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icials—had been sure what the credit line or the “28-day” mention actually meant. “They took hope in that language,” says a Fed official. “I don’t know why they did. We made it very clear at the time, ‘This is not the be-all end-all.’ Then again, this whole thing was done so fast. We didn’t think through all the details of what would happen next.”Mortagesmortgagebank Mortagesmortgagebank hsearchnsearchS Mortagesmortgagebank h Nbsp a Nbsp t Www e Tag u Tag nsearchd Nbsp t Tag Tag i Nbsp
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hsearche Nbsp searche Www d Nbsp f Tag r Tag . Www Sun Tag a Nbsp Nbsp isearchht Nbsp searchesearchrsearchp Www a Nbsp e Mortagesmortgagebank . B Tag t Nbsp at Nbsp psearchi
t Tag epr Www se Nbsp t Www t Tag v Mortagesmortgagebank ssearcho Tag pr Tag s Mortagesmortgagebank e Nbsp tive sitor Tag Www er Nbsp lsearche Tag dy Mortagesmortgagebank trea Mortagesmortgagebank isearchg Mortagesmortgagebank th Nbsp o Mortagesmortgagebank g Bear’s hallways, poring over financial documents. Their efforts switched into overdrive as word spread of the Sunday deadline. A team from Flowers was there, a team representing Henry Kravis, plus another half-dozen or so groups from major banks. J. P. Morgan alone had 16 different teams meeting with all of Schwartz’s top people.It was a sobering process: as the day wore on, the bidders began dropping out, one by one. Everyone had an excuse: they didn’t have the time or the money or the balls to do such a risky deal in so short a time. The two best possibilities, it appeared, were Morgan and Flowers. The latter told Parr on Saturday afternoon it was prepared to buy 90 percent of Bear for about $30 billion, or $28 a share—that is, if it could scrape up $20 billion from a bank consortium by the next day. No one thought Flowers could possibly get such a deal done in time.
From the outset, Schwartz assumed Morgan was the bridegroom. Across the street, in Morgan’s eighth-floor executive suite, Jamie Dimon and Steve Black fielded nonstop reports from their due-diligence teams, now numbering more than 300 people. The key, everyone knew, was Bear’s mortgage “book,” that is, its inventory of mortgage-backed securities. Much of it was illiquid—it couldn’t be sold. How to value these Rube Goldberg devices was anyone’s guess. The more Black studied Bear’s book, the more worried he grew. He and another Morgan executive, Doug Braunstein, got on the phone with Schwartz and Parr that night and told them that, if Morgan did bid, it wouldn’t be much.
Bear’s stock had closed Friday at $32. “The fact you’re at 32 doesn’t mean much at this point,” Black said. He suggested that a Morgan bid might be in the range of $8 to $12 a share. “We said, ‘That’s all there is, and that’s with a lack of due diligence and a lot of other issues,”’ says a person involved in the call. “Alan asked, ‘Will you do it come hell or high water?’ That was their key issue.”
At nightfall everyone hunkered down for long hours studying Bear’s numbers, especially its mortgage book. By dawn, however, many Morgan executives were having second thoughts. The more they studied the securities Bear owned, the worse it looked. Bear, for instance, had initially estimated it had $120 billion in so-called risk-weighted assets, those that might go bad. By Sunday morning, Morgan executives felt the actual number was closer to $220 billion.
“We all kind of slept on it,” says one executive involved in the talks, “or not slept on it, kind of closed our eyes for a half-hour, and realized that if you take a step back and remove yourself from the enormity of it, what we were being asked to take over, from a risk factor, was gargantuan.” And it wasn’t just the financial risk. The morning’s New York Times carried a piece on Bear, by veteran reporter Gretchen Morgenson, that dredged through all the seamiest aspects of Bear’s recent history. Steve Black walked around the eighth floor making sure everyone read it. “That article certainly had an impact on my thinking,” remembers one Morgan executive. “Just the reputational aspects of it, getting into bed with these people.” He shudders.
Dimon had to agree. It was just too much. Steve Black broke the news to Schwartz. “Whatever other things you are working on, you should actively pursue them,” he said. Downtown, at the Fed, Tim Geithner stepped out of his conference room to hear the news from Dimon. “I remember he came back in a minute later, with this look on his face that said, ‘Huh?”’ recalls a member of the Fed team.
