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

On that Monday, McDade, who remained skeptical that a deal would come to pass, walked over to Sullivan & Cromwell’s Midtown offices with his colleagues to begin formal negotiations. “They are never going to have the balls to do this,” Mark Shafir said as he headed up Park Avenue with McDade and Skip McGee. Kunho Cho and Jesse Bhattal of Lehman, who were closest to Min, had flown over from Asia to help shepherd a deal. McGee had urged Fuld to stay at the office, despite his insistence on coming to the meeting. “Chill out,” McGee had told him. “You’re the CEO. You have to be the ‘missing man’”—Wall Street parlance for the handy excuse they could use when they closed in on the final terms of the deal but wanted to push for slightly better ones: They’d simply say they still needed approval from the CEO.

McDade also had become increasingly anxious that Fuld’s fragile state wouldn’t help the negotiations. McDade was beginning to fear that Fuld suspected him of attempting to take over the firm. Often when he was in conversation with Gelband and Kirk, his protégés, Fuld would emerge seeming apprehensive, as if imagining they were plotting his ouster. Fuld’s paranoia was only further encouraged when McDade refused to inhabit Joe Gregory’s old office directly next to Fuld’s, citing its “bad karma”; instead, he took an office farther down the hall, where it was harder for Fuld to monitor him.

In truth, McDade was increasingly in control of Lehman. He was in the process of putting together a document called “The Gameplan,” a detailed examination of the firm’s finances and a vision for a way forward. It included a half dozen possible scenarios, most of which included some variation on dividing Lehman in two: a “good bank” that they’d keep and a “ bad bank ” that they’d spin off, thereby ridding themselves, at least on paper, of their worst real estate assets. The plan would enable Lehman to make a fresh start, unencumbered by assets that continued to fall in value. McDade also had pressed Fuld to put Neuberger Berman and the firm’s investment management business up for sale, and an auction was already under way among a series of private-equity firms.

While the rumors about Lehman may have continued unabated, the leaks coming out of the company appeared to be shrinking in volume. A few weeks after McDade was appointed president, McGee gave him a T-shirt with the inscription: “A Person Familiar with the Situation”—a wry reference to how the financial press generically referred to its sources. McGee had told him, “Give it to Scott!” a not-so-subtle dig at Scott Freidheim, who managed much of the firm’s media strategy.

The first meeting that morning at Sullivan & Cromwell was to allow the Koreans an opportunity to review Lehman’s commercial real estate assets. Mark Walsh, the architect of the firm’s foray into the commercial real estate market, gave a presentation to the group. But Min quickly found Walsh unprepared and pulled aside Kunho to tell him as much. “I need to understand this better,” he told him in Korean. “I feel very uncomfortable with the valuations.”

It quickly became clear that Min wanted nothing to do with Lehman’s commercial real estate holdings. For at least an hour it looked like the talks could collapse. But that afternoon the two sides started working on a new structure: Min said he was interested in buying a majority stake in Lehman, but only if it were to spin off its commercial and residential real estate assets into a separate company so that KDB’s investment couldn’t be impacted. The discussions seemed to be going well, except for the fact that Fuld kept calling McDade’s and McGee’s cell phones every twenty minutes to ask for an update.

By the next morning, at 11:00, Min said he had received authorization for Korean regulators to make an initial offer. He said he was prepared to pay 1.25 times Lehman’s “book value”—or the value at which Lehman held its assets on its balance sheet. The deal, which was still subject to a discussion about the firm’s true book value and would have included Lehman spinning off the real estate business, meant that KDB was valuing Lehman somewhere between $20 and $25 a share, a premium over its current share price, which had closed the day before at $15.57.

Whether Min was posturing—as some of the Lehman bankers suspected—remained an open question, but McDade, McGee, and the rest of the Lehman team said they were inclined to accept his offer. However, McDade said he wanted to retreat back to the firm’s headquarters to discuss it with Fuld first. They agreed that both sides would return at 7:00 p.m. in hopes of reaching at least an agreement in principle.

When both sides reconvened several hours later, a surprise guest arrived: Fuld. The goal for the Lehman team was to press Min to sign a letter of intent ahead of the final agreement, even if it meant it would take several more weeks to hammer out the details. That gesture, everyone agreed, would take some pressure off Lehman’s stock.

Fuld took a seat alongside McDade, McGee, and Kunho, an inexplicable scowl on his face. Across from them at the table were Min, his banker, Gary Barancik of Perella Weinberg Partners and his lawyer, Victor I. Lewkow of Cleary Gottlieb Steen & Hamilton.

“Look, we hear you. We understand what you want to do,” McDade said, referring to Min’s plan to acquire a controlling stake in Lehman after it spun off the real estate assets. “Let’s start—”

Fuld interjected. “I think you’re making a big mistake,” he told Min. “You’re going to miss a great opportunity. There’s a lot of value in these real estate assets,” pressing Min to buy at least some of them. As the conversation continued, Fuld suggested that Min’s plan to pay 1.25 times book value was “too low,” instead recommending they negotiate on the basis of 1.5 times book value.

McDade and McGee couldn’t believe what they were witnessing. They had spent the past two days orchestrating a deal based on spinning off the real estate assets, and now Fuld was trying to retrade on their work. Worse, a look of horror crossed Min’s face. Min pulled Barancik aside and whispered, “I’m not comfortable with this,” and in response, Barancik spoke up on behalf of KDB. He said they would only negotiate on the basis of 1.25 times the book value valuation, and then, as his aggravation mounted, started questioning Lehman’s accounting. “I don’t believe that you’ve taken all the write-downs,” he said, reiterating why they weren’t interested in the real estate assets.

“Okay,” Fuld said, his frustration showing. “What do you think our real estate portfolio should be marked at?”

Before Barancik could answer, McDade piped up. “Well, we have a term sheet,” he interjected, trying to steer the conversation back in a more productive direction. “Why don’t we look at that?”

“Look, I just think we need to take a break,” Barancik said, sensing the tension could topple the talks.

As they stepped into the hallway, Fuld, having misread Min’s mood, approached him and again started promoting the idea of selling him the real estate.

McGee, who was standing behind Min and could see this conversation was only antagonizing him, tried to signal Fuld , slicing his finger across his throat to urge him to stop badgering the Korean.

Finally managing to break free of Fuld, Min took Barancik to a small room to study the term sheet—which was more a list of broad principles than a formal agreement. As they reviewed it, Min nodded at each bullet point until he reached the final one, which stipulated that KDB would provide credit to Lehman to help support it. To Min that was an instant red flag. Was Lehman seeking an open-ended credit line, hoping to leverage KDB’s balance sheet to bolster its own standing?