Fixers (22 page)

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 Rosenweis 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.”

“That’s ridiculous! Our program is specifically designed to unblock the nation’s credit arteries! Are you suggesting that the Treasury is lying?”

“Oh, bullshit,” I said. “You know and I know and Treasury knows that adding capital to the banks won’t thaw the credit freeze. Besides, who wants to borrow? Buisness is scared shitless, and the consumer’s out of gas.”

As I watched him chew on that, I had a sudden bit of inspiration, and almost as if some mysterious power was working me like a ventriloquist’s dummy, I heard myself saying: “Oh yes, one more thing. My client has close to $20 billion in underwater swaps and hedges with GIG that are now under your control and therefore in your gift, shall we say. We need to get those made whole. A hundred cents on the dollar, no matter what the market thinks they’re worth. We don’t care how it’s done, and we don’t care how long it takes—as long as it’s by the end of the year. And nobody need be told about it until it’s a done deal.”

I still don’t have the slightest idea where the thought came from. Perhaps my suppressed investment-banking id.

Spass seemed genuinely shocked. “This really is blackmail,” he exclaimed.

“You can call it what you want. No GIG, no bailout.” The
moment I said them, I wanted those words back. If Mankoff had heard me, he would’ve had me snuffed. And yet something told me this wouldn’t be a deal-breaker.

“You know we can’t do that!” Spass insisted. “GIG was never on the table.”

“Ian, my client’s councel thinks that Treasury can do this. A bunch of overseas banks are locked up in GIG swaps the same way we are; they’re screaming to get paid and the State Department’s all over Treasury to do it. There’s a wrinkle in French law that will give you an out, and we can piggyback on that. Get your own lawyers to check this out.”

“What I’d said was true—something I’d heard Arnold Braum tell Mankoff when I happened to arrive at the latter’s office just as as Braum was leaving.

“I don’t know,” Spass muttered. But he was on the hook. This was a guy who had to make a deal. Had to. The GIG swaps were just icing, someone else’s problem. I could see him thinking the same thing. What’s another $20 billion? Especially when it’s not your money.

In my excitement about GIG, I’d completely forgotten a concession Mankoff was insisting on. I hated to stick it to Spass on top of the GIG ploy, but I had no choice. “One final point: there’s talk this plan of yours may include limits on banker bonuses. That’s a deal-breaker. No limit on bonuses or other compensation. Understood?”

“You can’t be serious! The Congress—the people, the voters—won’t stand for that! These are the very people who brought this crisis down on the country and you’re insisting they continue to be paid as obscenely as they have been?”

I understood his reaction. To go on paying tens of millions in annual compensation to people who might have wrecked not only the capital markets but the world economy, as well, would strike
most people as a gross miscarriage of justice. Justice is not Wall Street’s objective, however. Money is.

“The Congress is well paid both above and under the table to keep its mouth shut and vote the way they’ve been told to vote,” I replied. “It’ll be years before the voters and taxpayers figure out what’s been done to them. Besides, Congress has given you people carte blanche on TARP. So what do you say? Deal?”