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

“Lehman’s got to file immediately,” Paulson, leaning back in his chair, instructed Geithner and Cox. He made it clear that he didn’t want Lehman adding to the uncertainty in the marketplace by dragging the situation out any longer.

Paulson had another reason for insisting that Lehman file: If the Fed was going to open its discount window even wider to the remaining broker-dealers, he didn’t intend that Lehman be granted that access; doing so would represent another opportunity for moral hazard.

Cox said that he wanted to hold a press conference to announce the bankruptcy. As the sole regulator with formal authority over the firm, he felt he needed to communicate the news to the public before it crept out on its own and panic ensued.

He summoned Calvin Mitchell, the head of communications for the NY Fed, and Jim Wilkinson, Paulson’s chief of staff, into his temporary office and asked when a conference could be scheduled.

“Well, can’t you do it at the SEC office somewhere? Isn’t that more appropriate?” Mitchell asked, clearly uncomfortable about arranging a media event in the middle of such chaos.

“It’s easier to do it here; no one is there,” Cox insisted. “The journalists are here,” pointing out the window at the scrum of press lined up on Liberty Street.

“Okay, so, we could do it on this floor,” Mitchell said. “Or, if we do it on the main floor, we have a podium we can bring down.”

Cox liked the idea of holding the press conference downstairs and added, “That’s a good backdrop.”

As they began discussing the substance of what Cox would say at the conference about Lehman’s bankruptcy, Erik Sirri, the SEC’s head of markets and trading, pointed out a slight problem with the plan.

“We can’t announce this,” Sirri said. “We can’t say a company has filed for bankruptcy until they decide to file. And that’s a decision for Lehman’s board.”

Just after 1:00 p.m., Stephen Berkenfeld of Lehman called Stephen Dannhauser of Weil Gotshal, the firm’s bankruptcy lawyer, frantically explaining that a group of Lehman executives—led by Bart McDade—had just been ordered to appear at the New York Fed. “You’d better get down there,” he urged, and said nothing further.

Seconds later, Dannhauser grabbed three senior partners—Harvey Miller, Thomas Roberts, and Lori Fife—and dashed to the street to find a cab. As the four sat sweating in gridlocked traffic, Roberts took a call from a partner back at the Weil Gotshal office who told him that Citigroup had just asked about the firm’s availability to represent it as a creditor in a Lehman bankruptcy.

“That doesn’t make any sense,” Roberts told the partner. “We’re on our way to discuss a deal with Barclays.”

An hour after leaving the General Motors Building, the cab finally approached the New York Federal Reserve Building. News camera crews were still camped outside, watched over by uniformed Fed security. As the lawyers finally entered the building, they encountered Vikram Pandit of Citigroup hurrying out, looking as if he was late for another appointment.

Bart McDade and other Lehman representatives had already arrived upstairs and were sitting across from several rows of government officials and lawyers. Baxter, the general counsel for the New York Fed, was clearly running the meeting, as were lawyers from Cleary Gottlieb, representing the Securities and Exchange Commission.

McDade was just then telling Baxter, “You don’t understand the consequences. You don’t understand what is going to happen!”

Baxter, on noticing the arrival of the Weil Gotshal team, politely stopped the conversation to explain what was going on. “Harvey, we have had a great deal of deliberations and we’ve been thinking about this a lot, and it’s clear now that there isn’t going to be a Barclays transaction. We’ve come to the conclusion that Lehman has to go into bankruptcy.”

Incredulous, Miller leaned forward until he was inches from Baxter. “Why? Why is bankruptcy necessary?” Miller demanded. “Can you explain, can you please elaborate on this?”

“Well, I’m not sure it’s really necessary, given all the circumstances,” Baxter responded, sheepishly. “But, ah, there’s not going to be any kind of bailout, so we think it’s appropriate that Lehman go into bankruptcy.”

Miller looked at his colleagues. “I’m sorry, Tom, but we don’t understand.”

Alan Beller, a lawyer at Cleary Gottlieb, cut in peremptorily. “You need to do this, and it should be done before midnight tonight. We have a program to calm the markets.”

Miller raised his voice. “Oh, you have a program to calm the markets, do you? Could you possibly tell me what that program is?”

“No, it’s not necessary for your decision making,” Baxter shot back.

“Tom,” Miller persisted, “this makes no sense. Yesterday, no one from the Fed was talking to us about bankruptcy, and now we have to have a filing ready before midnight. And what is the magic of midnight? The only way we could ever file, and it won’t be by midnight, is with a skinny Chapter 11 petition. What will that accomplish?”

“Well, we have our program,” Baxter repeated.

Miller stood up, his six-foot-two frame looming over the other lawyers.

“What,” he slowly bellowed, “is this program ?”

Baxter just stared uneasily, offering no immediate answer.

“If Lehman goes into bankruptcy, totally unprepared, there’s going to be Armageddon,” Miller warned. “I’ve been a trustee of broker-dealers, little cases, and the effect of their bankruptcies on the market was significant. Here, you want to take one of the largest financial companies, one of the biggest issuers of commercial paper, and put it in bankruptcy in a situation where this has never happened before. What you’re going to do now is take liquidity out of the market. The markets are going to collapse.” Miller waved his finger and repeated, “This will be Armageddon!”

Baxter looked at the SEC lawyers, and, considering for a moment, finally said, “Okay, I’ll tell you what we’re going to do, we’re going to caucus.”

“This is insane,” Miller said to Roberts as soon as the Lehman team was alone in the conference room. “They’re telling us to fucking file. The government is telling us to file .”

“I don’t even know what to say,” Roberts replied. “This has got to be illegal.”

About a half hour later, Baxter and the other government lawyers returned to the room, and the meeting resumed. “Well,” Baxter announced, “we’ve considered everything you said, and it hasn’t changed our position. We are convinced that Lehman has to go into bankruptcy, but what we are prepared to do is keep the Fed window open for Lehman so that the broker-dealer can continue operating the business.”

Baxter was making the case for compromise, that there could be a way for an orderly winding down of Lehman. The Fed would loan money to Lehman’s broker-dealer unit, but not indefinitely, only as part of a bankruptcy.

Sandra C. Krieger, executive vice president at the NY Fed, asked, “How much cash are you going to need us to provide you tomorrow to fund yourself on Monday night?”

“It’s impossible to know the answer to that,” Kirk told her.

“Well, that seems highly irresponsible!” she replied edgily.

“Really?” Kirk said, growing angry. “You want to tell me on the $50 billion of trades selling tomorrow how many of our counterparties are going to send us the money when we file for bankruptcy?”