House of Cards (19 page)

The board then agreed to continue to pursue both transactions. What choice was there? Paulson and Geithner had made clear that the financing that had been arranged through JPMorgan the day before would
be disappearing. While there can be no question that Bear's management and board bore near-absolute responsibility for the sorry state the firm was in, there is also little doubt that by pulling the “up-to-twenty-eight-day” financing, the federal government had forced the firm into an utterly untenable Hobson's Choice: either find a buyer in less than twenty-four hours or file for bankruptcy protection, which, given the existing laws, would have led to the liquidation of the firm and very little, if anything, for shareholders, debt holders, and employees. “We really needed to keep Flowers engaged, and the board was trying to make sure that there continued to be some level of negotiation going on, and that we were continuing to reach out to anybody who could potentially be a bidder, and also that we were keeping very plugged in to what was going on with the Fed,” Molinaro said. “The board was trying to make sure that we were doing all the things that we needed to do to properly safeguard the shareholders' interests here, and at the same time trying to get a deal done.”

There was, however, brewing inside the boardroom a slight variant to the liquidation option, which became known as the “nuclear card.” The idea was to reject the lowball offers to buy the company and threaten to blow the company up by filing for bankruptcy. With the company would go the global financial system, to which Bear Stearns was so deeply connected. The thinking was that nobody—not the federal government, not JPMorgan, not other banks and investment banks—would want to experience the consequences of such mutually assured destruction and that, accordingly, the threat of such an option would be sufficient to award Bear more time—for instance, a
real
twenty-eight days—to fashion an orderly sale process or to be offered a price for the firm that would allow everyone to save face. It was just a germ of an idea, but one that was largely in keeping with the firm's image of being a bunch of rough-and-tumble iconoclasts. Jimmy Cayne was the loudest advocate for playing this hand. “I knew that there was very strong probability that if Bear Stearns went down, there might be systemic failure,” he explained. “I knew I had a nuclear card. But you can't play it…. If anybody on earth would have played it, it would have been me.”

Throughout the night, the Flowers and JPMorgan teams continued their respective due diligence efforts and occasionally reported in to Parr and the Bear executive team. Flowers was finding it increasingly difficult to line up the necessary $20 billion in financing and so informed Lazard. There was a discussion about the importance, given the dire circumstances, for both Bear Stearns and JPMorgan to have a high degree of certainty that any deal would, in fact, close. This led to the decision to make sure the lawyers did not gum up any merger agreement with all
sorts of typical closing conditions and legal caveats. According to Molinaro, the plan for Sunday was to “try to push it”—the $10 per share deal with JPMorgan—“to the conclusion. Get it done.” He said that while everyone was “taken aback” by the $10 deal, there was also a feeling of resignation: “It is what it is. Let's go get this done. Let's go do what we have to do to get done here.” People started trickling home after midnight on Saturday, somewhat confident that a deal with JPMorgan would coalesce the next day before the deadline.

T
HE
P
RICE OF
M
ORAL
H
AZARD
? $2

n Sunday morning at around eight-thirty, Bear's team of fifty professionals reassembled in the thirteenth-floor conference center. Schwartz kicked off the day by telling everyone how it “was going to unfold,” explained one participant, “but people were not in a good mood.” Bear's lawyers had received a draft of a proposed merger agreement from Wachtell, Lipton, JPMorgan's lawyers, as well as a draft of an option agreement that would allow JPMorgan to buy a large chunk of Bear Stearns's stock. The draft merger agreement, as would be typical, did not have a price included. Schwartz knew that the Flowers bid was not coming together and that the JPMorgan deal, if it happened, would be in the $10 range. “We have a deal,” he told his team, “but you're not going to like it.”

Vince Tese showed up at Bear Stearns early that morning. “When I got in at seven o'clock, the merger agreement was in pretty good shape,” the lead director said. “The lawyers had read it. There were a couple of issues, but nothing earth-shaking.” After Schwartz and Molinaro spoke, Tese's driver took him to Cayne's apartment, at 510 Park Avenue, and together the two men headed up to the Jackson Hole restaurant, at 91st and Madison. Tese wanted to talk sense to Cayne about the wisdom of continuing to think about the nuclear card. It was best, Tese told him, to accept reality and push to get the deal on the table done. They had a hearty breakfast and a frank chat. “I picked Jimmy up, and we went and had a couple of eggs,” Tese said. “I told Jimmy at the time that … bankruptcy's not an option. ‘Yeah, but,' he kept on saying, ‘they won't let us go
bankrupt. We can get more money out of them.' And I said, ‘We've been doing that for two days. They know we don't have a hand. That'll get you nowhere. You can't go to the eleventh hour, because you got to start declaring bankruptcy between four and five [in the afternoon]. I don't mind playing the game a little bit. But you got to realize at the end of the day, it ain't an option.’” Tese said Cayne understood what he was saying. “I told him, ‘This is in your interest, just like it's in everybody else's interest.’” And he reminded Cayne that if the deal fell apart because Cayne convinced the board to press the nuclear button, it was Cayne they'd go after. The former CEO took that message to heart.

