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CEO Cayne a Burden to Bear

Bear Stearns CEO James Cayne seems increasingly inaccessible as the firm flounders.

Bear Stearns


is experiencing a rocky ride after reporting the first quarterly loss in the firm's storied history. But Bear's bigger problem appears to be a lack of leadership.

Shares of the nation's fifth largest investment bank closed up almost 1% to $91.42 Thursday, but was down as much as 2.8% during the trading day after it

posted a loss of $859 million, or $6.90 per share, compared with a profit of $558 million, or $4 per share, a year earlier. Analysts polled by Thomson Financial had expected a loss of $1.79 per share on $625.1 million of revenue for the quarter ended Nov. 30.

The colossal hit turns out to be the largest in Bear's 84-year history -- a history that recently has been marred by wrong-way mortgage bets, mounting lawsuits and a flagging reputation. "Our performance this quarter and for the full year is clearly disappointing and not acceptable to us," said CFO Sam Molinaro Jr., during a year-end earnings call.

Molinaro's diffidence during the call was perhaps the most appropriate way to play the situation after Bear took a greater-than-estimated $1.9 billion writedown on bad mortgage securities and many of its typically stronger business units, including fixed income and equities, suffered.

But what have become even more typical at the embattled investment bank are the inexplicable absences of its CEO James Cayne during its roughest patches.

Cayne, who has been depicted in media reports as an aloof, marijuana-smoking chief executive -- who golfs excessively when he's not spanning the globe to play in bridge tournaments -- has increasingly appeared to take a public back seat in the company's affairs.

Cayne preferred to save his public comments about Bear's shabby earnings performance for a press release. "We are obviously upset with our 2007 results, particularly in light of the fact that weakness in fixed income more than offset strong and, in some areas, record-setting performance in other businesses," Cayne wrote.

A Bear spokesman declined to comment on Cayne's whereabouts. The 73-year-old Cayne put on a similar disappearing act on Aug. 3, when Bear held an emergency Friday conference call to discuss subprime and its hedge fund failures.

Is this meant to serve as stewardship?

"It's just another indication of the

Cayne's total arrogance to shareholders," Punk Ziegel financial analyst Richard Bove said of Cayne's absence. "He treats it like a private company and he practically owns the board."

Andrew Corn, head of New York-based Clear Asset Management, told


that the company's board of directors "needs to find leadership and more financing from the outside,'' adding that the firm will soon come under pressure to replace the CEO. "The firm's reputation is tarnished, and they're losing clients," he said.

Cayne's actions are in stark contrast to those of

Morgan Stanley


CEO John Mack, who reported equally sour year-end numbers for his firm Wednesday.

Mack was prominently featured during Morgan Stanley's earnings call to describe the bank's misadventures in fixed-income trading. He reported the firm's first-ever quarterly loss and said it was "embarrassing." Mack took full responsibility for the firm's mistakes while speaking to analysts and investors who listened in to glean some guidance about the direction of the firm and outlook for Wall Street.

Mack's mea culpa may not save his job if the firm continues to run into trouble, but it was better received by investors than Cayne's absence. Mack's performance, and a $5 billion capital infusion from China, may have helped the firm's stock close higher. Shares of the second largest investment bank closed up 2.6% to $51.37 Thursday.

Both Cayne and Mack have opted to forego bonus pay this year, after each bagged about $40 million last year.

The outlook for both franchises is shaky, but with a much stronger international presence and the link-up with China, Morgan Stanley is on more solid ground.

Bear will have a much dicier time if the fixed-income market continues to be roiled as it was in November, when traders found it difficult to hedge mortgage bets as the spreads between the derivative instruments used to protect investments and the underlying securities widened out dramatically.

"We're operating in unprecedented market conditions," Molinaro said. But he also implied the firm's ability to assess and manage risk is shaken. "Candidly, we made decisions that in hindsight didn't turn out well," he added.

Bear's precarious position led Punk Zeigel's Bove to slash his earnings estimate for Bear to $7.96 a share from $8.20 per share and trim his 2009 estimate to $8.54 per share from $8.92 per share.

Challenges at Bear's asset management arm are also weighing it down.

Barclays Capital


is suing the firm, accusing Bear, among other things, of being defrauded by the managers of a pair of highly leveraged hedge funds that went bankrupt.

All the bad news surrounding the firm has helped to maul its share value by nearly 50%.

Still, Molinaro said that Bear has taken a number of measures to buffer itself, including reducing head count by 1,400 employees, a 9% reduction. He also said that the company is sufficiently capitalized, even without a $1 billion investment from China's Citic Securities. He noted that Bear's exposure to troubled monoline insurance company

ACA Capital

is minimal. On Wednesday, the insurer was downgraded to junk status by Standard & Poor's.

Left alone to address analyst questions, Molinaro did his best to placate concerns and underscored that he believed that Bear was well-positioned for the future but worries seemed to abound.

Questioning Cayne's leadership over the past few months has proved a fruitless exercise so far, especially since the CEO has a strong loyalist contingent in and outside the company. There are rumblings, however, that suggest shareholders are becoming somewhat disillusioned.

"I have a lot of clients that would love to see Jimmy Cayne out of there," said Punk Ziegel's Bove.

Answering a question from Bank of America analyst Michael Hecht, Molinaro said that at least the executive management team's relationship with the board of directors was still "very solid and very good".

But how much worse can things get before there's a Cayne mutiny?