House of Cards (24 page)

“Once the thing was announced, people were unhappy, upset, angry, depressed,” Molinaro recalled. “All those feelings. People were crying. People were angry. I was feeling depressed and sad. I couldn't believe it. But I knew that we didn't really have any choice. We were fucked. We didn't have any choice. We did the best we could do with what we had. I couldn't say I was as angry. I wasn't that angry, because I had lived through what had happened, and I knew how we got to where we had gotten to.” Fred Salerno held out some hope—a prayer, really—that when the inevitable shareholder lawsuits were filed in the Delaware courts questioning whether the board had done all it could have and whether the deal lockups that JPMorgan had demanded were fair to shareholders, the courts would throw out the deal. “The more lockups there are, the worse it is,” he said. “They'll throw the whole damn thing out. So we always had, when we left that night, the hope that the Delaware court would look at this and say $2 is not the right number for the shareholder. But what we didn't know is they”—JPMorgan—“screwed up.”

At about 7
P.M.
, the
Wall Street Journal
broke the news online that JPMorgan would buy Bear Stearns for $2 per share. The reactions were immediate and shocking. “This is like waking up in the summer with snow on the ground,” said Ron Geffner, a former SEC enforcement lawyer. “The price is indicative that there were bigger problems at Bear than the clients and the public realized.” The price must be a typo, the consensus seemed to be, since surely a company that fourteen months earlier had been trading at $172.69 per share could not now be worth so little. Steve Schwarzman, the head of The Blackstone Group, had been vacationing with his wife in St. Barts, the exclusive Caribbean island. He had spoken to Schwartz on Friday for about thirty minutes to see if Schwartz needed Blackstone's help and was told, “We're fine. We're good. We don't need any help.” That Sunday evening, he had just sat down for dinner with fellow Philadelphia billionaire Ron Perelman on Perelman's 188-foot yacht, the
Ultima III,
when the news paraded across his Black-Berry that Bear Stearns had been sold for $2 a share. “It must be $20,” Schwarzman and Perelman said to each other. “It can't be $2.” John Mack, the CEO of Morgan Stanley, had a similar reaction. But there was no typo. “I've got to think we can get more in a liquidation,” a midlevel Bear executive told the
Wall Street Journal
. “I'm not selling my shares, this price is dramatically less than the book value Alan Schwartz told us the building is worth. The building is worth $8 a share.”

At 7:11, Friedman e-mailed John Shrewsbury, at Wells Fargo Bank
in San Francisco, one of Bear Stearns's large lenders. “We have been acquired by JPM,” he wrote, and then, paraphrasing the REM song, added, “It's the end of life as we know it but all will ultimately be fine.”

Friedman then heard from his friend Glinert again, wondering how he was doing. He answered: “Angry, sad, depressed. Sitting in the office drinking scotch.” Glinert wanted to call, but Friedman suggested, “Not till I have lots more scotch. Got a room full of angry people and we need the venting.”

Thirty minutes later, Friedman wrote Glinert again. “Still drinking,” he allowed. “Getting less coherent but no less angry. Death of a family member. Loss of friends. Wouldn't work at JPM on a bet—which is good since they wouldn't want me.”

Glinert urged some restraint. “One day at a time—ok?” he wrote. “You still gotta get back in tomorrow.”

Replied Friedman: “Maybe. If I come in I come in. If not … who gives a damn.”

Starting at eight that night, while Friedman and his colleagues were busy getting drunk, JPMorgan convened a conference call to discuss the deal. “It's been a long weekend,” JPMorgan's chief financial officer, Mike Cavanaugh, conceded with some understatement. Cavanaugh walked the listeners through a hastily assembled six-page “investor presentation” that highlighted the acquisition's benefits, including the view that “when fully integrated” the deal would add about $1 billion annually to JPMorgan's earnings. The bank seemed especially excited to be buying Bear Stearns's prime brokerage and clearing businesses, its energy-trading business (which had attempted to raise money for the firm on Friday by liquidating its physical stores of natural gas), and its four hundred brokers (both Dimon's father and grandfather were brokers, and Dimon has always liked that business, which JPMorgan did not have). Cavanaugh also announced that JPMorgan would provide “management oversight” and “guarantee the trading obligations” of Bear Stearns immediately and that, in addition to the $290 million purchase price for the equity, JPMorgan also estimated that it would cost another $6 billion, pretax, to cover other related costs: Bear Stearns's litigation; consolidating people (including paying severance), technology, and facilities; selling off large chunks of the $350 billion of assets just acquired; and conforming the accounting systems. “I want to hit right off the bat that this is a good economic transaction for JPMorgan Chase shareholders,” he said. “Obviously the price that's being paid here … gives us the flexibility and margin for error that was appropriate given the speed at which the transaction came together.”

