House of Cards (12 page)

Within hours the various armies of the night began descending on 383 Madison Avenue. Lawyers from Cadwalader, Wickersham, & Taft, one of Bear's principal outside law firms, took over much of the sixth floor of the Bear Stearns building, the floor where both Cayne and Molinaro had their offices. Other lawyers from Skadden, Arps and Sullivan & Cromwell also arrived at the firm. One set of lawyers worked on drafting documents for a potential financial rescue involving new third-party investors, assuming any could be found; the other group of lawyers worked on drafting the papers for the bankruptcy of Bear Stearns, both Chapter 11 for the Bear Stearns holding company and those that would lead to the liquidation of Bear Stearns's broker-dealer in accordance with the Securities Investors Protection Act of 1970. “It took about fifteen minutes to decide that a Chapter 11 bankruptcy was not a viable option [for the broker-dealer],” explained Greg Milmoe, a bankruptcy lawyer at Skadden, Arps. “I was amused at the speculation in the press about how viable the [Chapter 11] bankruptcy option would have been. It was so obvious that the only way you would consider it is if you had no other choice and you wanted to close the doors and turn the lights out.” Since the chances of finding a viable third-party financing option looked grim, the bankruptcy options for Bear Stearns quickly started to seem like
Bear's only choices. At 8:35
P.M.
, Bruce Geismar, the firm's head of operations, asked Paul Friedman, “How bad is it?” To which Friedman replied, “Very. End-of-the-world bad.” Geismar also wanted to know if the repo lines for the next day had been pulled. Friedman told him that, at the moment, “repo isn't the problem; free credits, CP”—commercial paper—“and bank lines are.”

After the calls with the SEC, the Fed, and Jamie Dimon, Molinaro and Schwartz wandered back to Molinaro's sixth-floor conference room to give an update to the non-executive-committee senior management that had been waiting around, wondering what was going on. “Sam had wandered off and Alan had wandered off, and the rest of us are just sitting there going, ‘What are we doing?’” Friedman recalled. “A couple hours go by. There was some food somewhere. We had some food. I can't remember if Alan came back, or Sam came back and said, ‘Okay, JPMorgan was coming in,' which seemed like good news at long last.” Friedman recalled, “Our view was, ‘Somebody needs to lend us a lot of money really fast. JPMorgan is coming over. Perfect. JPMorgan is going to lend us a bunch of money.’” But for hours nobody from JPMorgan came into the sixth-floor conference room to discuss the situation. This led Tim Greene, the co-head of the repo desk, to begin strategizing about possible solutions to the growing funding crisis. Just after 9
P.M.
he sent an e-mail to Friedman: “Do you guys think it is worth calling the Fed in the morning and see if they will lend to us against whole loans”—large securitized mortgages. “The other alternative may be to ask a bank to go to the [Fed's discount] window with them. That will free up the cash against master note money which Treasury will need tomorrow. I know I'm reaching but I cannot think of another way to free up the unsecured money.” Friedman gave Greene a quick update: “Sam [Molinaro] and Alan [Schwartz] just finished an hour with the Fed. They don't plan to lend to us. We're still strategizing.” Greene replied a few minutes later, “Is there a bank we are comfortable asking to go to the window? I can ask Citi in the morning, but I know there was an end-of-the-day problem. We would free up billions of cash if we can get to the window.”

At one point, a few people from JPMorgan's treasury department— one from an office in southern New Jersey and another from an office “way out” on Long Island—came around to the conference room, but Friedman began to wonder if any decision makers were intending to show up. Tim Greene, from Bear's repo desk, remained optimistic, though. At 11:17
P.M.
, he wrote Friedman, “We'll fund as usual tomorrow. Plan on doing more until 6/30 unless market fades on us.” A few minutes later, Friedman sounded a note of caution. “Maybe,” he wrote. “Discussions
with Board and SEC include whether we need to make a statement in the morning.” As the hour got later, the intensity of the situation ratcheted up exponentially. “That's why that night became such a crazy night— with JPMorgan there, the discussions with the Fed and the SEC—because we were going to have real problems in the morning,” said one senior executive.

