Fixers

by Michael M. Thomas

  “With you on board, yes.”

  For the next half hour, it was like watching two world-class poker players. Bluff, check, raise, call, check. Mankoff cold-eyed, polite, understated. Gerrett exuding a kind of dumb-as-a-fox country innocence. Norman Rockwell would have loved the guy.

  Finally Gerrett said, “OK. Here’s my final offer. We’ll buy $5 billion of preferred stock, with a 10 percent annual dividend, reasonable call protection, and warrants or a similar conversion feature to buy $5 billion of your common stock at a favorable price, say 10 percent below where the market is right now.”

  Mankoff did some quick figuring, then made his counteroffer. “Our stock’s at $123 and change, which means you’re looking for $110.”

  “Around there.”

  “That’s pretty rich. I’m not sure I can get my board to go along at that level.”

  “I recognize that, but I have my own stockholders to think of.”

  “How about $115?” Mankoff asked. “That’ll make it easier for me to sell.”

  Gerrett reflected briefly, then nodded. “I can live with that,” he said. He extended his hand, and Mankoff took it.

  Mankoff turned to me. “Chauncey, you must have a legal pad around here somewhere.” Of course I did. I got out a pad and wrote down the terms of the deal. Mankoff and Gerrett reviewed these, made a couple of tiny emendations, and initialed the sheet. I signed as witness. Then I went to my printer and made two copies

  The two agreed to get their lawyers on it pronto so that Mankoff could lay the transaction before the STST board via a 7:00 p.m. conference call. Press releases and regulatory filings would be put in the works. Neither foresaw any problems. Gerrett shook hands and departed. Thus do great men settle the affairs of nations.

  SEPTEMBER 25, 2008

  Yesterday STST successfully completed the second half of the Gerrett deal, a $5 million equity offering. So Mankoff has now got $10 billion in new equity to play with, and he’s hit the ground running, already contriving to take over $5 billion in busted Lehman derivatives positions on the Chicago Mercantile Exchange for essentially zero cost, positions STST can probably liquidate for a couple of billion, or pledge back to the Fed at par as collateral for more free money—on top of which STST is being paid a fee of $445 million in cash just to take the paper off the Chicago Merc’s hands. Which adds up to 2,445,000,000 reasons that a crisis is too valuable to waste. And I can’t help but feel that this is just the beginning.

  Eighteen months ago, Mankoff summoned me to Three Guys and laid out a long-term strategy that involved pretty tricky financial and political maneuvering. So far, everything’s fallen into place. Depending on how things play out, STST may be on the cusp of the biggest windfall in its entire glorious one-hundred-year history.

  Even Scaramouche is impressed. “Nobody but Leon could have pulled this off,” he said over a twilight-hour martini at San Calisto. “Of course, poor old Bagehot must be spinning in his grave, seeing what the Fed’s up to.”

  He explained. Walter Bagehot was an influential nineteenth-century English journalist and editor of The Economist. In a crisis, he wrote, the central bank should lend freely, but on good collateral and at a penalty rate of interest. The Fed is lending freely all right, but against dubious collateral and at a giveaway rate.

  OCTOBER 3, 2008

  Congress finally approved TARP. Bush signed it into law, and Wall Street’s breathing easier.

  The gratification wasn’t instant, though. Congress sent back Treasury’s initial proposal, telling the public that the bill didn’t do enough for Main Street.

  Of course, that’s bullshit. The party the draft bill didn’t do enough for is the 1 percent, so it was back to the honey pot. It’s Wall Street that instructed Capitol Hill to complain and use Joe Sixpack as the straw man. Like Oliver Twist, the rich and powerful always want more, and they have both the Speaker of the House and his notional right-hand man, the House Whip, in the pockets of K Street. The redrafted bill includes all sorts of special-interest add-ons, such as a tax break for manufacturers of toy wooden arrows, for fat cats whose beachfront cottages have suffered storm damage, for Hollywood producers, stockcar racetrack owners, Virgin Islands distillers … you name it.

