Last Man Standing (38 page)

But Schwartz was desperate. He asked if Dimon would consider a mere overnight loan. “I can’t; it’s impossible,” said Dimon. “There’s no time to do the homework. We don’t know the issues. I’ve got a board.” Dimon suggested that Schwartz call both the Federal Reserve and the Treasury Department, and told Schwartz he would be in touch. And then he hung up.

Dimon left dinner, went home, and was on the phone for much of the night. The first of his flurry of phone calls was to Tim Geithner, who urged him to help Bear. Despite the implied threat that regulators can hang over a Wall Street CEO’s head, Dimon wouldn’t be bullied. “Tim, look, we can’t do it alone,” he said. “Just do something to get them to the weekend. Then you’ll have some time.” The two agreed to continue the conversation later. Dimon also spoke to Secretary of the Treasury Hank Paulson and to the Federal Reserve chairman, Ben Bernanke.

He also called Steve Black, who was on vacation in Anguilla with his wife, Debbie. At dinner in a beachside restaurant, Black knew something was up when a man came striding urgently toward his table. “Are you Mr. Black?” he said. As had happened so many times before, an investment banker trying to enjoy a vacation had been tracked down by his boss. In short order, Black was on the phone in the restaurant’s kitchen with Dimon. Black returned the next day to take control of the investment bank’s efforts in New York; in the meantime, Bill Winters (who received another call) led the team by phone from London on Thursday night and Friday morning.

Yet another call was to Mike Cavanagh, who by that point was at home for the night. “Jamie rarely calls in off-hours and is pretty respectful of family and weekend time,” recalls Cavanagh. “So I knew something was up.” After a quick briefing, Cavanagh was on the phone with John Hogan, the chief risk officer of JPMorgan Chase’s investment bank. He then spoke with the chief financial officer of Bear Stearns, Sam Molinaro, and its treasurer, Robert Upton.

The executives at JPMorgan Chase were surprised to discover how
baffled the executives at Bear Stearns were about what was happening. Instead of presenting a crisp request—“Here’s what we need, J.P. Morgan:
x
billion dollars”—Bear’s executives tossed out numbers ranging anywhere from $5 billion to $20 billion in the span of a single conversation. “The mere fact that it was that wide of a range left us thinking that they really didn’t know how bad it was going to be,” recalls Cavanagh.

At 11:00
P.M
., JPMorgan Chase dispatched a number of credit people to the beleaguered firm’s offices at 383 Madison Avenue, the first of many teams to go to the Bear Stearns building that night, headed by the senior trader Matt Zames. He was joined at 2:00
A.M
. by teams from both the Federal Reserve and the Securities and Exchange Commission.

At 3:00
A.M
., Cavanagh received another call from Dimon. “I felt like a fireman at that point,” recalls Cavanagh. Dimon said he was about to get on the phone with the Treasury and the Federal Reserve and needed Cavanagh in the office immediately. An hour later, a bleary-eyed Cavanagh walked into John Hogan’s office, and into the middle of a conference call with Dimon, Tim Geithner, Bill Winters, and Matt Zames. The discussion was still theoretical at that point, as the men speculated blow-by-blow on the events that would occur if Bear Stearns couldn’t open for business. Bear Stearns, after all, had trading positions with 5,000 firms and billions of dollars at risk. “It was a scary description of events that we all thought would lead to more dominoes falling in subsequent weeks,” recalls Cavanagh.

Dimon essentially demanded all hands on deck on Thursday night. By 6:00 the next morning, he told his team to cut Bear Stearns into numerous slices. He wanted the teams looking at those slices to come back every three hours and give him a sense of their value.

Government officials had no playbook for this kind of event. They also lacked the power to lend directly to broker-dealers such as Bear Stearns. Somewhere in the wee hours of the morning, a plan began to take shape. Instead of lending directly to Bear Stearns, the Fed would lend $30 billion to JPMorgan Chase, which would turn around and lend that money to Bear.

The arrangement was termed a “conduit,” though it was really
nothing more than a circumvention of the Fed’s own lending restrictions. “It was harebrained,” recalls one executive at JPMorgan Chase. “It wasn’t like we went to ‘Section Five’ of the ‘Emergency Financial System Meltdown Manual’ and found out what we should do.” The outcome, however, was nothing short of profound. For the first time since the Great Depression, the Federal Reserve was going to backstop an investment bank.

