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

As the evening wore on, Jamie Dimon, now back at JP Morgan’s headquarters, rang Doug Braunstein for an update on AIG.

“It’s not good,” Braunstein told him, referring to AIG’s growing hole as a “snowball.”

Dimon understood that AIG might have immediate problems because of a “liquidity crisis,” but he continued to believe that there was enormous value in its underlying business. For a moment, he started to daydream. “Maybe we should be taking a look at it. There’s got to be value there. Got to be.”

“What do you mean? For us? ” Braunstein asked in disbelief.

“Yeah,” Dimon replied.

“No, no, no,” Braunstein insisted, trying to talk Dimon out of it. “They don’t seem to have a handle on their own numbers.”

“I don’t know,” Dimon mused, still unconvinced that AIG could really be worthless. “It could be a good idea.”

Paulson checked his watch and saw that it was past 7:00 p.m., which meant the Asian markets were opening, and Lehman still hadn’t filed for bankruptcy.

“Has Cox talked to them yet?” he barked at his chief of staff, Jim Wilkinson.

Wilkinson said that he had been trying to get Cox to call Lehman directly, but that he had been resistant.

“He hasn’t done shit,” Wilkinson said dismissively. “I went in there and repeated what you said, and it’s like he’s frozen. Like a fucking deer in the headlights.”

Cox, for whom Paulson had had very little respect to begin with, was proving how over his head he really was. Paulson had assigned him the task of coordinating Lehman’s filing by, well, now . “This guy is useless,” he said, throwing his hands in the air and heading over to Cox’s temporary office himself.

After barging in and slamming the door, Paulson shouted, “What the hell are you doing? Why haven’t you called them?”

Cox, who was clearly reticent about using his position in government to direct a company to file for bankruptcy, sheepishly offered that he wasn’t certain if it was appropriate for him to make such a call.

“You guys are like the gang that can’t shoot straight!” Paulson bellowed. “This is your fucking job . You have to make the phone call.”

The Lehman board had already begun its meeting when the bankruptcy lawyers from Weil Gotshal, towing wheeled suitcases stuffed with documents, finally arrived. Speaking in a subdued voice, McDade gave the directors a detailed account of what had happened at the New York Fed. He was answering their questions when Fuld’s assistant came in and handed a slip of paper to her boss, who began to slump in his chair as he read it.

“Hold on a minute—sorry, Bart,” he blurted. “Chris Cox is calling and he wants to address us.”

The board members looked at one another, their surprise etched in their expressions. No one could recall a time when the chairman of the SEC had asked to address a corporate board. One director questioned whether they should even take the call, but he was overruled. What did they have to lose? The lawyers, however, cautioned that if there were any questions, only the directors themselves should speak.

Fuld leaned in toward the speakerphone and said in a weary voice, “Ah, Chris, this is Dick Fuld. We got your message, and, ah, the board is in session here, everyone is here, all the directors and the firm’s counsel.”

A Lehman bankruptcy, Cox argued deliberately, stiffly, as if he were reading off a script, would help calm the market. It would be in the best interests of the nation, he said. He then introduced Tom Baxter, general counsel of the Federal Reserve of New York, who told the directors that the Fed and the SEC were in agreement that Lehman should file for bankruptcy.

One of Lehman’s outside directors, Thomas Cruikshank, who had led the oil services company Halliburton through the 1980s oil bust before anointing Dick Cheney his successor as CEO, was the first to speak.

“Why is it so important,” he asked, with a slight air of umbrage, “for Lehman to be in bankruptcy?”

Cox repeated that the markets were in turmoil and that the government had taken everything into consideration. Others followed up with variations of that same query, but Cox and Baxter stayed on message. The directors grew increasingly and visibly frustrated by the vagueness of the two men’s answers.

Finally, Cruikshank stated point-blank: “Let me see if I understand this. Are you directing us to put Lehman into bankruptcy?”

For several moments there was silence on the other end. Then Cox said, “Ah, give us a few moments, and we will get right to you.”

After one of the lawyers reached over the table and pushed the mute button on the speakerphone, the Lehman directors erupted with questions. Is the SEC telling us to file? Is the Fed? What the hell is going on here? To the best of anyone’s knowledge, the government had never ordered a private firm to declare bankruptcy, essentially hanging the Going Out of Business sign on the door itself.

Ten minutes later, Cox, clearing his throat, got back on the line. “The decision on whether to file for bankruptcy protection is one that the board needs to make. It is not the government’s decision,” Cox said in the same steady, methodical tones. “But we believe that in your earlier meetings with the Fed, it was made quite clear what the preference of the government is… .”

John Akers, the former chief executive of IBM, interrupted. “So you’re not actually directing us?”

“I’m not saying anything more than what I just said,” Cox replied before ending the conversation.

The directors looked around at one another dumbfounded as Fuld sat impassively, his head buried in his hands.

Tom Russo, Lehman’s chief legal officer, stood and outlined the board’s responsibilities under securities laws. As he spoke, some directors talked quietly among themselves. Bankruptcy seems inevitable. Do we file now? Next week?

The government, they all knew, had plenty of leverage. If they did not do what Cox wanted, who knew what the consequences could be? The Fed, which had agreed to lend money to Lehman’s broker-dealer unit to allow it to fund trades, could just as easily close it and force Lehman into liquidation. There was a motion to vote on filing for bankruptcy.

Henry Kaufman, an eighty-one-year-old former Salomon Brothers economist who headed the Lehman board’s risk-management committee, haltingly stood up to speak. Known as “Dr. Doom” for his downbeat outlooks in the 1970s, Kaufman had been sharply critical of the Fed earlier in the year, accusing the central bank of “providing only tepid oversight of commercial banking.” Now he again took aim at the government for pushing Lehman into bankruptcy.

“This is a day of disgrace! How could the government have allowed this to happen?” Kaufman thundered. “Where were the regulators?” He went on for another five minutes without stopping, and when he finally slumped into his seat the other directors could only look on in sadness.

As midnight approached, the resolution to file was put to a vote and passed. Some of the directors had tears in their eyes. Fuld looked up and said, “Well, I guess this is good-bye.”