House of Cards (28 page)

Paul Friedman decided to skip the Wednesday afternoon show. “It was childish and petty, and it was my personal revolt over the whole thing,” he said. “I didn't want to hear Jamie come and tell us, ‘It's all going to be okay, and everything's going to be great, and we love you. There's jobs for everybody, and it's going to be a meritocracy, and it's going to be a matter of who's the best.' I could write the script for him: ‘Whoever's the best person is going to get the job, whether it's a JPMorgan person or a Bear person.' It's nonsense. It was never going to happen. I didn't want to hear it.” Upton stayed around just long enough to hear Dimon explain what the benefit would be if a Bear employee was offered a full-time job and chose to accept it and stay. “Once that was over, I just left,” he said, “because I was really pissed at everyone in the room because those were the guys who fucking filibustered and didn't allow me to save the firm. So they could bitch and whine and moan, but this is where we are, and at the end of the day I'm not sure the bitching and whining and moaning was going to get anything done. I was very narrowly focused and I just left, went back upstairs, and tried to do some more work.”

O
N
T
HURSDAY NIGHT
, Schwartz, Molinaro, Salerno, and Cohen called Tese. Recalled Tese: “Rog says, ‘They want to change the deal or they're going to pull out.' So I said, ‘That's great. If they want to pay us $10 [a share], we'll change the deal.' Rog said, ‘Well, that's the idea.' I said, ‘But how can they pull out?' ‘Well,' he goes, ‘it gets into this contract. The contract had a guarantee. But it was silent as to the duty to fund, because we didn't have enough time to write it.' It was just assumed that the guarantee came with the funding, that they would get to write that part of it later. It never got written. They were funding us through that Wednesday. They were going to cut off the funding. Then we'd be back in the same box, but we had a lawsuit.” Although no one relished the thought of JPMorgan cutting off the funding or of Bear launching a lawsuit against it, when Molinaro left the office on Thursday night he thought the matter would get resolved satisfactorily. Indeed, he was sufficiently confident that he flew to the Ritz-Carlton in Jamaica.

On Good Friday, Schwartz called Jamie Dimon. “Jamie was very agitated over the guarantee,” Molinaro recalled, “because I think his worst fear was that he's now on the hook for twelve months, while we can go shop the company and even vote it down, in fact, and he's still on the hook…. They wanted to shrink the time period if there was a failed vote, and they wanted to make the deal much more certain of being completed.” Schwartz asked Tese and Salerno to fly back to New York from Palm Beach. They were the only two outside directors involved at that point. “I was upset it all was perpetrated over the holiday weekend,” said Salerno, who is a religious Catholic. “All my family's down there. Everybody's down in Florida, my kids and my grandkids, but who cares? Fourteen thousand people are depending on me, so who cares about that?”

Suddenly, bankruptcy lawyers reassembled at 383 Madison in case the two sides could not reach a new agreement and JPMorgan pulled out of the deal. On the other hand, Schwartz realized that for the first time he had some leverage. “I think Alan recognized that in order to make the deal more certain, we had to get a higher price,” Molinaro said. I think he told Jamie that without a higher price, the board's not going to be able to recommend it…. It was really the first opportunity we had to try to get more out of them.” The Bear executives—Cayne, Greenberg, Schwartz, and Molinaro, joining in by phone from Jamaica before flying back on Saturday night—plus Tese and Salerno reassembled at Sullivan & Cromwell's midtown office, at 250 Park Avenue, to see if they could reach a new agreement with Dimon. “We went through everything,” Salerno said,
“and the fact of the matter is JPMorgan's share price had gone up $12 billion [since the deal had been announced]. So we figured that… Jamie has some egg on his face if this deal goes belly up. But we also know that if it goes belly up that we have a problem because we represent the bondholders and we had a deal. So we're on the horns of a dilemma.”

The market's reaction to the deal in the previous four days showed that nearly everyone was very reluctant to do business with Bear Stearns. As a result, JPMorgan had become Bear's sole overnight repo lender. Now JPMorgan was threatening to walk away from that essential role. “If they walked away, it was over,” Salerno said. “We'd just close the doors.” Suddenly, everyone on the Bear Stearns side of the table was thinking about filing a lawsuit against JPMorgan if they chose to walk away from funding Bear Stearns.

Upon hearing what was going on, Paul Friedman wrote a friend around seven-thirty on Friday night of the “new developments from hell.” “As of this moment, the world has shifted again,” he wrote. “It had suddenly dawned on JPM that if the [Bear] shareholders vote down the deal—and they will—that they will have to leave their guarantee in place for a year without having control. In addition, the Fed, which had previously agreed to buy $30 billion of our stuff, now says that what they really meant was that they'd buy it after the deal closed. As a result, JP has informed us that unless we grant them sufficient stock to guarantee that the deal is approved, they're telling the world on Monday that they're pulling their guarantee. They will also stop lending to us (currently around $10 billion) and demand repayment. Whether they can do that legally is another question but they're doing it anyway, damn the consequences. Meanwhile, our Board has said that we can't give away something that the shareholders currently have without getting something in exchange. So we're deadlocked and we're back to thinking about going b/k [bankrupt]. You can't make this stuff up.”

With a scrap of leverage for the first time, with Bear Stearns stock having closed on Thursday at just under $6 per share (Good Friday was a stock market holiday), and with Schwartz leading the charge, the strategy quickly gelled at the board level. “Alan was terrific, 100 percent great,” Salerno said. “There wasn't anybody I respected in that room more than Alan Schwartz and what Alan Schwartz did. His interests were 100 percent aligned with the fourteen thousand people. He was more upset about that than losing $200 million himself. I have enormous respect for that man. I will always, always remember how he behaved during these very troubled times. He stepped up to the plate and he did the right thing
every time. Not what was best for him, but he did the right thing throughout this whole weekend.”

