Present value, p.16
Present Value, page 16
“When did management know about this restatement?”
“What are you, the special prosecutor? Have you forgotten who your client is? Can I hold the press’s hand and make sure they write down their quotes accurately? Can I hold finance’s hand to make sure they get me all the necessary information in a timely—”
But MacMullin was mad as a hornet, a fat hornet whose nest has just been sprayed. And he wasn’t buying one more shovelful of Peter Greene’s bullshit. “On target? On fucking target, Peter? Are you telling me the management of this company is so inept, so clueless, so incompetent, so utterly without controls that you didn’t know this restatement was coming?”
A hornet? A terrier? No—a pit bull! The accountant was a pit bull with his jaws clamped right on Peter Greene’s leg.
That was just about enough of that. Who the hell’s conference room was this, anyway? Whose Fortune 100 company? Not MacMullin’s, that was for sure. King Peter would rally the troops. Once more unto the breach! If Settles wanted war, it would be war.
“Listen, Terry, your firm did fourteen mil of consulting here last year, and twenty-two in the audit. Mouth off like that again, and we’ll see if maybe Ernst and Young would like the work.”
Peter Greene looked to his left and right, looked for his troops to be sounding the war cry and leaping to the battlements. But the troops were all consulting their fingernails or musing over some interesting footnote on a piece of paper, or the view from the windows of flickering headlights on the cars driving through the rain on Route 128. The troops were about as noisy as a gang of librarians. They certainly weren’t going to fill up the breach with English Dead, or even Playtime Dead, for the Playtime King.
Nice speech, Peter, but you lose.
Everyone knew it as soon as the words were out of Peter’s mouth. Everyone knew that Terry MacMullin might as well have had Peter Greene’s balls right in his fat little hand.
“Peter, you won’t fire my firm,” said MacMullin. “But after what I’ve seen today, we might consider resigning. And if we resign, I’d recommend you short the stock yourself. Because your company will be toast.”
Silence. The troops were cowed. Pins could be heard dropping.
The cocksucker! An accountant mouthing off like that—to the CEO of Playtime! Up went Peter Greene’s Adam’s apple. And then down.
But nothing came out of Peter Greene’s mouth. Because MacMullin was right. Settles held his balls. After today’s slide on the market, if the accountants resigned, it was over. The whole thing would melt down. No question about it, when a Big 5 accounting firm turned and ran from a Fortune 100 company after this kind of stock crash, then nobody would trust anything. Forget the banks, forget the bondholders, forget the equity markets, forget the vendors, forget the employees. Playtime would be a big smoky hole in the ground.
Greene turned on his heel and left the room.
But the tension remained, and it was powerful. The lawyers, the finance guys, they stood as mute as the statues on Easter Island, each wondering what came next, until a voice in the back said, in a stage whisper, “Bitch-slapped—in his own damn house!”
It was Brubaker. His colleagues turned to him, shocked at this breach of loyalty. (Oh, God, Linda thought.) But the joke broke the ice. There were nervous chuckles from the accountants, and then a laugh or two from the investor relations guys, and then even the lawyers smiled.
“Maybe I got a little carried away,” said MacMullin.
“Everybody’s jumpy tonight, Terry,” Fritz said. “It’s been a rough day. I think we all need a beer. It was pretty rough on Peter, too, and I’m sure it’s been rough as hell on you guys. Let’s all relax for a few minutes, then take this a step at a time. We need to finish the restatement, you guys need the books. Terry, give us your proctologists. We’ll pull every record you want, if it takes all night and you have to climb right up into Playtime’s intestines. Let’s all take a deep breath and do our jobs.”
15 NO SAFE HARBOR
THE FUNNY THING—and the thing that continued to bother Fritz as he finally headed home at two the next morning—was that the math was wrong. The actual numbers would show that the market had way overreacted. You ought to be able to make money by buying some stock.
But now it wouldn’t matter. Nobody would read the numbers; nobody would read past “restatement.” “The shorts were right,” people would say. “There was something.”
