Jan. 8 (Bloomberg) -- Bear Stearns Cos.' James ``Jimmy'' Cayne plans to hand over the chief executive officer role to his hand-picked successor, staying on as chairman as the firm tries to recover from the collapse of the subprime mortgage market, a person with direct knowledge of the matter said.

Board members have been notified by Cayne, 73, that he will step down as CEO of the New York-based company, according to the person, who declined to be named because the decision isn't public. He will be succeeded by President Alan Schwartz, 57, and an announcement may be made as soon as today, the person said.

Cayne would join former Citigroup Inc. CEO Charles Prince and his counterpart at Merrill Lynch & Co., Stan O'Neal, who left after the sinking value of assets tied to mortgages eroded earnings. Bear Stearns's fourth-quarter loss of $854 million was the first in its history and the company's stock dropped 57 percent in New York trading during the past year, more than any Wall Street rival.

``Jimmy's been so engaged with the company for a long time, he and Ace have been the personification of the company,'' Bear Stearns board member Henry Bienen said yesterday in an interview, referring to Cayne's 80-year-old predecessor, Alan ``Ace'' Greenberg. ``Jimmy's still a huge shareholder. It's the board's view that Jimmy would stay very involved.''

Bear Stearns spokesman Russell Sherman declined to comment. The Wall Street Journal reported Cayne's plan to resign on its Web site yesterday, citing people familiar with the matter.

Shares Decline

Bear Stearns fell $5.08, or 6.7 percent, to $71.17 in composite trading on the New York Stock Exchange at 4 p.m.

``CEOs at other financial institutions who were less impacted than Bear Stearns by the subprime crisis have been forced out, yet Jimmy Cayne has managed to cling on and will even continue as chairman,'' said Octavio Marenzi, chief executive officer at Boston-based consulting firm Celent. ``He is truly the Harry Houdini of the boardroom.''

Cayne, who joined Bear Stearns in 1969 and was named CEO in 1993, faces the prospect of leaving his job amid a crisis his firm helped create. The fifth-largest U.S. securities firm by market value spurred last year's crash in the market for home loans to people with poor credit when two of its hedge funds, which invested in securities tied to the mortgages, collapsed in July, prompting investors to shun the debts.

About 30 percent of Bear Stearns's fixed-income revenue comes from mortgages and related securities, according to estimates from Sanford C. Bernstein & Co. analyst Brad Hintz. The company's $1.9 billion mortgage writedown wiped out revenue in the three months ended Nov. 30.

Cioffi's Departure

Bear Stearns shuttered the two failed hedge funds and Cayne ousted his co-president, Warren Spector, whom investors considered the heir-apparent. Ralph Cioffi, the manager of the two funds, left last month amid probes by the U.S. Securities and Exchange Commission and the U.S. Attorney in Brooklyn. The government investigators haven't accused Cioffi or Bear Stearns of any wrongdoing.

Cayne told board members at a meeting in December that he was considering stepping down, and the board didn't push him, said Bienen, who is president of Northwestern University in Evanston, Illinois. Cayne holds 4.9 percent of Bear Stearns shares, making him the firm's second-largest individual investor after billionaire Joseph Lewis, data compiled by Bloomberg show.

``It's a different situation from what there was at Merrill and some other places, where clearly there was some pressure for them to step down,'' Bienen said. ``Part of it may be the culture of the company. It's been a place where there hasn't been a lot of turnover in leadership.''

`Natural Choice'

Schwartz ``was a natural choice'' to become the next CEO, Bienen said. ``He's a very experienced guy and obviously respected by the board.''

A Brooklyn native and 1972 graduate of Duke University in Durham, North Carolina, Schwartz was drafted as a pitcher by the Cincinnati Reds baseball club but injured his elbow and never reported to the team. He started at Bear Stearns's Dallas office in 1976 as an institutional stock salesman.

Greenberg, who became Bear Stearns CEO in 1978, took notice after Schwartz called him with ideas for improving the stock- research department. Schwartz moved to New York and in 1979 became head of research and investment strategy. He was named executive vice president in 1985 and charged with running the firm's fledgling investment-banking division. He was promoted to co-president, with Spector, six years later.

Lost Bonuses

Cayne said last month that he and his senior managers agreed to forgo bonuses for 2007 after producing ``unacceptable results.'' In addition to the mortgage-related losses, fourth- quarter revenue from equity sales and trading dropped 11 percent to $384 million. Investment-banking fees during the quarter fell 44 percent to $205 million.

Lehman Brothers Holdings Inc., Morgan Stanley and Goldman Sachs Group Inc. posted gains for the quarter from trading stocks and advising on mergers. All the firms are based in New York.

``Cayne stepping down will help keep Bear out of the headlines, and that's what the firm needs to rebuild,'' said Bruce Foerster, president of Miami-based South Beach Capital Markets. ``He was under pressure and the only way to ease the pressure on the firm is for the CEO to step down.''

Cayne ranks as Wall Street's richest CEO, with $1.3 billion of assets, according to Forbes magazine's 2007 billionaire survey. Cayne left Purdue University before graduating to join the U.S. Army and was hired 38 years ago by Bear Stearns. A world-class bridge player, Cayne was promoted to president by Greenberg in 1988 and then to CEO five years later.

Return on Equity

Bear Stearns's return on equity dropped to 1.8 percent for 2007 from 19 percent the year before. Morgan Stanley reported a 7.8 percent return; Lehman generated 21 percent. Goldman delivered 33 percent for the year.

The world's largest banks and securities firms have reported at least $97 billion of writedowns and credit losses stemming from the collapse of the subprime mortgage market and ensuing credit-market contraction, according to Bloomberg data.

``People realize that clearly mistakes have been made at the world's financial institutions, a tsunami, and I'm not sure you'd blame the individual,'' Bienen said. ``One person didn't get you into these difficult situations, and one person's not going to get you out.''

To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: January 8, 2008 16:11 EST