in no mood to be disturbed, but he reluctantly agreed, and stepped out on the sidewalk in front of the restaurant. Schwartz told Dimon that Bear Stearns “might not have enough cash to meet obligations coming due the next day,” Dimon said later, “and that it needed emergency help.” How much money did Schwartz need? “What I remember is something like $30 billion,” Dimon said, “to which I said, ‘No, we cannot do that.’” Within ten minutes, Dimon had called Paulson, Geithner, and Ben Bernanke. “The real question was what would happen if Bear Stearns went bankrupt,” he said.
Dimon quickly realized that the bankruptcy of a securities firm such as Bear Stearns would be a disaster. “Unlike bankruptcy of something like a factory, where you continue to produce and the courts figure out how to split up the debt and equity and who gets what,” he said, “[here] you would have had an implosion. People the next day would have grabbed on to hundreds of billions of dollars of collateral that would have been sold on the Street. People would be quitting. Bear Stearns would have no revenues. It would have been an implosion of a financial company, not even like a commercial bank.” Dimon, the Fed, and the Treasury all agreed that the best outcome for Bear Stearns was to figure out a way to get the firm to the weekend, when there would be slightly more time to sort things out.
There were at least four principal reasons Schwartz reached out to Dimon that Thursday night. First, Dimon had expressed interest in buying Bear Stearns before. At least once between March 2000, when Dimon became the CEO of Bank One, then the nation's fifth-largest bank, and mid-2004, when he agreed to merge Bank One with JPMorgan Chase (and become its CEO in short order), he had approached Cayne about buying Bear Stearns. At the time, Cayne said, both he and Dimon realizedquickly that such a deal would never get done; his concern was that such a deal would have been dilutive to Bank One shareholders and the market would have reacted negatively, all but erasing any premium Bank One would have paid for Bear Stearns shares.
The second reason for the call was that JPMorgan Chase had a number of existing commercial relationships with Bear, including being a counterparty on derivatives contracts, being part of the group of banks that lent money to the firm, and, most important, acting as Bear Stearns's “collateral clearing agent,” meaning that JPMorgan had a regular and ongoing sense of the value of the collateral that Bear Stearns used on a daily basis as security for its overnight repo financing. Therefore, Schwartz's thinking went, JPMorgan would know exactly what it was getting as security for a quick loan to Bear or, alternatively, if JPMorgan chose to acquire Bear in its entirety, what it was buying on a granular level.
Third, as the Oppenheimer analyst Meredith Whitney knew all too well when she heard the rumor that UBS was looking to unload PaineWebber and she thought immediately of JPMorgan as the buyer, JPMorgan was the only bank (as opposed to an investment bank) that still had the financial wherewithal and the management credibility this late into the credit crisis of 2007 and 2008 to potentially pull off a deal of this magnitude in the required time frame. The financial industry had become so paralyzed by self-inflicted wounds by March 2008 that the only serious private-market solution to Bear's mounting problems was to fashion some sort of rescue through JPMorgan—and everyone knew it, from the Fed on down. If Dimon, for whatever reason, balked at making the deal, the federal government would have only two choices: let Bear face liquidation and brace for the consequences reverberating across the global financial system, or take full control of the firm itself, much as the British government had done a month earlier when it nationalized Northern Rock, the large British mortgage lender. Neither was a palatable option.
Finally,
Dimon quickly realized that the bankruptcy of a securities firm such as Bear Stearns would be a disaster. “Unlike bankruptcy of something like a factory, where you continue to produce and the courts figure out how to split up the debt and equity and who gets what,” he said, “[here] you would have had an implosion. People the next day would have grabbed on to hundreds of billions of dollars of collateral that would have been sold on the Street. People would be quitting. Bear Stearns would have no revenues. It would have been an implosion of a financial company, not even like a commercial bank.” Dimon, the Fed, and the Treasury all agreed that the best outcome for Bear Stearns was to figure out a way to get the firm to the weekend, when there would be slightly more time to sort things out.
There were at least four principal reasons Schwartz reached out to Dimon that Thursday night. First, Dimon had expressed interest in buying Bear Stearns before. At least once between March 2000, when Dimon became the CEO of Bank One, then the nation's fifth-largest bank, and mid-2004, when he agreed to merge Bank One with JPMorgan Chase (and become its CEO in short order), he had approached Cayne about buying Bear Stearns. At the time, Cayne said, both he and Dimon realizedquickly that such a deal would never get done; his concern was that such a deal would have been dilutive to Bank One shareholders and the market would have reacted negatively, all but erasing any premium Bank One would have paid for Bear Stearns shares.
The second reason for the call was that JPMorgan Chase had a number of existing commercial relationships with Bear, including being a counterparty on derivatives contracts, being part of the group of banks that lent money to the firm, and, most important, acting as Bear Stearns's “collateral clearing agent,” meaning that JPMorgan had a regular and ongoing sense of the value of the collateral that Bear Stearns used on a daily basis as security for its overnight repo financing. Therefore, Schwartz's thinking went, JPMorgan would know exactly what it was getting as security for a quick loan to Bear or, alternatively, if JPMorgan chose to acquire Bear in its entirety, what it was buying on a granular level.
Third, as the Oppenheimer analyst Meredith Whitney knew all too well when she heard the rumor that UBS was looking to unload PaineWebber and she thought immediately of JPMorgan as the buyer, JPMorgan was the only bank (as opposed to an investment bank) that still had the financial wherewithal and the management credibility this late into the credit crisis of 2007 and 2008 to potentially pull off a deal of this magnitude in the required time frame. The financial industry had become so paralyzed by self-inflicted wounds by March 2008 that the only serious private-market solution to Bear's mounting problems was to fashion some sort of rescue through JPMorgan—and everyone knew it, from the Fed on down. If Dimon, for whatever reason, balked at making the deal, the federal government would have only two choices: let Bear face liquidation and brace for the consequences reverberating across the global financial system, or take full control of the firm itself, much as the British government had done a month earlier when it nationalized Northern Rock, the large British mortgage lender. Neither was a palatable option.
Finally,
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