House of Cards (11 page)

Around six on Thursday night the senior Bear Stearns executives gathered in Sam Molinaro's sixth-floor office. In attendance were, among others, Schwartz, Molinaro, Friedman, Begleiter, Upton, and John Stacconi, the treasurer of the securities company. “We go through the cash position, and there's a lot of questions as to how accurate is it,” Friedman explained. “It's hand-scribbled on a piece of legal pad. The firm was not really set up—most firms are not—to do real-time cash accounting. You come in in the morning and you reconcile your bank accounts and you see where you stand, and try to put this all together. To try to do it on the fly in the evening was like scribbles. But the bottom line is $2.5 billion of cash. Over here, I've got this spreadsheet that I got from the repo desk of money they already know that they're losing tomorrow, and that's $14 billion. They know they're going to need at least $1 billion or so that they're going to have to borrow out of the cash reserve. Basically, if nobody else pulls any money, we're down to zero when we open the day. Not a good place to begin. We go round and round, challenging the numbers, but they're pretty accurate. Then we're like, ‘Okay, what now?’”

Remembered Begleiter: “We still had cash, but we had items we had to repay in the morning”—for instance, a multibillion-dollar cash repayment to Citigroup. “When the team finished going through everything related to our cash situation, I remember saying, ‘Guys, we need advice; it is not clear that we should repay Citi. At some point our responsibilities shift from working for the stockholders to working for the debt holders. It's essentially all the money we have left and we'd have to send it out to just one party first thing in the morning.' Everybody knew this. I was just the first one who said it. Whether we repaid Citi or not, given the other likely cash requests on Friday, it was clear to me that this was the end. We were gone as an independent, viable firm. If you're talking about seminal meetings, that meeting on Thursday at 6
P.M.
in Sam's conference room, that's when I realized we were done.”

“What are my options?” Molinaro asked Upton. Since the previous Friday, Upton reported to Molinaro, the firm's cash had declined to $5.9 billion, from $18.3 billion, and Bear still owed Citigroup $2.4 billion. “Mr. Molinaro buried his head in his hands, Mr. Schwartz looked ashen and left abruptly,” the
Wall Street Journal
reported.

Regulators from both the SEC and the New York Fed began arriving on the sixth floor. They were put in separate conference rooms and told to cool their heels. Molinaro called Vincent Tese, the lead independent director on the Bear Stearns board. He was in Jupiter, Florida, just north of his Palm Beach home, having dinner at Buonasera Ristorante with his fellow director Fred Salerno, a former CFO of Verizon, and their wives. Coincidentally at the next table was Rocco Marano, an old colleague of Salerno's from New York Telephone who ran Bellcore and was the father of Tommy Marano, the head of Bear Stearns's mortgage desk. “We're sitting next to each other and I introduce Rock to Vince,” Salerno recalled, “and we had just finished saying to Rock, Vince had, what a great guy Tommy was, you should be so proud of him and everything. Then boom, boom, boom, and his phone goes off. And we get the bad news.” Molinaro told Tese how desperate the situation was. “Nobody expected this to hit the fan that quickly, so we all ran back to our houses and we got on the [board] phone call later that night,” Salerno said. “The next day we're on the plane going back.”

At 7:30
P.M.
, Geithner had a conference call with the SEC to talk about how Bear Stearns's predicament had worsened during the course of the day. The SEC had been monitoring Bear Stearns's cash balances through the afternoon, and their early-evening report was not the least bit encouraging. According to the federal agency, Bear's $18 billion cash balance at the start of the day had dwindled to $2 billion at the end of the day (in the vicinity of where Upton had told Molinaro and Schwartz the firm's
cash balances were) as hedge fund customers stampeded for the exits. The firm had to use its own cash to make good on their demands since it had—perfectly legally—used its customers' free cash balances to buy assets that were now difficult to sell quickly. The firm had effectively run out of cash on Thursday afternoon. Absent a major shot of capital, there would be no way for the firm to keep up with cash withdrawal demands during the next business day. Bear Stearns's fellow Wall Street firms would no longer take Bear's Treasury securities as collateral for the overnight loans essential to the smooth running of the global capital markets. The confluence of the two events—either one of which on its own likely would have been fatal—proved devastating.

According to Geithner, the seven-thirty call changed the dynamic completely. Without additional financing in the repo markets, Bear Stearns would have to repay billions of dollars in repo borrowings beginning twelve hours later. If the firm could not repay, the lenders could then seize the pledged collateral and begin selling that to get their money back. The repercussions of such an action—which had never happened before—could have plunged the interconnected global economy into uncharted waters, as Bear Stearns had trading positions with some five thousand other firms worldwide. “The SEC gets on the call,” Geithner explained, “and says, ‘We've looked at the numbers, the end-of-day numbers. Our sense is that [Bear] doesn't have enough resources relative to what's maturing. They believe they have no option but to file for bankruptcy. That's our view too.' … We talked for forty-five minutes or so. Then I got everybody back here. We tried to think through what we could do to protect the rest of the system because we didn't really think there was a viable option.”

After the SEC call, Schwartz called Geithner. Recalled Geithner: “At that point, I said, ‘Alan you told me in the morning you were talking to a bunch of other people about funding. Where are those conversations?' He said, ‘Well, so-and-so said they were interested but haven't gotten back to me.' I said, ‘Why don't you call them? Now might be a good time.’”