Finally, around midnight, Matt Zames, the co-head of global rates and currency trading at JPMorgan, arrived in the conference room. The brusque Zames had been a trader at Long-Term Capital Management when it blew up ten years earlier. The Bear Stearns executives started to run through the situation for Zames. “About ten minutes into it he goes, ‘Where's the Fed?’” Friedman said. “We said, ‘They're in one of the other conference rooms.' He goes, ‘Well, we can't talk about anything until we talk to the Fed. We've got Reg W issues'“—referring to a complicated regulation that limits the transactions between a bank and its affiliates. “Some number of weeks later, he actually apologized to me for being rude at that meeting. I said, ‘No, we'd been sitting there for hours. You're the only one who made any sense.' For the group of us to sit in this little conference room all by ourselves made no sense at all, so that was the catalyst for getting serious with the Fed. They had issues of lending to us the amount of money that we needed and that was going to trigger capital issues for them.” All the JPMorgan executives left to go find the Fed representatives. “My assumption was that they'd get their head around whether or not they could lend us money against the collateral, and what the haircut would need to be, and that they would go to the Fed to get the financing for that,” Molinaro said.

F
ROM
M
OLINARO'S SIXTH-FLOOR
office conference room, at around 8
P.M.
, Schwartz convened a telephonic board meeting to provide directors with an update. As it was late, most board members phoned in from home. Molinaro reached Ace Greenberg, to tell him about the impending board meeting, at a restaurant in Manhattan. “‘We're going to have a board call at whatever time and we got a problem,’” Molinaro recalled telling him. “He said, ‘What's the problem?' I told him what the problem was. I said, ‘We're going to have a board call. We've got JPMorgan coming in. You might want to either come here or be on the call.’”

Jimmy Cayne, the board's chairman and the firm's former CEO, phoned into the call late from a Detroit hotel, where he had been playing championship-level bridge at the North American Bridge Championships, just as he did three weeks of every year. Cayne's team—composed of Cayne, longtime partner Michael Seamon, and four professional Italian
players, whose services Cayne hires for around $500,000 annually— was out of the major event of the tournament by Wednesday, March 12, but he stuck around Detroit anyway to play in the minor events with Alfredo Versace, his sometime teammate and one of the world's best bridge players. Although incredulous that Cayne did not fly back to New York after losing on Wednesday, one of his former partners did allow that the chance to play with Versace made his absence at least plausible. “It would be like playing the pro-am tournament with Tiger Woods,” he said. “I can understand that.”

The call to join the board meeting on Thursday night was the first time, Cayne said, that he knew just how difficult things were for the firm of which he had been CEO for fifteen years and remained the chairman of the board of directors. “Thursday night I got a call from Schwartz,” he said, “saying it's over. I knew what he was talking about. He said he tried as hard as he could. It happened with rumor and innuendo. He also mentioned how and what happened. As far as I'm concerned, I knew the cash position was what it was. I knew that we were highly dependent on overnight repo, except there was no flag. There was no ‘We're worried about Dreyfus. We're worrying about Fidelity. We're worrying about people rolling in the overnight repo.' Because this wasn't term repo, it was overnight. This was good collateral, and all of a sudden, poof! You're vulnerable to it being over at any time when you're leveraged. You didn't have a chance. So, that same lesson that we learned today, Long-Term Capital Management had back then [in 1998] and the tulip people had it back in the 1400s.” Although he had watched Schwartz on Wednesday morning on CNBC, until Thursday night Cayne, who had spent his last forty years at the company and built it into the fifth-largest securities firm on Wall Street, had no idea what had been transpiring. Nor, for that matter, did any of the board members. Salerno and Tese dialed into the call from their homes in Palm Beach after their aborted dinner. “Everybody was in shock,” Salerno said. Schwartz told the board that he and the other senior executives were speaking with the Fed, the Treasury, and JPMorgan to try to fashion an overnight solution to the liquidity crisis.

