NEW YORK Bear Stearns Cos Inc BSC.N on Tuesday turned to its star investment banker, Alan Schwartz, to replace James Cayne as chief executive and revive the company's badly damaged mortgage franchise.
While Cayne, 73, could be profane and sometimes hot-headed during his near-15 year run as CEO of the investment bank, Schwartz acted as peacemaker and in the 1990s advised on some of the biggest corporate takeovers of that time.
"Even when Alan was annoyed, he was polite about it," said Michael Ehrlich, who ran Bear's emerging markets fixed income business for a period in the 1990s.
Now, stung by big mortgage losses, Bear Stearns' future as an independent company is in serious question, some analysts say.
But Schwartz, who cemented his reputation as an unflappable adviser to the likes of former Walt Disney Co (DIS.N) CEO Michael Eisner, said he is not going to wait for a takeover bid to chart Bear's future.
"Being acquired is not a strategy," Schwartz told Reuters in a telephone interview.
He vowed to return the company to strong profitability while pushing the company's expansion overseas.
Cayne is retiring from the company, but will be non-executive chairman and remains one of Bear's largest individual shareholders. Cayne, who once sold scrap metal, became CEO in 1993 and more than tripled the company's revenue to $7 billion during his tenure.
Schwartz's path to Bear was much different.
The old Washington Senators offered him a contract to play professional baseball out of high school. Instead, he opted to attend Duke University, where he starred as a right-handed pitcher with a good fastball and slider, said Tom Butters, who was his coach.
"He was always eager to be the best. He never allowed anything to stop him from attempting to be that," Butters said.
Schwartz injured his arm, curtailing any thought of playing professional baseball and graduated in 1972. He joined Bear Stearns four years later and became head of investment banking in 1985.
As an investment banker, he built relationships with top executives at some of America's largest companies. Thanks in part to Schwartz, Bear won substantial merger-and-acquisition business in the 1990s. For example, he served as co-adviser on Viacom Inc's $9.6 billion takeover battle for Paramount Communications.
But he might be best known for advising Eisner on Disney's 1996 acquisition of Capital Cities/ABC Inc for more than $19 billion. That massive deal and others helped Bear dominate the media and entertainment M&A market with 11 transactions worth $36.5 billion in a single year.
Eisner said the best advice he got from Schwartz was simple, but necessary with so much at stake:
"Stay cool. Stay calm. Don't overreact."
Schwartz will need to follow his own advice as roiled credit markets threaten to disrupt the company's key franchise.
Bear Stearns is best known as a savvy trader that packages pools of loans into mortgage-backed bonds. And that fixed income business stumbled badly last year when two of its hedge funds collapsed, wiping out $1.6 billion in investor capital.
In the fourth quarter, the company recorded its first loss ever, mostly because of bad bets on risky subprime mortgages.
Bear's standing with investors also was hurt by unflattering press accounts about Cayne playing bridge and golf while the subprime mortgage crisis rattled credit markets around the globe. Cayne bought himself some time by firing Warren Spector, who oversaw the company's capital markets business.
Spector and Schwartz were colleagues and rivals as co-presidents of the company. But with Spector gone, Schwartz quickly became Cayne's heir apparent.
Investors will want Schwartz to boost Bear's sagging stock, which is down 53 percent over the past year. He also will have to show that the company's mortgage franchise has not suffered irreparable damage. Even in good times, the company has been criticized by analysts for not being as diversified as larger rivals such as Goldman Sachs Group Inc (GS.N).
Ehrlich said Bear Stearns may lose some of the hard edge that Cayne cultivated, but he doesn't see that as all bad. "There will be a lot of changes in the culture," he predicted.
Ehrlich recalled how one time a trader was bouncing a basketball off a wall that adjoined Schwartz's office.
"He came out of his office and calmly said, "Do you suppose you could keep the basketball on the ground," Ehrlich recalled.
Eisner said he always found Schwartz to be reasonable, steady and with good advice, even if it meant not doing a deal.
"He was interested in our best interest," Eisner said. "For an investment banker to tell you not to do a deal, well, you don't hear about that a lot."
Eisner did not doubt Schwartz will run Bear Stearns well.
"He understands shareholders. He understands corporate governance," he said. "He has a good twinkle in his eye for the future."
(Editing by Leslie Gevirtz & Ian Geoghegan)