House of Cards (27 page)

He was no more in favor of it when he showed up in Cayne's office wanting to talk about a PR campaign against the deal. “I said, ‘Joe, look, whatever plan you have as far as moving forward or PR issues or whatever, I'm not part of it. I signed the piece of paper saying I was in support of the $2 thing. How I vote is my business. I can only tell you that your idea of what you might settle for is far different than me because if the price is dramatically different than $2, which doesn't have to be $30, but different than $2, I'd go along with that on one hand. On the other hand, I'm not really talking about it.' He said, ‘I understand.’”

By the time Lewis and Cayne said their goodbyes on Tuesday morning, Bear's stock was trading near $8 per share, more than four times the JPMorgan offer price. While the Bear Stearns executives appreciated the implications of this kind of trading—the likelihood the deal would get voted down was increasing exponentially—they were even more focused on what to do if that actually
did
happen. “There was a decent chance there was going to be turmoil in the business of Bear Stearns while shareholders said, ‘We're not voting in favor,’” Parr said. “So then there wouldn't
be a deal, but the business of Bear Stearns would continue to deteriorate.” Upton was worried about that, too, and had started to try to raise money almost immediately that week. “The fucking sad thing is Monday morning I came in and started trying to raise money in our own name again,” he said. “I started talking to rating agencies, I started talking to lenders. I said, ‘We effectively are now an AA bank, right? We got a guarantee.' I wanted to get talking points on the guarantee, what's covered, let's get that out, let's start funding ourselves in our own name again.” But as he carefully read the guarantee document and then tried to refinance some of Bear's debt, he discovered relatively quickly that “there was a lot of very senior-level tension going on, on both sides of 47th Street,” regarding “the guarantee and what's covered and what's not and can we fund ourselves and can we not, and under what conditions can they walk away. Quickly what became clear was Jamie was unhappy because he'd given himself some open-ended exposure. As it was constructed, we were really not going to be able to successfully to fund ourselves in our own name because they would walk away and we would just be declaring bankruptcy again.”

There was also a lot of chatter in the market on Tuesday, as the stock continued to trade at nearly four times the offer price, that in addition to bondholders buying up the stock to make sure the vote for the deal was positive, there were rumors that “angry Bear employees were teaming up with outside investors to buy Bear stock to force JPMorgan to increase its $236 [
sic
] million offer or to lure a higher bid from a rival bank,” the
New York Times
reported. One blogger, Ami de Chapeaurouge, a U.S.-educated German lawyer, wrote, “It's about time for a good, old-fashioned management buyout by … those hardworking senior managing directors who have gotten short shrift, and may be in the best position to rescue Bear, realign the interests of employees and outside shareholders by offering a meatier purchase price and redirect strategy away from credit enhancement and repackaging folly to a sounder product mix.” The idea, however far-fetched, was a clear indication of the depth of the dismay in the market with JPMorgan's offer.

At one o'clock, Dimon convened a conference call with Bear's four hundred or so brokers. Dimon was anxious to keep as many of them as possible, since JPMorgan had no brokers and the ones at Bear were among the top revenue producers in the industry. Then there was his own DNA. “I have broker's blood in my veins,” Dimon told the brokers on the call.

In the meantime, the lawyers were trying to tie up any loose ends in the various agreements that had been so hastily drafted the previous
weekend. “It was understandable that there was some cleanup to do,” Parr said. “It is not unreasonable that there might be some things where somebody would say, ‘Hey, you know, we need to change this' or ‘We didn't mean that' or ‘We need to flesh this out.’” But at some point late in the day on Tuesday, JPMorgan had figured out the flaw that meant it could get stuck with the guarantee for a year even if the Bear Stearns shareholders voted down the deal. The JPMorgan lawyers asked the Bear Stearns lawyers to make a change. But this request was more than a simple matter of “cleanup;” this was beyond the lawyers' ability to resolve on their own. “When they said, ‘We want to change this'—meaning the guarantees going beyond the year—that was clearly a substantive point, and there was no way we could give a substantive point without getting something,” one of the participants recalled.