Cavanaugh pointed out that the merger agreement did not contain
a typical material adverse change (MAC) clause, in part to demonstrate to the market the likelihood that the deal would close. Without such a clause in the contract, JPMorgan would have very little legal recourse if Bear Stearns's business materially deteriorated further; this decision exposed JPMorgan to some additional risk but also was meant to send a strong signal to the market. “This is a deal we all want to see close and will close,” he explained. Cavanaugh also made clear that all the counterparties that had worried about doing business with Bear Stearns during the previous week need be concerned no longer. “We're also, effective immediately, providing a JPMorgan guarantee to all trading obligations of Bear Stearns,” he said. “So all counterparties facing off against Bear Stearns should understand that they're dealing with JPMorgan Chase on that basis.” JPMorgan's agreement to guarantee immediately, before the deal closed, Bear's trading obligations—its daily operating activities, as opposed to the firm's long-term holdings of company debt—was a hugely important signal to the market that Bear remained sufficiently open for business until the merger could close, estimated by Cavanaugh at ninety days. “Having taken Bear Stearns out of the problem category, and the strong action by the Federal Reserve, we would anticipate the market will behave quite differently on Monday than it was on Thursday or Friday,” Cavanaugh said on the call. Parr said this was an essential deal point, recognized by both sides. “Otherwise they'd be buying a rapidly melting ice cube,” he said.

But such an interim-period guarantee by one firm of another firm's obligations was another place in this historic deal where new ground was broken, and right away this led to confusion in the marketplace. The very first question on the conference call was about whether Bear Stearns would be open for business. “Bear Stearns is absolutely open for business,” Bill Winters answered. “That's the purpose of the guarantee that we've put in place. That should absolutely give everybody in the market complete comfort that when dealing with Bear Stearns you're backed by the full facing credit of JPMorgan. So Bear is open for business today, with all the credit backing that we can provide. And it obviously intends to remain completely active in the market up to and through the date we complete the acquisition.”

The next caller picked up on Winters's answer and wanted to know what would happen to the guarantee if Bear's shareholders voted down the deal. “First of all, the guarantee applies to all transactions on the books today and any transactions that are entered into while that guarantee is in place,” Winters said. “We have every expectation that Bear Stearns shareholders will approve this deal. I think we're offering the best alternative
that they've got at this point and … we'd be surprised if a better alternative came along. If in the future the shareholders do fail to approve the transaction, then our guarantee would no longer apply prospectively. But of course everything that was on the books up to and to that point would be covered by the guarantee.”

At this point Steve Black added a rather confusing comment: “And that shareholder vote is an ongoing process. It takes place—if it does fail—over the course of a continuing vote brought back again throughout the period of twelve months.” He seemed to be suggesting that even if the Bear shareholders voted down the deal, the guarantee would still apply for a period of twelve months.

To clarify, analyst Brandon Seward asked, “How long is that guarantee good for if shareholders do fail to approve this transaction?”

Black tried again. “The guarantee is good for the period of time that the shareholders have to approve the transaction for everything that is on the books now or will be put on the books over that time frame. If the shareholders were to choose not to approve the transaction, they have to continuously take it back to a vote over the course of a twelve-month period.”

“Okay, so the guarantee is good for twelve months because that's how long the vote has to stay outstanding?” Seward asked again.

“No,” Black replied. “Let's be clear. We all firmly believe that the shareholders at Bear Stearns will approve the transaction. So we think that it will be a moot point. But the fact is if they were to choose not to approve it, then the guarantee would eventually go away when that process has run its course, which is over the course of twelve months.”

“Okay,” Seward pursued, “so the guarantee is the lesser of approval or twelve months?”

Cavanaugh jumped in this time. “So just to be clear, we have a guarantee on all trades on the books as of today, all trades that get put on the books up to any date where our deal could ever fall away, which we don't think would happen. Only prospectively from that point forward would the JPMorgan guarantee not exist.”

