Sponsored By:

Where There's Smoke, There's a CEO Under Fire

November 01, 2007

Dear Fellow Options Trader,

Reading today's news about Bear Stearns (BSC) Chairman James E. "Jimmy" Cayne reminded me of the tale about Nero fiddling as Rome burned, which actually has little historical accuracy, as no such instrument existed in first-century Rome.

Now, Nero may or may not have played his lyre and sang about the destruction of Troy as Rome burned, but the accusations that Mr. Cayne burned something himself while Bear Stearns flamed out during the thick of the credit crunch are what has the Street's attention.

When Mr. Cayne should have been guiding his fold through round two of the subprime blowup in late July, he is reported to have been too busy playing golf, taking part in a bridge tournament and throwing BSC president and co-chief operating officer Warren Spector overboard.

You can understand why investors might wonder how the man who runs one of the largest fixed-income firms in the world found time to head to Nashville for a bridge tournament and played enough golf to keep his handicap in the single digits while his firm was, in effect, burning.

Now, Mr. Cayne, like fellow billionaire Bill Gates, never completed his undergraduate studies but rose through the ranks of one of Wall Street's most respected firms. Some might point to certain arrogance on his part stemming from making his own way, but had Cayne stuck to golf and bridge, this story may have been just an afterthought!

Because, by most accounts, 73-year-old Cayne performed suitably and was well compensated as his $38 million salary and $58 million in stock option grants in 2006 would indicate. However, for as bad as taking time away from work to play golf and bridge might sound, that was not, as comedian Lewis Black would say, the bad news!

An article in yesterday's Wall Street Journal claimed that, on at least one trip to a bridge tournament, Mr. Cayne invited a fellow player and a woman to smoke pot with him!

Stop the presses!

Jimmy Cayne, the CEO and chairman of Bear Stearns, the boss of 15,500 people worldwide with assets of more than $350 billion, fired up a fat boy, lit that funky stuff, hit the hookah, tightened someone's wig, walked to Tijuana, had a bowl of cocoa puffs, hit the happy stick, puffed the magic dragon, got lost in the purple haze, twisted up a torpedo and took a dive in the yellow submarine?

Mr. Cayne said the article is nothing but smoke and mirrors, if you will, and denied the incident. But when asked about whether he smoked pot during bridge tournaments or on other occasions, he said he would respond only to "specific allegations."

Next thing we know, Jimmy Cayne will be debating the meaning of the word "is," as in: Is Jimmy Cayne a pothead?

The distinction between "is" and "was" may have worked for former-President Bill Clinton, but Wall Street is a different story. Arrogance and confidence are what make traders' careers, but they are also what takes them down.

Speaking of going down, I know the 362-point drop today hurt, but the reaction shows that at least the economic leader of the United States isn't teeing off or toking up when he should be working.

The quarter-point interest rate cut the Fed decreed on Wednesday was welcomed, at first, because many believed it signaled that the central bankers were stepping in to save the day.

What many investors don't understand is that the Fed's main concern isn't the health of the markets -- nor should it be. It's true that with the Fed's help in the form of the September rate cuts, the economy weathered the summer's credit crisis, but there's still a macro-storm to come.

Fortunately, unlike Cayne, the Federal Reserve is more focused on monetary policy that promotes long-term economic growth and stability, and fights inflation. So if that means we don't get a rate cut in December, so be it. And if that, in turn, means a 362-point-drop as investors react to the reality of what "is," that's OK, too.

While temporary dips certainly sting, the fact is that the Fed is on top of it by pledging to make decisions that will ensure the economy moves higher in the long-term -- and not wasting time getting higher.


Jon "Doctor J" Najarian
Editor
ChangeWave Options Trader