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

Cohen was already uneasy, for while McDade had been sending out enthusiastic e-mails about the near-consummation of the deal, Cohen had overheard a number of government officials who seemed to be more circumspect about its prospects. McDade now also sensed that something was amiss and sent a message to Gelband while he was waiting, telling him, “There might be a holdup.”

The door to Geithner’s office opened and out walked Geithner, Paulson, and Cox, all looking alarmingly dour.

“We got the banks to agree to fund, but the U.K. government has said no,” Paulson announced.

“Why? Who?” Cohen asked, incredulous.

“It came from Downing Street. They don’t want U.S. problems infecting the U.K. system,” Paulson said.

While McDade just stood mutely in shock, Cohen, who was famous for his equanimity, virtually shouted, “I cannot believe this! You have to do something!”

“Look,” Paulson said sternly, “I’m not going to cajole them and I’m not going to threaten them.”

Cohen was not finished.

“I know a lever we can pull with the U.K. government,” Cohen offered. “I have a friend I can call.”

Paulson just stared at him, shaking his head. “You’re wasting your time. The decision was made at the highest levels.”

Cohen walked to a corner and dialed Callum McCarthy directly. They had known each other for years; Cohen had been Barclays’ lawyer in the 1990s when McCarthy worked there. But the look on Cohen’s face as he explained the situation told the story unequivocally: McCarthy was clearly not able to help his friend.

“You’ve really got this wrong if you don’t think this is going to infect you,” Cohen told McCarthy, nearly begging him to reverse his decision. “By not doing the deal, it’s going to infect you.”

Downstairs, Paulson, Geithner, and Cox entered the main conference room where the CEOs were still trying to coordinate funding of Lehman’s real estate assets. The mood in the room had been noticeably upbeat as they continued to make progress.

“Those of you who do not want to assist a Barclays deal can breathe a sigh of relief,” Paulson announced, somewhat awkwardly, and a number of bankers in the room did not understand what he was trying to convey until he formally announced that the deal was dead. “The British are not allowing for this type of guarantee; they can’t get it done by tonight; they need a shareholder vote.”

“But we have the money!” Jamie Dimon said.

“Isn’t this our closest ally in the world?” one of the bankers asked.

“Guys, trust me,” Paulson said. “I know how to be a tough guy. I’ve done everything I can. There is no deal.”

The general opinion in the room was that they had been blindsided; Paulson merely shook his head and declared that the British had “grinfucked us.”

Geithner steered the conversation to the necessity of setting up contingency plans. He said that Lehman’s holding company would file for bankruptcy that day. He also indicated that the government would open up an emergency trading session in the afternoon for all of the biggest banks to unwind positions with the firm.

Finally, Geithner broached the idea of creating a revolving credit facility, which would effectively serve to help the next bank in trouble. The proposal was for a $100 billion emergency fund, with each bank in the room putting up $10 billion: $7 billion funded and $3 billion unfunded. Any one bank could withdraw up to $35 billion from it in the case of an emergency.

At the end of the meeting, Paulson and Geithner pulled Thain aside and quietly told him, “We’ve got to talk to you.”

“John, you see where we are with Lehman Brothers,” Paulson told Thain once they had seated themselves in a conference room. “You’ve got to do something here. We don’t have the authority it’s going to take if you’re looking for the government to save you.”

“I’m working on it,” Thain said solemnly. “I’m trying to save myself.”

Thain explained that he was working on two parallel paths: one to sell a small stake in the firm to Goldman Sachs, and the other to sell the entire firm to Bank of America. He said that he had had coffee with Ken Lewis that morning and that Bank of America was much farther along, but that he expected Goldman could move quickly, too.

Geithner had heard enough; he had to brief Bernanke, so he got up and left.

Paulson could tell that Thain might be leaning toward the Goldman investment option—he knew Thain wanted to remain CEO of Merrill—but instructed him to push forward on the deal with Bank of America.

“John, you have to get this done,” he urged. “If you don’t find a buyer by this weekend, heaven help you and heaven help our country.”

So far, Paulson had been trying to show no sense of fear among his colleagues and CEOs, but, in truth, the moment was beginning to overwhelm him. He was getting increasingly anxious that the market could end up toppling.

Paulson stepped out of a meeting room and found a quiet corner to call his wife Wendy on his cell phone. His voice immediately betrayed his own panic. “What if the system collapses?” he confided in her. “Everybody is looking to me, and I don’t have the answers. I’m really scared.”

Wendy tried to allay his fears with encouragement and prayer. She immediately began reciting Timothy 1:7—“For God hath not given us the spirit of fear, but of power, and of love, and of a sound mind.”

“I understand it’s not going through,” Bart McDade told Bob Diamond when he reached him at his desk at Barclays’ headquarters.

“What do you mean?” Diamond replied, completely taken aback. “I haven’t heard that.”

“It’s off. The government says it’s not happening,” McDade told him, and recounted Paulson’s discussion with the British regulators.

Diamond immediately got off the phone and called Tim Geithner’s office.

“I just heard,” Diamond said, exasperated. “What happened?”

“You should talk to Hank,” Geithner told him.

When he finally managed to reach Paulson, he said, somewhat curtly, “I want to tell you that it was really difficult for me to get a call from someone else well after you did this.” He paused, trying to keep his voice level. “And what I’ve been told you said is very much against what I think the facts are, and I think I deserve an explanation.”

When he hung up after hearing Paulson’s account of the communications, Diamond was in turn deflated, furious, and embarrassed. He was livid with Paulson and dismayed by the British government. How could they have led him so far only to quash the plan at the last moment?

At 12:23 p.m., Diamond tapped out a message on his BlackBerry to Bob Steel, who had been trying to set the deal up for six months:

Couldn’t have gone more poorly, very frustrating. Little England.