T
HE
A
RMIES OF THE
N
IGHT

hile Geithner headed back into his office to grapple with the emergency, Gary Parr called the cell phone of Jamie Dimon, the chairman and CEO of JPMorgan Chase, to ask if he had a moment to speak with Alan Schwartz. Dimon was having dinner at Avra, a Greek restaurant on East 48th Street, just down the street from his midtown Manhattan office. Dimon was celebrating his fifty-second birthday with his parents and one of his three children. He was in no mood to be disturbed, but he reluctantly agreed, and stepped out on the sidewalk in front of the restaurant. Schwartz told Dimon that Bear Stearns “might not have enough cash to meet obligations coming due the next day,” Dimon said later, “and that it needed emergency help.” How much money did Schwartz need? “What I remember is something like $30 billion,” Dimon said, “to which I said, ‘No, we cannot do that.’” Within ten minutes, Dimon had called Paulson, Geithner, and Ben Bernanke. “The real question was what would happen if Bear Stearns went bankrupt,” he said.

Dimon quickly realized that the bankruptcy of a securities firm such as Bear Stearns would be a disaster. “Unlike bankruptcy of something like a factory, where you continue to produce and the courts figure out how to split up the debt and equity and who gets what,” he said, “[here] you would have had an implosion. People the next day would have grabbed on to hundreds of billions of dollars of collateral that would have been sold on the Street. People would be quitting. Bear Stearns would have no revenues. It would have been an implosion of a financial company, not even like a commercial bank.” Dimon, the Fed, and the Treasury all agreed that the best outcome for Bear Stearns was to figure out a way to get the firm to the weekend, when there would be slightly more time to sort things out.

There were at least four principal reasons Schwartz reached out to Dimon that Thursday night. First, Dimon had expressed interest in buying Bear Stearns before. At least once between March 2000, when Dimon became the CEO of Bank One, then the nation's fifth-largest bank, and mid-2004, when he agreed to merge Bank One with JPMorgan Chase (and become its CEO in short order), he had approached Cayne about buying Bear Stearns. At the time, Cayne said, both he and Dimon realized
quickly that such a deal would never get done; his concern was that such a deal would have been dilutive to Bank One shareholders and the market would have reacted negatively, all but erasing any premium Bank One would have paid for Bear Stearns shares.

The second reason for the call was that JPMorgan Chase had a number of existing commercial relationships with Bear, including being a counterparty on derivatives contracts, being part of the group of banks that lent money to the firm, and, most important, acting as Bear Stearns's “collateral clearing agent,” meaning that JPMorgan had a regular and ongoing sense of the value of the collateral that Bear Stearns used on a daily basis as security for its overnight repo financing. Therefore, Schwartz's thinking went, JPMorgan would know exactly what it was getting as security for a quick loan to Bear or, alternatively, if JPMorgan chose to acquire Bear in its entirety, what it was buying on a granular level.

Third, as the Oppenheimer analyst Meredith Whitney knew all too well when she heard the rumor that UBS was looking to unload PaineWebber and she thought immediately of JPMorgan as the buyer, JPMorgan was the only bank (as opposed to an investment bank) that still had the financial wherewithal and the management credibility this late into the credit crisis of 2007 and 2008 to potentially pull off a deal of this magnitude in the required time frame. The financial industry had become so paralyzed by self-inflicted wounds by March 2008 that the only serious private-market solution to Bear's mounting problems was to fashion some sort of rescue through JPMorgan—and everyone knew it, from the Fed on down. If Dimon, for whatever reason, balked at making the deal, the federal government would have only two choices: let Bear face liquidation and brace for the consequences reverberating across the global financial system, or take full control of the firm itself, much as the British government had done a month earlier when it nationalized Northern Rock, the large British mortgage lender. Neither was a palatable option.

Finally, one of the more compelling reasons for Schwartz's call to Dimon was sheer proximity. JPMorgan's headquarters was literally across 47th Street from Bear Stearns. Even if others had the slightest interest— for instance, Wells Fargo, or Bank of America—their corporate brain trusts were in San Francisco and Charlotte, respectively. “We thought Bear Stearns would be talking to other people and the government would be thinking of other solutions,” Dimon recalled. “But we said we would do everything we could. One of the reasons we could do it was we had the balance sheet and the capital. But that is not the important thing. The really important thing, and people forget, [is] the human side—you
know, this kind of almost brings tears to my eyes. I called up Steve Black and Bill Winters [JPMorgan's co-heads of investment banking], who then called up audit, tax, traders, derivative traders, options, lawyers, real estate people from around the world, called them up, got them out of bed, and they drove back to work. Hundreds of people by Thursday night, through the night. I don't even know the number.”

“We called JPMorgan because we knew we needed a large bank to provide us a liquidity line,” Molinaro said. “We knew we had a lot of collateral. We felt that we had plenty of equity. We felt the company was sound financially, and we were dealing with a liquidity run on the bank, and we needed somebody to provide liquidity…. We thought Jamie was tough and shrewd. We thought that he was entrepreneurial enough and had the capacity to do this, if it made sense.” While it was true that Bear Stearns had around $6 billion of untapped credit facilities globally, Molinaro believed they would be insufficient and, if drawn down, likely to cause concern among the bank group. “We felt that to do that in the condition that we were in was going to be to take on a battle with the banks, and we weren't looking to fight with the banks,” he said. “We were looking to get them in to work with us. And the decision to go to JP Morgan—given the speed at which [the situation] deteriorated, we didn't have time to go try to put a syndicate together.”