In thinking about Dimon’s tirade, I could see it from his perspective. JPMorgan Chase had made real sacrifices during the financial crisis, taking on Bear Stearns and Washington Mutual and the liabilities associated with those two troubled institutions. Furthermore, Chase had not been involved in the nefarious activities that led to the crisis. Dimon was fending off politicians out for blood on one end and an outraged public on the other. But if I wasn’t going to be an advocate for all-to-all electronic markets with mutualized clearinghouses, who exactly was going to? That’s what Nasdaq does! JPMorgan lends money; Nasdaq runs fair markets.
In 2010, Dodd-Frank passed with a version of our proposed regulated structure for derivative markets. We did get clearinghouses overseeing the derivatives market trades, an important step forward, though it would take many years to fully implement. Moreover, all interest rate swaps now must be reported to a public database at the DTCC clearinghouse—a move toward greater transparency, which is also positive. While the OTC markets are still a big step short of where the equity markets are today, I do believe that they are stronger and better today because of our and others’ efforts, and I take some pride in having helped them to evolve.
The Madoff Mess
The final coda to the lesson we all learned about trust in the financial crisis was an event that, for many, personified the greed and corruption that led our economy to the brink of disaster—the Bernie Madoff affair.
I had been involved in a few dealings with the Madoff brothers, Bernie and Peter, over the years. When I was at ASC representing our software platform, BRASS, I ended up negotiating with both of them on the price structure of that contract (which in practice meant negotiating with Peter, as Bernie didn’t seem to be a detail person). He argued incessantly for every extra cent that they could get from me, even though he had no real leverage in the discussions. Generally, I’m not one to disparage good negotiating tactics. But it was, frankly, overwrought. In the early days at Nasdaq, I would find myself in another difficult negotiation with the Madoffs as I sought to unwind a horrible contract my predecessors had signed with the brothers for a joint initiative that went nowhere. While Bernie was never Chairman of the Nasdaq Board, as some news outlets have reported, before my arrival he was Chairman of an advisory board, a much more ceremonial position, but one that still speaks to his connections at the stock market. I reluctantly settled the contract for more than I thought we should have paid, but I was glad to end Nasdaq’s dealings with the brothers.
Still, when I heard the news about the Ponzi scheme, I was as shocked as everyone else. For several days, the news dominated my thoughts and every conversation on Wall Street, although no one I knew was affected personally. Madoff’s targets were not professionals in the industry, who would be more inclined to a high level of due diligence.
After the initial shock had passed, everyone in the industry was suddenly a confident Madoff expert. “I knew something was wrong with those guys.” “They always seemed dishonest.” “It’s obvious there was something unsavory about their operation.” And yet, right under the noses of all of these self-appointed experts with their perfect, retrospective knowledge, somehow the Madoff Ponzi scheme had lasted for well over a decade, defrauding a whole community of billions and billions of dollars.
If good markets, successful economies, and healthy societies are built on high levels of trust, the Madoff scandal was the polar opposite—an event that degraded our trust in each other and in the markets that support our financial dealings. As with the larger financial crisis that was ultimately Madoff’s undoing, it was a moment to appreciate that markets are not abstractions but dynamic systems that are fallible, sensitive, and continually in need of improvement. They exist to allocate precious capital and facilitate its free flow, allowing the entire economy to function better. Like the movement of water in an ecosystem, the functional circulation of capital plays an irreplaceable role in the health of the system it supports. When that circulation breaks down, as it did in the greatest financial crisis of my lifetime, our economies dry up, and we all suffer the consequences.
We are all children of the great recession. It’s no exaggeration to say that we will never be the same. A generation of Wall Street bankers and executives had been lulled to sleep by decades of relative stability; it had been several generations since we’d seen a crisis on this scale. When one finally came, after so long, it came with a vengeance. Before 2008, we had risk models and disaster-scenario planning—but let’s be honest, it was mostly theoretical. All of our existing models about what could go wrong were swamped in that wave of contagion. The existential threat was real, and we all felt it—the knowledge that we might all go down with the ship.
