Last Man Standing (40 page)

In one sense, at least, the comparison was apt. During the panic of 1907, when Morgan had saved a floundering bank, he had picked up its stake in Tennessee Coal & Iron in return—patriotism and the profit motive rolled into one. “With his peculiar bifocal vision, he saw the panic as a time for both statesmanship and personal gain,” writes Ron Chernow in
The House of Morgan
. Likewise for Jamie Dimon a century later.

Behind the scenes, however, things weren’t so peachy. The third page of the presentation Cavanagh had made to investors on Sunday night included the following line: “[JPMorgan] will guarantee the trading obligations of [Bear Stearns] and its subsidiaries effective immediately.” The purpose of the guarantee had been to head off another run on the bank by assuring the market that Bear Stearns could make good on its trades. A number of questions were raised about what would come of the guarantee if Bear’s shareholders voted down the deal, and the answers were not particularly clear, except for the fact that the guarantee would last a year.

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.”