Andy Stone’s Big Hangover: After Lending Binge, Mogul Fights for C.S. First Boston Bonus

Andrew Stone, Crédit Suisse First Boston’s top real estate financier, has always boasted that he is a Star Trek lender, willing to go where nobody on Wall Street has gone before. But these days, he’s in a particularly unfamiliar place: fighting with his bosses over money.

Last year, Mr. Stone earned an $80 million bonus for putting his firm’s capital into everything from Manhattan office buildings to Swedish jails. But now he isn’t even welcome at the firm’s office at 11 Madison Avenue. Instead, one of the highest paid executives on Wall Street sits around his Park Avenue apartment as his lawyers negotiate his departure and labor to get him his bonus money, a large portion of which he has yet to receive.

Mr. Stone, a heavyset 42-year-old with black slicked-back hair, was once the envy of Wall Street. With his boundless appetite for risk, he embodied the swaggering, winner-take-all spirit of the 1990′s real estate boom in Manhattan–in large part because he underwrote a large part of it.

From the time he was hired by C.S. First Boston in 1995, Mr. Stone poured billions of dollars into Manhattan real estate deals. He backed established developers Donald Trump, Harry Macklowe and hotelier Ian Schrager, and also created a new crop of moguls, including onetime Bronx landlord Steven Witkoff, and Tamir Sapir, a Russian immigrant and former cabdriver who now owns 5 million square feet of prime office space in the city. “Andy Stone is an unbelievably talented and creative guy,” said Jonathan Mechanic, chairman of the real estate department at Fried, Frank, Harris, Shriver & Jacobson.

Mr. Stone timed the market well. In three years, his group at C.S. First Boston made $1.5 billion. Even better, he got to keep a huge cut of the booty because the deal he made early on with the firm guaranteed his department a fixed cut of the profits, with no liability for losses elsewhere in the firm. The agreement still astounds many of his peers. “By far the best deal he ever made was the deal he cut for himself with First Boston,” Mr. Trump said.

But last fall when C.S. First Boston lost $864 million in Russia, the firm got nervous and reeled in Mr. Stone. Now the firm is stuck with the fallout. His binge has become the firm’s hangover. As a result of his spree, the firm still has an estimated $6 billion to $10 billion in what one knowledgeable source described as “highly illiquid” loans and equity. “No one really knows what this stuff’s worth,” said a source familiar with the situation. “That’s the problem.”

“Let’s put it this way,” said an executive at a competing firm. “If they needed to sell that in 60 days, then they could lose everything [Mr. Stone has] made, plus more.”

Worse, the firm’s relationship with Mr. Stone quickly deteriorated after he was told to stop lending and start selling. Some people say the firm got fed up with Mr. Stone because he seemed more interested in profiting from its misfortune than in helping the bank get the risky debt off its books. But Mr. Stone’s friends say his superiors have merely come to resent him because every time they’ve done a deal with him, they’ve gotten stuck with the short end.

Both Mr. Stone and C.S. First Boston declined to comment. But people who have followed Mr. Stone’s career aren’t surprised he and C.S. First Boston are feuding. “He’s the Michael Jordan of his business,” said a former colleague. “But he’s a Dennis Rodman management challenge.”

Mr. Stone grew up in Rockville Centre, L.I., the son of a prosperous real estate attorney. After getting his M.B.A. from the University of Chicago, he went to work at Salomon Brothers in 1981, where he became a protégé of Lewis Ranieri, the famed bond trader. Mr. Ranieri and his acolytes viewed the rest of Salomon Brothers with scorn. They played by their own rules and reaped huge profits off newfangled mortgage-backed securities of their own invention.

When he left Salomon, Mr. Stone tried to re-create that atmosphere at his next stop, Prudential Securities Inc., where he transformed a laggard trading desk into one of the Street’s top producers. But he ended up butting heads with his superiors, who didn’t share his appetite for risk.

In 1990, Mr. Stone joined the U.S. unit of Daiwa Securities, a Japanese investment bank. He created his own mortgage trading group, which kept about 40 percent of its profits each year. Once again, his group did well, in this case trading distressed Resolution Trust Corporation loans.

But the Japanese investors got nervous. In 1993, they pulled the plug and told Mr. Stone to liquidate his holdings. The group sold off everything just before the mortgage-backed securities market collapsed, narrowly escaping disaster.

It wasn’t long before John Costas, then head of fixed income at C.S. First Boston, came courting. After weeks of dining together, Mr. Stone finally accepted Mr. Costas’ offer to run C.S. First Boston’s mortgage securities department.

Before the end of the year, he had made a department that had been losing $10 million a month into one that was making $10 million a month. But he may have saved his best stuff for his bosses.

Soon after he arrived, during a flap over bonuses, traders began quitting in droves (to standing ovations from disgruntled colleagues). Before long, top managers started heading for the exits. One of them was Mr. Costas, Mr. Stone’s boss. Eager to keep its new star, Marc Hotimsky, the firm’s London-based global head of fixed income, made some concessions the firm would later come to regret.

