When the stock market opened on Monday, Bear Stearns stock bounced between $3.50 and $5.50 a share, signaling that the market didn’t think the deal was going to get done at $2 a share. One reason was the guarantee itself. Bear’s shareholders looking for a higher price could continue to vote down the deal, leaving JPMorgan Chase exposed for up to a year guaranteeing Bear’s trades. With about a third of the company’s shares held by employees—who were in a state of righteous indignation—the chance of a “no” vote was considerable. JPMorgan Chase had, in other words, given Bear’s shareholders a one-year “put” option on their company as part of the deal, without meaning to do so. By continuing to vote against the deal, they could buy themselves time in which the company might recover, all while JPMorgan Chase backstopped the business.
Andrew Ross Sorkin of the New York Times reported that when the error was discovered, Dimon lashed out at his firm’s lawyers at Wachtell, Lipton. A partner at Wachtell, Ed Herlihy, who had worked with Dimon on both the Bank One–J.P. Morgan and Bank of New York deals, had somehow missed this. Dimon also called Schwartz to argue that the agreement be modified. “Don’t you understand that we have a problem? Shareholders may vote this down!” Dimon asked him. Schwartz, however, savored the first bit of leverage he’d had since Friday: “What do you mean, we have a problem?” He told Dimon he’d need a higher offer to make any concessions on the terms of the deal. Sorkin reported that Dimon was outraged, and that he even threatened to “send Bear back into bankruptcy.” But cooler heads prevailed.
The guarantee was giving Dimon fits in another way, too. In its original language, it guaranteed only Bear’s “trading obligations.” That term didn’t cover all the company’s products, customer relationships, and subsidiaries, and a number of customers continued to take their business elsewhere for fear of suffering losses if the deal fell apart. Even if he could clarify the issue of the deal being voted down, Dimon had to expand the guarantee if he wanted to stop the customer exodus.
Looking back at the conference call during which he called Pandit a jerk, Dimon is both unapologetic and conciliatory. “He made a very good technical point, and it was one of the things that started causing us a problem the next day. But even he would say that in hindsight it was probably an inappropriate forum. But I never said he was wrong. No one had ever guaranteed someone else’s trades before—not that I’m aware of—so it was certainly one of the issues we were concerned about.” (In other words, Pandit was right.)
Dimon told his senior staff on Monday that he wanted to go over to Bear Stearns as soon as possible and “talk to the troops.” The response was that he was crazy. Emotions were still raw, he was told, and it might actually be dangerous. One executive even put in a call to Alan Schwartz, pleading with him to call Dimon himself and say it was too early. But Dimon argued that staying away would be disrespectful. By Wednesday, March 19, he had waited as long as he was prepared to wait, and scheduled a meeting with 400 managing directors of Bear Stearns in their second-floor auditorium. Standing with him on the dais were Steve Black and Bill Winters.
Dimon tried a peacemaking approach—a wise move, considering that most of the people in the room had just lost the majority of their net worth, not to mention their reputations. Wall Street’s scrappiest firm had just been swallowed whole by one of the most plodding and predictable. “I don’t think Bear did anything to deserve this,” Dimon said. “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 J.P. Morgan a chance.”
At least a few people weren’t going to let him off easy. During a Q&A, when he referred to the merger as a “shotgun marriage,” a broker stood up and 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.” (He was shouted down and booed by his colleagues. A number of Bear Stearns executives apologized to Dimon afterward.)
Another Bear employee added, “In this room are people who have built this firm and lost a lot, our fortunes. What will you do to make us whole?” Leaving aside the absurdity of Wall Streeters wanting a “do-over” on their stock, this raised an interesting issue. Just what could Dimon do to satisfy people whom he needed to make the deal worthwhile? “You’re acting like it’s our fault, and it’s not,” he said. “[But] if you stay, we will make you happy.”
