Andrew Sorkin - Too Big to Fail - The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

Downstairs at the New York Fed, the CEOs and their underlings had all begun milling around the lunch buffet tables. Despite the grave assignment they’d been given, there was little they could actually accomplish on the spot. Not only did they not have computers with them, but the people with any real expertise in analyzing balance sheets and assets were either with the Lehman team upstairs or back at their offices, poring over volumes of spreadsheets.

In one corner a number of executives, trying to pass the time, were doing vicious imitations of Paulson, Geithner, and Cox. “Ahhhh, ummm, ahhhh, ummm,” one banker muttered, adopting Paulson’s stammer. “Work harder, get smarter!” another shouted, mocking Geithner’s Boy Scoutish exhortations. A third did his best impression of Christopher Cox, whom they were all convinced had little understanding of high finance: “Two plus two? Um—could I have a calculator?” In another corner, Colm Kelleher, Morgan’s CFO, had begun playing BrickBreaker on his BlackBerry, and soon an unofficial tournament was under way, with everyone competitively comparing scores.

After lunch, they were all summoned back into the main conference room, where John Thain’s absence did not go unnoticed.

If there was one topic besides Lehman’s future on the minds of the CEOs, it was the fate of their own firms. What would Lehman’s bankruptcy mean for them? Was Merrill really next? What about Morgan Stanley or Goldman Sachs? And what about JP Morgan or Citigroup? While commercial banks like JP Morgan had large, stable deposit bases, they still funded part of their business the same way the broker-dealers did: by regularly rolling over short-term commercial paper contracts that had become subject to the same erosion of confidence that had brought down Bear Stearns—and now Lehman Brothers. To them the waning trust only suggested the nefarious handiwork of short-sellers.

At one point, John Mack questioned the whole idea of bailouts and ruminated aloud about whether they should just let Merrill fail, too, even though seated just a few places away from him was Peter Kraus, who was standing in for John Thain. The question quickly quieted the room. Some thought he was gaming all of them—maybe he wanted to buy Merrill on the cheap? What they didn’t know was that he had approached Thain just hours earlier and had set a meeting for that evening.

Dimon looked at Mack dumbfounded. “If we do that,” he said caustically, “how many hours do you think it would be before Fidelity would call you up and tell you it was no longer willing to roll your paper?”

When Thain finally did call Ken Lewis, the conversation was brief and to the point—merely a discussion of the logistics of their meeting. Thain was concerned enough to get the details correct that he called Lewis back a second time to confirm which entrance of the Time Warner Center he ought to use.

Before driving over to Lewis’s apartment, Thain met with Fleming at the firm’s Midtown offices to strategize. He made it clear to Fleming that the discussions were purely exploratory—and that he wanted to sell only a small stake in the firm, maybe up to 20 percent.

“He’s not going to go for that,” Fleming warned. “Lewis is going to say that he wants to buy the whole company.”

Thain opened the car door himself, making a beeline to the entrance. Ducking under the extended steel-and-glass awning, with its One Central Park address, he rushed solo up the South Tower to Lewis’s apartment.

Lewis greeted Thain warmly in a room with striking views but one that revealed its status as a corporate apartment by the virtual absence of artwork or furniture.

“Given all the events that were going on,” Thain said, once they settled themselves, “I am concerned about the impact on the market and on Merrill if Lehman were to go bankrupt.” He paused for a few seconds and then said bluntly: “I’d like to explore whether you’d have an interest in buying a 9.9 percent stake in the company and providing a large liquidity facility.”

“Well, I’m not really very interested in buying 9.9 percent of the company,” Lewis shot right back just as directly. “But I am interested in buying all the company.”

“I didn’t come here to sell the entire company,” Thain replied with a slight grin on his face, having not expected Lewis to be so aggressive.

“That’s what I’m interested in,” Lewis repeated firmly.

Thain nervously tried to forge a compromise. “Are you willing to go down two tracks, explore a 9.9 percent sale and explore a 100 percent sale?”

“Yes,” Lewis agreed, “but remember that I said to you, I’m not really interested in 9.9 percent, I’m really interested in a full merger.”

Lewis and Thain spent the next half hour reviewing the various mixes of businesses, the strategic rationale for a merger, and assembling some due diligence teams. Lewis suggested they reconvene with “the two Gregs”—Greg Curl and Greg Fleming—at 5:00 p.m.

“I can’t do it then,” Thain told Lewis.

Strange, Lewis thought. Thain showed up wanting to do a deal and now he couldn’t meet in two hours? Did he have somewhere better to be? Was he in talks with someone else?

As he was about to leave, Thain stopped and raised a final point: “I have to tell Hank about these conversations,” he explained, “because I’m worried that if Hank finds out about them, he’s going to think that I screwed up the Lehman deal.”

“Well, look, you know,” Lewis answered, “I would prefer the Merrill deal. You can tell Hank that we’re having these discussions, because we’re not going to pursue Lehman without government assistance.”

In the end, the men would separately brief Paulson, who, as it happened, was thrilled to hear the news. As far as he was concerned, Barclays was about to buy Lehman, and now Bank of America was talking about acquiring Merrill. It was all coming together.

“I got voice mail again,” a frustrated Fuld told Tom Russo. “Nobody’s picking up his goddamn phone!”

He could not locate anyone he needed—Paulson, Geithner, Cox, Lewis. Even Bart McDade, his own employee, was unreachable. They were all down at the NY Fed, but no one was taking his call or calling him back.

Fuld wanted an update. He had been in his office all of Saturday, dressed in a blue suit and starched white shirt as if it were a typical work day, but hadn’t heard a word about Bank of America or Barclays.

When the phone did ring, it was Rodgin Cohen, who, calling from the NY Fed, said, “Yeah, we’ve got a problem. I think Merrill and BofA are talking.”

“What do you mean?” Fuld barked.

Cohen explained that he had just left a meeting with Geithner at which he tried to persuade him again that government assistance was necessary to avoid the collapse of the entire banking system. As Cohen recounted it, he had told Geithner: “If you don’t help, Merrill will be gone by Monday.”

Geithner’s response—“We’re working on a solution for Merrill”—had been purposefully vague, but both Cohen and Fuld knew exactly what it meant. It also explained Bank of America’s silence. They both hadn’t forgotten Greg Curl’s comment to them over the summer about how Lewis had always wanted to buy Merrill. And it explained the odd phone call Cohen had received from Merrill’s Fleming earlier in the week, casting about for information.