What It Takes: Lessons in the Pursuit of Excellence

by Stephen A. Schwarzman

By the time we became a public company, the market’s nerves were beginning to fray. In February 2007, Freddie Mac announced that it was no longer buying subprime loans, the mortgages given to less creditworthy borrowers who had pumped up the housing market. Mortgage lenders that specialized in subprime lending were increasingly in trouble. Their problems would eventually infect the entire credit market. Several weeks later, I got a call from Jimmy Cayne, the CEO of Bear Stearns. He needed help. Two of his hedge funds were in trouble, and he wanted an outside opinion. I sent over a couple of our people who understood these funds. They returned with troubling news. The first fund had bought only securities collateralized by subprime mortgages. These weren’t publicly traded, so it was hard to determine their value. As people started defaulting on their mortgages in increasing numbers, you could assume these securities would plummet in price and no one would buy them. Yet under the terms of the fund, investors could withdraw their money once a month. You couldn’t make this up: an opaque and fast-depreciating fund that was still promising monthly liquidity to investors. The second fund was the same as the first one, but with leverage: if the first fund was broke, the second was astonishingly broke. I called Jimmy and told him the funds were going to blow up and there wouldn’t be any equity for investors. I advised him to take the hit and write the investors a check to cover the...