Fritz was still pondering the same question—what was Playtime worth?—as he drove back up through Waltham that morning, returning to Burlington after only a few hours’ sleep. The company wasn’t owned by one accountant with a clipboard, who knew what all the bits and pieces were and could tally them up each day. It was owned by tens of thousands of strangers who didn’t know much of anything. Banks, insurance companies, pension plans—they knew a few things, they read the SEC filings and the analyst reports and kept tabs, but the moms and pops, all with their teeny-weeny pieces of ownership, they didn’t know bupkus. To them, it wasn’t about bits and pieces, bricks and mortar. To them, it was about what someone would pay for their hundred shares. And what somebody might pay for the stock might not have too much to do with the bits and pieces.
Now, a person might say that valuing the company based on the stock is appearance, not reality. But in the world of public companies, appearance can become reality very quickly. And it was happening to Playtime.
The stock had tumbled because of fear. People thought other people knew things—bad things—that they didn’t, and people generally assume in that circumstance that the mysterious evils known by others are much more evil than they actually are. Their fear was compounded by the jitters that had never left the marketplace since the 9/11 attacks. People were still scared. This was the psychological dimension that Brad Jamieson exploited.
Still, Playtime might have recovered. Smart, greedy investors (men like Brad Jamieson, perhaps even Brad Jamieson himself) might have bought the stock as an investment, figuring it was undervalued. They had made money riding it down, and if they were convinced the price had gone too far, they would get right back on the horse and make money riding it up.
The problem was the accountants. The stock crashed on October 4. Instead of being able to announce the next day that the company was strong, was robust, that this was an anomaly, the opposite happened. The accountants made Playtime announce that its June earnings report was wrong and had to be redone: this was the dreaded restatement. This headline was all that anybody read. Nobody wanted the details, nobody cared about the details, the headline was enough. It proved the shorts right. A restatement! Problems in the books! There must be other shoes to drop.
On October 5, the price didn’t climb back. It hovered at around $20, waiting for the other shoes. This led to other problems, so the perception became reality—the reality that ultimately sent the company into a death spiral.
Playtime’s lifeblood was Christmas. September and October were its crucial time for shipping the hottest-selling items. Each year, to pull off its business plan, Playtime bought up billions in toys from the third-world pushers who supplied America’s habit for plastic junk. Maquiladoras in Mexico, factories in Malaysia, China, Korea; factories in Indonesia and Ecuador, factories around the globe were poised to ship massive amounts of toys. Playtime was poised to buy them. But these factories were a long way away.
If you were in China, did you want to hope that some company in Boston would get around to paying you after the goods were shipped? Some company that might be having a little financial problem? You didn’t.
If you were Playtime, could you pay cash in advance for Action Men? You couldn’t.
So before he shipped his Action Men, the guy in China wanted a letter of credit, an ironclad promise by a bank he’d heard of (even in China), a bank he could trust, that once those Action Men were in the hold of the container ship, he would absolutely get paid. That would be good enough. But without it? No letter of credit, no Action Men.
Where did these letters of credit come from? New York banks, banks that had six-inch-thick agreements with Playtime. The agreements had provisions that said, If you’re very very good, and if your financials are all spit-polished to a shine, we’ll give the guys in China and Malaysia the LCs so they’ll ship. The lawyers called these provisions “covenants.” But the agreements also said, If you violate the covenants, we won’t issue the letters of credit.
How many covenants were there? Pages and pages.
The stock crash turned out to violate those covenants. Precipitous stock decline was one of six dozen misfortunes that would excuse the banks from lending another penny. So the banks said no. We won’t issue any more letters of credit. Because at bottom, the big sophisticated New York banks, like the simple pensioners, were scared.
“No,” they said to Larry Jellicoe. (The actual letter was four pages long, and written by lawyers, and it had about fifteen defined terms in it, but what it said, basically, was no.) The letter referred to “that certain Third Amended and Restated Credit Agreement dated as of September 29, 1998 (hereinafter, the Credit Agreement).” And to section 14.1(d) of the Credit Agreement (hereinafter, “Section 14.1[d]”). And, for that matter, to sections (e), (f), and (g) (hereinafter, well, you get the idea). In breach of all of which, Mr. Jellicoe, your company now was. You need to cure these violations before we’ll issue any more letters of credit.
