House of Cards (17 page)

At around six o'clock Friday evening, in a stupor that was equal parts exhaustion and gloom, Friedman wrote a friend, “27 years at this place and it only has days left to live. Hundreds of people I care about and thousands [of] others will be out on the street. I've been at this long enough that it won't kill Susie”—his wife—“and me but I'm surrounded by people who will have their lives ruined.”

Meanwhile, the Fed and the Treasury were closely examining Bear's liquidity at the end of Friday and were not happy. Treasury Secretary Hank Paulson, the former CEO of Goldman Sachs, decided there was no way Bear would be able to open for business on Monday morning.
Paulson and Geithner called Schwartz, who was then in the backseat of a car taking him home to Greenwich, Connecticut. “You have got to understand that we're not having this thing [be unresolved] on Monday morning,” Paulson told Schwartz. “This thing has got to be done over the weekend.” Schwartz made his pitch for more time, which would allow for a more orderly process and, he hoped, a higher sales price for shareholders. But Paulson would have none of it. “I hear ya,” he said. “But this thing's got to be done. You need to have a deal by Sunday night.” Paulson later told the
Wall Street Journal:
“It was just clear that this franchise was going to unravel if the deal wasn't done by the end of the weekend.” Recalled Geithner: “That evening Paulson and I together told him that it was going to have to be Sunday night because we didn't see an option that would buy more time. The run accelerated over the course of the day Friday, and I wasn't going to lend into the run. We didn't have any authority to guarantee their whole liabilities or buy them, no ability to do that. So given [that,] the only options really were to maximize the chance that they were going to get bought and guaranteed before Asia opened. Paulson and I were very clear to him, crystal clear to him Friday night. He understood it, didn't like it. Kept hoping Saturday morning that there would be a way to give him a longer period of time—understandably, because it's very hard to run an open process to get people to do due diligence. On the other hand, it wasn't impossible. It was earth-shattering but not impossible. We didn't know what was possible. We were doing two tracks.”

After hearing the shocking news from Paulson and Geithner “that a stabilizing transaction needed to be accomplished by the end of the weekend,” Schwartz called the equally exhausted Molinaro, who had stopped for a cup of coffee at a Mobil station on the Merritt Parkway on his way home to New Canaan, Connecticut, with the news that Bear Stearns had to somehow find a buyer by Sunday night or face liquidation. Paulson had reminded him, Schwartz told Molinaro, that Bear had known it would have no control once it accepted the financing deal. “You've got to be kidding me,” Molinaro said. “I thought we had twenty-eight days.”

“So did I,” Schwartz answered. “Now we've got to get a deal done this weekend.”

“He was clearly upset,” Molinaro recalled. “And I was dumbfounded, candidly, when I heard it. I couldn't believe it.”

This was not even remotely the news the exhausted Bear Stearns management wanted to hear on this particular Friday night. “To be honest,” Molinaro said, “I was so exhausted at that point, I just wanted to go home and go to bed, and to get back in here and see what we had to do the next day,” he said. “I guess in hindsight, I think that the conclusion
was reached because this was unprecedented, what had happened. And the markets were in chaos. And I think there was concern that there would be other investment banks that might be right behind us, and that was not going to be a good outcome obviously. Lehman Brothers was [also] under significant duress.”

Other Bear executives, who had not been part of the previous night's vigil, freaked out as Paulson's dictum began to circulate. “Everybody went into a panic,” one disillusioned senior managing director explained. “The general feeling was, ‘You've got to be fucking kidding me. We can't get anything done in forty-eight hours. Nobody here has slept in three days and you're giving us two days to find a long-term solution? There is no long-term solution here.' It was a total panic.”

At that moment, given how radically the dynamic had shifted in the wake of Paulson's call to Schwartz, Vincent Tese, the multimillionaire wireless entrepreneur and the lead independent director on the Bear Stearns board of directors, thought that it might be useful for the independent directors of the board to retain their own counsel. Tese called Rodgin Cohen, of Sullivan & Cromwell, on his cell phone. Cohen, who had not been involved in the evolving situation since his call to Geithner late Wednesday night, had just landed back at LaGuardia Airport from Washington. “We really could use your help at the board level,” Tese told Cohen. Tese then told Cohen about how, instead of having twenty-eight days, they'd been told they needed to have a deal by Sunday night. Cohen decided to call Geithner to see if the Fed had any flexibility at all. “I was told it was done,” Cohen said. “There was no extension beyond Sunday night…. The gun was absolutely to their head at that point.”

