Fixers

by Michael M. Thomas

  FEBRUARY 25, 2008

  Citi has replaced Bear as the epicenter of malicious Street gossip, at least for the time being. Here’s my latest tidbit, gleaned from a MoMA trustee.

  It seems that last Friday the big bank announced its preliminary 2007 results. Earnings from operations were lousy, but Citi still contrived to post a modest profit, thanks mainly to a fat tax credit. All blessed with the usual blah blah blah from the bank’s “independent” accountants about how management believes that the bank’s financial controls are effective and the auditors find no cause to differ.

  The accountants’ sign-off letter was apparently time-stamped last Friday, February 22. But a week earlier, on February 14 to be precise, Citi had received a harsh letter from the SEC criticizing its accounting, financial modeling, risk management, and valuation procedures and demanding that the bank fix them pronto. But get this: Citi has elected not to disclose the SEC letter to the public, including its stockholders.

  The question is: did they show the SEC letter to their auditors? What happens if this gets out? If challenged on the SEC letter, will Citi lean on Shearman & Sterling, its main law firm, which probably generates hundreds of millions in annual billings from this particular client, to come up with a Wall Street version of “the dog ate my homework”? The guess up and down Wall Street is: for sure.

  Citi and Bear Stearns are today’s bad news, but from what one hears, Lehman is closing fast. The latter is apparently getting by thanks to a really dubious overnight funding scam called Repo 105. It’s getting to be hard not to conclude that Wall Street has been as crooked as it has been reckless in its drive for bonus-generating profit.

  MARCH 1, 2008

  The Campaign Finance Institute has released its estimates. To date, OG has raised $184 million, Hillary $129 million. Such is the power of leverage. A year ago, OG was barely a blink on the financial radar. They’re saying that over 40 percent of contributions to the campaign are $200 or less, from small donors. Hilary’s comparable number is under 30 percent. Not bad, eh? A glowing testimonial to my money-moving prowess.

  Now I can sit back and gloat, because exactly as anticipated, the big money’s started to flow to OG. Wall Street’s all in on the candidate, falling all over its collective wallet to get on board the bandwagon before it’s too late.

  MARCH 10, 2008

  Happy days are here again!

  Just kidding.

  Yesterday, the European central banks played “Little Dutch Boy at the Dike” and pumped $200 billion into their credit markets with zero effect. This morning, there’s an estimate floating around that as many as a million and a half U.S. subprime mortgages will go into foreclosure. A lawyer I see at Municipal Art Society meetings tells me that he hopes the banks have got their paperwork in order, because otherwise there’ll be an ungodly mess; the scuttlebutt here is that STST outside counsel Corbett & Charles have been ordered to review Samarra/Hatton, the recently acquired redneck mortgage mill that got my San Calisto buddies so exercised. Fingers crossed.

  From what I’m hearing, the banks have collectively let more than 40,000 people go. A leading financial newspaper is predicting that global layoffs may exceed 70,000. This estimate includes a large percentage of the 14,000 employees of Bear Stearns, which is said to be on life support. I know from Lucia that STST’s headcount is being cut back, mainly at lower levels—equivalent, say, to furloughing a couple of dishwashers at the Four Seasons, but these waves tend to oscillate upward and people below the rank of vice president are definitely nervous. Another small sign of the times: a couple of my invoices to Wall Street clients are thirty days late.

  One last cheerful fact. MSNBC reports that one bank—I forget which—has put out a forecast that subprime losses may exceed $200 billion. $200 billion, can you believe that! And since reporting disaster has become a form of media poker, S&P saw that number and raised it, with a forecast that total subprime losses may reach close to $300 billion. Either figure is frightening enough, but what I find ironic is that people are saying that a goodly portion of those losses will be on debt that S&P and its fellow credit-rating whores have rated AAA. Did someone say “fraud”?

  Scaramouche advises that anyone looking at Wall Street today will do well to follow the immortal wisdom of Chico Marx: “Who you gonna believe? Me or your own eyes?”

  MARCH 13, 2008

  These days Wall Street seizes on any figment of good news to jump for joy, and today the Street was positively hopping.

