House of Cards (22 page)

This was the crucial moment for Cayne. “I don't have a degree in law,” he said. “Basically, I don't have a degree in anything, but it seemed to me that that was off the table, bankruptcy. After my meeting I came back in and I said, ‘Okay, the fourteen thousand people.' Which way do I go? … I agree $2 a share, saying in my mind that this guy would have paid $20, now it's $2. Now I'm thinking, it's over. It's like you got a bad grade on your test. That's it. No appeal. This thing that you spent forty years building, it's over.”

Tese explained just how difficult a decision this was for Cayne. “I said to Jimmy, ‘You believe in doing the right thing. This is the right thing to do, even though in your case, it's very painful'… Here's a guy that saw something that he worked for, for forty years, implode.” But Cayne got with the program. “Jimmy, after he got to understand how the bankruptcy system would work, he voted for it,” Tese said.

Still, there was a fair amount of incredulity among the board members about the $2 per share offer. “I think they were unhappy,” Molinaro said. “I think Jimmy expressed his unhappiness with the price, the ridiculous
price that we were getting. But I think the other board members basically were of the view that we don't have any hand. Once the conclusion was reached that we were not going to go down that path, now it's simply just trying to get the best terms and conditions that we can get for them, and make sure the file's properly prepared.”

Further efforts were made by Parr to see if JPMorgan would increase the consideration being offered by adding some form of contingent value right, or CVR. CVRs were popular once upon a time on Wall Street as a way to cleverly bridge the valuation gap between buyers and sellers or to offer more value to sellers if certain hurdles were met, most famously in Viacom's 1993 $10 billion acquisition of Paramount Communications. But CVRs have been used infrequently since then. In proposing the use of a CVR-like security, Parr told Braunstein, the JPMorgan M&A banker, “You're fundamentally telling us you don't believe our book value. We do believe our book value, so that this should be easy to give. You don't believe it. We believe it, so we'll take a CVR. If you're right and there's nothing there, well, fine.”

But JPMorgan wouldn't go for it. When Parr came back into the room to explain that Braunstein told him the offer would be $2 period, Cohen asked him if he knew why. “He said, ‘The government is insisting on it,’” Cohen recalled. “I said, ‘Is that what you were told?' He said, ‘Yes.' I said, ‘I'd like to talk to the government.’” Cohen stepped out of the room and called Geithner and Paulson. He told them the board had been informed by JPMorgan that the government had insisted on the low price and that fact would be written just that way in the proxy statement seeking the shareholder vote for the merger. “They said, ‘You'll have to do what you'll have to do,’” Cohen remembered. (The proxy subsequently stated that following “discussion with government officials,” JPMorgan refused to increase its offer beyond $2 per share.) But the government's Sunday afternoon hard line was a new posture. Previously, a participant recalled, “There was a whole round of, ‘No, no, we don't set prices. We don't negotiate deals. That's for other people to do.’” Not anymore. Now, with the markets in Asia and in Australia getting closer to opening, what little flexibility that seemed to exist evaporated quickly. “When Dimon got the backing of the Fed, what I was very upset about was it came down to two bucks,” Bear director Fred Salerno said. “It was clearly this moral hazard issue. Somebody gave him the signal—I don't know who, I could guess. I'm very upset we're now down to $2…. [W]e had no choice but to take the $2 because we lived for another day and the bondholders are okay. When you get that close to bankruptcy, right, you had to represent the
bondholders—it was punitive. The
building
was worth $10 a share. It was punitive. To me, it was something done for political reasons. The Democrats were yelling on Friday, ‘How could you bail out Bear Stearns and you couldn't help the homeowners?' All right? And Lord knows why it came all the way down to $2. It didn't have to be.”

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s had happened many times during the previous seventy-two hours, the Bear Stearns executives found themselves in the uncomfortable position of having accepted their horrible fate but still not being entirely sure if they even had a deal. JPMorgan had gone silent again, presumably because it was awaiting the outcome of the Fed's meeting. Without the Fed's agreement on the $30 billion emergency loan, there was no deal. Over at Bear, nerves were once again getting frayed. “There was some concern,” Parr said. “There were gaps of time when our board would be sitting in the room saying, ‘Where's the other side? They asked us to make a decision. We review it. We go through all the discussions and we're ready to make a decision. Now where are they?'… It became a very tense time because truly you felt like you were sitting on a bomb and the clock was ticking. And there we sat for whatever period of time wondering, ‘What's going to happen? Have we got a deal? What's it going to look like, and are they going to sign or aren't they?' And we're running into Japan and Australia time.” Finally, the call came from JPMorgan that its board had approved the $2 deal. But time had indeed run out. “We were given like forty-five seconds to sign,” Cayne recalled. Cohen remembered being told: “There is no negotiating room. It's either this or nothing.”

The moment had come to seal the fate of Bear Stearns, the fifth-largest Wall Street securities firm. The lawyers walked the board through its fiduciary duties under Delaware law, which required them to consider their duty to creditors if they turned down the JPMorgan deal and opted for bankruptcy. Given that the choice was between nominal consideration for shareholders and 100 cents on the dollar for creditors or nothing
for shareholders and pennies for creditors, Sullivan & Cromwell's advice for the board was that its fiduciary duties had shifted from shareholders to all the other stakeholders of Bear Stearns, among them creditors, employees, and retirees. Dennis Block, at Cadwalader, walked the board through the material terms of the merger agreement, including that stunning $2 per share in stock, as well as the option JPMorgan would get on 383 Madison Avenue—an agreement, regardless of whether the deal closed, for Bear Stearns to sell the building to its rival for $1.1 billion, some $400 million below its market value—and the option to buy 19.9 percent of Bear's stock. (As part of the deal, JPMorgan was to take over some two million square feet of office space around the world, including sixty-five acres and five buildings with 673,000 square feet in Whippany, New Jersey.) The lawyers also explained that the merger agreement called for JPMorgan to “guaranty Bear Stearns' trading and certain other obligations” and that the New York Federal Reserve Bank would provide “up to $30 billion” of “supplemental funding” secured by a “pool of collateral” consisting primarily of Bear Stearns's “mortgage-related securities and other mortgage-related assets and related hedges.”