Cure? What was Playtime supposed to cure? Playtime was the patient, not the doctor. How could Playtime cure itself when it was lying on a cot in the ICU, unable to choke down a soft-boiled egg and toast points? What should it do? Wiggle its nose and make the stock price go back up?
Playtime couldn’t cure anything. In fact, it was doomed to get sicker. When the banks stopped issuing letters of credit, the company had to say so, publicly. That drove the stock price down again. This got Larry another letter, accelerating the debt. This meant, technically, that Playtime was supposed to pay all the debt back in cash—wire the banks $2.4 billion the next morning. Except that Playtime didn’t have $2.4 billion, or any billion, in cash. It didn’t have the cash because the banks wouldn’t lend it. Acceleration meant the banks might come in and take their collateral back, shutting down the company. This was the one bike too many that sends all the other bikes clattering to the garage floor. It set off the bonds one after the other: the 9 percent 2004s, the 9.25 percent convertibles due in 2006, the 10 percent issue due in 2010, and all the others. These bonds collided with the stockholders, whose shares fell still further. When the vendors saw the stock price fall away, they puckered up like a bare sphincter in a Vermont snowstorm. They demanded more onerous terms. Cash on delivery. Cash in advance. Cash the company didn’t have because—guess who—the banks wouldn’t advance it.
Now, banks—self-interested and nervous as they are—you can work with even in tough times, even when they write you letters with every other word a defined term. Because banks do well when the borrowers do well, and they get hurt when borrowers don’t do well. But bondholders? Forget about it. At the first sign of trouble, they sell off and cut their losses. And to whom do they sell?
The polite phrase for the ladies and gentlemen to whom they sell is “distressed debt traders.” Their funds are also, and more accurately, known as vulture funds. Vultures are different from banks, and they part from the relative civility of normal bondholders. Banks want you prosperous; bondholders want you alive, at least long enough for them to sell; but vultures want you dead. Actually, they want you sun-cured on a stake so they can peck at your liver. They bought your whole stinking putrid body for fourteen cents, and they happen to know that if they could rip out your spleen and maybe a nice piece of kidney quickly enough, and not have to be bothered with the rest of the festering carcass, they could get twenty cents for them.
Playtime hired the best and toughest lawyers available, and they called up the banks and the debtors and tried to work something out, but that didn’t get the company anywhere. You could talk to a vulture, but mainly it was thinking about how to eat you.
ABROAD, the practical problems mounted. No letters of credit meant the vendors didn’t ship. The vendors not shipping meant no product for Christmas. And no product for Christmas meant the toy chains, the discount houses, the department stores, the video outlets didn’t pay. A well-diversified company might have been able to weather such a blow. But Playtime had diversified into growth plays: the investments looked good on paper; they were, as Greene liked to tout, “platforms.” But they didn’t generate cash. To Playtime—with its off-balance-sheet partnerships, its heavy load of bond debt, its high leverage—the lenders’ blow was mortal.
Greene and Jellicoe knew this. The Street knew this, too. Everybody knew this. The Wall Street Journal knew this and speculated openly about a bankruptcy filing. As Greene and Jellicoe implored the commercial banks night and day to extend a credit line, the stock price dropped, and as the price dropped, the lenders got more nervous and less willing to cut Peter Greene and Larry Jellicoe a little slack.
“But the vendors are there! They have the product, we have the orders! It’s a no-brainer!” shouted Jellicoe. And it was a no-brainer. But no one had any brains at that point. There was too much fear and mistrust abroad.
Jellicoe begged them. He cajoled, he pleaded. He screamed. He threatened to sue them.
Nothing worked. The banks wouldn’t lend. The vendors wouldn’t ship. The stores wouldn’t pay. Cash dried up. And winter was coming on.
On November 11, two months to the day after the bombings, Playtime and eighty-three of its subsidiaries filed chapter 11 petitions in the United States Bankruptcy Court for the District of Delaware. It was a sad day, a stunning day, for the company. In Burlington, people sat in their cubes and cried.