Still confused, Seward tried one more time. “But as part of the process, they have to continue to go back and seek shareholders' approval over a twelve-month period?”

“No,” Winters replied. “We would expect that shareholders would approve this transaction on the first pass. But of course that's up to the shareholders to decide.”

It seemed evident that Cavanaugh, Black, and Winters either did not understand fully how the guarantee would work or did but had failed
to make clear what would happen to the guarantee if the Bear Stearns shareholders voted down the JPMorgan deal. A three-page Guarantee Agreement had been executed on March 16 and signed by Dimon along with the Merger Agreement itself, but these documents were not particularly clear about how this very important aspect of the deal would work. Indeed, it would not take long for that confusion to manifest in the marketplace, for Dimon to lash out publicly at his high-priced lawyers for failing to anticipate the issue, and for the resulting dispute to almost derail the deal consummated just hours before.

First, though, the government wanted to make sure the markets saw the events as a positive and would react calmly. “Last Friday, I said that market participants are addressing challenges and I am pleased with recent developments,” Treasury Secretary Paulson said in a statement. “I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets.” The New York Fed also wanted to explain to the Wall Street mafia what had just happened. In a conference call late Sunday night, at about the same time of the JPMorgan call with investors, Geithner explained how the opening of the discount window to investment banks would work, including what collateral would be accepted by the bank. According to the
Wall Street Journal,
“Geithner and Dimon led off with some brief remarks, noting that J. P. Morgan would be guaranteeing Bear Stearns's debts and that if the pact hadn't come together, the market impact may have been catastrophic. During the question-and-answer session, Citigroup Inc.'s new CEO, Vikram Pandit, spoke up. Mr. Pandit—who did not initially identify himself—asked a shrewd but technical question” about whether JPMorgan would be guaranteeing trades with Bear Stearns until the deal closed. “How would the deal affect the risk to Bear Stearns's trading partners on certain long-term contracts? The query irked Mr. Dimon. ‘Who is this?' he snapped. Mr. Pandit identified himself as ‘Vikram.' Offended that Mr. Pandit was taking up time with what he considered granular inquiries, Mr. Dimon shot back, ‘Stop being such a jerk.' He added that Citigroup ‘should thank us' for staving off further mayhem on Wall Street.’” Schwartz was listening on the call but found he was having “an out of body experience.”

Just after midnight, as the few remaining Bear Stearns stalwarts were trickling out of 383 Madison, James Egan, head of Global Fixed-Income Sales, sent an e-mail to his bosses, Craig Overlander and Jeff Mayer, and a few others, including Tom Marano. “I had always heard about a job described as a ‘$2.00 Broker,’” he wrote. “I was never really sure what that was but now I do—it's us!”

By the time the Bear employees arrived at work the next day, some wag had already taped a $2 bill above the Bear Stearns logo on one of the revolving doors leading into 383 Madison Avenue. That image quickly became an apt metaphor for the brutal decline and fall of a once-proud firm, a firm that had survived every other crisis of the twentieth century, from the Depression to World War II to the market crash of 1987, without a single losing quarter but could not make it through the global credit crunch of 2007 and beyond. “Once you have a run on the bank, you are in a death spiral and your assets become worthless,” observed David Trone, a brokerage industry analyst at Fox-Pitt, Kelton. “Banks and brokerages are a house of cards built on the confidence of clients, creditors and counterparties. If you take chunks out of that confidence, things can go awry pretty quickly.”

On Monday morning, as “firefighters in kilts and St. Patricks Day revelers on their way to the parade streamed by Bear employees smoking cigarettes in front of the firm's headquarters,” the
Wall Street Journal
reported, the Bear brethren had to start picking up the shattered glass of their firm. “Basically we're all wondering first if we'll keep our jobs, second, if we'll get severance if we don't,” one anonymous investment banker told the
Times
. “And then we're hoping that Lehman won't go under because then there will be way too many bankers looking for jobs.” Carol Guenther, thirty-eight, who had been an administrative assistant at the firm for thirteen years, said, “I am very, very upset—heartbroken, actually. I figure I will probably be laid off. I love the people I work with. And Bear is very good to employees. So, we have a great sense of teamwork. Now, we are all in a daze.”