“They’re not going to do it,” Geithner said.
Geithner believed he couldn’t let Bear die. The repercussions were unthinkable. “For the first time in history the entire world was looking at the failure of a major financial institution that could lead to a run on the entire world financial system,” a Fed official recalls. “It was clear we couldn’t let that happen.”
Within minutes Geithner was back on the phone with Dimon. There ensued a series of conversations where, in one Fed official’s words, “they kept saying, ‘We’re not going to do it,’ and we kept saying, ‘We really think you should do it.’ This went on for hours. Finally, [the conversation] shifted to ‘Well, maybe if.’ They kept saying, ‘We can’t do this on our own.”’ All through these talks, Geithner kept a nervous eye on the clock. The Australian markets opened at six on Sunday evening, New York time. They had to have some kind of deal by then or risk chaos. Geithner had several long conversations with Ben Bernanke and Hank Paulson. There was never any serious question whether the Fed would help out. Even though it had never attempted anything like this before, there was ample precedent for the move; both the German and British central banks had stepped up to rescue institutions laid low by the mortgage crisis in just the last year. Still, the details took hours to unspool. At one point, Paulson had to sign a document confirming that, yes, in the event Bear defaulted on its securities, the American taxpayer would pay the tab.
Meanwhile, at Bear, Alan Schwartz, now merely a spectator at his firm’s funeral, watched the clock. By one, Bear’s board was in session, many of its members, including Jimmy Cayne, present by phone; Cayne was in Detroit at a bridge tournament. At one point, Schwartz took a call from Morgan executives, who told him that any bid was likely to be less than the $8-to-$12 range mentioned the night before. In fact, they suggested the likely number was $4. When Schwartz relayed the $4 idea to his board, several, including Cayne, grew apoplectic. Cayne argued strenuously that Bear simply file for bankruptcy. “There were a lot of people at that point who were just saying, ‘Fuck ’em—let’s go 11,”’ remembers one person in the boardroom. It was then that Gary Parr and the bankruptcy attorneys patiently explained that bankruptcy was actually not an option, not for a major securities firm. Changes to the bankruptcy code in 2005 would force federal regulators to take over customer accounts. All its securities would be subject to immediate seizure by creditors. Slowly, the humiliating inevitability of a $4-a-share buyout—for a firm whose shares had traded as high as $170 the year before—sank in. It was at that point, midafternoon, that Treasury secretary Paulson twisted the knife. As the ranking politician involved in the deal, he was concerned with appearances—both how it would look that the federal government was bailing out a well-heeled investment bank at a time when normal Americans were losing their homes, and the appearance of something lawyers call “moral hazard,” that is, the idea that a Bear deal, by appearing to “save” a bank whose poor judgment had pushed it to the brink of bankruptcy, might actually encourage risky behavior by other financial institutions. This deal, Paulson judged, had to hurt Bear. And it had to hurt badly. Paulson and Tim Geithner telephoned Dimon at Morgan. He put them on speaker. Dimon said he was considering a price in the $4-to-$5 range. “That sounds high to me,” Paulson said. “I think this should be done at a very low price.” A little later, Morgan’s Doug Braunstein reached Gary Parr at Bear. A formal offer would be forthcoming, Braunstein said. “The number’s $2,” he said.
Parr nearly choked. “You can’t mean that,” he said. He did. Schwartz took the news quietly, which was more than one could say about some of his board members. Jimmy Cayne—whose 5.66 million shares, once worth nearly a billion, would now be worth less than $12 million—swore he would never accept such a humiliating offer. “The people around the table, some of them, their net worth was being wiped out,” says one person who was in the room. “There was every emotion you can think of: sadness, anger. They saw the tragedy. But the bottom line was, you know, when they got in a pickle, Bear Stearns didn’t have many friends.”
Schwartz took a half-hour explaining that the board really had no choice. It was Morgan or bankruptcy, which would mean liquidation, putting 14,000 employees out of work by noon the next day. “What can I say?” he said at one point. “It’s better than nothing.”
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