June 16, 2009
Cunningham on Kelly's Bear Book
Posted by Lawrence Cunningham

Kate Kelly is a gifted young journalist who prepared useful accounts of the federally-orchestrated and partially-financed fire sale of Bear Stearns by JP Morgan published in The Wall Street Journal two months afterwards. Revised versions of the reporting now appear in a short book, Street Fighters, of about 64,000 words, consisting of a well-written chronology of events and personalities whisking through the four day weekend leading to Bear’s death.

The book is a well-told chronology, not having a theme or point of view, other than a preface saying the book’s purpose is to help people understand the “brutal impact” an enterprise’s collapse has on “workers.” I only detect a slight thematic whiff of that in the book and don’t see why Bear is a peculiarly good firm to illustrate the “brutal impact” notion.

Instead, I find in the chronology a few points of greater interest. It is difficult to be sure about the points because the reader must wade through haphazard minute-by-minute chaos of that weekend to determine what the facts add up to. Yet I discern several points relevant to people interested in economic crisis, government’s response and corporate governance during crisis.

The most important is the forceful, directive, role the US Treasury Department, especially then Secretary Henry Paulson and now Secretary Tim Geithner, played commanding, czar-like, the termination of Bear and sale of it to JP Morgan, in a weekend. They dictated an extraordinarily low price, $2 per share, and played some directive role in identifying and securing JP Morgan as buyer, instead of other potential suitors. The story dramatizes how Paulson called the shots:

• Paulson told US President, George Bush, to remove a line from a pending speech disparaging bailouts, as Bush intended, because his administration was about to orchestrate one.

• Paulson told Bear CEO, Alan Schwartz, who Paulson perceived to be “in denial,” that its receipt earlier that week of federal financial support meant Bear did not so much get a life line as become an instrument of the government.

• When JP Morgan CEO, Jamie Dimon, expressed difficulty accepting the deal at the original $8-12 level, Paulson told him he should pay less, saying “I can’t see why they’re getting anything. I could see something nominal, like one or two dollars per share.”

That’s the basis on which the forced deal was formally approved, under a façade of regularity.

Bear’s board, nominally responsible for protecting Bear’s shareholders, lenders and workers, appears to have done a reasonably competent job during the chronicled weekend. It is difficult to be certain, however, because reports of meetings, discussion and decisions are given chronologically, not analytically. So it is difficult to gain a comprehensive sense of what they knew or what they did.

But there is no question that, when they received JP’s Paulson-endorsed bid of $2 per share, they and their outside counsel (Sullivan & Cromwell) and investment bank (Lazard ) were astounded, outraged, furious, and sickened—to use words from this book. They were convinced that the decision emanated from Paulson and Geithner, was political and left them no choice.

Riveting as these details are, the chronology stops before the story ends. Its Epilogue notes, but does not explore, how that $2 price was quintupled in further negotiations conducted by Bear and JP Morgan in the ensuing two weeks—after Paulson’s federal heavy-hand abated, his main objective apparently having been reached, and he having moved on to other problems. It is important to learn more about what happened in those two weeks to shed light on Paulson’s and Geithner’s exact roles.

Illumination of such matters, at Bear and other firms, will be vital as federal investigators continue to probe how heavy-handed Treasury (both Paulson and Geithner) and the Federal Reserve have been in their bailout quests. The seriousness of these issues is epitomized by ongoing Senate hearings into whether Paulson, Geithner and Fed Chair Ben Bernanke instructed or induced Bank of America to violate federal securities laws when they pressured it to take over Merrill Lynch, in a pattern analogous to that of JP Morgan taking over Bear.

References spread throughout the chronology note about six parties other than JP who might have bid but did not. As with the rest of the book, these are scattered and mentioned more in passing rather than collected or analyzed. It is rarely clear who suggested what other bidder, what steps were taken, or how far most got. So it is not possible to assess with confidence whether Bear’s board and Lazard conducted reasonably satisfactory process to determine that JP’s $2 per share bid really was the best alternative that weekend. Even so, enough evidence is scattered around to support that inference, at least as a journalistic matter.

But it does not matter: Paulson and Geithner appear to have left no one any choice.  Notably, Paulson himself had contacted some potential bidders, which is very odd, and the only other bidder who actually made a bid, J.C. Flowers, was effectively rejected, not so much by Bear’s board or its advisors, as by Paulson and Geithner.

Kelly's "Street Fighers" has a good dramatic quality, which will help sell copies. The story builds momentum and tension to the ultimate decision Sunday night. This creates empathy and understanding for the stakes and plight of the decision makers, even among those pressuring the deal (government), and certaintly those reluctantly accepting it (Bear’s board and top managers and even JP) or coordinating it (advisors from Lazard, S&C, Skadden, Cadwalader) and, above all, those affected, despising the deal, especially Bear employees and shareholders.

Government regulators come off as least sympathetic. Paulson and Geithner are concerned about the system and don’t really care about Bear in particular; others have the opposite functional priority, caring mostly about Bear, not the system. Kelly’s “brutal impact on workers” perspective does emerge here, feeling for particular individuals at this firm, not abstract notions of systemic stability.

This book will be of use to researchers trying to piece together facts that occurred during Bear’s final weekend. But, as the foregoing suggests, and Larry Ribstein's accompanying contribution attests, the fact-filled book gives no synthesis or diagnosis, and readers must draw their own conclusions.  The book will certainly be of general reading interest to people fascinated by investment banking and deal-making cultures—a large number, judging by book sales so far.

Kelly has a knack for good writing of complex business, financial and legal matters. She likely will join a distinguished line of Journal reporters writing business best sellers.  Count on her next book to be more confident and bolder in setting a more direct thesis.

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