In the four-sentence release announcing the conduit, Stephen Cutler, general counsel of JPMorgan Chase, included a line saying that the secured funding would be good for “an initial period of up to 28 days,” followed by the statement that “JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company.” When Alan Schwartz and Bear’s chief financial officer, Sam Molinaro, received the release in an e-mail from Cutler at 6:45
A.M
., they thought this meant that they had 28 days to come up with a solution to their predicament. They were naturally relieved. They shouldn’t have been.

• • •

When the stock market opened the next morning, Bear’s shareholders appeared to be relieved as well. The stock floated around its close of the previous day, $57 a share, even climbing to $62 in the first half hour of trading. Steve Black, who’d been up all night helping to get the debt facility in place, was packed and ready to go to Miami with his wife, Debbie, on a 10:00
A.M
. flight. At 9:30, he switched on CNBC. He couldn’t believe that the stock hadn’t plummeted.

Turning to his wife, he said, “The markets don’t have any idea what’s really happening here. Mark my words, by the time we get back to New York, and the market has digested the news, the stock price will have been cut in half.” It didn’t take even that long. When the couple arrived at the airport with their luggage, the stock was already trading at $31 a share. One hundred ninety million shares of Bear traded that day—17 times the daily average, and the stock closed at $30 a share, down 47 percent. The cost of a five-year credit default swap on the company’s
debt had risen to $772,000, nearly double that of Lehman Brothers’ $451,000 and triple that of Goldman Sachs’s $253,000. Clients continued to pull out their accounts.

Alan Schwartz was in a car on the way to his home in Greenwich that evening when Paulson and Geithner called. Geithner delivered the first surprise. The financing from the Fed would not be available on Monday. Paulson delivered the second. A “stabilizing transaction” had to be done by the end of the weekend—in other words, the firm would have to be sold in the next 48 hours. Schwartz later testified, “All the leverage went out the window when a deal had to happen over the weekend.”

Ever since, many of Bear’s former executives have maintained that Paulson and the Fed played dirty pool by “changing” the terms of a deal made only the night before. Dimon didn’t see it that way. The original goal of the financing was to get Bear to the weekend, at which point he (or any other interested party) could consider buying the company.

Then there was the exact wording of the press release itself, about which there has been much consternation. It did not say “28-day financing.” It said “up to 28 days.” “I’ve always considered this a moot point,” Dimon said after the eventual purchase of Bear Stearns by JPMorgan Chase, “because they were still having a run on the bank. The Fed had lent them $30 billion on Friday and we had to lend them another $20 billion on Monday. We wouldn’t have done that had we not done the deal, and the fact that we’d done the deal wasn’t even stopping money from continuing to head out the door. So they would have never survived Monday anyway, even if the financing had been for 28 days. It didn’t matter. It was over.”

What’s more, the lending from the Fed was collateralized, which meant that Bear Stearns needed to have assets to pass on. “The Bear people seemed surprised,” recalls Cavanagh. “But I have no idea why. They didn’t have the collateral anyway.”

By 8:00 the next morning, Schwartz and Molinaro were back at 383 Madison, meeting with bankers from JPMorgan Chase as well as representatives from the private equity outfit J.C. Flowers & Co., which would prove to be the only other interested party. Other firms had representatives
in the building, but none of them mounted a serious bid. Citigroup, obviously, had its own troubles. Bank of America was busy completing a purchase of Countrywide Financial. Goldman Sachs had the resources to buy Bear, but had no reason to—the two firms overlapped too much. But JPMorgan Chase was diving headlong into the deal, dispatching 16 teams from various departments to meet with Bear’s officials and combing through their books.

The members of JPMorgan Chase’s team were still not entirely sure that they were interested. They were merely doing due diligence at breakneck speed. While several hundred top executives scurried around the company’s own headquarters at 270 Park Avenue holding meetings—some 2,000 people had been called in to work on the deal globally—Steve Black was thinking to himself, “Didn’t we just do this?” And they had. When Bear’s hedge funds had run into trouble in the summer of 2007, executives at JPMorgan Chase had taken a pass on buying the firm. Six months later, things were even worse for the struggling investment bank. So what was the point of going through the motions again?