  You’d think there’d be some public outcry to the effect that if the people’s money is to be given away, some of it might be given to the people. Indeed, what about “of the people, by the people and for the people?” Ask Wall Street that question, and you’ll likely as not be told, “Where’s the money in that?”

  OCTOBER 9, 2008

  This has been a long but really productive day. It’s 10:00 p.m. and I’m on the Acela, returning from the nation’s capital to New York. I judge my Washington mission to have been a success. Not only have I come away with what I was dispatched by Mankoff to negotiate, but also with a $20-billion-dollar “bonus” add-on thanks to a brilliant bit of last-minute improvisation by yours truly. Maybe I have a future in investment banking after all. I can’t help reflecting that if I worked at STST or any of the big firms, the deal I concluded today would be worth a bonus of $100 million, minimum. However, I’m working pro bono oligarchia, so my only reward will be the satisfaction of a job well done and the approval of a man whose respect I crave. It has occurred to me that if I’m going to work these long hours for him, maybe I should get paid at my normal rates. Then I reflected that I really do owe the guy, and the thrill of the chase and the insiderness—the chance to really see how power and money operate in these United States—is recompense enough. Besides, I have a feeling that if payment were added to the equation, I couldn’t do it. So I’m going to hold on to my amateur status.

  OK, let’s take it from the top. Mankoff summoned me to his office yesterday at twilight. Things are heating up. He’s had a call telling him to keep next Monday, October 13, clear for an important meeting in Washington at the Treasury Department, at which Uncle Sam’s plan for TARP will be put on the table. The same summons has been issued to Dimon and other Wall Street CEOs.

  Mankoff wants me to meet with Ian Spass to make certain that whatever Treasury’s planning to put on the table will benefit STST. Based on what he’s been able to learn from sources in Washington and elsewhere, he’s convinced that Uncle Sam has no choice but to dictate a “one size fits all” solution that will lump the biggest firms together, the ones in pretty solid shape, like STST, alongside those in deep doo-doo, like Citi. If Treasury and the Fed try to negotiate bank-by-bank, with one set of terms for strong institutions like JPMC, Wells Fargo, or STST and another for the likes of Citi and Morgan Stanley, it could take forever, and Wall Street will be out of business by Thanksgiving, with breadlines running up and down Pennsylvania Avenue and Main Street screaming for blood.

  Mankoff likes his negotiating situation. STST has bank-holding-company status and therefore access to free money, come what may; it can leverage the $10 billion in equity it raised back in September from Merlin Gerrett; hedge-fund clients and other important sources of liquidity are returning to the fold. All in all, he’s in a strong enough position not to have to take any government offer he doesn’t buy 110 percent. This is the message I was dispatched to Washington to deliver.

  This was going to be the first time I’d dealt with Spass face-to-face. In all negotiations, venue is a key element. I took the initiative and booked a junior suite at the Embassy Suites on 22nd Street NW. I was gratified to hear him sniff audibly when I told him my choice. He’s obviously a Ritz-Carlton/Four Seasons–type guy.

  My train was more or less on time; I got to the hotel a little before one and had room service send up some coffee and bottled water. Spass turned up at 1:30, right on time—which I considered a good sign. When Washington people think they have all the cards, they tend to be late, just to show the other side who’s who. He was a bit less lean and hungry than I expected—clearly a man who tends to his vittles. Standard big shot turnout: dark suit, Hermes tie, asshole shirt (white collar, striped body, the sort of thing R
osenweis considers chic), Ferragamo loafers, flag pin on his lapel. We wasted no time getting down to cases.

  “I’m authorized to give you a general preview of our TARP program for you to convey to your client,” he said for openers; “in total confidentiality, of course, on deepest background. If we know he’s on board before we sit down on the 13th, it will be very helpful to the Secretary.”

  I said I understood.

  “Fine. I know from our prior conversations that you know what’s what, Chauncey, and so do I, so let’s skip the bullshit. We’ll play cram-down if we have to, but frankly, if your client and a few others sign up early, it’ll be easier to sell to the rest of the Street.”

