Fixers (17 page)

I found my contact waiting for me over near the walkway along the Hudson. Nice-looking, late thirties or early forties, nothing sensational. Typical high-up government girl: in four or five years she’ll be back in the private sector, reaching for the brass ring in some big bank’s compliance department or as a partner in a major law firm.

At this time of year, the marina outside the World Financial Center was empty, and the little park was virtually deserted. We strolled along the water, her stiletto heels clacking on the cement, until we found a suitably isolated bench. When we sat down, she looked at me curiously. “Can I ask you something? They tell me you’re an arts consultant. Why am I talking to you?”

“Because I have the confidence of my client. He and I did some work of this kind a long time ago in another galaxy. Let’s leave it at that. Now: let’s get down to business. The word on the Street is that you have a deal with JPMC to take over Bear Sterns. Is that correct?”

She shook her head vigorously. “We don’t have any kind of a merger arrangement on Bear. With Dimon or anyone.”

I figured she was bluffing, in hopes of finding how much our side knew.

So I responded, “You know, we can waste our time pretending—or we can get real. Our information is that you’ve agreed to provide Dimon with backstop financing, you and Treasury that is, because he’s not about to take the crap on Bear’s balance sheet on to his own, even if it’s guaranteed by you people, without some kind of kicker. My client feels the same about his role.”

“There’s some kind of mix-up here,” she said. “Your client’s not involved.”

Time to play my trump card. “In this mess,” I said, “everyone is involved. Here’s the way my client reads the situation. JPMC merges with Bear Stearns, by contamination if not by law it becomes an investment bank, which throws into question whether it can continue to draw on your discount window or any other source of low-cost or no-cost taxpayer capital normally available to banks of deposit.”

“That’s ridiculous!”

“What can I say? It may be, but there’s enough substance there to inspire some strike suit lawyer to file for an injunction, and that’ll put whatever discussions you’ve been having with JPMC on the public record.”

She stared out at the harbor and the boats and the Jersey shoreline and said nothing.

I went on. “It gets better. It’s the view of my client, and my
client’s counsel, that the Fed can hardly extend a loan to JPMC secured by the very same assets it wouldn’t let Bear Stearns borrow against three days ago! All this leads my client and his counsel to conclude that there are excellent grounds to enjoin any merger of Bear into JPMC that involves a taxpayer or Federal Reserve backstop or indemnity.”

“There’s no indemnity in the Bear Stearns package,” she said, sounding indignant.

“Maybe yes, maybe no. It’s common knowledge that JPMC is chomping at the bit to become a broker-dealer without losing its bank status and the funding privileges that go with it. So here’s where my client and his attorneys come out: if you use the term-lending facility or the discount window or any other Federal backstop to help Mr. Dimon buy Bear, fairness demands that you open said term-lending facility etc. to all the rest of the Street. Without conditions and using collateral similar to what you’ll be financing against in the Bear Sterns deal. One size fits all. Isn’t that what you people are after?”

“Why should we do that? JPMC is stepping up to the plate on Bear. You’re not!”

“Oh, really? How exactly is JPMC stepping up? Bear has 14,000 people working there. Is JPMC guaranteeing the job count? They get the building, and the good stuff,
and
the equivalent of a $30 billion loan of the taxpayers’ money that they can use any way they like, because the word is that once the deal is done, you’ll be taking the crap onto Uncle Sam’s balance sheet. You could have done that directly for Bear when they came begging.”

“We rejected a direct loan to Bear Stearns because they aren’t creditworthy.”

“As we see it, you might with equal justice make the case that Bear wasn’t creditworthy because you rejected them. If you did for Bear on its own what you’re doing for JPMC, they’d be alive
and dealing. Speaking of which, what sort of deal do you have with Dimon regarding Bear’s stockholders? Do they get wiped out completely, or will they get a few crumbs?”

“We have no arrangements regarding Bear’s stockholders.”

“I see. I wonder what the market’s saying about that.” I checked my BlackBerry. “Aha! Bear’s stock is under $20. Here, you want to see?” I made to shove the BlackBerry at her, but she looked away.

