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Ralph Cioffi left Bear Stearns by mutual agreement on November 28, 2007, at the age of 51. His compensation reportedly soared to eight figures during his BSAM days. The less-leveraged fund had positive returns for several years, and colleagues invested money with him after noting he was returning around 1 percent per month—more than 12 percent per year—in an interest rate environment in which 10-year Treasuries were yielding less than 5 percent. It was an old story: If it sounds too good to be true, it is.

Warren Spector did not last as long as Cioffi. Like Warren Buffett, Warren Spector and Jimmy Cayne are avid bridge players. On August 5, 2007, Spector became the highest ranking bridge player—one of the world’s top 300 contract bridge players—to lose his job over the mortgage lending crisis. Bridge is a great comfort in your old age. If it distracts you from business, it can help you get there faster. Spector had been the lead promoter for Bear Stearns to get into the hedge fund business, and Cayne held him responsible. Cayne’s ire may also have been sparked by the fact that while the funds faltered in July, Spector was at a bridge tournament playing perfect hands of bridge and racking up 100 master points. Cayne played less well at the same bridge tournament, and apparently he thought Spector should have been closer to the hedge fund problem, even if Cayne himself did not feel compelled to fly back to New York.

Unlike Cayne, Spector had sold millions of shares of his Bear Stearns stock in 2004. Bloomberg reported that Spector, 51, earned $228 million in cash from 1992 to 2006, and got another $372 million when he cashed in most of his Bear Stearns shares.42 Jimmy Cayne, 74, resigned in January of 2008, after serving 15 years as CEO. His Bear Stearns stock had been worth more than $975 million in January 2007 and was worth around half of that when he resigned in January 2008. Cayne did not liquidate until after JPMorgan’s March 2008 takeover. The stock was worth only $61 million.

Cayne may feel lucky in comparison to Ralph Cioffi and Matthew Tannin, Ralph’s cohead at BSAM. On June 18, 2008, they were indicted on allegations of securities fraud, among other charges .4344

Prosecutors focused on electronic exchanges between Tannin and Cioffi. The partners may have stumbled over the truth, picked themselves up, and hurried on. In late April, they saw a negative report prompting Tannin to write to Cioffi: “If the report was [sic] true, the entire subprime market was toast.”45 Yet they did not seem to share those concerns with investors. Perhaps the partners gave themselves unwarranted reassurance.

It reminded me of a bridge joke I sent Warren Buffett after our lunch. It was a partnership misunderstanding. My partner thought I knew what I was doing.

Chapter 9

Dead Man’s Curve

I evaluate the probable loss myself. I don’t use a model.

—Warren Buffett

to Janet Tavakoli, September 2005

Benjamin Graham was not a fan of market timing, in which investors try to forecast stock market prices (or oil spreads, interest rate spreads, or prices of CDOs). He was sure those who followed forecasting would “end up as a speculator with a speculator’s financial results.”1 Instead, Graham advocated buying a stock if it was trading below its fair value and selling when it was above its fair value after doing a fundamental analysis. He knew that his views were “not commonly accepted on Wall Street.”2 Even after Warren Buffett achieved a successful track record following (and then modifying) Graham’s principles, many on Wall Street still did not accept these views.

A recent example is the demise of Bear Stearns, which was preceded and partly triggered by the deaths of Peloton, a European-based hedge fund cofounded by Ron Beller, and one of the funds of the Carlyle Group, a Washington-connected private equity firm. At the time of its demise, Peloton’s held long positions of the type that Bear Stearns’s research group touted in February 2008.

Ron Beller first made big headlines in 2004 when