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

At 3:00 on Sunday morning, more than two hundred bankers and lawyers from Bank of America and Merrill Lynch were on their second round of pizza delivery at Wachtell, Lipton, and they were still sprinting to complete their diligence.

Greg Fleming, who had been awake for almost twenty-four hours, had booked a room at the Mandarin Oriental, so that he wouldn’t have to drive back to Rye.

He was gathering his belongings and about to call it a night when Peter Kelly, Merrill’s deal lawyer, entered the conference room.

“I’ve got news,” Fleming told him. He enthusiastically explained that he had already broached the issue of price with Curl and had reason to believe that Bank of America might be willing to pay as much as $30 a share.

For a moment Kelly thought Fleming had to be joking.

“I can’t believe they’re going pay us $30,” Kelly told him. “Greg, this trade is never going to happen. It doesn’t make any sense. We’re on our knees here.”

“I’m telling you,” Fleming insisted. “I think they’re going to get there.”

“You’re getting gamed right now and you don’t know it!” Kelly snapped, trying to talk some sense into his friend at this late hour. “You need to wake up and figure out how you’re getting gamed, because there’s no way they’re doing a $30 trade! They’re going to lead us to the altar and they’re going to renegotiate it at $3, or they’re just going to let us go.”

“Don’t doubt me, Pete,” Fleming insisted. “The trade is going to happen.”

CHAPTER FIFTEEN

At around 8:00 the next morning, Sunday, September 14, Wall Street’s groggy CEOs trudged back to the NY Fed.

Lloyd Blankfein and Russell Horwitz, his chief of staff, each of whom had had roughly four hours of sleep, entered the building together.

“I don’t think I can take another day of this,” Horwitz said wearily.

Blankfein laughed. “You’re getting out of a Mercedes to go to the New York Federal Reserve—you’re not getting out of a Higgins boat on Omaha Beach! Keep things in perspective.” Blankfein was making a not-so-subtle reference to John Whitehead, one of Goldman’s former CEOs and a company patriarch, who had written a book titled A Life in Leadership: From D-Day to Ground Zero, which Blankfein had made required reading at the firm.

A Fed staffer announced to all the CEOs that Paulson, Geithner, and Cox would soon be coming downstairs. When Jamie Dimon, dressed in tight blue jeans, black loafers, and a shirt showing off his muscles, wandered into the room, Colm Kelleher whispered to John Mack, “He’s in pretty good shape for his age.”

Paulson and Geithner appeared and announced that they had good news, which everyone in the room already seemed to know. Overnight, Barclays had put together a proposal to buy Lehman and was prepared to move ahead. The only stumbling block that remained was getting all the other banks to contribute enough money—some $33 billion—to finance Lehman’s “bad bank.” After instructing the group to finish working out all the details, Geithner abruptly left the room.

A document titled “Certain Deal Issues” was now circulated, identifying some of the more difficult questions the bankers would have to consider. Would the two parts of a split-up Lehman each have enough funding after the deal closed? And could Lehman’s bad bank be made “bankruptcy remote”—in other words, legally sealed off so that creditors couldn’t go after the healthy part later?

It was then that Dimon decided to play the role of John Pierpont Morgan, who helped rescue the nation following the Panic of 1907.

“Okay, let’s make this really simple,” he announced. “How many of you would kick in $1 billion—I don’t care what form it takes—to stop Lehman from going down?”

It was the question on everyone’s mind but the one that no one had dared to ask. It was the same question that Herbert Allison, then of Merrill Lynch, had posed a decade earlier in the same building when at stake was saving Long-Term Capital Management. Dimon, then at Citigroup, had had a seat at the table for that one, too. The only difference between then and now was that Allison had asked how many banks could put up $250 million; even factoring in inflation, $1 billion a bank was a steep request.

At the time, Jimmy Cayne, Bear’s chairman, had refused to take part. “What the fuck are you doing?” Merrill’s CEO, David Komansky, screamed at him.

Cayne shouted back: “When did we become partners?”

Everyone in the room today was well aware of that famous exchange between the two Wall Street kingpins.

Blankfein told the room that while he wasn’t convinced that Lehman actually posed a systemic risk, there was a larger issue of all the banks’ reputations and public perception to consider. “Bear Stearns did a lot of good things over the last decade, but the only thing they’re remembered for is, they didn’t step up when the industry needed them to.”

What went unspoken but was surely on the minds of many of the bankers in the room was the role that Dick Fuld had played in the rescue of LTCM. When it came time for him to contribute his $250 million share, he explained that he couldn’t afford to do so. Given the pressure on his firm—and the rumors then that Lehman was about to go out of business—he had contributed only $100 million.

Now, with a dozen banks represented around the table, Dimon kicked off the fund-raising effort.

“I’m in,” he said. One by one the bankers began to indicate what they might be willing to ante up as well. When the tally was added up, they were close to saving Lehman—or so they thought.

Peter Kraus and Peter Kelly of Merrill Lynch arrived at Goldman Sachs’ headquarters just after 8:00 a.m., rode the elevator up to the thirtieth floor, strode through the glass doors, and slipped into the virtually empty executive suite on their own. Kraus, having worked at Goldman for twenty-two years, knew his way around the place.

Gary Cohn and David Viniar of Goldman greeted them and escorted them to a conference room. Before the meeting, Cohn had privately told Viniar that if Goldman were to buy a stake in Merrill, the price was going to be a lowball one. “I’m going to be low single digits,” he asserted, a far cry from the $30 a share that Fleming had been hoping to get out of Bank of America. (Cohn didn’t say so at the time, but he was thinking the entire firm’s value might be just several billion dollars; Merrill’s market capitalization on Friday had been $26.1 billion.)

Kraus brought with him the same deck, or presentation, that he had taken to Morgan Stanley. He told the Goldman bankers that Merrill was looking to sell a 9.9 percent stake in the firm and also looking for a $20 billion credit facility.

Before the negotiating even began, Cohn, always blunt, told them: “I’m going to write down your mortgage portfolios to a place where I think they click.” In other words, he was going to value Merrill’s toxic assets at next to nothing.

“I know the way you think,” Kraus replied. “You could put a positive number on it,” he said, hoping that Cohn and Viniar would at least assign some value to the portfolio.

Just as Kraus began digging deeper into Merrill’s balance sheet, Kelly, the only non-Goldman-connected man in the room, stopped him. He was clearly anxious about providing Goldman with too much information. Kraus may have trusted his former colleagues, but Kelly was more circumspect. To him, the odds of pulling off a deal with Goldman were low, and given Cohn’s comments, if a deal did come together, Merrill would be sold for a song.