By the end of Friday, Paul Friedman was exhausted, emotionally and physically. He took the train to his house in Scarsdale, at the end of a cul-de-sac. He collapsed in bed with the help of an Ambien and hoped to get some sleep. It was around 7:30 at night. His head was spinning with the calamitous events of the previous forty-eight hours. “At 9:15, I'm asleep,” Freidman said, “and I hear knocking. [My wife] Susie comes upstairs and says, ‘Timmy Greene is on the phone for you.' Timmy is one of the co-heads of the repo desk. I said, ‘He's on the phone for me now? What day is it?' She said, ‘He needs to talk to you right now. He's still at the office.' I pick up the phone. I'm lying in bed like this, I've got the phone, and I'm staring at the ceiling barely coherent. I go, ‘Yeah?' Timmy goes, ‘JPMorgan has sent over an agreement. It's only good until Monday.' I said, ‘What do you mean it's only good until Monday?' He said, ‘The agreement that they sent says this loan facility terminates Sunday night.' I said, ‘Okay, get the lawyers involved.' He said, ‘I did. I called Mike
Solender,' who had also gone home and taken a sleeping pill. ‘We were in the middle of the conversation and he fell asleep.' I go, ‘Okay,' and I'm not a whole lot better. I said, ‘We need to get the Fed involved.' Timmy said, ‘We just spoke to the general counsel, the guy who works for Geithner, and he says this is a private transaction and you should work out the details with JPMorgan.' I said, ‘Okay, what does JPMorgan say?' He said, ‘They're saying it runs out Sunday night.' It's a one-day facility. The ‘up to twenty-eight days' came out as, ‘It's a one-day facility. We'll decide later on whether we want to renew it for more days, up to twenty-eight.' I said, ‘Okay. You've gotta get Alan on the phone.’”

Greene then set up a conference call between himself, Friedman, still half asleep, and Alan Schwartz, who was not much better. “We take Alan through it,” Friedman said. “Timmy is saying, ‘JPMorgan is saying unless we sign the document tonight, they won't lend us the money tonight that we need to not run out of cash tonight.' There was a whole lot of technical repo stuff that I've forgotten how exactly he described it. Alan goes, ‘Sign the document.' Timmy goes, ‘It says the loan expires Sunday night,' or Monday morning. I forget which. Alan goes, ‘It doesn't make any difference. We're out of business. Just sign the damn document.' I said to Timmy, ‘Okay, you got your orders.’”

By then, Schwartz had also received his orders from on high. Paulson and Geithner had reviewed the events of Friday and told Schwartz he needed to “find a solution” for the firm before the markets opened Monday morning in Asia—also known as Sunday night in New York. Recalled Schwartz: “We believed at the time that the loan and the corresponding backstop from the New York Fed would be available for twenty-eight days. We hoped this period would be sufficient to bring order to the chaos and allow us to secure more permanent funding or an orderly disposition of assets to raise cash, if that became necessary. However, despite the announcement of the JPMorgan facility, market forces continued to drive and accelerate our precipitous liquidity decline. Also, that Friday afternoon, all three major rating agencies lowered Bear Stearns's long-term and short-term credit ratings. Finally, on Friday night, we learned that the JPMorgan credit facility would not be available beyond Sunday night. The choices we faced that Friday night were stark: Find a party willing to acquire Bear Stearns by Sunday night, or face what my advisors were telling me could be a bankruptcy filing on Monday morning, which could likely wipe out our shareholders and cause losses for certain of our creditors and all of our employees.”

Geithner is not sure why there ended up being such confusion about the proposed JPMorgan facility. “I don't understand actually what
happened,” he said. “All I know is the following: The only thing in the public domain about terms [of the facility] was what JPMorgan put out. They said ‘up to twenty-eight days.' Alan saw that. All we said was the board had voted to approve the arrangement announced by JPMorgan. We didn't say anything else. I told Alan that morning when it was announced that he was going to have to find some solution for his company. That evening Paulson and I together told him that it was going to have to be Sunday night because we didn't see an option that would buy more time.”