It changed us. I think about risk today very differently than I did prior to 2008. And I see the same every day on Wall Street—the level of awareness, attention, and concern about what could happen is entirely different than it was prior to the crisis. People are less inclined to underreact. I’m not pretending that our financial system has somehow been derisked. Finance inevitably involves risk, as does all business. It is part of the capitalist endeavor. Nor have the incentives of human nature evolved that much in the last decade. Yet, something has shifted. We all stared into the collective abyss in 2008. Anyone who took a good look into that dark and deep chasm, and came back from the brink, has not forgotten the view.
LEADERSHIP LESSONS
• The Future Doesn’t Always Look Like the Past. Beware the trap of predicting what’s likely to happen only through the lens of what’s come before.
• Trust Is Delicate. Business is fueled by competition, but it also depends on trust and cooperation. It’s too easy to take that for granted—until it fails.
Chapter Ten
The One That Got Away
Nasdaq Drops Bid to Buy NYSE Euronext
New York Times, May 16, 2011
There is a reason why the sleepy, midsized city of Augusta, Georgia, has a regional airport frequented by private jets. The nearby Augusta National Golf Club, home of the annual Masters Tournament, is the most celebrated course in the world. As you drive under the famous canopy of Magnolia Lane, a hush descends, and it is easy to imagine that you are traveling back in time to the antebellum South. For lovers of the sport, the greens and fairways of Augusta have a near-religious hold over the imagination. At this tradition-steeped, invite-only club, there are certain rules and customs that you simply don’t transgress—whether a guest or a member. For example, wearing shorts is simply not done. Asking for autographs is forbidden. And, perhaps most difficult for many of the industry titans who make up the membership ranks, mobile phones are not allowed on this immaculately groomed course.
I’m not a member, but I did receive an invitation from a longtime member to play at Augusta one day in the spring of 2011. Little could I have imagined that when I finally set foot on golf’s hallowed ground, I’d be wishing I was somewhere else. It was a beautiful afternoon, and I was doing my best to acquit myself well on that celebrated course. I was lying one about 150 yards from the green on the left of the fairway, when my heart lurched at the sound I’d hoped not to hear: my phone vibrating in the pocket of my golf bag.
I swiftly glanced around; luckily no other players were close. I’d had no intention of using the forbidden phone, but I was in a dilemma. The biggest deal of my career was hanging in the balance at the Justice Department, and my general counsel had made it clear: If they called, I was expected to be available. Feeling like a guilty sinner, I had stood in my cabin that morning, phone in hand, unsure what to do. Silent mode? Vibrate? I chose the latter, and slipped it in my bag. I swear I’ll leave it alone, I thought to myself as I shoved it inside and closed the zipper. At least I’ll know if they call and I can hurry to finish and call them back. Even having the phone in my bag was a violation, but I saw no other choice. Now the offending handset was threatening to out me.
Surreptitiously, I opened the bag a little and glanced at the name
on the screen. Ed Knight. The call went to voice mail, but immediately he called again. And again. On the third call, I switched it to silent and closed the zipper.
I played the next eight holes in a daze. Every golfer dreams about playing the legendary Amen Corner, yet my mind was elsewhere. I tried to acquit myself with some dignity on the final holes, but all I could think about was getting back to the cabin and returning Ed’s call.
When he answered the phone, his voice was calm and collected as usual, but I knew the news must be urgent for him to call me here.
“Bob, sorry to bother you,” said Nasdaq’s general counsel. “We have news on the deal.”
“So soon? How is that possible?”