On Saturday morning, Schwartz and Cohen, at Sullivan & Cromwell, called Dimon. “We said, ‘We want to go back to $10 to $12, and do not come back at $9.99,’” Cohen said. “‘We need two numbers.’” Dimon told them he would consider offering a revised exchange ratio for Bear shareholders that would get the Bear shareholders $10 a share but wanted the guarantee revised and near certainty that the shareholder vote would be an affirmative one. To that end, Dimon asked that JPMorgan be able to buy a block of Bear stock that would equal 53 percent of the fully diluted shares outstanding. He also asked for a lockup on the shares of the officers and directors of the company. The 53 percent number was well beyond New York Stock Exchange rules (which required a shareholder vote in order to issue more than 20 percent of the shares of a company, unless the circumstances were desperate—a waiver was sought and issued) and also, the lawyers feared, could be easily challenged in court. There was a lot of back-and-forth on Saturday night but no agreement. “Nothing happened Saturday night, no movement,” Salerno said. “Still at $2.” Dimon's position remained that he wanted the guarantee changed but refused to change the price. “We said no,” Salerno said.

On Easter Sunday, the group reconvened at Sullivan & Cromwell. After having slept on their decision, they decided to hold firm with it. “‘Get ahold of the Fed, let them know we're going to file.' That's what we say to Alan,” Salerno recalled. “Vince said it. I said it.” Tese and Salerno then left the law firm and headed up to St. Jean-Baptiste, a Catholic church at the corner of Lexington and 76th Street, for Easter mass. When they came out, the phone rang. It was Alan Schwartz. “They changed their mind; they're going to give us $10 per share. So if you're a spiritual person, it happened not
because
we were there but
when
we were there.”

For Schwartz, in the end, Dimon's calculus was simple. “The excess alpha”—Wall Street jargon for profit—“was $12 billion or $14 billion that went to JPMorgan's stock price the day they did the [first] deal in a down market,” he told his partners. “That hasn't come back out of them relative to the market. They got a $12 or $14 billion windfall. So … maybe they paid three billion for it instead of two. But that's a lot better than taking all the risk and then letting somebody else take it away. A lot better.”

After they got Schwartz's phone call, they quickly returned to Sullivan & Cromwell. “Now it's easy,” Salerno continued. “Now just get it done…. I think the board stepped up to the plate. Now $10 is a rotten number anyhow, but it's five times what they would have gotten had they
blinked. It's as simple as that, and it was right that these people should have gotten more. People will say it's a bailout and all this other stuff, [but] there would have been havoc in the marketplace had they not done it.”

L
ATE ON
S
UNDAY
afternoon, after the revised deal had been agreed upon—as a result of the brief shifting of leverage, divine intervention, or both—and while all the various documents that accompany a merger of this magnitude and import were being drafted or amended, someone on the JPMorgan side of the deal leaked the story to Andrew Ross Sorkin at the
New York Times
. Very late Sunday night, Sorkin reported on the
Times
Web site that JPMorgan and Bear were in talks to raise the price of the Bear deal to $10 a share in stock. By the next morning, Sorkin was reporting that a new exchange ratio of .21753 shares of JPMorgan stock would be used for each Bear Stearns share. The exchange ratio was 3.97 times greater than the original exchange ratio agreed upon the week before, but because JPMorgan's stock had increased to around $46 since the first deal was announced, the new deal equaled $10 a share, a quintupling of the original offer. JPMorgan agreed to pay $1.45 billion for Bear's equity, up from $290 million seven days earlier. Sorkin also reported that JPMorgan— for which certainty of closing had become a paramount issue—had negotiated an agreement with Bear Stearns to buy 95 million new shares, representing 39.5 percent of Bear's fully diluted shares outstanding. During the week, Dimon had been convinced that his initial demand for a 53 percent voting bloc would have violated Delaware corporate law in addition to NYSE rules, and he decided that 39.5 percent was a safer number. Dimon also won from Bear's board members a tacit agreement to vote their shares—representing another 5 percent of the stock—for the amended merger, with the one caveat that they would do so assuming they still owned the shares at the time of the “record date” for the shareholder vote, which was to be sometime after April 8, when JPMorgan expected to purchase the 95 million Bear Stearns shares. This ambiguous provision about the board's “intention” to vote its shares for the deal was done to accommodate Jimmy Cayne, who had no desire whatsoever to do so.

Sorkin further reported that JPMorgan and the Fed had renegotiated
their
deal, so that now JPMorgan would absorb the first $1 billion of loss—should there be such a thing—on the $30 billion asset portfolio the Fed would purchase from Bear Stearns. The Fed would finance the remaining $29 billion on a nonrecourse basis. Sorkin also wrote about the poorly worded clause that required JPMorgan to continue to guarantee Bear Stearns's trades for a year, even if shareholders voted down the deal.
More startling was the fact that Sorkin reported that Dimon had been “apoplectic” when he discovered the mistake and went out of his way to blame his high-priced lawyers at Wachtell, Lipton. “Finger pointing over the mistakes in the contracts began as bankers blamed the lawyers and vice versa,” Sorkin wrote. In the clubby but highly competitive world of big-deal M&A, for Wachtell, Lipton to be blamed so publicly and in such a high-profile way was yet another piece of raw meat for the Street to chew on.