News January 10, 2008, 5:00PM EST

Mauled By Bear Stearns

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

by Ben Levisohn

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.

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