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

“I’ve got Lewis on the line,” West finally called out to Paulson, who picked up the receiver.

“Ken,” he began gravely, “I’m calling about Lehman Brothers,” and after pausing said, “I’d like you to take another look at it.”

The receiver was silent for a few seconds. Lewis agreed to consider it, but added: “I don’t know how much it will do for us strategically.” He made it clear, however, that the price would have to be right. “If there’s a good financial deal there, I could see doing it.”

Lewis’s biggest concern about a potential deal, as he told Paulson, was Fuld, who Lewis worried would be unrealistic about his asking price. He recounted to Paulson how badly their meeting had gone back in July.

“This is out of Dick ’s hands,” Paulson assured him. It was a powerful statement that could be interpreted only one way: You can negotiate directly with me.

By 7:30 p.m., the conference room on the thirtieth floor of Simpson Thacher was packed with executives from JP Morgan and Citigroup, who were milling about impatiently. “This is going to be a waste of two hours of our time,” John Hogan of JP Morgan whispered to his colleague, Doug Braunstein, who just smiled wryly.

Larry Wieseneck greeted Gary Shedlin—co-head of global financial institutions M&A of Citigroup and one of his closest friends and regular golf partners at Crestmont, their club in New Jersey—then assessed the crowd. Realizing that he wasn’t even certain who everyone was, he passed around a piece of paper asking them all to sign in. If he was going to share confidential information with them, he wanted to know precisely with whom he’d be dealing.

Wieseneck was particularly worried about the imbalance of people from JP Morgan’s risk department, compared to the deal-making bankers he had expected would be coming to help them think through their options. “These are all risk guys,” he told his colleague Brad Whitman, as the two chatted in the corner, plotting strategy. This was supposed to be a meeting on how to save Lehman, he thought, not a due diligence session for JP Morgan to figure out the extent of its exposure if Lehman fails.

Apologizing for the delay, Wieseneck announced to the room that they were waiting for Skip McGee, Lehman’s head of investment banking, to arrive.

“We’ve got a lot of people here,” Braunstein, who had brought his whole team along, complained. “We can’t wait here all night.”

As tension in the room continued to rise, Whitman finally received an e-mail from McGee, who told him to go ahead and begin, as it was unlikely that he would be able to make it at all.

After calling the group to order, Wieseneck walked it through Lehman’s plan to spin offits real estate assets as a “bad bank.” Everyone agreed the plan was a good one, but there was general concern that it might have come too late, given that it would take months to put into effect. And Lehman would need to infuse the entity with at least a modicum of capital to prevent it from toppling immediately.

Wieseneck then opened up the meeting to questions, and almost immediately became annoyed by the sheer volume of them posed by the JP Morgan bankers—most of which had nothing to do with helping Lehman raise capital. “How big is the book? What assumptions are you using around the models?” Hogan asked. “It sounds like you probably need some capital to make this whole thing work.” The Lehman representatives didn’t have any answers, suggesting that he get in touch with their CFO.

To Wieseneck it was obvious that what the queries were really about was determining Lehman’s liquidity position: whether counterparties were trading with it and the status of its cash position. These were all legitimate concerns that any prudent investor might have, but in this case, Wieseneck and Whitman suspected that they were intended more as a means to protect JP Morgan. Shedlin’s questions, in contrast, were directed at various possible structures of deals that could help Lehman, but he was getting drowned out by the other bankers around the table.

The one point on which bankers from both sides agreed was that Lehman should not announce its SpinCo plan unless it could identify the exact “hole” that it needed to fill—that is, how big a capital infusion was necessary. “You don’t know how much money you’re going to need,” Hogan told them. “By going out and announcing this, you’d only add uncertainty to the market,” he warned. “You’d get crushed.”

Shedlin was even blunter. “Look, we think it’s very dangerous for you guys to lay out a strategy with a SpinCo where people basically will conclude that you guys still have a very significant capital hole,” he said. “Going out with a story that suggests you have a big capital hole and no solution to raising it is only gonna put you at the mercy of the market even more.”

As the meeting broke up, two messages were clear as day to Wieseneck and Whitman. The first: Forget about announcing the plan, but if you feel you must do so, be very careful about talking about raising new capital and don’t get pinned down to a specific number.

It was the other, however, that made them appreciate the true depth of their predicament: You’re on your own. None of the banks volunteered to offer any new credit lines.

As soon as Braunstein and Hogan left the building and crossed Lexington Avenue, they called Jamie Dimon and Steve Black.

“Here’s the story,” Hogan said, virtually shouting into his cell phone. “I think these guys are fucked.” They proceeded to walk Dimon and Black through all of the details of what Lehman was preparing to announce the following day.

“We have to go back and tie everything up and line up all of our contingent risks,” Hogan insisted. “I don’t want to take a hickey on this.”

From the Bank of America headquarters in Charlotte, North Carolina, Greg Curl dialed Treasury’s Ken Wilson, who was still in his office, frantically fielding calls. Wilson had been expecting to hear from Curl, notifying him that he was getting on a plane to New York to begin his due diligence on Lehman.

Curl, however, was phoning with very different news. “We’re having an issue with the Richmond Fed,” he explained. Jeff Lacker, the president of the Federal Reserve of Richmond, Bank of America’s regulator, had been concerned about the bank’s health and had been putting pressure on it to raise new capital ever since it had closed its acquisition of Countrywide in July. As the official overseer of banks in Virginia, Maryland, North Carolina, South Carolina, the District of Columbia, and part of West Virginia, the Richmond Fed wielded considerable power through its regulation of capital reserves.

“They’ve been screwing around,” Curl complained to Wilson, who was hearing of this for the first time. Curl told him that at the time that Bank of America was considering acquiring Countrywide back in January—a purchase that the government had quietly encouraged to help keep that firm from imploding—the Fed had quietly promised to relax its capital requirements if it proceeded with the deal. Or at least that’s what Ken Lewis thought.

Now, two months after the Countrywide acquisition had been completed, Lacker was threatening to force the bank to slash its dividend. Bank of America had not disclosed the conversations, hoping they’d be able to resolve the matter before the news ever leaked. The bank had been working the phones that afternoon with the Richmond Fed to try to figure out where the bank now stood with Lacker, but it was having little luck. “We’re going to need your help,” he told Wilson. “Otherwise, we can’t move forward.”