Molinaro believes that the Fed and the Treasury had a strategy— relatively early on—of pushing Bear Stearns into the arms of JPMorgan for the good of the financial system. “I think that was the plan,” he said. “Force us to merge into JPMorgan that weekend. From what I know from talking to the JPMorgan people, they were getting leaned on by the Fed to do this. So the Fed [was] pushing them to do the deal, pushing us into their arms, trying to make sure that the shareholders didn't get any money out of this. It would be effectively a liquidation of the company, a bankruptcy, if you will. The bondholders all get bailed out and get paid off. That was just a by-product of the whole thing. JP Morgan is the beneficiary of that, for stepping in and being there.”

A
S A HIGHLY
regarded M&A banker, Alan Schwartz knew something about selling a business. A former fastball pitcher who played in high school and college and almost made it to the Cincinnati Reds before an elbow injury sidelined him, Schwartz also knew a little something about pressure situations. After getting the news from Paulson and Geithner that Bear Stearns needed to consummate a deal for the company by Sunday night or file for bankruptcy Monday morning, Schwartz knew he had lost nearly all of his leverage in negotiating a deal. With such stark choices, so little time, and so much negative publicity about the firm's trouble already part of the zeitgeist, how could Schwartz hope to pull off something “earth-shattering,” as Geithner described it, in thirty-six hours? The odds were long and seriously daunting. Geithner had made a difficult situation even more difficult by insisting that Schwartz run a “competitive” process, making sure that as many parties as possible had access to the potential deal. “We told Alan that he had to run an open process,” Geithner said. “I told Jamie that he couldn't—whether he was interested or not—he couldn't have any exclusive thing. But [Bear Stearns] had a huge interest in talking to everybody they could. They talked to a bunch of people. I think a bunch of people were polite and
said, ‘Yeah, we're really interested.' But only two people seemed really focused and engaged.”

Schwartz went into deal mode. At least two of his advisors, Gary Parr, at Lazard, and Rog Cohen, at Sullivan & Cromwell, believed that Schwartz's background as a dealmaker made it possible for something to get done in such a short period of time. “The fact that he'd done complex deals, where there were lots of pressures, lots of different moving pieces, [where it was important] to be able to keep your wits about you and withstand the pressures and sort of circle everything together and make sense out of it, probably being an M&A banker helped,” Cohen said. While much of the previous day had been consumed with the Fed's action and the market's unhelpful reaction to it, after making calls around the world, Lazard had managed to gin up at least one other party besides JPMorgan that was interested in thinking seriously about some sort of deal for Bear Stearns. Starting late on Friday afternoon, private equity firm J. C. Flowers & Co., led by the former Goldman Sachs partner Chris Flowers, began conducting due diligence on Bear Stearns—studying its financial records—in the offices at 383 Madison. Flowers, then forty-nine, had been a financial institutions banker at Goldman until he founded his eponymous firm in 1998. With $7 billion in his second fund, Flowers was best known for his 2000 purchase, along with former Lazard banker Tim Collins, of Japan's Long Term Credit Bank, which he turned around, cashing out with a personal profit of around $1 billion. Flowers became known as “Bidder A.” The only other bidder interested in pursuing a deal for Bear Stearns was, of course, JPMorgan.

To accommodate the full-blown due diligence efforts of both Flowers and JPMorgan, Schwartz and Molinaro met back at 383 Madison at around seven-thirty Saturday morning to map out a plan for the day, which included immediately reassembling his weary bankers and traders with various expertise about the firm—its cash balances, its trading book, its real estate holdings, its securities holdings—and setting them all up in various conference rooms at 383 Madison. JPMorgan's due diligence efforts were confined to the firm's conference center on the twelfth and thirteenth floors. Flowers's sessions were in and around Cayne's office on the sixth floor. “Those of us running business units were each assigned to a spot,” Friedman explained. “We'd go in, and the JPMorgan people, who matched up with us, would come in and start to do the transfer of knowledge, which went most of Saturday. I spent time with Matt Zames and with the treasury people and with the repo people. I was sort of flitting from group to group because we don't line up that well with them from a
funding standpoint and from a business standpoint. At the same time, the lawyers are swirling around, the bankruptcy lawyers are back, and they have a whole bunch of offices and they're working on what happens” if no deal can be agreed by Sunday night.