At that point, though, there were few happy people at Bear Stearns. In House of Cards, Cohan cites an e-mail sent by Paul Friedman, chief operating officer of Bear’s fixed income division, to another Bear executive, despairing at their predicament. “The (optimistic) view is that this was JP’s plan all along: bid, pull the bid, string it out to the last minute to force the Fed to take all the risk and then steal us cheap AND risk free.” When the deal was sealed, Friedman wrote an e-mail to another executive while drunk. “Getting less coherent, but no less angry,” he typed. “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.” He was not alone in that sentiment. Ed Wolfe, a securities analyst at Bear, responded to a question about whether he’d quit by replying, “Well, I can’t talk about that but I’m never going to work for those fucking assholes.” These were the sounds of a defeated group of self-styled rebels lashing out at the man who not only had not caused their demise but had salvaged what equity—and jobs—he could. He had done what any of them would have done had they been in the same situation. But whom else did they have to blame but themselves?
(Dimon was concerned about a possible staff exodus, and offered both cash and stock incentives to employees to stick around at least until the deal was closed. He also called a number of rivals on Wall Street and pleaded with them not to poach Bear’s employees. Even in the midst of the craziness of the time, this is a bizarre image, like a lion asking other lions not to eat his recent kill.)
The criticism didn’t end in the auditorium. It had been drizzling when Dimon stepped out the door of JPMorgan Chase to walk across the street to Bear Stearns. A bodyguard standing nearby decided to do the thoughtful thing, opened an umbrella, and held it over Dimon’s head at the very moment a photographer from the New York Times was taking a picture. When the photo appeared in the paper the next day, Dimon was vilified on all manner of websites for his monarchal appearance—he looked like he had a butler. The general tone: Who does this guy think he is?
Dimon called JPMorgan Chase’s head of communications, Joe Evangelisti, in frustration. “I have never ever in my life had someone hold an umbrella for me,” he said. “Can’t you buy that picture?” Evangelisti couldn’t quash the photo—it was used in another story a short time later—but Dimon soon found he could laugh at the absurdity of it all. “That’s the last time that will ever happen,” he says. “There are jokes about it now. If I walk outside when it’s raining these days, they’ll literally throw an umbrella at me while trying to get some distance between us at the same time.”
By the end of the week, the haggling was down to two crucial points. First, Dimon wanted to shrink the time during which JPMorgan Chase would be on the hook for Bear’s trades if the deal was voted down. Second, he needed more certainty that the deal would close, and to that end asked for the right to buy new shares of Bear Stearns equivalent to 53 percent of the stock. (The original deal called for only a 19.9 percent stake.) On the morning of Saturday, March 22, Schwartz called Dimon and said that his board wanted to go back to $10 to $12 a share to get the deal done. “There’s a psychological limit here,” he added. “Don’t come back to me at $9.99.”
Meanwhile, having taken a lot of heat in the press for guaranteeing $30 billion in toxic securities, the Fed came back to Dimon and asked to renegotiate its deal. It wanted JPMorgan Chase to take the first billion in those losses, and then the Fed would take the next $29 billion. The Fed also wanted JPMorgan Chase to guarantee its loans to Bear Stearns. In the
span of a week, Dimon had gone from calling the shots on both fronts to making concessions on each.
Sullivan and Cromwell’s Cohen, who worked for Bear on the deal, was impressed by Dimon’s approach to negotiations. “It’s not unique, but really good negotiators follow this kind of style,” he says. “Most people try to figure out what they want and how to get it. Jamie is one of a small number of people trying to figure out what the other guy wants and how to give it to them. It’s a mind-set. That sounds like a play on words, but it isn’t.”
Whereas Schwartz and the board demanded $10 a share, Paulson wanted the price to stay at $2. The deal was at risk of falling apart, bizarrely, over a number Dimon himself considered beside the point. “It was irrelevant to me,” Dimon recalls. “The only number that mattered was how much money we were going to lose de-risking the thing, not the per share price we paid.” (In other words, if the company saw $6 billion in costs associated with the deal, the total price it was paying was $2 or $10 plus $25 in costs per share, or $27 to $35. So the nominal price per share really didn’t matter too much. By the end of the year, with the cost of de-risking approaching $15 billion, the comprehensive cost per Bear share turned out to be about $72.50.)