  The reason? One of their principal adversaries has bit the dust. Eliot Spitzer is toast!

  That’s right! Eliot Spitzer, governor of New York since January 2007, the self-styled “Scourge of Wall Street”—and easily the person most hated by the financial community—will be resigning the governor’s office effective next Monday. It seems that the about-to-be-former governor suffers from Bill Clinton syndrome: can’t keep it in his pants. In Spitzer’s case it isn’t White House interns in irresistible blue dresses—it’s hot and cold running hookers. Dickheads and their dicks: it never changes.

  As regards the larger political canvas, OG had a bad patch back at the beginning of the month when it turned out that the pastor of the Chicago church he attends is some kind of a cut-rate Farrakhan who talks a lot of anti–white trash. You can see the problem this presented: no way do Orteig and his colleagues want OG to seem more than coincidentally black. They don’t dare even breathe the word “race.”

  The Hillary people tried to make this a big deal—asked the voters to imagine “gangsta rap” in the Oval Office, etc., etc.—but one thing OG is really peerless at is smothering problems with blah blah blah, and he did. So after a few uneasy moments, the campaign’s back on track. He did well last month on Super Tuesday (won 13 out of 22 states); he won in Mississippi two days ago, and continues to pick up delegates while Clinton’s base is hanging on for dear life. Perhaps he should start working on his acceptance speech for the Democratic Convention in Denver in late August. Mankoff’s looking like a genius.

  MARCH 14, 2008

  Another long day. Mankoff called me at 7:00 a.m. to tell me he had a new mission for me and was coming by. This must be a big deal; apart from my Good Friday cocktail party, he’s hardly ever visited me at home.

  He was here a bit after eight. He apologized for bothering at home, but he’s wary of people seeing us together too often at his office. I told him it was no problem, made him tea, settled him on the sofa and did the “all ears” bit.

  “We need to move quickly,” he told me. “The situation may be worse than even I pictured. To start with, Bear Stearns is in the shit so deep that Uncle Sam is going to have to bail them out with a steam shovel. I hear they’re close to a deal with JP Morgan Chase to provide Bear with interim financing backstopped by Washington.”

  “Well, you’ve been predicting this,” I said. “What’s new? If you listen to the gossip on the Street, there isn’t a firm that isn’t on the brink. What kind of shape are you guys in?”

  “We’re OK; not great, but definitely nowhere near the trouble others are. JP Morgan Chase: same. So is Wells Fargo and Bank of New York and a few others. But here’s the thing. What Washington ought to do is let the strong survive and the weak perish. But when the weak include systemically connected outfits the size of Citi or Lehman or even Bear, you can’t walk away from them, because you may trigger a domino effect.”

  “So what do you do?”

  “My guess is that Uncle Sam’s going to have to come up with a ‘one size fits all-let’s pretend’ plan that treats both the weak and the strong the same way. A plan that’ll make it look like they have to bail out the system, and not just a few firms that screwed up. That’ll give us leverage, because Treasury and the Fed will need us and JPMC and Wells to play along. Otherwise, any plan they come up will be dead on arrival, especially if we and the others turn our lobbyists loose on Capitol Hill to kill it. In other words, I want us to be in position to leverage our situation when the time com
es.”

  As Mankoff sees it, Treasury wants to set up a bailout template now—and he wants to be sure that this template serves STST’s interests and also wants me to negotiate it. He ran thorough his plan, satisfied himself that I got it, and gave me the number of the relevant woman at the New York Fed.

  She was expecting my call. We made a date to meet in Battery Park at 11:30 a.m.

  Over my second cup of coffee, I tuned in to MSNBC, just in time to hear the network report that JP Morgan Chase, “in conjunction with the Federal Reserve Bank of New York,” has agreed to provide a credit line to Bear Stearns for twenty-eight days, the financing to be guaranteed by the Federal Reserve. When I left my apartment, Bear shares had opened at around $60; by the time I reached Battery Park an hour or so later, my BlackBerry told me they were under $30.

