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

Initially, it seemed as if Fuld had understood the veiled threat. “Let me get my guys, and we’ll take a look at it,” he said resignedly. Fuld proceeded to conference Lowitt into the call and calmly explained the situation to him. The four men discussed a handful of options that would enable Lehman to provide the collateral. Perhaps Lehman could move all its cash over to JP Morgan and just leave it on deposit, so it wouldn’t count against the firm’s capital?

Fuld tried to turn the call around, using it as an opportunity to ask Black if JP Morgan might be willing to offer Lehman some amount of cash, perhaps in the form of a loan that could be converted into Lehman stock. After all, Dimon had always told Fuld to call if he needed anything.

“We’re getting ready to preannounce tomorrow,” Fuld told Black. “Maybe we need to hold that up for a day if you guys seriously think Jamie would consider doing a convert and taking a piece of us.”

To the JP Morgan bankers, it was a ludicrous suggestion, like someone’s asking the repo man if he had any spare change.

Black looked at Zubrow as if to say, Fuld has lost it , and replied carefully, “I don’t have any ideas, any brilliant ideas off the top of my head, but if you’re telling me you’re at that point where you would consider … that you’re at the point where it’s really getting difficult, then let us still talk and come back and see if there’s anything we can do.”

Five minutes later, after a quick and sober discussion with his colleagues, Black was back on the phone with Fuld.

“Dick, there’s nothing that anybody’s gonna … there’s nothing we can do, and frankly, there’s nothing anybody’s gonna do other than what might be in their own self-interest,” Black explained. “I’m sorry to say this, but my suggestion is to call the Fed and see if they might try and put together a Long-Term Capital-type proposal, and herd all the cats into one room.”

There was a pause at the other end of the line, and then Fuld said icily, “That would be terrible for our shareholders.”

Black could hardly keep from laughing. “No one is going to give a shit about your shareholders,” he replied.

Stilling his frustration, Fuld tried to reengage Black. “I just talked to Vikram,” he announced. “Citi is sending a bunch of guys over to meet with our capital markets guys, and some of our management team, to see if there is some type of a capital market solution that we could announce at the same time that we’re pronouncing earnings.”

Citi? Was Fuld joking? “OK,” Black said guardedly. “We can send over some of our guys.”

Black immediately called Doug Braunstein, head of JP Morgan’s investment banking practice: “I’d like you to go and John [Hogan] to go,” he told him after explaining the situation. “I have no idea what they want. The fact that Citi has an idea probably means it doesn’t work,” he said with a chuckle. “But see what is up and see what they’re talking about.”

Hank Paulson had his eyes fixed on his Bloomberg terminal as he watched Lehman’s share price carefully. It was 2:05 p.m., and the stock was down 36 percent, to $9, its lowest level since 1998.

He had just gotten off the phone with Fuld, who had called with an update on his approach to Bank of America. Paulson was pleased to hear Fuld was now taking this seriously but afraid it was all too late.

On Paulson’s television that moment, tuned to CNBC, the speculation among the network ’s commentators was illuminating.

“The stock is coming down at the rate it’s coming down because a number of people believe strongly that the company is headed for bankruptcy,” explained Dick Bove, a veteran banking analyst at Ladenburg Thalmann. “I think that that belief is what is driving the short selling.”

Erin Burnett, the anchor of Street Signs, countered: “But if people are still using the company as a counterparty, trusting the company, isn’t that a significant statement?”

“The key thing you have to understand is it’s not in anyone’s interest for Lehman to fail,” replied Bove, who, oddly enough, had a buy on the stock and a $20 price target. “It’s not in the interest of its competitors—Goldman Sachs, Morgan, Citigroup, JP Morgan—because if Lehman were to fail, then the pressure moves to Merrill Lynch and then it moves to who knows who else?

“It’s also, you know, not in the interest of the U.S. government for Lehman to fail,” Bove stressed again. “You have to believe, although I can’t tell you this is true, that Lehman has been talking to the Federal Reserve of New York, to Ben Bernanke, probably to Hank Paulson, because they don’t want this company to fail.”

How true . Paulson picked up the phone to call Geithner to discuss what other options they might pursue.

By the time the closing bell rang at the New York Stock Exchange, Lehman’s shares had taken a brutal beating, ending the day at $7.79, having fallen 45 percent. McDade’s secretary could hardly keep up with the calls. McDade himself had to help his new CFO, Ian Lowitt, prepare the numbers for the following day’s earnings call. They’d officially decided they had to preannounce something—anything, really—as investors needed to hear from them.

McDade also had to brief Larry Wieseneck and Brad Whitman, whom he had designated to meet with JP Morgan and Citigroup executives at Simpson Thacher’s Midtown offices later that day. They would ask for one or both banks to extend a credit line or perhaps to consider helping them raise capital. Finally, perhaps the trickiest task of all, he had to figure out how the firm would position its good bank-bad bank plan to investors. The reason that was such a challenging proposition was that nobody could or would put a price on the firm’s abundance of toxic assets.

If all that weren’t enough to deal with, McDade had just had a baffling conversation with Fuld, who informed him that Paulson had called him directly to suggest that the firm open up its books to Goldman Sachs. The way Fuld described it, Goldman was effectively advising Treasury. Paulson was also demanding a thorough review of Lehman’s confidential numbers, courtesy of Goldman Sachs.

McDade, though never much of a Goldman conspiracy theorist, found Fuld’s report discomfiting, but moments later was on the phone with Harvey Schwartz, Goldman’s head of capital markets. “I’m following up on Hank’s request,” he began.

After another perplexing conversation, McDade walked down the hall and told Alex Kirk to immediately call Schwartz at Goldman, instructing him to set up a meeting and get them to sign a confidentiality agreement.

“This is coming directly from Paulson,” he explained.

At 4:30 p.m. Paulson asked Christal West, his assistant, to get Ken Lewis on the phone. Ken Wilson had just briefed Paulson on his most recent call with Fuld—his seventh of the day—about Bank of America again. Now, Wilson told Paulson that all he needed to do was to make the case directly to its CEO. Paulson and Lewis did not know each other well, and the only real time they had spent together was a lunch in Charlotte several years back, when Paulson was still at Goldman. Ken Wilson had brought Paulson down to meet Lewis then to demonstrate Goldman’s loyalty to their acquisitive client.