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

Bernanke finally arrived and took his seat. He, too, had just been privately briefed that Lehman might preannounce a staggering loss the following day but had decided that he would keep that news to himself during his meeting with the JP Morgan executives.

Dimon informed Bernanke that they had just come from a visit with Paulson at Treasury, and the conversation turned to the blowback he had been facing for orchestrating the Fannie Mae and Freddie Mac takeover. “The negative publicity is really getting to him,” Bernanke acknowledged of Paulson, who had spoken to him yesterday morning and gotten an earful about the press coverage.

Dimon then launched into his semiprepared remarks, glancing down occasionally at a paper on which he had scribbled some notes during the car ride over.

“There’s a broad lack of confidence out there,” he said. “We’re hearing it from our clients, our customers; we’re seeing it in our prime brokerage.” He pointed out that despite the fact that the turmoil was, temporarily and perversely, helping JP Morgan’s business—since customers trusted it as one of the most solid banks—it was bad for everyone else and ultimately would be bad for his firm, too.

This, of course, was hardly news to Bernanke, who sat politely nodding in his best professorial manner.

Dimon then told the chairman—who had been joined by late-arriving Kevin Warsh, one of the Fed governors—that he was particularly worried about Lehman Brothers. He praised the decision to nationalize Fannie and Freddie, but noted the move had not helped calm the markets. “There’s confusion about the role government will play going forward,” he said, looking for the answer to the question on everyone’s mind: Would the Fed back additional bailouts?

Bernanke, however, wasn’t prepared to show his hand, and as the meeting came to an end would say only, “We’re working on a number of initiatives. We’re just trying to stay ahead of this thing.”

At Lehman, the air on the thirty-first floor seemed to only grow thicker as the day advanced. To some of his colleagues, Fuld looked as if he were having trouble breathing. He had been debating all weekend about whether to call Bank of America, and Treasury’s Ken Wilson had phoned him at least three times that morning to press that case. “You gotta make the call,” Wilson instructed him. Wilson knew Bank of America well; during his stint at Goldman, he had been its banker for more than a decade. It’s a good strategic fit,” Wilson urged. What Wilson hadn’t told Fuld was that he had already worked over Greg Curl of Bank of America to tee up the phone call. During an earlier conversation, Wilson had informed Fuld that the only way a deal was going to take place was if he was willing to take price off the table as a bargaining point. That was an indirect way of warning Fuld that he didn’t have much negotiating power—or time.

Rodgin Cohen, who has a bad back, was standing at the computer in his corner office on the thirtieth floor of Sullivan & Cromwell’s offices overlooking the New York Harbor when the phone rang. It was Dick Fuld, giving him the instructions to call Bank of America’s Curl. Cohen scribbled out a script for himself as Fuld was speaking; the stakes on this one were too high to do a presentation off the top of his head.

“Got it. I’ll call you back after I’ve talked to him.”

Cohen studied his script one final time and got Curl on the line. “Look,” he said amiably, “the world has moved a lot. We’d like to reengage.”

“O … kay,” Curl said slowly, making it clear that, while he agreed to listen to Cohen’s pitch on behalf of his client, he remained wary.

“We have two priorities. Preserving Lehman’s brand and reputation and doing well by the Lehman people,” Cohen said.

Then, checking the next sentence in the script, he paused for effect. “You will notice price is not a priority,” he said, “ but there is, of course, a price at which we could not do a transaction.”

“We could be interested,” Curl replied cautiously. “Let me talk to the boss and call you back.”

“Greg, we’d be looking to do something quickly,” Cohen told him.

“Got it.”

Dimon and Zubrow hopped out of their black Town Car in front of 601 Pennsylvania Avenue, a six-story modern limestone building northwest of the White House that serves as JP Morgan’s Washington headquarters. It was here that all of the government-relations people worked, so a constant stream of Gucci-clad lobbyists was a familiar sight.

By the time Dimon and Zubrow arrived most members of the operating committee had already finished their morning meetings and were eating lunch in a conference room on the second floor. Sandwiches and sodas were being passed around as Cavanagh was recounting how his conversation with Sheila Bair had gone and Black was regaling the group with anecdotes from his encounter with James Lockhart.

As the conversation inevitably turned to Lehman and its falling stock price, Dimon told the group about their discussion with Bernanke. “I think he gets it,” Dimon said, but when a banker asked if the Fed was likely to bail out Lehman, Dimon’s reply was unequivocal: “Not going to happen.”

Black had long been bearish on Lehman. At an internal leadership forum at JP Morgan in January 2007, he had predicted: “Dick Fuld will end up selling that company when he has to sell instead of when he should have sold it.” Reminding the group of his earlier prognostication, he announced: “I told you they would be fucked!”

The mood grew more somber, however, as they all realized what an upheaval of that order would mean to them. If Lehman went down—and the government elected not to intervene—JP Morgan itself could suffer colossal losses. Zubrow informed the group that John Hogan, chief risk officer for JP Morgan’s investment bank, had sought more than $5 billion in collateral from Lehman the week before, and again during the weekend, but had received nothing as of yet. Zubrow had also been to see Lehman’s CFO, Ian Lowitt, and put him on notice that JP Morgan was worried about them.

Black suggested that they call Fuld and demand that he send the collateral immediately. Just as important, the group decided that they should probably broaden the collateral agreement so that they’d be able to ask for even more money if other parts of Lehman’s business were to falter.

Everyone agreed that this was the best course of action, so Black and Zubrow slowly rose from their seats and left the conference room. Their faces told the story: It was not going to be a pleasant conversation.

Black dialed Fuld on the speakerphone and when the connection was made immediately explained their plight: “We got, you know, $6 to $10 billion worth of intraday exposure to you, and we don’t have enough collateral,” Black said. He reminded him that JP Morgan had asked for $5 billion the week before.

“We understand that that’s a tough ask for you guys,” he continued, “so let’s spend some time on how we might solve our issue without creating a major issue for you.” In the back of Black’s mind he knew he was being far too generous; he could easily have said, If you don’t, we’ll shut you down tomorrow morning, which we have every right to do.