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

Bart McDade, Alex Kirk, and Mark Shafir walked in silence through the underground garage at the NY Fed and piled into McDade’s black Audi A8 to drive back to Lehman headquarters. For at least five minutes nobody said a word as they all just tried to comprehend what had just happened. They had all come to accept that they were out of options.

As they drove up the West Side Highway, McDade dialed Fuld on the speakerphone.

“Dick, you’ve got to sit down,” he began.

“I’ve got bad news. Horrible news, actually,” he said. “Supposedly the FSA turned the deal down. It’s not happening.”

“What do you mean ‘not happening’?” Fuld bellowed into the phone.

“Paulson said it’s over. The U.K. government won’t allow Barclays to do the deal. Nobody’s saving us.”

Fuld, too, was speechless.

Across town, Greg Fleming of Merrill Lynch and Greg Curl of Bank of America were getting closer to formulating their own agreement, as lawyers began to draft the outlines of a deal document. The combined company would be based in Charlotte but would have a major presence in New York; the brokerage business would continue to use the iconic Merrill Lynch name and its familiar bull logo.

Fleming was working through some of the details when he took a call from Peter Kraus, who was on his way back to Goldman Sachs. He told Fleming that he needed part of the diligence team sent over to meet him there.

“I’m not sending anybody anywhere,” Fleming replied. “We’ve got a good deal in hand and we’re going to finish it.”

Fleming was worried that Kraus, who he felt had been unhelpful from the day he had arrived at Merrill just over a week earlier, was trying to undermine the agreement with Bank of America and that he was more interested in a deal with his old pals at Goldman. Fleming was also concerned that if Bank of America officials discovered that Merrill was talking to Goldman, they would simply walk.

“We need as many options as we can get,” Kraus told him. “You’re the president of the company, it’s your call, but you’re making a big mistake.”

“Well, it is my call,” Fleming agreed, “and I just made it.”

“John, we have to talk,” said Dick Fuld, almost begging, when he reached John Mack on his cell phone at the New York Fed. “There’s a way to make a deal work. Let’s set something up.” Mack was clearly devastated for his friend, but there was no way to do what he was asking. “I’m sorry, Dick,” he said sympathetically. “I’m really sorry.”

When he got off the phone, he strolled over to a group of bankers that included Jamie Dimon and recounted the conversation, lamenting Lehman’s fate.

Dimon furrowed his brow.

“I just had the most surreal conversation with a guy at Lehman,” Dimon said. “He seems to be in denial.”

Mack just shook his head. “This is bizarre.”

Over at AIG, Chris Flowers, taking a break from working with Bank of America, had stationed himself at one of the secretarial desks in the hallway, waiting to meet with Willumstad. Accompanying him was Dr. Paul Achleitner of Allianz; together they had prepared an offer for the company.

When they were invited into a conference room, they found Willumstad there with Schreiber and a group of his advisers, including Doug Braunstein from JP Morgan, Michael Wiseman from Sullivan & Cromwell, and several others.

“We have an offer,” Flowers announced, producing a one-page term sheet that he handed to Willumstad.

Flowers, who hadn’t yet heard about the additional $20 billion hole that JP Morgan’s bankers had discovered, explained that he had put together a deal that valued AIG at $40 billion. (The company’s actual market value on Friday had been about $31 billion.) Given the company’s problems, he asserted, it was the best estimate he could come up with quickly.

He then spelled out the rough terms: His own firm and Allianz would put up about $10 billion of equity—$5 billion each—and they planned to raise $20 billion from banks; they would also sell $10 billion of assets. The investment they’d be making would be directly in AIG’s regulated subsidiaries, but they’d gain control of the parent company. That condition was a move to protect Flowers and Allianz: If the parent company were to falter, they’d still own the subsidiaries. Finally, Flowers said they would have to be able to convince the Federal Reserve to turn AIG into a broker-dealer, so that it had the same access to the discount window that investment banks like Goldman Sachs and Morgan Stanley had.

Before ending his presentation, Flowers added that he had one other term that hadn’t been noted on the deal memo: “Bob, we would replace you as CEO.”

The silence that greeted the offer reflected the fact that Willumstad and his advisers thought the bid had to be a joke—not because Flowers had the audacity to tell Willumstad that he would be fired, but because the deal was also filled with potential pitfalls; Flowers was putting up scarcely any of his own money, and he hadn’t lined up 80 percent of the funds needed to do the deal. They also thought the price ludicrously low. In their minds the company was worth at least twice that.

“That’s fine,” Willumstad said calmly. “We have an obligation, we’ll take it to the board, but I have to tell you, you know, you’ve got contingencies in here that none of us can agree to,” he said, referring to the need for Flowers to still receive bank financing. “Thank you,” Willumstad said and stood, trying to get them to leave as quickly as possible. As soon as Flowers departed the room, Achleitner closed the door and took his seat again.

“I don’t approve of what he just did,” Achleitner said, almost whispering.

“Well, you read the letter before you came,” Willumstad said, his temper in check.

“No, no, no, that’s not how we do business,” Achleitner said apologetically.

“Okay. Whatever,” Willumstad responded. “Thank you very much.”

When the entire group had finally left, Willumstad turned to Schreiber and whispered, “Don’t let those guys back in the building!”

For a brief moment Dick Fuld allowed himself to smile. Ian Lowitt, Lehman’s CFO, had just gotten word that the Federal Reserve was planning to open the discount window even wider, a move that would enable broker-dealers like Lehman to pledge even more of their assets—including some of their most toxic assets—as collateral in exchange for cash.

“Okay, here we go!” Fuld said, believing they might be able to hang on a bit longer as they sorted out their options.

“This is great, great news,” Lowitt said, already tallying in his head the tens of billions of dollars of real estate assets he thought they might be able to pledge to the Fed. “We have enough collateral!”