Fixers (21 page)

I must say that I’m not surprised the public’s not buying
this pitch. To accept that a vast conspiracy of bureaucrats and barely literate, basically innumerate working people at the bottom of the wage pyramid has somehow duped a self-professed elite of hugely well-paid people with degrees from the finest universities, working off financial models designed by Nobel laureates, into lending them the better part of a trillion dollars takes a level of imagination I don’t have. I can’t help thinking that knowingly putting people in houses from which it’s odds-on that they’ll be evicted only months later is an act of cruelty and cynicism unworthy of a nation that boasts of its generosity and great communitarian heart with a fervor worthy of Emma Lazarus. When John Winthrop spoke of America as “a city on a hill,” I doubt he foresaw his vision financed with thirty-year ARMs with teaser rates.

Well, we’ll just have to see what tomorrow brings.

I feel like I’ve been present at the Creation. Allowed to watch the Almighty at work.

It started last night with another call from Mankoff.

“I need to use your apartment,” he said without preamble. “See you at four o’clock.”

“You want the place to yourself?” I asked. “I can make myself scarce.”

“Don’t be ridiculous,” Mankoff said. “I want you there. I may need a witness.”

He showed up on the dot. He checked out the place, lingered briefly and approvingly over my bookshelves, asked for a glass of water. “The person I’m expecting,” he told me, “he’s on his way in from Teterboro now. Should be here in another half hour.”

“Mind telling me who our mystery guest is?”

“All in good time.” He smiled. Although hardly the playful sort, now and then he likes to tweak my curiosity.

At around 4:45 the house phone rang to advise me that my guest was on the way up. A couple of minutes later, I opened the door and there, to my shock and amazement, stood the so-called Sage of Shawnee himself, Merlin Gerrett, ranked by
Forbes
as the country’s second-richest man, with a net worth of $69.8 billion in holdings in financial services, transportation, retail, energy, fast food, and God knows what else.

His nickname derives from his hometown of Shawnee, Kansas, where he still lives and where Arrow Northumberland, his holding company, is headquartered. He’s the town’s economic patron saint; over time he’s bought up half the businesses in Shawnee, many of which he’s put back on their feet with sensible advice and
hard cash. Arrow Northumberland has been an incredible ride for investors; if you’d bought a hundred shares back in the late ’60s, you’d have paid $2,500. Those shares would now be worth just under a million dollars.

The man’s considered about the best argument for capitalism going. He’s built his enormous fortune by buying decent businesses at advantageous prices, hiring good people, and giving them free rein. He plays for the long term, doesn’t go for quick profits by manpower attrition or cutting lines of business, or drowning his companies in leverage with which to pay quick dividends the way the fast-money private-equity types do. Most of his cash flow derives from his wholly owned insurance businesses, cash cows that provide nourishment for the rest of Arrow Northumberland.

Not everyone buys his act. Gerrett’s detractors complain that when Gerrett dishes out the down-home, deep-dish, “aw shucks” wisdom he dispenses on television, in the op-ed pages, and, most notably, in the letter to shareholders that accompanies Arrow Northumberland’s annual report, he’s no different from any hedge-fund hustler “talking his book,” saying stuff that’ll redound to the benefit of his investments. His worshippers say this kind of criticism is mostly sour grapes.

Maybe yes, maybe no. For instance, there’s his big position in Morton’s, the credit- and bond-rating house, which one commentator has called “perhaps America’s largest
financial disservices
company.” When Gerrett bought into Morton’s, its ratings were blue-chip and gold standard. Today they’re more problematical, what with the triple-A ratings the house bestows on the topmost layers of pyramids of junk-debt and derivatives. You’d think someone who called derivatives financial thermonuclear bombs would steer clear of the stuff, but the Arrow Northumberland statements show swaps exposure running to the tens of billions. Usually, when
one of Gerrett’s portfolio companies has faltered either ethically or financially, Gerrett hasn’t hesitated to step in, chop off heads, and set matters to rights. But he’s allowed Morton’s to go on its merry way, rubber-stamping as AAA debt deals that ought to have the same kind of “bad for your health” warnings that cigarettes carry. Ah, well, who was it that said that a little hypocrisy is the price we pay for civil society?