“Bottom line,” I said, “the smart money is saying there’s no there there. Without you guys, Bear goes poof! My client simply wants the funding advantages that JPMC’s getting. My client has his lawyers standing by with a motion ready to be laid on shortest notice before a certain judge whose name you can guess, a judge who is seldom if ever well disposed to Wall Street and who can be relied upon to enjoin any deal involving JPMC taking over Bear. We don’t want to go to court, but we will if we have to. I doubt Bear can stand the delay—or that JPMC won’t back out of the deal.”

“This is blackmail!”

“You can call it whatever you want,” I said pleasantly. “All we’re trying to do is balance out a simple asymmetry of interest.”

She thought that over for a minute, then stood up. “Look, the best I can do is pass your message along. You understand that I can’t give you the least assurance …”

“We know that,” I replied. “All any of us can do is try. Just make sure it gets through loud and clear.”

We shook hands and left it at that.

Will the Fed cave? In Mankoff’s mind, after I related my brief meeting, without a doubt. What choice do they have? If you follow Mankoff’s reasoning, they aren’t ready to let a big firm go completely down the toilet. Washington’s preference is always to try to buy time, presumably in the expectation that some deus ex machina will descend from Mammon’s halls and make matters sort
themselves out, or some kind of “rescue” can be stitched together. But Bear, unpopular and unrespected as it is by the loftier exponents of high finance, is simply too interconnected for Washington to walk away from. The result could be a punch to a nerve center that paralyzes the entire system. Something has to be done
now
.

And so, Gentle Reader, when next year or the year after that or whenever, you ask yourself how come the Fed did a one-eighty with respect to letting the investment banks belly up to the discount window, thereby hammering home the final nail in the coffin of Glass-Steagall, you’ll know the answer.

As Mankoff expected, Uncle Sam has caved and Bear has vanished down Jamie Dimon’s maw. As initially announced, Bear’s stockholders were to be virtually wiped out, receiving only $2 for shares that were selling at fifteen times that when the lady from the New York Fed and I chatted in Battery Park. This was subsequently deemed to be cruel and unusual punishment and was revised upward to $10. The official excuse was a drafting error on the part of JPMC’s lawyers, although Mankoff thinks that Jimmy Cayne threatened to oppose the deal. Ever the gambler, he would have been willing to take his chances rather than accept a lousy two bucks for his stock, and at that point the deal was still too fragile to absorb even a flicker of contention.

So Bear is
finito
. Thousands of blameless people will lose their jobs, longstanding client relationships will be ground to dust, an old and prominent Wall Street name will be effaced—but the system will be saved to blow itself up another day. The official announcement reminded me of that famous statement by a U.S. officer in Vietnam: “The only way to save the village was to destroy it.”

The bet that Mankoff delegated me to place has paid off. The Fed has announced that it is opening the discount window to broker-dealers for the first time since the 1930s. The Bear people, who asked for exactly this concession a week ago, and whose firm has now been swept out from under them, are beside themselves and crying foul. Anyone whose schoolboy heart was tenderized with notions of fair play, as mine once was, might argue that they have a point.

One down, how many to go? Who’s next? Lehman is now the odds-on favorite. I can hardly sit down with a Wall Street client without being told a new Lehman horror story.

Some are saying that the real problem at Lehman is its real-estate portfolio. It seems that Richard Fuld has been mesmerized by his current favorite at court, a kid named Mark Walsh, into betting the firm on commercial real estate, and the consensus is that if Lehman buys the farm, it’ll have been real estate that delivered the coup de grâce. And remember those Repo 105 swap-outs that I mentioned last month? Conditional sales that allow the notional “buyer” to return the merchandise if he feels like it? Lehman’s accountants are allowing these to be booked as bona fide dispositions of assets that would otherwise be subject to killer write-downs. When those chickens come home to roost, one client told me—during discussions about a Bonnard show in Philadelphia—they’re going to be the size of 747s. Even the SEC has finally wised up to the situation at Lehman and has seconded teams of observers to keep an eye on things, but chances are Uncle Sam’s people won’t understand what they’re looking at, or looking for.