On Wednesday, with the lawyers unable to resolve the matter, Dimon called over to Bear Stearns. Dimon's message: “You know this wasn't what anyone intended, this guarantee. This wasn't what any of us meant to have happen. You know that we want to get this deal done. You know you need our guarantee. But this has to change.” Dimon's tone, according to one person, was “pretty tense. He wasn't yelling. But this is a big issue. It's a business issue and it needs to be fixed. He was quite irritated with [Wachtell], but that wasn't aimed at us. He just wanted it fixed.” Later that day, Dimon called Schwartz. “Don't you understand that we have a problem?” he said. “Shareholders may vote this down!” Schwartz, the seasoned M&A practitioner, would have none of it. “What do you mean,
we
have a problem?” he told Dimon. Remembered Fred Salerno: “Jamie's a very bright guy, but it sort of was a little bit too arrogant of a position to take. So I told Alan, ‘We're not going to change anything. My vote is we're not going to change anything.’”

For the first time since the world had started collapsing on them sometime around March 7, the Bear Stearns executives felt they had some serious leverage, and they were anxious to use it. JPMorgan needed relief, whether from some poor legal drafting or from a poorly conceived business concept (where the blame truly lies has never been made clear), and Bear Stearns intended to use that fact to try to regain a shred of its dignity. Even though JPMorgan had signed a contract without a material adverse change provision, the firm left the distinct impression in the minds of the Bear executives that JPMorgan “would do what it had to do to protect itself,” according to one participant. This meant, unmistakably, that if an agreement could not be reached to revise the guarantee provision, JPMorgan would walk from the deal, and if that led to a lawsuit with Bear Stearns, so be it. The clear message for JPMorgan, if the Bear
Stearns board didn't agree to changing the agreement, was “We will find ways to hurt you,” this person recalled. “We will find ways to protect our interests.” Rog Cohen, for one, thought that a lawsuit between the two merger partners would result in, at best, a pyrrhic victory for Bear Stearns, since JPMorgan was the only firm still providing overnight financing to Bear, and should it walk away, the firm would soon thereafter be liquidated. “That lawsuit was not one that we thought had a lot of merit, and even if it won five years down the road, the company is totally kaput,” Cohen said. “All the heartache and destruction would have occurred.”

Parr, too, urged caution. “We had some leverage because everyone needed to find a solution,” he said. “But let's set aside the arrogance. Everyone realized we have to find a way to increase the likelihood of a yes vote. There's this problem, and we want something for changing the error.” But some members of the Bear board, particularly Cayne and Tese, were not so anxious to make the change Dimon wanted without some meaningful compensation. If the mistake was material, their thinking went, then the cost to fix it was going to be material, too. “Sometime during the week I find out Chase wants to make a change in the deal,” Cayne said. “Oh, really? Why? Well, it seems that they fucked up. Wachtell Lipton. Chase had an obligation to fund Bear Stearns for a year if they lost the vote. Whoever heard of anything like that?”

When the Bear Stearns board heard that Dimon wanted the provision changed, it agreed there would be no change made unless the price went up dramatically. Tese and Salerno, who had come up to New York from their homes in Palm Beach for the drama of the previous week or so, flew back to Palm Beach on Wednesday to be there for the Easter weekend. “The negotiations continued day after day with us saying, ‘We're not going to give on this without getting something,’” Parr said. He couldn't believe that he was going through this debacle a second time; it was déjà vu all over again. “On Sunday night when we had finished the first deal and we were rolling it out, I could not have imagined we'd be negotiating within three days again to restructure the deal,” he said.