But back to business. After Mankoff introduced me and I made Gerrett a cup of tea, we settled ourselves on the sofa and chairs surrounding a low coffee table, and the two men got down to cases. Namely, the terms of a $10 billion investment in STST by Arrow Northumberland.

Gerrett opened the bidding. He took some papers from his briefcase and placed them on the table, then said, “Leon, I’ve looked over these spreadsheets you e-mailed me. Did a little sharp-pencil work of my own. It looks to me like you people are in a lot better shape than I would have expected. Much better than most of the competition, and I can tell you I’ve seen a whole bunch of
their
statements in the past ten days, because everybody’s out in the streets looking to raise equity.

“By my reckoning, you don’t really need me, although you
could
use new equity, but more as a cushion than as a matter of survival. By my calculations, your present balance sheet can take a hit of, say, $40 billion and still keep afloat, if only barely. Does that sound right to you?”

Mankoff nodded. “Pretty much.”

Gerrett went on: “You now have access to really cheap money, thanks to your turning yourself into a bank. As a taxpayer I find this disagreeable, although as a stockholder I applaud the strategy. Anyway, you look OK to me. Am I missing something?”

Mankoff smiled. “Technically, Merlin, you’re right. We could get by without raising outside equity. But I’m thinking longer-term.
Down the road, there are going to be opportunities, big ones. We could be looking at half the competition we faced as recently as the first of the year. Bear’s gone, Lehman’s gone, Merrill’s gone, Morgan Stanley’s on the ropes, and BofA and Citi are halfway down the crapper. Everything’s terrible right now, but nothing goes on forever, and when things start to turn, even if it isn’t for a year or two, I want to be ready.

“Then there’s this. We don’t want bureaucrats and politicians telling us how to run our business and how much we can pay our people. I want to put us in a position to negotiate from strength with Washington. And if I had you as a partner …”

He let the thought die.

“So what do you have in mind?” Gerrett asked.

“Ten billion. Five billion from you, plus another five we’ll raise from the market.”

“With you on board, yes.”

For the next half hour, it was like watching two world-class poker players. Bluff, check, raise, call, check. Mankoff cold-eyed, polite, understated. Gerrett exuding a kind of dumb-as-a-fox country innocence. Norman Rockwell would have loved the guy.

Finally Gerrett said, “OK. Here’s my final offer. We’ll buy $5 billion of preferred stock, with a 10 percent annual dividend, reasonable call protection, and warrants or a similar conversion feature to buy $5 billion of your common stock at a favorable price, say 10 percent below where the market is right now.”

Mankoff did some quick figuring, then made his counteroffer. “Our stock’s at $123 and change, which means you’re looking for $110.”

“Around there.”

“That’s pretty rich. I’m not sure I can get my board to go along at that level.”

“I recognize that, but I have my own stockholders to think of.”

“How about $115?” Mankoff asked. “That’ll make it easier for me to sell.”

Gerrett reflected briefly, then nodded. “I can live with that,” he said. He extended his hand, and Mankoff took it.

Mankoff turned to me. “Chauncey, you must have a legal pad around here somewhere.” Of course I did. I got out a pad and wrote down the terms of the deal. Mankoff and Gerrett reviewed these, made a couple of tiny emendations, and initialed the sheet. I signed as witness. Then I went to my printer and made two copies

The two agreed to get their lawyers on it pronto so that Mankoff could lay the transaction before the STST board via a 7:00 p.m. conference call. Press releases and regulatory filings would be put in the works. Neither foresaw any problems. Gerrett shook hands and departed. Thus do great men settle the affairs of nations.

Yesterday STST successfully completed the second half of the Gerrett deal, a $5 million equity offering. So Mankoff has now got $10 billion in new equity to play with, and he’s hit the ground running, already contriving to take over $5 billion in busted Lehman derivatives positions on the Chicago Mercantile Exchange for essentially zero cost, positions STST can probably liquidate for a couple of billion, or pledge back to the Fed at par as collateral for more free money—on top of which STST is being paid a fee of $445 million in cash just to take the paper off the Chicago Merc’s hands. Which adds up to 2,445,000,000 reasons that a crisis is too valuable to waste. And I can’t help but feel that this is just the beginning.