  I found my contact waiting for me over near the walkway along the Hudson. Nice-looking, late thirties or early forties, nothing sensational. Typical high-up government girl: in four or five years she’ll be back in the private sector, reaching for the brass ring in some big bank’s compliance department or as a partner in a major law firm.

  At this time of year, the marina outside the World Financial Center was empty, and the little park was virtually deserted. We strolled along the water, her stiletto heels clacking on the cement, until we found a suitably isolated bench. When we sat down, she looked at me curiously. “Can I ask you something? They tell me you’re an arts consultant. Why am I talking to you?”

  “Because I have the confidence of my client. He and I did some work of this kind a long time ago in another galaxy. Let’s leave it at that. Now: let’s get down to business. The word on the Street is that you have a deal with JPMC to take over Bear Sterns. Is that correct?”

  She shook her head vigorously. “We don’t have any kind of a merger arrangement on Bear. With Dimon or anyone.”

  I figured she was bluffing, in hopes of finding how much our side knew.

  So I responded, “You know, we can waste our time pretending—or we can get real. Our information is that you’ve agreed to provide Dimon with backstop financing, you and Treasury that is, because he’s not about to take the crap on Bear’s balance sheet on to his own, even if it’s guaranteed by you people, without some kind of kicker. My client feels the same about his role.”

  “There’s some kind of mix-up here,” she said. “Your client’s not involved.”

  Time to play my trump card. “In this mess,” I said, “everyone is involved. Here’s the way my client reads the situation. JPMC merges with Bear Stearns, by contamination if not by law it becomes an investment bank, which throws into question whether it can continue to draw on your discount window or any other source of low-cost or no-cost taxpayer capital normally available to banks of deposit.”

  “That’s ridiculous!”

  “What can I say? It may be, but there’s enough substance there to inspire some strike suit lawyer to file for an injunction, and that’ll put whatever discussions you’ve been having with JPMC on the public record.”

  She stared out at the harbor and the boats and the Jersey shoreline and said nothing.

  I went on. “It gets better. It’s the view of my client, and my client’s counsel, that the Fed can hardly extend a loan to JPMC secured by the very same assets it wouldn’t let Bear Stearns borrow against three days ago! All this leads my client and his counsel to conclude that there are excellent grounds to enjoin any merger of Bear into JPMC that involves a taxpayer or Federal Reserve backstop or indemnity.”

  “There’s no indemnity in the Bear Stearns package,” she said, sounding indignant.

  “Maybe yes, maybe no. It’s common knowledge that JPMC is chomping at the bit to become a broker-dealer without losing its bank status and the funding privileges that go with it. So here’s where my client and his attorneys come out: if you use the term-lending facility or the discount window or any other Federal backstop to help Mr. Dimon buy Bear, fairness demands that you open said term-lending facility etc. to all the rest of the Street. Without conditions and using collateral similar to what you’ll be financing against in the Bear Sterns deal. One size fits all. Isn’t that what you people are after?”

  “Why should we do that? JPMC is stepping up to the plate on Bear. You’re not!”

  “Oh, really? How exactly is JPMC stepping up? Bear has 14,000 people working there. Is JPMC guaranteeing the job count? They get the building, and the good stuff, and the equivalent of a $30 billion loan of the taxpayers’ money that they can use any way they like, because the word is that once the deal is done, you’ll be taking the crap onto Uncle Sam’s balance sheet. You could have done that directly for Bear when they came begging.”

  “We rejected a direct loan to Bear Stearns because they aren’t creditworthy.”

  “As we see it, you might with equal justice make the case that Bear wasn’t creditworthy because you rejected them. If you did for Bear on its own what you’re doing for JPMC, they’d be alive and dealing. Speaking of which, what sort of deal do you have with Dimon regarding Bear’s stockholders? Do they get wiped out completely, or will they get a few crumbs?”

  “We have no arrangements regarding Bear’s stockholders.”

  “I see. I wonder what the market’s saying about that.” I checked my BlackBerry. “Aha! Bear’s stock is under $20. Here, you want to see?” I made to shove the BlackBerry at her, but she looked away.