Schwartz and Molinaro walked the board through Bear Stearns's liquidity position, “including the possibility that Bear Stearns would not be able to meet its liquidity needs the next day” without new funding. The Bear board reluctantly authorized the bankruptcy filing if it proved necessary to go that route and agreed to reconvene in a few hours to get a further update. “Everybody was stunned,” Molinaro remembered. But Schwartz held out hope—increasingly slim—that third-party financing could be found.

At one point, after going round and round with the board about the various options, a question arose that Cayne was best able to answer. “They needed Jimmy's opinion on something,” Paul Friedman remembered being told by someone there. “They said, ‘Jimmy, are you there?' and there was dead silence. They sent someone out to call Pat, his wife, who said, ‘No, Jimmy left the call. He's playing bridge.' They sent Pat to go get him, and they dragged him out of the bridge tournament to come vote on, I'm told, whether or not we were declaring bankruptcy Thursday night.”

To an outsider, the Bear Stearns board's lack of involvement to this point in the firm's financial meltdown could be interpreted as a near-complete abdication of its fiduciary responsibility to shareholders. There are more than a few financial heavyweights who have just that view. “The Bear Stearns debacle was a corporate governance error of the most profound kind,” said Steve Schwarzman, the co-founder of the Blackstone Group. But at the quirky and insular Bear, which continued to operate as a small partnership despite having been a public company since November 1985, the lack of involvement by the board or its chairman, Jimmy Cayne, was not particularly disturbing or unusual for the rank and file. “Jimmy who?” asked Paul Friedman rhetorically. “I guess because I've never worked at a real firm. We used the phrase all the time: ‘If only we were a real firm …' I guess because I'd never worked at a firm with a real board, it never dawned on me that at some point somebody would have or should have gotten the board involved in all of this, because we didn't have a board. We had this group of cronies and Jimmy. I guess if you had a real board that had real outsiders with real expertise, you would actually get them involved and they might have some role to play, but not here. What would they do? What would the board do? We were living it and we couldn't figure out what to do. What the hell are they going to do? But I can see in the real world that's an odd thing.” On the other hand, there was no question that once the board was informed of the dire straits the company found itself in, it sprang into action and did everything it could—however narrowed the choices quickly became—to bring the crisis to the most satisfactory conclusion.

Meanwhile, downtown at 33 Liberty Street, the home of the New York Federal Reserve Bank, Geithner and his team were frantically trying to fashion a solution to Bear's immediate problem and what he feared might lead to a cataclysmic disaster in the financial system. He commandeered a bunch of conference rooms near his office and invited his legal, liquidity, infrastructure, and markets supervision experts to begin thinking through possible solutions.

In Washington, a group of government leaders including no less than Fed Chairman Ben Bernanke, Fed Vice Chairman Donald Kohn, Treasury Secretary Hank Paulson, Treasury Undersecretary Robert Steel, and SEC Chairman Christopher Cox were all working hard to see if liquidity could be found for Bear Stearns. This financial brain trust knew well that despite the revolutionary steps taken by the Fed earlier in the week to help investment banks trade their illiquid assets for more easily salable Treasury securities, this financing option would not be available for another ten days or so. Commercial banks, of course, could borrow from the Fed's discount window, a privilege of long standing that came with the cost of giving the Fed direct oversight over them and their capital requirements (which were generally quite high as compared to pure investment banks). The SEC, not the Fed, regulated investment banks. As a result, investment banks could not borrow from the Fed's discount window and were permitted much higher levels of leverage on their balance sheets. For instance, the ratio of assets to equity capital in investment banks—one measure of leverage—often approached 50:1 during the middle of a quarter. (Before the ratio was published at the end of each quarter, investment banks would take the necessary steps to sell enough of the assets to get the leverage down to a more “acceptable” 35:1 ratio.) Commercial banks, by contrast, had leverage ratios of around 10:1.