“We’d been through it the past summer,” Black recalls, “and we’d told them that we’d be interested if they wanted us to make some sort of convertible investment in their prime brokerage business. Alan’s response had been, ‘Why would we do that? Wouldn’t it make the whole franchise worth less?’ I’d said, ‘That’s a fair point, but consider this us registering some interest if you guys get to that point.’ We had done the work on whether we’d be interested in the whole bank and the consensus was it wasn’t worth all the aggravation. Certain pieces fit well, but the rest of it would have been too time-consuming to integrate. Plus, at the kind of price Bear was likely to get, it wouldn’t give us much in the end.” The “certain pieces” he was referring to were Bear’s prime brokerage operations—estimated to be worth about $3 billion—its clearing business, and its energy and commodities divisions.

There was also the building. Constructed at the height of the commercial real-estate market in Manhattan, Bear’s headquarters at 383 Madison Avenue were worth an estimated $1 billion. JPMorgan Chase had recently announced, with Mayor Michael Bloomberg and Governor Eliot Spitzer, its plan to construct a new headquarters for the investment
bank in downtown Manhattan, on the site of the old Deustche Bank building, which had been condemned after 9/11. If JPMorgan Chase could nab Bear’s building, it would save itself a whole different kind of aggravation. “We could have taken five years and spent $3 billion to build a new building, or just said, ‘Who cares about the rest of Bear Stearns, let’s just get the freaking building,’” recalls one JPMorgan Chase executive. “I kept saying, ‘Guys, we
have
to get that building.’” The Bear building is even shaped like an octagon, the symbol of Chase.

At 11:00 Saturday morning, Steve Black and Mike Cavanagh quizzed each of the due-diligence teams on how much downside they saw, even if JPMorgan Chase were to pick up Bear Stearns for a single dollar. Was there enough value in the Bear businesses, they wanted to know, to absorb the pain that would come along with unloading or hedging all the toxic and unwanted assets? The numbers thrown out were all ballpark estimates: $2 billion worth of losses here, $500 million there. The goal was to come up with a raw total of the de-risking costs and lawsuits that would undoubtedly come with the deal.

This approach was Dimonology: dwell on the downside of a potential deal before entertaining the upside. “He kept the board informed of every change in their thinking as well, and didn’t get too far out ahead of us” recalls JPMorgan Chase’s director William Gray. “He inspires great trust that way. What we read in the papers was old news for us. He raised every problem that could occur. We could never walk out and say he never told us about this or that.”

By the afternoon, the team from J.C. Flowers had a contingent bid ready: $3 billion for 90 percent of a recapitalized Bear Stearns’ equity—the equivalent of about $2.80 a share including the billion or so new shares that would have to be issued—provided that Flowers could line up $20 billion in financing to cover Bear’s short-term cash needs. Rounding up that much in such a short time was a long shot, but at that point, it was all Bear had.

A few hours later, Steve Black and the head of investment banking, Doug Braunstein, walked over to Bear Stearns to speak to Schwartz and Gary Parr. Bear’s stock had closed at $30 on Friday, but Black had bad news for the two men. JPMorgan Chase hadn’t been able to do as much
work as they’d hoped, said Black, and so there would be no “firm offer” that evening. But their work had led them to one obvious conclusion. “If you guys are thinking that we’re going to be interested anywhere close to where you closed, or God forbid, a premium, then we should just send everybody home right now, because it’s not even going to be close,” he added. “You need to tell us now that it’s worth the effort to keep working. We’re thinking of somewhere from $8 to $12 a share.” Schwartz, feeling that he was out of options in any event, told Black to keep working.

A short time later, Schwartz called Dimon. He wanted to know whether Dimon considered this a “hell or high water” deal. In other words, if Schwartz asked his board for approval, he needed to know that Dimon was serious about getting it done, and wouldn’t start adding conditions after the fact. Dimon told Schwartz that he’d kept his own board apprised of the process and he would be surprised if they didn’t give him their support when it came time to pull the trigger. Schwartz said he’d meet with his board and be in touch in the morning.

Schwartz and Parr updated Bear’s directors on the progress of the negotiations. Although disappointed at the low level of the offers, the board members agreed to continue pursuing both. They knew that Christopher Flowers was unlikely to be able to line up $20 billion of financing overnight. Bear Stearns, after all, had been unable to do the very same.