  “Bottom line,” I said, “the smart money is saying there’s no there there. Without you guys, Bear goes poof! My client simply wants the funding advantages that JPMC’s getting. My client has his lawyers standing by with a motion ready to be laid on shortest notice before a certain judge whose name you can guess, a judge who is seldom if ever well disposed to Wall Street and who can be relied upon to enjoin any deal involving JPMC taking over Bear. We don’t want to go to court, but we will if we have to. I doubt Bear can stand the delay—or that JPMC won’t back out of the deal.”

  “This is blackmail!”

  “You can call it whatever you want,” I said pleasantly. “All we’re trying to do is balance out a simple asymmetry of interest.”

  She thought that over for a minute, then stood up. “Look, the best I can do is pass your message along. You understand that I can’t give you the least assurance …”

  “We know that,” I replied. “All any of us can do is try. Just make sure it gets through loud and clear.”

  We shook hands and left it at that.

  Will the Fed cave? In Mankoff’s mind, after I related my brief meeting, without a doubt. What choice do they have? If you follow Mankoff’s reasoning, they aren’t ready to let a big firm go completely down the toilet. Washington’s preference is always to try to buy time, presumably in the expectation that some deus ex machina will descend from Mammon’s halls and make matters sort themselves out, or some kind of “rescue” can be stitched together. But Bear, unpopular and unrespected as it is by the loftier exponents of high finance, is simply too interconnected for Washington to walk away from. The result could be a punch to a nerve center that paralyzes the entire system. Something has to be done now.

  And so, Gentle Reader, when next year or the year after that or whenever, you ask yourself how come the Fed did a one-eighty with respect to letting the investment banks belly up to the discount window, thereby hammering home the final nail in the coffin of Glass-Steagall, you’ll know the answer.

  MARCH 17, 2008

  As Mankoff expected, Uncle Sam has caved and Bear has vanished down Jamie Dimon’s maw. As initially announced, Bear’s stockholders were to be virtually wiped out, receiving only $2 for shares that were selling at fifteen times that when the lady from the New York Fed and I chatted in Battery Park. This was subsequently deemed to be cruel and unusual punishment and was revised upward to $10. The official excuse was a drafting error on the part of JPMC’s lawyers, although Mankoff thinks that Jimmy Cayne threatened to oppose the deal. Ever the gambler, he would have been w
illing to take his chances rather than accept a lousy two bucks for his stock, and at that point the deal was still too fragile to absorb even a flicker of contention.

  So Bear is finito. Thousands of blameless people will lose their jobs, longstanding client relationships will be ground to dust, an old and prominent Wall Street name will be effaced—but the system will be saved to blow itself up another day. The official announcement reminded me of that famous statement by a U.S. officer in Vietnam: “The only way to save the village was to destroy it.”

  The bet that Mankoff delegated me to place has paid off. The Fed has announced that it is opening the discount window to broker-dealers for the first time since the 1930s. The Bear people, who asked for exactly this concession a week ago, and whose firm has now been swept out from under them, are beside themselves and crying foul. Anyone whose schoolboy heart was tenderized with notions of fair play, as mine once was, might argue that they have a point.

  One down, how many to go? Who’s next? Lehman is now the odds-on favorite. I can hardly sit down with a Wall Street client without being told a new Lehman horror story.

  Some are saying that the real problem at Lehman is its real-estate portfolio. It seems that Richard Fuld has been mesmerized by his current favorite at court, a kid named Mark Walsh, into betting the firm on commercial real estate, and the consensus is that if Lehman buys the farm, it’ll have been real estate that delivered the coup de grâce. And remember those Repo 105 swap-outs that I mentioned last month? Conditional sales that allow the notional “buyer” to return the merchandise if he feels like it? Lehman’s accountants are allowing these to be booked as bona fide dispositions of assets that would otherwise be subject to killer write-downs. When those chickens come home to roost, one client told me—during discussions about a Bonnard show in Philadelphia—they’re going to be the size of 747s. Even the SEC has finally wised up to the situation at Lehman and has seconded teams of observers to keep an eye on things, but chances are Uncle Sam’s people won’t understand what they’re looking at, or looking for.