Mauled By Bear Stearns

The bank's biggest investor has lost hundreds of millions. But Joseph Lewis is a patient man

Joseph C. Lewis' big bet on Bear Stearns (BSC) looks like one of the biggest mistakes on Wall Street. The billionaire investor came on board last September, upping his stake from 9 million to 11 million shares in December after an options strategy failed. Since then the stock has been in a free fall. The latest hit: a nearly 7% plunge on Jan. 8 following the expected news that James E. Cayne would step down as chief of the beleaguered investment bank. In all, Lewis, the single largest shareholder in Bear, has watched the value of his roughly 10% stake erode from $1.2 billion to $827 million.

The 70-year-old Lewis has endured losses before in his eclectic portfolio. The Tavistock Group, which he founded in 1978, has investments in 170 companies worldwide, largely spanning real estate, financial services, and entertainment. He also uses at least five other fast-moving investment funds to trade currencies and make more opportunistic plays like Bear.

One of Lewis' hallmark strategies is to trawl for cheap picks, patiently waiting years for the payoff. After he bought a controlling stake in Tottenham Hotspur, the English soccer team, for $1.10 a share in 2000, the price dropped to 27 cents. Today it trades at $2.72.

Lewis may need to be long on patience with Bear, which took a $1.9 billion writedown from subprime-linked securities in the latest quarter. New chief Alan D. Schwartz has to figure out a way to revive the firm's core business of underwriting, selling, and trading bonds and other credit securities. Mortgage-related investments, once that division's bread and butter, are dead. Meanwhile, Bear faces scrutiny from securities regulators and federal investigators after the implosion of two of its hedge funds last summer. "Bear became a one-trick pony, and now its business model is broken," says Dick Bove, analyst with research firm Punk Ziegel. "It's one of the worst investments of all time." Bear did not return calls for comment. Lewis would not comment.

There's plenty of vague speculation that an American or overseas rival will swoop in to buy Bear at its current battered price. The stock sells at a 11% discount to the value of the assets on its books—rare for an investment bank. Given its problems, Bear may be too unappetizing to swallow whole, increasing the odds that a few players will buy pieces. One chunk still in decent financial shape: the prime brokerage, which offers clearing and others services to hedge funds.

So that leaves a lot to ponder about exactly how Lewis will play his hand. The secretive financier has a history of hostile takeover bids. An art collector who owns paintings by Chagall and Picasso, Lewis made a move on auction house Christie's International in 1995. He gradually built a 29% stake in the company. As usual, he got in at a good price, buying when the art market softened and Christie's bottom line took a hit. Ultimately, Lewis couldn't pull off a takeover. And in 1998 he sold his shares to French media tycoon François Pinault for $328 million, banking a 100%-plus gain.

A similar run by Lewis at Bear would be a long shot. So it's more likely he will take a passive stance, at least at the outset, allowing Schwartz time to prove he can restore the bank as a Wall Street competitor.

ROUGH BEGINNINGS

Lewis made his early millions rehabbing a business in much the same way. Born in London in 1937, he lived above his family's pub, the Roman Arms, until the Germans destroyed it during the Blitz in World War II. At 15, he left school to work at the family's new eatery. Eager to tap into the tourist market, he supposedly dragged a concrete bus-stop sign in front of the restaurant to attract patrons. From that rough beginning the family business took off, with Lewis expanding it into a chain of themed restaurants, including Beefeater and Caledonian.

In 1979, Lewis sold the restaurant empire for $64 million and used the proceeds to fund his next moves, this time in the financial markets.

To avoid Britain's capital-gains tax, he moved to the Bahamas and began speculating in foreign currencies. His first big score was in 1992, after he bet on a falling British pound, the same type of trade that famously made George Soros billions "breaking the Bank of England." Lewis went on to short the Mexican peso in 1994, profiting from that country's economic crisis. Those bets turned millions into billions for Lewis, whose personal wealth now stands at more than $2 billion.

Today, Lewis, who still has a Cockney accent, puts much of his fortune to work through Tavistock, where he leaves the day-to-day stuff to his managers. Although he meets with the board of directors to discuss macroeconomic trends in countries and industries that will affect his business or investments, Lewis is just as likely to call up a portfolio manager for an informal chat about an idea or to host a dinner simply for a brainstorming session. "He probably fears for the organization, the larger it gets," says Rasesh Thakkar, senior managing director at Tavistock. "He doesn't want it to get bureaucratic and lose its nimbleness."

Lewis' base now centers around his Windermere (Fla.) home, which doubles as Tavistock headquarters. He stumbled upon the Orlando area while negotiating in the 1980s with Disney World to manage an English-themed restaurant on the park's grounds. The deal never panned out, but Lewis thought the region had untapped potential. In 1993 he purchased Isleworth out of bankruptcy for $21 million and transformed the struggling gated community into a thriving one, wooing actors and professional athletes, including basketball star Shaquille O'Neal and golfers Tiger Woods and Ernie Els. Isleworth is now one of the most sought-after addresses in Florida, where a three-bedroom, three-bath, 2,800 square-foot golf villa sells for $1.5 million.

BIOTECH BUILDUP

As with Isleworth, Lewis bought a nearby property, Lake Nona, at a cut-rate price and turned it into a high-end, 7,000-acre planned community. He is currently making it a hub for biotechnology, helping to lure a medical school, a research center, and an ultramodern veterans hospital to the area. "Lewis and his team had a vision for life sciences in Orlando," says Ray Gilley, head of the Metro Orlando Economic Development Commission.

Of course, Lewis benefits. He now has close connections with the academics and researchers settling in Lake Nona—a plus, considering he owns stakes in several small pharmaceutical companies. By anchoring the development with a medical complex, Lewis hopes to distinguish Lake Nona from the usual suburban sprawl, and perhaps insulate it from the whims of the real estate market. Says University of Central Florida President John Hitt: "He created a lot of value for us and for himself."

He is no doubt hoping Bear will create value for his portfolio as well. And although doubters could certainly make a case it's an ill-fated investment, Lewis isn't the type of person to second guess his decisions. "If he loves an idea, he empowers the people and [marshals the] resources needed to make it work," says Tavistock's Thakkar. Then, he "moves on to the next great idea."

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