“I don’t know, but a staff person at the Department of Justice called me,” he said. “Bob, you’re not going to believe this…”
An Intriguing “For Sale” Sign
The lead-up to that fateful phone call had started a few months before, with a surprising public announcement. “NYSE, Deutsche Boerse Agree to Merge” was the CNN headline on February 15, 2011, announcing an agreement between NYSE and the largest European exchange, based in Frankfurt. This deal proposed to create a powerhouse global exchange with Deutsche Boerse shareholders paying $9.53 billion for NYSE and owning 60 percent of the newly combined company. NYSE’s CEO was tapped to keep his job postmerger, but the headquarters would be in Europe, and the majority of the Board was going to be from the German company.
In the mid-2000s, both Nasdaq and NYSE had begun to look to Europe for partnerships—Nasdaq with the purchase of the OMX in the Nordics, and NYSE with their purchase of the European-based exchange group Euronext. However, both still valued their independence, or so it seemed until we saw the news story announcing that NYSE was running into the arms of a German exchange, seeking to make a deal that would change the face of the global equities market if it succeeded.
In the offices of Nasdaq the message was clear—NYSE is on the market. And the price was advertised right there in the news stories. NYSE had put into the public domain the value they placed on the company, and the price at which they were willing to give up control. My executive team and I had occasionally mused about buying our rival, but those discussions had never gone very far. But if ever that vision was going to become a reality, this was the moment. For all intents and purposes, the Board of NYSE had just nailed a “For Sale” sign on those massive Corinthian columns with a price attached, and we weren’t going to pass up this unique opportunity. They had a fiduciary responsibility to seriously consider higher offers.
Our competitor down the street was still an equities trading powerhouse, the largest stock exchange in the world by trading volume and value of listed companies. But their problems were not small and were not going to go away without significant action from management—which, as far as I could tell, was not going to happen anytime soon. John Thain, CEO from 2004 to 2007, had made some attempts to drag the exchange into the electronic future. But execution was poor, and he wasn’t there long enough to make a true difference. Duncan Niederauer, his successor, had come over from Goldman Sachs and said some of the right things about becoming a technology-driven exchange. But he had no experience managing an outfit like NYSE, and I wasn’t sure he was proving adept at learning on the job. In a post–Reg NMS world, the equity-trading market had fragmented, leaving NYSE with a much lower market share in trading cash equities, around 26 percent. Furthermore, the exchange still had many of the problems that had plagued all old-school exchanges.
NYSE was a unique mix of a storied American brand, an incredible equities franchise, and an inefficient operation. In the global equity exchange space, it was the last of the large exchanges to not go through the reformation, so to speak—an attractive target for an effective CEO to transform into a lean, mean, highly profitable business.
The proposed deal with Deutsche Boerse would make the combined company the largest exchange in the world, led by Niederauer, though I had to wonder how long that would last given the Deutsche Boerse control of the Board of Directors. Regardless, I didn’t intend to find out. We immediately put our heads together to discuss how we might muscle our way between the parties in this proposed merger and make a better offer.
This would be an uninvited bid, which was always a daunting proposition. This was also a deal that would draw massive publicity, with media and investors breathing down my neck, and maneuvers scrutinized every day by financial pundits. Chances of success were not high. I’d been once bitten with the LSE deal, which had been a time-consuming, difficult process. Was I twice shy? After considering it with my team, I finally decided to “screw my courage to the sticking-place” (to paraphrase Macbeth)1 and go for it.
But I would need a partner. We didn’t have the size to simply buy NYSE Euronext outright. Moreover, there were valuable assets in Euronext that didn’t entirely fit with Nasdaq’s business model. So I reached out to Craig Donohue, CEO of CME, the huge derivatives exchange, to discuss a joint bid. After some consideration, he decided to sit this round out. I also approached Jeff Sprecher, CEO of ICE (Intercontinental Exchange). I knew that Sprecher had created a very entrepreneurial, operationally efficient culture at ICE, and I thought he might just be the perfect partner for Nasdaq on such an acquisition. In some respects, their corporate culture seemed very close to Nasdaq’s.