While Cayne and Tese were at breakfast, though, events took a curious turn, one of many that would make for a long and nerve-wracking day. The two co-heads of investment banking at JPMorgan, Steve Black and Bill Winters—the two men Schwartz and Molinaro were talking to regularly—had agreed to resume the negotiations on Sunday morning at 383 Madison, but they didn't show. “We were all sitting around for hours waiting for the JPMorgan guys to show up and nobody did,” Paul Friedman remembered. Schwartz attempted to get in touch with Black—his fraternity brother at Duke—and discovered he was in a meeting with Jamie Dimon. The word was that JPMorgan's executives were meeting with their board to decide whether this shotgun marriage made any sense whatsoever. “We assumed that they were doing what they got to do, to figure out where they're standing,” Molinaro said. Under the extreme circumstances, a delay to consider carefully the wisdom of such a deal seemed prudent from both a fiduciary point of view and a tactical point of view. After all, if you are the only serious bidder in a situation where time is limited and the deadline is clear, why rush into anything?

“The first thing I get in, in the morning,” Schwartz told his colleagues, “I get Steve Black calling me saying, ‘We're 50/50 at best.' Schwartz said, ‘What the fuck happened?' He said, ‘We ran it overnight. We threw all this stuff through our models and you may be $6 billion overmarked in your mortgage portfolios.' Schwartz responded, ‘Steve, that's not fucking possible. I've had Wes Edens through here, one of the mortgage experts, and Chris Flowers through here, another one of the mortgage experts. I'm not saying we're marked perfectly, but these guys can't walk away saying they're very comfortable with our portfolio and you have it off by $6 billion. There's some mismatch here. So let's get on that.' Black said, ‘Well, you just need to be aware we're 50/50 at best. You've got to be thinking about that.' Great.” Just before ten Sunday morning, with some sarcasm, Friedman e-mailed his guys about the sudden disengagement of JPMorgan: “I guess it's a long walk over here.” Then Schwartz called
Rog Cohen. “Look, we've got a much bigger problem,” Cohen recalled Schwartz telling him. “I just got a call from Black saying they ran their models all night and they're not sure they're going to do the deal.”

T
HE
JPM
ORGAN TEAM
had spent the night studying Bear's “book” of securities and became increasingly uncomfortable with what it saw. At first, JPMorgan thought that of Bear's $300 billion of assets, $120 billion might be worth less than they were marked on the books for and might continue to deteriorate in value. By the end of the night, the firm's analysis concluded that more like $220 billion of the assets might be toxic. “We kind of slept on it,” according to a JPMorgan banker, “or not slept on it, kind of closed our eyes for a half hour, and we realized that if you take a step back and remove yourself from the enormity of it, what we were being asked to take over, from a risk factor [point of view], was gargantuan.” Also weighing on the JPMorgan executives was that morning's Gretchen Morgenson column in the Sunday
New York Times,
which openly questioned the Fed's decision on Friday to provide the rescue financing for a firm that “has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach.” Morgenson then ran through the litany of Bear Stearns's missteps over the years, from being the only member of the Wall Street fraternity not to participate in the billion-dollar, Fed-orchestrated 1998 bailout of the hedge fund Long-Term Capital Management to the firm's willingness to “provide its balance sheet and imprimatur to bucket-shop brokerages like Stratton Oakmont and A. R. Baron”—for which the firm was fined $38 million in 1996 and its head of clearing fired—and for being one of the engines of the mortgage securities business and the originator of subprime mortgages. She also mentioned the collapse of two Bear Stearns hedge funds the previous summer that had cost investors $1.6 billion in losses. Morgenson could have gone on to mention Bear's roles in both the mutual-fund scandal and the scandal involving the exchange of favorable research coverage for investment banking business, but she did not, as her point was already well made. “And so, Bear Stearns, a firm that some say is this decade's version of Drexel Burnham Lambert, the anything-goes, 1980s junk-bond shop dominated by Michael Milken, is rescued,” she wrote. “Almost two decades ago, Drexel was left to die. Bear Stearns and Drexel have a lot in common. And yet their differing outcomes offer proof that we are in a very different and scarier place than in the late 1980s.”

Black insisted that the JPMorgan teams camped out on the firm's eighth floor read Morgenson's column. “That article certainly had an impact on my thinking,” one anonymous JPMorgan banker recalled for
Vanity Fair
. “Just the reputational aspects of it, getting into bed with these people.” Added another JPMorgan banker about the prospects for the deal as the executives discussed it over and over Sunday morning: “Things didn't firm up, they got more shaky.” Black called Schwartz and told him JPMorgan was out. “Whatever other things you are working on, you should actively pursue them,” Black said. At the time, Schwartz didn't think this was a negotiating tactic. He pointed out that if you asked any bunch of traders in that kind of pressured atmosphere where they would mark these illiquid and toxic securities if they had to be sold immediately, of course they would say, “Sorry, that's down fifteen points because there's no buyers.”