Parr then reviewed for the board the process he had undertaken since Wednesday night—a mere five days earlier—to scour the world for potential buyers for all of Bear Stearns or its salable pieces. He reported to the board that, aside from JPMorgan's modest offer, Lazard could find no buyers for the firm or its assets in such a seriously constricted time period. Parr told the board that Lazard was prepared to issue a “fairness opinion” (for which it would receive a $20 million fee at closing) to the effect that the “exchange ratio”—the ratio of the $2 being offered to the Friday closing price of $36.78 for JPMorgan's stock—of 0.05437 was “fair, from a financial point of view, to holders of Bear Stearns common stock.” Given that the choice was between about $290 million for the 145.4 million Bear shares outstanding and nothing, Lazard's fairness opinion was not a hard one to give, nor was it particularly meaningful— which does not mean that Parr and his team did not work hard but does raise the question of why corporate boards agree to pay so much money for a couple of pieces of paper that are of so little value.

Then the discussion turned to the all-important indemnity by JPMorgan of Bear's officers and directors. According to the terms of the merger agreement, JPMorgan agreed to “indemnify and hold harmless” each current and former Bear director and officer “from liability for matters arising at or prior to the completion of the merger” as well as keeping in place Bear Stearns's existing indemnification agreements “for six years following completion of the merger.” The indemnification agreement was
a hugely important deal point for Bear's officers and directors, who knew by the evening of March 16 that they were already the target of numerous lawsuits—with more to come—questioning the individual and collective decisions and judgments that had allowed the situation to reach the edge of the abyss. The board also agreed to amend the company's bylaws to allow Bear Stearns to pay the legal and other expenses of any indemnified person “promptly upon demand by such person.”

Corporate governance experts—along with the justice system—will likely debate for years to come whether the Bear Stearns board properly exercised its fiduciary duty during this crisis, or in the years leading up to this crisis, but Parr is confident the board did all it could. “They asked lots of questions,” he said. “They asked that every option be pursued and considered, so it wasn't as though they said, ‘This is the right answer' or ‘That's the right answer.' They didn't have prejudice—indeed, to the contrary. In many respects, they didn't like the way things were going, so they wanted to make sure other options were considered, other things were pursued.”

Parr was especially impressed by the way Greenberg and Schwartz conducted themselves during the deliberations. “Ace did a good job as a board member,” Parr said. “He didn't like where things were. It was clear he hated this outcome. But he was very measured and very good about focusing on the right thing to do. It was really quite helpful in just setting a tone.” Schwartz's long experience as an M&A banker—his ability to herd the cats—was essential. “He was really the right guy to be the CEO,” Parr said. “Many CEOs have never dealt with something as complex as an M&A transaction, so it takes time … Alan, thankfully, having been through it so many times, knew how to take in information and then cut through it and say, ‘This is what needs to be done.' It was extremely helpful.”

Finally, the time had come for Schwartz to lead his fellow directors into purgatory. “Two dollars is better than nothing,” he said. For the next thirty minutes, he spoke. According to the
Wall Street Journal,
“A price of $2 and the right for shareholders to vote, [Schwartz] explained, was better than a price of zero and a bankruptcy filing. He also pointed out the untold consequences a bankruptcy filing would have on world markets— a scenario Bear Stearns directors didn't want to be held responsible for.” At another point, Schwartz reportedly looked at the directors and said, “What can I say? It's better than nothing.” Then he called for the vote. “Do I have anyone who's opposed?” he asked. No one said anything. At around 6:30
P.M.
, with markets just opening in Asia, the board voted unanimously to approve the JPMorgan deal. Parr and Cohen then informed JPMorgan of the Bear board's approval.

A press release announcing the deal soon hit the wires. “Effective immediately, JPMorgan Chase is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations,” it read. “Other than shareholder approval, the closing is not subject to any material conditions.” Dimon added, “JPMorgan Chase stands behind Bear Stearns. Bear Stearns' clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns' counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner.” Schwartz, the man who presided over Bear Stearns's demise, chimed in: “The past week has been an incredibly difficult time for Bear Stearns. This transaction represents the best outcome for all of our constituencies based upon the current circumstances. I am incredibly proud of our employees and believe they will continue to add tremendous value to the new enterprise.” In delicious corporate fashion, both Black and Winters, the co-heads of investment banking at JPMorgan, offered some inspiring words in the press release as well: “This transaction helps us fill out some of the gaps in our franchise with manageable overlap,” Black said. “We know the Bear Stearns leadership team well and look forward to working with them to bring our two companies together.” Added Winters: “Acquiring Bear Stearns enables us to obtain an attractive set of businesses. After conducting due diligence, we're comfortable with the quality of Bear Stearns' business, and are pleased to have them as part of our firm.” JPMorgan scheduled an investor conference call for eight o'clock that night.