Sprecher was immediately interested. He and I discussed the various assets and how we might split them up. We didn’t have access to the internal documents of NYSE Euronext, but as it was a public company, we felt good about the reliability of the company information available. Nevertheless, we spent many long days locked in conference rooms—discussing, negotiating, arguing. How do we slice up the apple? How much does each company pay for each asset? It was a complicated negotiation, and this was just to get to the point of making a reasonable bid.
During those weeks, I walked him through my understanding of the assets of NYSE Euronext, the value to ICE, and how much potential savings and synergies could come from a merged Nasdaq-NYSE. I knew I could cut out a huge percentage of the costs of their operation. We eventually agreed that ICE would take on Euronext’s derivatives business, headlined by LIFFE, the London International Financial Futures and Options Exchange.
In many respects, LIFFE was the jewel of Euronext, a high-margin business in a growing market. Once upon a time, in the early 2000s, LIFFE had been independent and up for sale itself. Everyone assumed that LSE would buy it, but somehow Clara Furse (CEO of LSE) had let it slip through her fingers, allowing the Paris-based Euronext to come in and steal one of London’s prime financial assets. Now, LIFFE was in play again and a perfect asset for ICE, itself a collection of derivatives exchanges, to pick up.
So in the proposed Nasdaq ICE purchase of NYSE Euronext, we were, in a sense, willing to take the inferior businesses, the lower-margin parts of the acquisition—meaning all of the equities exchanges (NYSE and the European ones). ICE was going to take the high-margin European derivatives exchange, a natural fit for them. It might seem strange to call the massive NYSE equities franchise “inferior,” but compared to the margins at LIFFE, it really was. But whatever the margin, equities was Nasdaq’s business, and we knew how to run it like a finely tuned machine.
On April 1, 2011, Nasdaq (then Nasdaq-OMX) and ICE launched an alternative bid for NYSE Euronext. Our proposal was for $42.50 per share, an $11.3 billion deal—a 19 percent premium over the Deutsche Boerse offer. We felt it was an offer that the NYSE Board had to take seriously. How could they turn down such a significant premium over the other proposal? As we outlined in the press release announcing the offer, “Given that our proposal is clearly superior, we hope that NYSE Euronext’s Board will recognize this opportunity as well as the benefits for NYSE Euronext’s employees and customers.”
Despite the truth of that statement, there was one major stumbling block to getting the deal done: the Department of Justice. Antitrust scrutiny was going to be intense on this deal, as a
Nasdaq-NYSE merger would significantly alter the national trading landscape, changing the competitive dynamics dramatically. I had learned a lot about the rhythms of Washington in my eight years as head of Nasdaq. I knew that antitrust battles are won or lost on the definition of the market. In a national market, a Nasdaq-NYSE marriage would be an uncompetitive monopoly. In a globally defined market, we would be the leader but not without competitors. From that perspective, it was time to pull out the stops to see if we could turn two great national listing franchises into one global powerhouse. What could be better for New York? Indeed, what could be better for America?
A Delicate Dance with the DOJ
The Obama White House was not known for its pro-business stance. Our forty-fourth President came into power at a time when the financial industry had just cratered and was seen by many as having wrecked the economy. The Occupy Wall Street protests were still a few months away, but public sentiment was not exactly friendly toward any business with a Wall Street connection. We knew that there would be some skepticism toward the proposed deal. But in our minds, the issues involved were not about Wall Street, good or bad. Indeed, any sober accounting of the various troubles that led to the financial crisis didn’t implicate the exchanges.
Here was a chance, we felt, to build the preeminent global listings exchange. That “strong competitor in a global market” was how we framed our pitch to the DOJ. On the political side, the emphasis was slightly different. On that front, we highlighted how this deal would retain national ownership of one of the jewels of American business. After all, despite the rhetoric of the NYSE Deutsche Boerse proposal, make no mistake: This was an acquisition of NYSE by a German business. The PR departments could spin the narrative however they wanted, but that was the unvarnished truth.
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