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

Wilson recognized the gambit all too clearly: Bank of America was using the Lehman situation as a bargaining chip. The bank would help Lehman, but only if the government would do it a favor in return. Lewis, through Curl, was playing hardball.

Wilson promised to look into the matter and then immediately called Paulson. “You’re not going to believe this …”

At 10:00 p.m., a frustrated Bart McDade was still holding court in the boardroom on the thirty-first floor at Lehman Brothers. He had just learned that Bank of America wasn’t coming up to New York in the morning, though he didn’t yet understand exactly why. “We’re playing against the clock,” he railed.

Hours earlier, McDade had implored Fuld to go home and get some sleep before tomorrow’s earnings call, for which he needed to be in his best form. Since Fuld left, he had been reviewing various drafts of the press release. What should they say? What could they say? How should they say it?

McDade had just finished coaching Lowitt, his CFO, through his part of the presentation when Wieseneck and Whitman returned from their meeting with JP Morgan and Citigroup.

Before joining everyone in the boardroom, they huddled with Jerry Donini and Matt Johnson, along with a half dozen other bankers. Whitman described the entire meeting to them. “It was unbelievable,” he concluded his account, shaking his head. “It was like a JP Morgan risk convention!”

The group then joined McDade in the conference room, where, after Wieseneck and Donini walked the group through the SpinCo plan, Wieseneck shared the advice that JP Morgan and Citigroup had given them earlier. “We’ve got to be careful how we message if we intend to raise capital or not,” Donini warned.

It was about 1:30 a.m. before everyone finally packed it in. A small fleet of black Town Cars lined Seventh Avenue in front of the building to whisk the bankers home. They’d need to be back at the office only five hours later, giving them time for perhaps a brief nap and a shower, before a day that they suspected would determine the course of their futures.

CHAPTER THIRTEEN

The day’s papers for Wednesday, September 10, 2008, were strewn everywhere in Dick Fuld’s office, where a sleep-deprived Bart McDade and Alex Kirk had arrived at 6:30 a.m. for last-minute preparations for the looming conference call, scheduled to begin in only three and a half hours. The news was not good.

The lead of the New York Times read: “Only days after the Bush administration assumed control of the nation’s two largest mortgage finance companies, Wall Street was gripped by fears that another big financial institution, the investment bank Lehman Brothers, might founder—and that this time, the government might not come to the rescue.”

Several paragraphs down came the quote that succinctly stated the threat that now faced them: “Some may worry that Treasury has taken on so much taxpayer burden they don’t have any remaining capacity to take on the burdens of Lehman,” said David Trone, an analyst at Fox-Pitt Kelton.

The Wall Street Journal noted the differences between what had taken place during the final days of Bear Stearns and what was now occurring at Lehman. For one thing, Lehman could borrow from the Federal Reserve.

It wasn’t just the stock investors who were nervous; Fuld and McDade had already begun receiving reports from the trading floor that morning indicating that more hedge funds were pulling their money out of Lehman. A sign of just how desperate the situation had become was that GLG Partners of London—whose largest shareholder, with a 13.7 percent stake, was Lehman—reduced the amount of business it conducted with the firm.

As they were making yet another pass through the earnings call script, Kirk’s cell phone rang. It was Harvey Schwartz from Goldman Sachs, phoning about the confidentiality agreement that Kirk was preparing. Before Schwartz began to discuss that matter, however, he said that he had something important to tell Kirk: “For the avoidance of doubt, Goldman Sachs does not have a client. We are doing this as principal.”

For a moment Kirk paused, gradually processing what Schwartz had just said.

“Really?” he asked, trying to keep the shock out of his voice. Goldman is the buyer?

“Yes,” Schwartz replied calmly.

“Okay. I have to call you back,” Kirk said, nervously ending the conversation, and then almost shouted to Fuld and McDade, “Guys, they don’t have a client!”

“What do you mean?” Fuld asked, looking up bleary-eyed from his notes.

“They’re doing this for themselves. For Goldman. That’s what he told me.”

For the next few minutes the three men frantically brainstormed about their course of action. McDade, reasonably, was concerned about sharing information with a direct competitor: How much did they really want to divulge? At the same time, he felt they couldn’t take a stand against a plan that he believed had originated with Paulson.

Kirk was even more apprehensive. “Why are we letting Goldman Sachs in here? Haven’t you read When Genius Failed ? The reference was to Roger Lowenstein’s bestselling book about the Long-Term Capital Management crisis. In it Goldman Sachs is depicted in one scene as trying to take advantage of the disaster by using its offer of assistance as a way to get inside Long-Term Capital’s books and download all its positions into a laptop—a charge Goldman fervently denied.

“They will rape us,” Kirk cautioned.

McDade, turning back to his preparations for the fast-approaching call, made his position clear: “We were told by Hank Paulson to let them in the door. We’re going to let them in the door.”

Twenty-seven floors below, Lehman traders gathered for a preview of SpinCo, the “bad-bank” spin-off that would be discussed an hour later during the earnings call. McDade had appointed Tom Humphrey and Eric Felder to explain what investors were about to hear.

After learning the details of the plan, the traders were unusually quiet, and the silence was broken only when Mohammed Grimeh, global head of emerging markets, stood up with a horrified look on his face.

“That’s it? That’s fucking it ?” he asked. “Well, what the hell have those fucking idiots up on thirty-one been working on for the past two months? This? You have to be kidding me. If this is all we have, we’re toast!”

In the time it had taken Humphrey and Felder to describe SpinCo, Grimeh had already seen through it—had seen exactly what JP Morgan and Citigroup saw the night before, and what he feared the market would see as well.

“All we’ve done is to take a dollar out of our right pocket and put it in our left. The heavy debt load would make it insolvent before it started,” he said, backed by a growing chorus of angry muttering from the disconcerted bankers.

Gregory J. Fleming, Merrill Lynch’s president and chief operating officer, had one eye on CNBC as he jogged on a treadmill at the health club at the Ritz-Carlton hotel in downtown Dallas. He had spent the day before with clients in Houston and had scheduled a town hall session here with Merrill employees before hopping on a flight back to New York.