On that afternoon the terrible feeling of dislocation returned. Chapter 11—it seemed unreal in the same way the collapse of the towers out of a clear blue morning had seemed unreal. This Burlington stronghold, too, could collapse, for causes that seemed born of fantasy. As an accountant, Fritz understood the economics, the numbers, the market fear, but at no human level did it make sense.
In the afternoon, as the sun was setting, Luce stood in his doorway, her hand on her forehead. She moved heavily to the chair, put Fritz’s gym bag on the floor, and sat down.
“Luce, you okay?”
It was obvious that she wasn’t. In that dark afternoon she looked gray and old. And frightened.
“Fritz, what does this mean? Chapter eleven . . .” She stopped and bit her lip.
“It doesn’t mean they lay you off, it’s—”
“Billy’s ten, Fritz. He’s ten!”
He’d never seen Luce like this: tough, funny Hyde Park Lucy O’Reardon, who’d always been chipper, and ribald, and sarcastic, and supremely competent. Luce was never intimidated by management. She’d been his pulling guard and run interference for him for years. She’d always been his protector. There was a tremor in her voice he’d never heard before.
“Luce—”
“Fritz, it’s just me, okay? I rent. I’ve got, I don’t know, like, two, three months’ rent saved, a few CDs put away for a rainy day.” Her hand strayed up to her temple again, and she winced as though suffering from a powerful headache. “I guess it’s raining, huh?”
“Not yet,” he said.
She looked up at him; imploring, it seemed. “He’s a ten-year-old boy, Fritz. And I’m it.”
“Luce, it’s not over. Tomorrow the lights come on, and the company is still in business. We’re just in chapter eleven.”
“How long does that last?”
Later, when he was alone again, Fritz kept remembering the gray cast of Luce’s face. He’d taken her for granted, too, it seemed. He felt a terrible emptiness in the pit of his stomach. Luce was raising her ten-year-old alone, and she had a few months’ rent saved. Bankruptcy—Fritz guessed it was real after all.
16 DID YOU SEE IT?
WERE YOU THERE?
“THEY GOT BRUBAKER! THE FBI!”
“So here’s Nathan from security, hurrying down the corridor, and behind him these FBI agents! Milly Kortanek—you know Milly in finance?—she was just coming back from the ladies’. Anyway, there’s four of them, wearing those blue windbreakers just like they have on TV, those windbreakers that say FBI in huge gold letters on the back. Milly said she had to, like, had to get out of the way or they would have bowled her right over. These guys went into Brubaker’s office, and then there was some kind of commotion. They led him out in handcuffs, like a criminal!”
“Did you hear what Brubaker said? He gives his little wink and goes, ‘We all make mistakes!’ Like it was some kind of joke!”
“I heard the FBI came back down the elevator with Brubaker in handcuffs, and took him outside, and held his head down and pushed him into the backseat of a dark green sedan, and then they shut the door and drove off.”
“Frank Pitts said—I heard this from Joe, he was talking to Frank’s assistant—anyway, he said they came in right before lunch. They found Brubaker outside his office, talking to Luce, and he looked up at them and wasn’t even surprised. You know what he said? He goes, ‘I guess I made a mistake, huh?’ And smiled like it was a big joke. Wasn’t surprised at all.”
“Really?”
“Everybody on the floor heard it. Brubaker goes, ‘I guess I made a mistake.’ Some mistake!”
“You know, Pitts thought something like this might happen. He’d had worries about Brubaker for a long time. The guy never took anything seriously. I guess the joke’s on him now.”
Did you see it? Were you there?
“You know Les in sales—Milt’s AA?”
“You mean the one with the—”
“Exactly. Anyway, Les was saying that Milt told her this was going to happen.”
“Really? He knew?”
“It was that Eduvest thing. Milt kept trying to tell finance they couldn’t take the revenue, he kept saying the deals weren’t final, and Brubaker was like, ‘Screw that, we need the revenue. I’m the accountant, you do your job, Milt, I’ll do mine.’ You know? That’s what Albert said, too.”