  He gave that a moment to sink in, then started to continue, but I judged this a good place to interrupt. “Look, Ian,” I said, “You have a plan, we have a plan. I think we can save ourselves both time and aggravation if I go first, since we’re the ones you have to persuade to go along. Us and JPMC and Wells. Citi and the others have no choice.”

  I could see he didn’t like this, but he’s too smart to debate the merits this early in the conversation and lose the thread, so he let me continue. “The word on the Street is that you’re dumping the idea of buying bad assets and moving to a capital-injection model, despite what the Secretary has told Congress. We have no objection to that in principle. Provided, of course, the price is right.”

  He really didn’t like this. “We’re here to discuss ways and means,” he responded, “nothing else. As regards terms, I’m not empowered to negotiate on that issue and I expect you aren’t either. That’s a decision that will rest with the Secretary. He expects the banks to go along.”

  “In which case,” I parried, shooting him my best ace-in-the-hole poker face, “we have nothing to worry about, since I assume the Secretary will cut his friends on the Street as sweet a deal as he made for himself when he took the job.”

  We both knew what I meant. The Treasury Secretary had cashed in $500 million of his former bank’s stock tax-free, thanks to special congressional dispensation.

  “Let me see if I can help us sort out what’s what,” I said in my most helpful voice. Using Spass’s own words was pretty artful, I thought, as I told him, “The way my people see it, any plan your people come up with is going to have to acceptable from the get-go. After Lehman and GIG you can’t risk another big failure, and a couple of the biggies are said to be right on the brink.”

  No reply. Just a shrug.

  “The way we see it is,” I went on, “unless all the big banks go along, you could be looking at a really treacherous situation, because the markets will perceive that the banks that stay out of the bailout are strong, while those that go along are weak. That’ll set the latter up for further deposit withdrawals and incremental credit cancelations, and that’ll only require additional infusions of the taxpayers’ money. To put it rather crassly, you have to have us—and to get us, you have to accept our terms.”

  Spass frowned. He’s no dummy. He had to guess what was coming, but he said nothing.

  “OK,” I continued, “let me outline what my client thinks the options are and what he proposes. To repeat myself, not everyone you have to include in the bailout, to make it work at all properly, is in the same financial position. Many on the Street will need Washington’s help to survive, but the people I represent and a few others don’t. I’m talking about JPMC, Wells Fargo—hell, we both know the names. They’re the banks you need to make your program fly on Capitol Hill. If they spurn Washington, saying they don’t need the taxpayers’ money, it’s going to be tough—maybe impossible—to sell a rescue of the likes of Citi and BofA and Morgan Stanley without doing what you did to GIG: namely wiping out the stockholders and unsecured creditors. You with me?”

  I paused for effect, then played what I thought was a killer hole card: “And one other thing. How do you think the taxpayers and their elected representatives will react when they learn that the Fed has put out a ton of green stuff to prop up a bunch of dipshit European banks that went berserk chasing yield by loading up on subprime garbage?”

  I was taking a chance here, as it might have occurred to Spass that when it came to flogging subprime paper to guileless Europeans, no one had done better than STST. But he let this pass.

  “So the real question is,” I continued quickly, not wanting to yield the floor, “what will it take to get the healthy parties like my people to go into TARP and whatever other schemes Treasury has up its sleeve? To act as if they need Washington’s money when the odds are that they can get along without further investment? That’s the trillion-dollar question. Of course, you do have a couple of due bills out: JPMC may have no choice but to go along with Washington after the sweet deal you cut them on Bear and Washington Mutual. Same with Wells Fargo: you curtseyed very prettily and let them buy Wachovia out from under a deal with Citi, a deal that you guys had brokered. Why you let that happen will probably never be known.”

  Spass still said nothing; he now looked as if he’d eaten a bad clam. I went on.

  “Now let’s look at my client’s situation. If you know anything about these people, it’s that they don’t do something just because someone else has. They went out and raised $10 billion in fresh equity capital while everyone else was sitting around waiting to see which way Washington would jump, or whether they could do a number on the Koreans or Singapore. We hear the deal Seoul offered Fuld was on better terms than STST got from Gerrett. Hell, if you people had been willing to take Bear and Lehman under your wing on the same terms you gave GIG, or if you’d given GIG the same kind of deal you’re giving Citi, you and I wouldn’t be talking. But you didn’t, so now it’s my side that gets to make the rules. To put it another way, Ian, they’ve have made themselves impervious to the stick; what they want to see is the carrot.”

