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

“Look,” Geithner said impatiently, “we’re going to have to decide in the next half hour what we do. Time is running out.”

“Good luck,” McCarthy said curtly.

Geithner ended the call and rushed into Paulson’s office, where the secretary and Chris Cox were speaking, and recounted the conversation.

“I asked him if he was saying no,” Geithner said, “and he kept saying that he wasn’t saying no.” But clearly, Geithner complained, that’s exactly what he was saying.

Paulson was beside himself. “I can’t believe this is happening now.”

After a brief discussion of strategy, Paulson ordered Cox, who was the only regulator in the room with legal authority over Lehman Brothers, to call McCarthy. Cox, Paulson thought to himself with a sense of annoyance, was supposed to have prewired these very regulatory issues. “I don’t want to be left here holding Herman,” the Treasury secretary said, glancing at his zipper in case the joke wasn’t clear.

Cox reached McCarthy on his cell phone in the living room of his two-story home in Blackheath, across the Thames River. After the FSA head patiently reiterated the problems that the Barclays deal faced, Cox suggested they could try to work around them, adding, “You seem to be very unsympathetic to this.”

“No,” retorted McCarthy coldly, “I’m trying to establish the facts of life so that you understand them and approach this with some realism.”

“You’re being very negative,” Cox insisted.

“Look, you should understand, one of the great problems for us at this end is not actually being properly kept in the loop of what you’re up to,” McCarthy complained, growing increasingly agitated. “You must understand, we’re hearing things late in the day,” he said, ticking off a list of requirements that Barclays would need to meet. “We could have told you earlier which ones would run into problems and which ones wouldn’t.”

Five minutes later Cox returned to Paulson and Geithner, notepad in hand, deathly pale.

“They’re not going to do it,” he said. “This is a total reversal. They never said a word to us about this before!”

Tom Baxter, the NY Fed general counsel, who had just walked in, couldn’t believe what he was hearing. “We’ve come this far, the money’s on the table,” he said in disbelief. “Didn’t they know this when they took the plane over here?”

“I’ll call Darling,” Paulson said.

In Edinburgh, Scotland, Alistair Darling, Prime Minister Gordon Brown’s Chancellor of the Exchequer, was preparing to head to London for the workweek, as he did every Sunday.

It was about 4:00 p.m. local time, and Darling had been on the phone for much of the day with John Varley of Barclays, officials at the FSA, and Prime Minister Brown himself, trying to decide whether the U.K. government should approve the deal with Barclays.

Darling had deep misgivings about the transaction, especially after he had learned from one of his staffers that Bank of America had dropped out of the bidding. Was Barclays going to be left buying leftovers? He had read all the coverage of the deal in the papers that morning, including an editorial in the Sunday Telegraph :

Free things can still make expensive purchases. Investors should only get behind Diamond if he can prove two things: that he is retaining the kind of discipline that has been sadly lacking from the world’s leading banks in recent times; and that Lehman, as transparently as it is possible to prove, is a genuine bargain.

Darling thought it was impossible that Barclays could have done a deep enough examination of Lehman’s books to be satisfied that the bank wouldn’t be exposed to extreme markdowns of Lehman’s assets in the future. Even worse, Darling had other problems on his mind: HBOS, the United Kingdom’s biggest mortgage bank, was struggling; he also knew that Lloyds was interested in buying them. Between Barclays, Lloyds, and HBOS, the entire British banking system, he thought, was at risk.

As all these concerns ran through his mind, he answered the phone call from Hank Paulson.

“Alistair,” Paulson said gravely. “We’ve just had a distressing conversation with the FSA.”

Darling explained that he understood that they had been in touch and that there seemed to be numerous unanswered questions. “I have no objection in principle to the deal,” Darling said. “But you’re asking the government to take on a huge risk. We need to be sure what it is that we are taking on and what the U.S. government is willing to do. The questions we are asking are not unreasonable.”

“We’re at the end of the line here,” Paulson said, surprised at Darling’s position, and pressing him again about whether he was prepared to lift the requirement for a shareholder vote.

“If this were to go ahead, you know, what would the U.S. government be doing? What are you offering?” Darling asked in return.

Paulson reiterated that he was hoping the private consortium was coming together, but now Darling shifted the conversation and began peppering Paulson with questions about the United States’ contingency plans for Lehman’s bankruptcy. “Well, if Lehman is going into administration, we need to know because it will have implications over here,” Darling said before ending the call.

“He’s not going to do it,” Paulson told Geithner in amazement. “He said he didn’t want to ‘import our cancer.’”

For the next two minutes in Geithner’s office, a half dozen excited voices were speaking at once, until he finally quieted the group and asked, raising his voice for the first time the entire weekend, “Why didn’t we know this earlier? This is fucking crazy.”

Paulson began to wonder aloud if President Bush should call Gordon Brown personally, but almost before finishing the question, he answered it himself. “There’s no chance,” he said, explaining that he thought that Darling had implied he had already spoken to Gordon Brown about the situation. “He was so far away from, ah, wanting Barclays to do anything,” he remarked of Darling.

“Okay. Let’s go to Plan B,” Geithner said after a moment’s reflection.

In case it wasn’t clear what all of this meant, Shafran of Treasury spelled it out in simple terms in a text message to his colleagues: “We lost the patient.”

They agreed to assemble downstairs to relate the news to the bankers so that they could begin preparing for Lehman’s bankruptcy. Plan B was simple: Regulators would press the banks to unwind trading positions they had with Lehman and with one another in a way that minimized the impact on the markets.

And then there was the next critical issue to address, Geithner said: “We have to deal with Merrill.”

As they got up to leave, Paulson, clearly depressed, remarked drily: “If you’re going to ride the pony, sometimes you have to step in the shit.”

A NY Federal Reserve security guard who had been searching for Bart McDade and Rodgin Cohen eventually found them on the first floor. “Secretary Paulson would like to see you,” he announced before escorting them to Geithner’s waiting room.