Paulson finally relented on Sunday. Freed to raise his bid to $10 a share—for a total of $1.456 billion—Dimon got the guarantee changed. He also bought 39.5 percent of the company without having to submit to a shareholder vote. (Like the earlier request of 53 percent, this significant portion actually violated the New York Stock Exchange rules. No matter. Dimon had the entire government on his side, and the rule was waived.) The same day the new deal was announced, JPMorgan Chase bought 11.5 million shares for $12.24 per share. By the time of the actual shareholder vote in May, the company owned 49.73 percent of Bear’s stock.
At the time, Dimon didn’t publicly admit that his team made a mistake in the original agreement with Bear Stearns. But he didn’t have to. The renegotiated deal admitted it for him. “We didn’t anticipate that we were leaving optionality in the hands of the shareholders,” he recalls. In other words, those shareholders weren’t facing a binary choice of $2 or $0 per share; it was $2 or perhaps more. “That they could just keep voting against the deal in the hope that things might recover. We didn’t make the deal airtight. In hindsight we should have made that guarantee shorter.”
Mike Cavanagh is also philosophical about having had to go back to the negotiating table. “We’d latched ourselves to Bear Stearns at that stage with the guarantee,” he recalls. “So it was worth it to us the subsequent weekend to get more certainty around the outcome. The one risk the government couldn’t help us with was the risk that shareholders would vote the deal down. So we got a pound of flesh extracted from us and took it to $10 a share.”
• • •
On March 24, the day the new deal was announced, Standard & Poor’s raised Bear’s credit ratings. That same day, Jimmy Cayne sold his 5.66 million shares for $10.84 apiece, a total of $61.3 million. The final vote on the deal was to be in May, and Cayne had now ensured that he wouldn’t have to bring himself to vote on a deal he would never have done had he felt he had any choice. His old boss, Alan Greenberg, who was still a broker at Bear, charged Cayne $77,000 to make the trade, instead of the $2,500 that would have applied under an employee discount. “If he doesn’t like it, he should do his future business elsewhere,” Greenberg said in an interview with the New York Times.
Admitting that the deal had not been charity—JPMorgan Chase had kept the interests of its own shareholders paramount in negotiations—Dimon nevertheless continued to push the notion that he’d done what he’d done for the good of the country, that JPMorgan Chase was “a responsible corporate citizen.” When he testified in front of the Senate Banking Committee on April 3, he wrapped up his prepared remarks in a sweeping conclusion about the benefits of the deal.
“Bear Stearns would have failed without this effort, and the consequences could have been disastrous. The idea that the Bear Stearns fallout would have been limited to a few Wall Street firms just isn’t so. People all over America—union members, retirees, small business owners, and our parents and children—are now invested in the financial system through pensions, 401(k)s, mutual funds, and the like. A Bear Stearns bankruptcy could well have touched off a chain reaction of defaults at other major financial institutions. That would have shaken confidence in credit markets that already have been battered. And it could have made it harder for home buyers to get mortgages, harder for municipalities to get the funds they need to build schools and hospitals, and harder for students who need loans to pay tuition. Moreover, such a cascade of trouble could have further depressed consumer confidence and consumer spending, resulted in widespread job losses, and accelerated the current economic downturn.”
Dimon gave a polished performance in front of the Senate, without a hint of the cockiness that he usually can’t hide when he is asked obvious questions. Watching the testimony on television, Mike Ingrisani, his high school English teacher, thought to himself, “No question that’s the Jamie I knew, albeit refined to the nth degree.”