Also that day, the billionaire shareholder Joe Lewis filed a document with the SEC showing that he owned 12.2 million Bear shares, or 8.35 percent of the total outstanding, and that he intended “to take whatever action that [he] deem[ed] necessary and appropriate to protect the value of [his] investment,” including communicating with Bear Stearns or “other shareholders or third parties regarding their concerns about the actions taken by” Bear Stearns and encouraging Bear “and third parties to consider other strategic transactions or alternatives.” In other words, Lewis was not going to go down without a fight. He had let Dimon know
that he was angry about the deal. For his part, Dimon had been calling the CEOs of other Wall Street firms “pleading with them” not to poach Bear's employees. He was also telling his colleagues at JPMorgan that he was prepared to “send Bear back into bankruptcy” if the deal did not get approved by shareholders.

A
T THIS MOMENT
, with the deal's prospects looking increasingly bleak on nearly every front, Dimon walked across 47th Street, with a steady rain falling, to meet with about four hundred of Bear's most senior executives at 383 Madison. According to the
New York Times,
the Bear employees were “seething, fearful and to their dismay, far poorer than they were a week ago.” The hostility in the room was palpable. “I don't think Bear did anything to deserve this,” Dimon said to them from a podium where he was flanked by both Black and Winters. “Our hearts go out to you…. No one on Wall Street could have anticipated this. I feel terrible sometimes when people think we took advantage. I don't think we could possibly know what you are feeling but I hope that you give JPMorgan a chance.” He told the group that there would be job cuts but that JPMorgan intended to retain the best people whether they worked at JPMorgan or Bear Stearns. Since JPMorgan especially coveted Bear's prime brokerage business, its retail brokerage business, and its energy-trading business, chances were high that most of the people who gathered to hear Dimon were going to lose their jobs. One of the most angry among them, Ed Wolfe, a ten-year Bear veteran and a highly respected research analyst in the transportation sector, spoke up after Dimon had finished making his pitch. “In this room are people who have built this firm and lost a lot, our fortunes,” Wolfe said. “What will you do to make us whole?” The room broke out in applause.

“You're acting like it's our fault, and it's not,” Dimon responded. “If you stay, we will make you happy.”

But Wolfe was not mollified. “I think it's galling you come into our house and you call this a ‘merger,’” he continued. Dimon, “ruddy-faced and sharply dressed in a light blue tie and white shirt,” according to the
Times,
said nothing in response. One of Wolfe's colleagues noted that Dimon could not even look at Wolfe after the latter asked his question. Wolfe was highly pissed off and, his colleagues say, resigned twice during that first week. “His bosses didn't know if he had gone completely around the bend,” a Bear research analyst said. “I asked Ed if he resigned and he said, ‘Well, I can't talk about that but I'm never going to work for those fucking assholes.’” (Wolfe declined to comment further about this incident.) At the meeting, Dimon went on to say that those employees who
stayed until the deal closed would receive a one-time cash payment and those who were hired—and stayed—would receive at least 25 percent of their previous year's Bear stock awards in the form of JPMorgan stock. At one point, Dimon explained that Bear Stearns's “shotgun marriage” to JPMorgan “is not the sort of thing we set out to do.” Ed Moldaver, a forty-year-old broker, stood up and blasted Dimon. “I've heard some people refer to this as a shotgun wedding,” Moldaver said. “I wouldn't use that term. I'd call this a shotgun wedding
to a rapist
. Yeah, yeah, the girl was lying there naked on the ground when you found her, that's true,
but you did it anyway.”

According to Clive Dobbs, who was in the room, Moldaver “went on to attempt to exhort the audience to meet him down on Madison Avenue en masse ‘and get the cameras back here,' and generally seemed to expect his colleagues to get all ‘Battle of Seattle' with him. This did not transpire.” Dimon said nothing after Moldaver finished.

Gary Parr, the Lazard banker, had some sympathy for the tough position Dimon, his occasional client, found himself in. “The people were so unhappy,” he said. “I just don't think it would have mattered who walked into that room or how genuine they were or how good they intended to be, and I'm sympathetic. It wasn't Jamie's doing. I'd say, they could blame the markets generally; they could blame the government; they could blame themselves. I could make the case that for those that kept their jobs, Jamie was the best thing that could have happened to them.”