  “This is ridiculous!” Spass sneered. “Ancient history.”

  “You’re right about that. Unfortunately, ancient is as ancient does,” I replied. “So here’s the bottom line. My client is convinced that unless he get a deal he likes, he’s under no compulsion to go along with whatever bailout program you’ve concocted. And if he refuses to participate, do you think Dimon will? And then what? Will you nationalize the banks in trouble? Just think what a run on Citi might look like.”

  I’ll say this for Spass. He’s a realist. He wasted not a second palavering about blackmail or patriotism. “Tell me what you have in mind.”

  “We understand you’re looking at a preferred-cum-warrants capital injection similar to what my client did with Merlin Gerrett. Which is fine with us, but don’t for a minute think we’ll pay Washington what we had to pay Gerrett in terms of dividend rate and conversion ratio. Taking that into consideration, we think an interest or dividend rate of 5 percent is fair, although they’ll agree to a bump on the back end for cosmetic purposes. An increase in the rate after, say, ten years to, say, 8 percent.”

  He objected immediately. “Your client is paying Gerrett a 10 percent yield. Twice what you’re proposing to offer the Treasury. That’s unacceptable.”

  I smiled sweetly. “The way my client—and the market—look at things, Uncle Sam doesn’t command the same respect as Gerrett and therefore isn’t entitled to the same rich terms. Washington’s name on our paper isn’t as strong a backstop as Gerrett’s. Now, moving on: we think that a fair equity kicker would be 5 percent of pro forma outstanding shares at a 10 percent premium over whatever the market price is when the deal—if the deal—gets signed.”

  I paused, like a matador preparing to dispatch a bull, then added, “Oh, yes, and we’d want the right to redeem the preferred after a year without a call premium. And the shares will, of course, be nonvoting.”

  He looked at me with disbelief. “What you’re proposing is a stickup! You can’t expect us to cut a deal on behalf of the taxpayer that’s nowhere near what you’re paying Gerrett for the use of his money! You’re suggesting that the Treasury accept an option on STST stock at 10
percent over market, while Gerrett’s warrants were priced at 10 percent under market.”

  I nodded but said nothing. I suspected it was time for his prepared remarks, and—sure enough—here they came: “If STST thinks they can blackmail the United States of America, they have another think coming. We are not going to tolerate this sort of crap! Especially when the national interest is at stake!”

  I gave my chin a few thoughtful strokes in best punditical fashion, then replied, “I think we can cut the national interest crap, my friend. Just do the numbers. What we’re proposing is peanuts compared to what JPMC and Wells have walked away with already, and peanuts compared to what you’re going to end up throwing at Citi and BofA/Merrill just to keep them from going under.

  I let him think that over, then continued: “There are a couple of other aspects of all this that need to be on the table. When—if—this deal gets done, Treasury will grandstand about how it will stimulate the general economy, but you and I know that’s rubbish. If it makes sense to lend to Main Street, my client will consider it, but if it doesn’t, he won’t. He intends to employ whatever money comes his way from Washington as he sees fit, not as Treasury does, or Bernanke, or The New York Times, or MSNBC, or anyone else. He’ll pay all the lip service you want, but the reality is, he’s going to run his business for the stakeholders he cares about, not like some kind of glorified Community Chest. If the market wants to infer that without TARP we’d be in the soup, he’ll play along; he’ll neither confirm nor deny. So that’s the deal.”

  As Spass weighed those points, I thought it useful to add, “Let’s say my people don’t go along and instead march to their own drummer, not yours. What are you going to say when six months from now, they start to show profits that have people gasping—profits that they will have earned without the bailout because of all the business they swept up from their weak sisters? There’ll be a lot of explaining to do. About why the weak and reckless were bailed out, while the strong and prudent could go their own way.”