Mr. Stone’s group already got to keep a fixed percentage of its profits. But the bank gave him permission to wager a much larger percentage of its capital. People in the firm say Mr. Stone’s superiors knew exactly what they were getting themselves into. But others aren’t so sure. “He’s a fantastic negotiator,” a former colleague. “He really gamed the place.”

Mr. Stone proceeded to shock Wall Street by sinking $7 billion in two years into commercial real estate deals in Manhattan, often financing 95 percent of his clients’ purchases. “Everybody said, ‘Should we go to Japan?’” recalled one colleague. “We didn’t know shit about Japan. But we knew Manhattan. We all lived here. The economy was doing well. The Dow was flying. We believed we could make it work.”

They were right. Real estate prices soared. His group had no trouble slicing up its debt into pieces and selling them to pension funds and insurance companies.

After his first year, Mr. Stone landed a $20 million bonus. Even his friends say his head began to swell. He built a huge house in Southampton, L.I., right next to Henry Kravis and Ian Schrager. He jetted out to Salt Lake City for a Utah Jazz basketball game with Mr. Trump and then, according to the developer, changed the interest rate on a deal they’d discussed. “He did the old midnight switch,” Mr. Trump told The Observer . “Fortunately, I was in a position where I could say ‘Fuck you,’ and I did.”

Mr. Stone continued to pour money into real estate. And when his superiors questioned why he was holding some of the riskier pieces of debt from these deals, he told them he’d be more than happy to buy some of the pieces himself.

That got some of the higher-ups thinking. If Mr. Stone was so eager to buy this debt, maybe they should get in on it themselves. So, according to people familiar with the transaction, a number of top officials, including Allen Wheat, the firm’s chief executive, bought in. They did rather well. But sources have said they sold too quickly and had to suffer the taunts of Mr. Stone, who held on longer and made considerably more money.

Then Russia collapsed, sending tremors through the global markets. It was a bad time for C.S. First Boston. It lost $864 million in the second half of 1998. Even though many in the firm were already jealous of his huge bonuses, Mr. Stone, whose group ended the year up $500 million, went out of his way to gloat. “I think the mature thing to do would have been to relax and wish everybody well and be nice,” said a former colleague. “Instead, he was like, ‘See, this is why I don’t tie my ass to you people.’”

Mr. Stone’s superiors were not amused. They decided to scale back the firm’s risk. Mr. Stone’s contract expired at the end of the year, and he was unable to renew it. Instead, the firm ordered him to start liquidating the group’s portfolio, which now was riddled with problems.

Among other things, the group had sunk $70 million into a largely empty office complex in Texas. A group of major skyscraper deals with Harry Macklowe were snarled in litigation. Then there were the b-grade debt pieces that Mr. Stone loved so much. C.S. First Boston wanted the stuff off its books.

Mr. Stone thought it was a terrible time to sell. But he arranged to sell $2.2 billion of the firm’s B pieces to an outside investment fund. To hasten the sale, C.S. First Boston agreed to finance the deal and give the investors the right of first refusal on the group’s other debt. C.S. First Boston even wound up taking a 49 percent stake in the partnership; Mr. Stone’s stuff was hard to move.

At first, the firm was overjoyed. According to a source, Mr. Wheat even said a statue should be erected in Mr. Stone’s honor. But the elation wore off when the b pieces sold by the firm at fire sale prices made the fund’s investors a great deal of money. Although people within the firm said they were pleased with the deal, others said Mr. Stone’s bosses started wondering whether their real estate chief, who had cut a deal to manage the thriving fund, had pulled another fast one.

From there, the relationship went downhill. Last April, the firm put the real estate group in the hands of Mr. Stone’s longtime lieutenants, Stewart Dauman and Karen Zimmerman, and put Mr. Stone in charge of winding down the group’s old portfolio. But instead of coming up with buyers, Mr. Stone went in search of investors to buy the debt himself.

The higher-ups at C.S. First Boston were appalled. To some of them, it looked as though Mr. Stone were trying to take both sides of a trade that would probably make the firm look stupid again. Mr. Stone’s friends said he still believed his investments would pay off, enough to put in his own money.

In the end, C.S. First Boston decided it didn’t want to do any more deals with Mr. Stone. The firm sent him home. The lawyers took over.

Now it’s just a matter of money. Sources said Mr. Stone’s bonuses are paid out over three years; he has yet to collect 50 percent of his legendary bonuses. Some people believe the firm may ask him to forgo some of it to offset future problems caused by his departure. But few expect Mr. Stone to give up his bonuses without a fight.

Regardless, Mr. Stone is done at C.S. First Boston. “It’s not his fault things didn’t work out,” said a friend of Mr. Stone. “They just didn’t think big enough for him.”