Wall Street and the financial media focused on who had been the chief beneficiary of the government intervention—Bear Stearns or JPMorgan Chase itself. JPMorgan Chase was a huge lender to Bear and was also its clearing bank. A default by the investment bank would have cost it dearly, regardless of the response of the broader markets. If Bear’s demise had started a cascade of defaults, as some analysts had feared, JPMorgan Chase, the largest player in the $45 trillion market for credit default swaps, could have seen any number of trading partners go bust. So even if saving Bear had saved everyone, the thinking went, saving Bear may have saved JPMorgan Chase a lot more than most.
One senior executive calls the issue a matter of splitting hairs, and says the focus was on the good of everyone, even if everyone, by definition, included JPMorgan Chase. “Our issue wasn’t our exposure to Bear Stearns, which showed up in numerous press reports,” he says. “It was what we thought could happen to the markets. If Bear went out on Monday, we were pretty sure Lehman would be out on Tuesday and then the only question was which firm would be next.”
Executives from Dimon on down also lashed out at those who thought that the $29 billion conduit made the deal at all risk-free or easy for JPMorgan Chase. “We took on a shitload of risk,” says one senior executive. “The Fed took $29 billion. We took $371 billion. And people-wise, the cultures did not mix. We have risk meetings for days with Jamie, in which we go over everything: our positions, our exposure, and our response to potential crises. Their culture was all about hoarding information, hiding shit, and being dishonest. It’s kind of like some mid-career Goldman Sachs banker getting hired somewhere else—there’s invariably some turbo culture shock, because the Goldman ‘Moonie’ culture makes them unable to work at other places. And I’ll tell you where we screwed up the most. We were way too eager to treat it as a merger of equals. Goldman Sachs would have hired the top 500 to 1,000 people and fired the rest. We offered to hire half of them and pay them double until the deal closed, which was a waste of money in the end.”
A rumor also circulated that JPMorgan Chase had made a margin call on Bear—asking it to beef up collateral on various trades and exposures with the larger firm—at the exact moment the investment bank was unable to meet such a demand, thereby forcing it into submission. Dimon found the suggestion absurd. “Some people just don’t know what they’re talking about,” he says. “There may be some truth that we were tightening our lending standards, but so was everybody. And there’s no question it reduced certain people’s cash. But in this business, you have to tightly control counterparty exposure. There are standards you have to follow, for God’s sake.”
His response didn’t exactly put an end to the question whether a collateral call by JPMorgan Chase pushed Bear over the edge. But it suggested that if it had been the case, well, that was a part of doing business on Wall Street. Jamie Dimon would no
t accept criticism for running his own company conservatively. (Highbridge Capital, the $27.8 billion hedge fund controlled by JPMorgan Chase, also pulled its assets out of Bear’s prime brokerage during that first chaotic week. But such a move can also be defended as a prudent one that put investors’ interests first.)
The most persistent question, however, was whether Bear’s demise was brought on by a cabal of short-sellers ganging up on the company and spreading false rumors in order to profit from a falling stock. Vanity Fair fingered the likes of Goldman Sachs, Citadel Investment Group (based in Chicago), and the secretive hedge fund SAC Capital Partners (based in Stamford, Connecticut) as coconspirators in such a scheme. (They all denied it.) Jimmy Cayne later threw the New York hedge fund Paulson & Co. and Hayman Capital (based in Dallas) into the mix. Even disinterested observers couldn’t help speculating on the possibility of a conspiracy. One old hand, the value investor Marty Whitman, wrote in a letter to shareholders that Bear was the victim of a “bear raid.”
Dimon later said that he didn’t know the truth of the matter, but that it was incumbent on the Securities and Exchange Commission to thoroughly investigate and make some determination, even if the determination was “We can’t tell.” “It’s wrong if people trafficked in rumor with malicious intent,” he says. “And for the SEC to say it’s hard to track a rumor isn’t sufficient.” In an interview with Charlie Rose, he added to the suspicion with the remark, “I would say where there’s smoke there’s fire.” He also offered a crowd-pleaser when asked about the original $2-a-share offer. “Buying a house and buying a house on fire are two different things.”
Last Man Standing Page 31