. "It's much easier to voice a complaint to somebody who's walking by saying 'Hi' than to have to sit down and write a letter."
He saw responsiveness as a matter of controlling information as much as being polite. A chairman people can reach hears about problems earlier. Clients who know their calls get returned don't go elsewhere. His desk on the trading floor, with risk arbitrage in his line of sight, made his oversight part of the floor layout.
This was what made his discretionary accounts and his raider clients possible. After the 1998 drop he got two calls, both buy orders. Clients trusted him because they knew he would pick up.
Tactic: Set a firm-wide rule that every call or message from a client or colleague gets a response the same day, and enforce it more strictly than you enforce profit targets.
Principle 10
Deliver discipline through a persona
Haimchinkel Malintz Anaynikal let Greenberg give harsh orders without sounding harsh. The invented sage banned rubber bands, warned against believing "thine own odor is perfume," and announced a backward planning committee. The humor let employees enjoy the memos while still following them.
It worked because the rules were serious, and the persona made the audience pay attention. Buffett's foreword shows how well it worked: one of the most respected investors in the country wrote, with a straight face, that he now "slavishly" followed Haimchinkel's teachings on paper clips. A rule people repeat as a joke tends to stick.
There's a tactical benefit too. Attributing a rule to a fictional authority lets a leader be strict without seeming self-righteous, and lets employees go along without feeling ordered around. The persona takes the resentment that would otherwise land on the boss.
Tactic: Pick one cultural rule your team keeps forgetting and restate it as a short, memorable, deliberately funny maxim, then repeat that exact wording until people start quoting it.
Principle 11
Forgive losses; never forgive concealment, including your own
"Absolution can be granted for losing money but never for lying about it." That line explains how Bear Stearns could be both risk-loving and strict. If losses are forgiven, people take risks. If hiding losses is never forgiven, people report losses quickly. The combination produces an organization where bad news moves up fast.
Greenberg applied this to himself. On the 1985 IPO, which he opposed and which made him $53 million, he said: "They were right. I was wrong." Willingness to admit a mistake publicly is a stop-loss on reputation, taken before the cost grows. A leader who admits mistakes makes it easier for others to do the same.
The record also includes his weakest moment by this standard. "I wasn't as vociferous as I should have been, maybe," he told Frontline. The "maybe" is the hedge he had taught others never to use. It suggests the principle gets harder to follow as the stakes get higher.
Tactic: In every post-mortem, the most senior person present should name one decision of their own that was wrong before anyone else speaks.
Principle 12
Apply your stop-loss to people, especially successors
Greenberg's career teaches this one by its absence. He could sell Rudd-Melikian at five. He couldn't, or didn't, cut his position in Jimmy Cayne. Their partnership began with a joke about a bad bridge partner limiting a career, grew into a mentorship, and ended with Greenberg describing meetings as "horrible" and Cayne telling Cohan that Greenberg "had one friend — me." In between, the firm Greenberg handed over took on 35.6-to-1 leverage, and its chairman was reportedly away at a bridge tournament while the hedge funds failed.
The difficulty is that the person needing to be cut is someone you picked, trained, and vouched for. Admitting the position failed means admitting your own judgment failed. Cohan's point that Greenberg "was part of the firm's DNA" means he couldn't separate himself from his successor's mistakes, because he had chosen the successor and stayed on the executive committee, which oversaw risk, until the end.
The broader lesson is that people need the same exit discipline as positions. The safeguards Greenberg built (limits, Monday reviews, a memory of everyone's positions) checked trades. None of them checked the person at the top.
B
The Arc of Bear Stearns, 1923–2014
The firm Greenberg joined, ran, handed off, and watched disappear.
1923
Bear Stearns founded May 1 with $500,000; it later survives the 1929 crash without layoffs.
1949
Greenberg joins as a $32.50-a-week clerk; the firm has 125 employees and $17 million in capital.
1958
Greenberg becomes a partner in May; he is diagnosed with colon cancer at 31.
1969
Greenberg hires James Cayne as a retail stockbroker.
1973
Empty office space at 55 Water Street becomes the start of the clearing business.
1977
Greenberg and Cayne win the Reisinger national bridge championship.
1978
Cy Lewis dies; Greenberg becomes CEO of a firm with about 1,000 employees and $46 million in capital.
1985
Bear goes public over Greenberg's objection; the paper-clip memo goes out in August.
1987
October 19 crash; Greenberg buys, promises no layoffs, and the firm posts a record year.
1993
Cayne becomes CEO; the firm has 6,300 employees and $1.8 billion in equity.
2001
Cayne becomes chairman; Greenberg chairs the executive committee.
2007
Two mortgage hedge funds collapse; Spector resigns; first quarterly loss in 83 years.
2008
March 16: board agrees to sale to JPMorgan at $2 a share, later raised to $10.
2014
Greenberg dies July 25; his magic wand is broken at Temple Emanu-El.
Tactic: Define in advance, in writing, the conditions under which you would withdraw support from your chosen successor, and give that document to someone who will hold you to it.
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Part IIIQuotes and Maxims
In their words
— Alan Greenberg, to The New Yorker, 1999People don't hesitate for a minute to take a small profit. But they don't want to take losses. Which is, of course, just the opposite of what you should do. If you're wrong, you're wrong. Sell, and buy something else.
— Alan Greenberg, Memos from the ChairmanAbsolution can be granted for losing money but never for lying about it.
— Alan Greenberg, on the 1985 IPO, to The New Yorker, 1999I wanted to incorporate but I didn't want to go public. I didn't want the scrutiny that goes with it. . . . So we went public. They were right. I was wrong.
— Alan Greenberg, Oklahoma Hall of FameWhy should I get tired of my job? To me, it's just a game. . . . You need to look forward to going to work in the morning and look forward to leaving in the afternoon. Otherwise, you're never going to make it.
— Alan Greenberg, The Rise and Fall of Bear Stearns, 2010Our most unassailable assumption — that Bear Stearns, an independent investment firm with a proud eighty-five-year history, would be in business tomorrow — had been extinguished.
Maxims
- Sell it today. Bad merchandise and bad positions only get worse, so the first loss is usually the cheapest one.
- Survival comes first. Every plan should begin by making sure the firm is still open tomorrow.
- Limits are for the trades you love. You don't need a cap on positions you don't like.
- Losers get the meeting time. Winners don't need managing.
- Cut costs when you're winning. That's when spending creeps up unnoticed and when cuts are easiest.
- Hunger outlasts pedigree. Within six months, people are either smart or dumb, and where they went to school stops mattering.
- Buy when the crowd is panicking. A panic sale is a discount for anyone who prepared for it.
- Return the call. Being reachable is how you hear bad news early.
- Deliver hard rules with humor. A rule people enjoy repeating is a rule they follow.
- The hardest stop-loss is on a person. Positions can be sold without regret. A successor you chose can't be.
