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

But not everyone agreed with that optimistic assessment. “Who the fuck are they kidding? Are you fucking kidding me with this?” Peter Kelly, Merrill’s outspoken lawyer, asked Edwards after the meeting. “How is the board walking away without shitting their pants?”

As market conditions worsened, it became clear that the metrics they were using had no grounding in reality. Two weeks after the July board meeting, Fleming and Fakahany sent a letter to Merrill’s directors, briefing them on the firm’s deteriorating positions.

O’Neal, meanwhile, became withdrawn and brooding, and began to lose himself in golf, playing thirteen rounds, often on weekdays and almost always alone, at storied clubs like Shinnecock Hills in Southampton.

Merrill’s CDO portfolio continued to plummet through August and September. In early October, the firm projected a quarterly loss of roughly $5 billion. Two weeks later, that figure had ballooned to $7.9 billion. Desperate, O’Neal sent an overture to Wachovia about a merger. On Sunday, October 21, he had dinner with Merrill’s board, and in discussing options to solidify the firm’s balance sheet, he mentioned he’d talked to Wachovia. Somewhat prophetically, he told them of the market turmoil. “If this lasts for a long period, we and every other firm that relies on short-term overnight and term repo funding will have a problem.” But the board did not focus on that last point. They were furious he had engaged in unauthorized merger talks. “But my job is to think about options,” he protested. Two days later the board met without him and agreed to force him out. Few were sympathetic. A former co-worker told the New Yorker: “I wouldn’t hire Stan to wash windows. What he did to Merrill Lynch was absolutely criminal.”

One morning in late June, New York’s mayor, Michael Bloomberg, left his brownstone apartment on Seventy-ninth Street, hopped into the back of his black Suburban, and headed to Midtown for a breakfast date. With his security detail waiting outside, Bloomberg, wearing his usual American flag lapel pin, strolled into New York Luncheonette, a tiny diner on Fiftieth Street across from a parking lot, and greeted John Thain. The restaurant was one of Bloomberg’s favorites; he had recently brought a long-shot presidential hopeful, Barack Obama, there.

Although Bloomberg didn’t know Thain very well personally, he had had a long and fruitful association with Merrill Lynch, which had supported his eponymous financial-data company since its inception. Bloomberg, who had been a partner at Salomon Brothers, the bond-trading powerhouse, and was in charge of the firm’s information systems, started his terminal business in 1981; Merrill, which helped finance it, was the first customer to buy one of his machines, which delivered real-time financial data for traders. In 1985, Merrill acquired 30 percent of Bloomberg LP for $30 million, though it later reduced its stake by a third.

When Michael Bloomberg became mayor of New York, he placed his 68 percent stake of the company into a blind trust and stepped away from managing it—even if, in reality, it was closer to a half-step, especially when it came to critical company matters—like the one John Thain was about to broach. Thain, desperate for more capital and sufficiently convinced after the Larry Fink debacle that he should try to keep the firm’s BlackRock stake, wanted Bloomberg to buy back Merrill’s 20 percent holdings in his company. If the mayor declined to make the purchase, however, it was unclear whether Merrill would have the right to sell its share on the open market. The contract had been written in 1986 and they both knew it was murky.

Tucked away in a corner booth, the two men sipped coffee and chatted amiably. As former bond traders and ski enthusiasts, they hit it off surprisingly well.

“We’d probably be looking to do this over the summer,” Thain said, trying to remain somewhat noncommittal so as not to convey any sense of panic. Within half an hour, they had an agreement to move forward.

It was the lifeline he had been hoping for, and as soon as he bid the mayor farewell, Thain raced back to the office to tell Fleming to start work on the project immediately.

CHAPTER EIGHT

Jamie Dimon’s 10:00 a.m. meeting was running long.

“Tell Bob I’ll be there in a minute,” he told Kathy, his assistant.

Robert “Bob” Willumstad and Dimon both had once been part of Sandy Weill’s team of financial empire builders. At different points in time, each had been considered Weill’s heir apparent at the behemoth Citigroup they had all helped create, though ultimately, neither would be given a chance to assume its leadership. The two had remained close in the decade since Dimon had been forced out.

A tall, white-haired executive who could have been the archetype of the Manhattan banker, Willumstad sat patiently on this early June day in the waiting room on the eighth floor of JP Morgan in the old Union Carbide offices. A glass cabinet displayed replicas of two wood-handled pistols with a resonant history: They had been used by Aaron Burr and Alexander Hamilton in the 1804 duel that killed Hamilton, the first U.S. secretary of the Treasury.

Like Dimon, Willumstad had been outmaneuvered by Weill and, after leaving Citi in July 2005, went on to start a private-equity fund, Brysam Global Partners, which made investments in consumer finance businesses in Latin America and Russia. His partner, Marge Magner, was another Citigroup exile. Under Dimon, JP Morgan had become the largest investor in Willumstad’s fund, whose offices were just across Park Avenue from JP Morgan’s own headquarters. While under his and Magner’s direction, Brysam had become a profitable firm. Willumstad held another, much more important position: He was the chairman of the board of American International Group, AIG, the giant insurer, which was the reason for his visit to Dimon this day.

“I’ve been thinking about something and could use your advice,” Willumstad, a soft-spoken man, said to Dimon after he had finally been ushered into his office. He revealed that the AIG board had just asked him if he’d be interested in becoming CEO; the current CEO, Martin Sullivan, would likely be fired within the week. As chairman, Willumstad himself would be responsible for paying a visit to AIG’s headquarters the following day to warn Sullivan that his job was in jeopardy.

“I like what I’m doing,” he said earnestly. “No one’s looking over my shoulder.”

“Except for me!” Dimon, one of his biggest financial backers, countered with a laugh.

Willumstad explained that he had been pondering accepting the top position over the past several months, ever since the credit crisis had engulfed AIG, and it had become increasingly clear that he might be given an opportunity to run the company. That prospect had left him painfully conflicted: While he had always wanted to be a CEO, he was sixty-two and now had the time to pursue outside interests, like auto racing.

A third-generation son of Norwegian immigrants, Willumstad came from a working-class background, growing up in Bay Ridge, Brooklyn, and then on Long Island. By the mid-1980s, he was rising through the executive ranks of Chemical Bank. As a favor to a former boss, Robert Lipp, he flew down to Baltimore to see what Weill and his right-hand man, Dimon, were up to at Commercial Credit, a subprime lender they were running. The drive and entrepreneurial energy of the Weill-Dimon team was strikingly different from the stuffy bureaucracy of Chemical and every other firm he’d seen in the New York banking industry.