Eighteen months ago, Mankoff summoned me to Three Guys and laid out a long-term strategy that involved pretty tricky financial and political maneuvering. So far, everything’s fallen into place. Depending on how things play out, STST may be on the cusp of the biggest windfall in its entire glorious one-hundred-year history.

Even Scaramouche is impressed. “Nobody but Leon could have pulled this off,” he said over a twilight-hour martini at San Calisto. “Of course, poor old Bagehot must be spinning in his grave, seeing what the Fed’s up to.”

He explained. Walter Bagehot was an influential nineteenth-century English journalist and editor of
The Economist
. In a crisis, he wrote, the central bank should lend freely, but on good collateral and at a penalty rate of interest. The Fed is lending freely all right, but against dubious collateral and at a giveaway rate.

Congress finally approved TARP. Bush signed it into law, and Wall Street’s breathing easier.

The gratification wasn’t instant, though. Congress sent back Treasury’s initial proposal, telling the public that the bill didn’t do enough for Main Street.

Of course, that’s bullshit. The party the draft bill didn’t do enough for is the 1 percent, so it was back to the honey pot. It’s Wall Street that instructed Capitol Hill to complain and use Joe Sixpack as the straw man. Like Oliver Twist, the rich and powerful always want more, and they have both the Speaker of the House and his notional right-hand man, the House Whip, in the pockets of K Street. The redrafted bill includes all sorts of special-interest add-ons, such as a tax break for manufacturers of toy wooden arrows, for fat cats whose beachfront cottages have suffered storm damage, for Hollywood producers, stockcar racetrack owners, Virgin Islands distillers … you name it.

You’d think there’d be some public outcry to the effect that if the people’s money is to be given away, some of it might be given to the people. Indeed, what about “of the people, by the people and for the people?” Ask Wall Street that question, and you’ll likely as not be told, “Where’s the money in that?”

This has been a long but really productive day. It’s 10:00 p.m. and I’m on the Acela, returning from the nation’s capital to New York. I judge my Washington mission to have been a success. Not only have I come away with what I was dispatched by Mankoff to negotiate, but also with a $20-billion-dollar “bonus” add-on thanks to a brilliant bit of last-minute improvisation by yours truly. Maybe I have a future in investment banking after all. I can’t help reflecting that if I worked at STST or any of the big firms, the deal I concluded today would be worth a bonus of $100 million, minimum. However, I’m working
pro bono oligarchia
, so my only reward will be the satisfaction of a job well done and the approval of a man whose respect I crave. It has occurred to me that if I’m going to work these long hours for him, maybe I should get paid at my normal rates. Then I reflected that I really do owe the guy, and the thrill of the chase and the insiderness—the chance to really see how power and money operate in these United States—is recompense enough. Besides, I have a feeling that if payment were added to the equation, I couldn’t do it. So I’m going to hold on to my amateur status.

OK, let’s take it from the top. Mankoff summoned me to his office yesterday at twilight. Things are heating up. He’s had a call telling him to keep next Monday, October 13, clear for an important meeting in Washington at the Treasury Department, at which Uncle Sam’s plan for TARP will be put on the table. The same summons has been issued to Dimon and other Wall Street CEOs.

Mankoff wants me to meet with Ian Spass to make certain that whatever Treasury’s planning to put on the table will benefit STST. Based on what he’s been able to learn from sources in Washington and elsewhere, he’s convinced that Uncle Sam has
no choice but to dictate a “one size fits all” solution that will lump the biggest firms together, the ones in pretty solid shape, like STST, alongside those in deep doo-doo, like Citi. If Treasury and the Fed try to negotiate bank-by-bank, with one set of terms for strong institutions like JPMC, Wells Fargo, or STST and another for the likes of Citi and Morgan Stanley, it could take forever, and Wall Street will be out of business by Thanksgiving, with breadlines running up and down Pennsylvania Avenue and Main Street screaming for blood.

Mankoff likes his negotiating situation. STST has bank-holding-company status and therefore access to free money, come what may; it can leverage the $10 billion in equity it raised back in September from Merlin Gerrett; hedge-fund clients and other important sources of liquidity are returning to the fold. All in all, he’s in a strong enough position not to have to take any government offer he doesn’t buy 110 percent. This is the message I was dispatched to Washington to deliver.