What also isn’t helping Lehman’s cause is that apart from Fuld’s immediate family and court retinue, you’re going to be hard-pressed to find anyone who has a good word for the guy. People who know him swear that if the waves start breaking over the bow, he’ll toss his closest and longest-serving colleagues overboard before himself. This does not encourage the kind of loyalty one needs from the crew when the ship begins to founder. I’m also told that Washington hates the guy, from the Treasury Secretary on down. Not the man you want to be worrying about when you show up with your tin cup.

It’s all a bit much to get one’s head around. So as I’ve often done in the past when I’ve felt the need for a refreshing perspective, I strolled across the lobby to San Calisto. As I expected, the place was pretty much deserted; at this time of year, old bones start to need warm weather, so most San Calistans are off to the Caribbean
or Palm Springs or Scottsdale, and there were only two at the table, the Ancient Mariner and the Warrior. Each had a cocktail in front of him, and each wore an expression that pretty eloquently said he was sick of the other’s company and conversation—so both of them were happy to see me.

The talk naturally turned to Bear.

“Never a first-rate firm,” said the Ancient Mariner. “I was always surprised that anyone would lend them money even in flush times. We treated them better than they deserved. Herman Strauss for some inexplicable reason liked Cy Lewis.”

“Who was Cy Lewis?” I asked.

“Back in the sixties, he
was
Bear Stearns,” the Warrior explained. “If you needed some sharp dealing to be done, Cy was the man to front it for you. Sort of fellow, you saw him in the locker room, you took your wallet into the shower with you. I’ll say this for him though. He could spot talent. He found Ace Greenberg and Ace was very, very sharp. Poor Ace, to see the firm he built disintegrate this way.”

“That’s the trouble with this business,” the Ancient Mariner interjected. “You build a great firm, employ thousands of people good at their jobs—and a single son of a bitch can spin out of control playing with the firm’s credit and destroy a century’s good work! Look at what happened at Barings.”

“You might say the same about the Federal Reserve,” the Warrior responded. “It’s all Greenspan’s fault. Met the fellow a few times. Never liked him. Pompous ass, bloated with self-regard and a bunch of lunatic Ayn Rand theories about the way the world ought to work. And so very anxious to please. Here’s a bit of interesting history for you, Chauncey. At the very end of the 1960s, we were making these crazy conglomerate loans, financing takeover bids, none of it adding a penny to the economy, but at least we weren’t risking the firm and taking these loans onto our own
balance sheet. Still, it got the Fed’s dander up, and Bill Martin, who was then the Fed chairman, or maybe it was Art Burns, his successor, came down to Wall Street and told us to cut it out.”

“And did you?” I asked.

“Of course. We had no choice. Back in those days, the Federal Reserve jawbone, properly wielded, was a fearsome disciplinary tool. Of course, Martin probably kicked off a bear market, but I’m not certain, looking back, that it wasn’t a good thing. The Street was out of control, financing terrible takeover deals with bank loans and dubious bonds. Abuse of credit is the rogue gene in capitalism’s DNA. It’s always the same. We got through that, and then in the eighties along came Milken and his junk bonds, and the savings-and-loans—and now this mess. Mankind’s curse is easy money badly lent and badly borrowed.”

They were very eloquent in their disgust, and I was quite impressed, yet when I finally left I found myself wondering whether, to such people, the present is ever qualitatively equal to the past. Practically everywhere I’ve ever been, past hates present, and present has little but contempt for past. Few can manage the transition from then to now. Most Street veterans remind me of certain older faculty at Groton who doubled as coaches of club hockey; they used to pine for the days before the school got artificial ice.

I’ve pointed out that I’m a bit of a worshipper of olden times and noble traditions. Remember General MacArthur’s speech at West Point? “The corps, and the corps, and the corps.” I didn’t go to West Point; I never served in the military; but I never hear or read that speech without tearing up. This is a key aspect of the allure that San Calisto holds for me. While I’m over there, I can pretend that there was once a world governed more or less by the principles I was raised and educated to hold dear and essential. Principles not found in the “eat what you kill” gangsta rap that Wall Street now dances to.

I’m probably fooling myself, I know. In their day, I’m sure these old guys prided themselves on the scalps on their belts. Cut every corner they could and double- and triple-dealt and engaged in every chicanery and manipulation they could—just like their successors do today. It’s human nature.