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

Lehman’s stock may have temporarily stabilized after the earnings call, but only hours later Fuld was faced with a new problem: Moody’s Investors Service announced that it was preparing to place Lehman’s credit rating on review, warning that if the firm did not soon enter into “a strategic transaction with a stronger financial partner,” it would cut its rating.

Fuld decided to call John Mack, CEO of Morgan Stanley; he needed options. And, unlike his relationships with Ken Lewis and Lloyd Blankfein, he actually trusted Mack.

“Listen, I really need to do something,” Fuld told him. “Let’s do something together.”

Mack had always genuinely liked Fuld and was concerned by the stress he could now hear in his voice. But he had no interest in entering into a deal and wondered if Fuld was deluding himself by even making the call.

“Dick, I want to help, but it just doesn’t make any sense. We’ve talked about this before,” Mack said, reminding him of the meeting they had had at his house over the summer. “There’s so much overlap.”

After getting off the phone, however, Mack continued to think about the possibility of a deal with Lehman and found that he was intrigued. His initial impulse about its unfeasibility may have been correct when Lehman’s stock was trading at $40 a share, but given its current price, a deal might well be financially attractive.

“I’ve been thinking,” he said, after calling Fuld back. “I agree with you. We should talk.”

After Fuld thanked him for reconsidering, Mack paused a moment and then said firmly, “Dick, I’m a very straightforward guy. I really like you, but let’s be clear, this is not a merger of equals. Only one person can run this. We have to get that up front now.”

After an awkward silence, Fuld finally responded, “I wasn’t thinking that way,” and then, after another brief hesitation, added, “Let me think about it. I’ll call you back.”

Twenty minutes later Fuld was back on the phone.

“Look, you’re right,” he said, the toll that recent days had taken shading his voice. “I want to do the right thing. Let’s see what can be done.”

Fuld suggested that they set up a meeting between the senior managements of both firms, without Fuld or Mack present; let them be the ones to decide if it was a good or bad idea.

The gathering was arranged for that night at the apartment of Walid Chammah, Morgan Stanley’s co-president.

Bob Diamond drummed his fingers on the desk as he waited on hold for Tony Ryan at Treasury, whom Bob Steel had suggested he call. “Tony,” Diamond began, “do you recall the conversation I had with Steel?”

For a moment, Ryan was confused.

“Which?” he asked, trying to act as if he knew what Diamond was talking about.

“On Lehman.”

“Oh, yes, yes.”

“I wanted to call you because I thought it would be worthwhile for me to talk to Hank. If not, no big thing, but my sense is that we should have a conversation.”

Ryan said he’d get Paulson to contact him as soon as he could.

An hour later Diamond’s secretary informed him that Tim Geithner was on the line. “What can I do to help this along?” he asked.

Diamond explained that he was very interested in buying Lehman, if it could be had at a distressed price.

“Why don’t you call Fuld?” Geithner asked.

“You don’t understand,” Diamond said. “I am not trying to be provocative here.” He told Geithner about their experience trying to buy ABN AMRO—how the deal had fallen apart and how big an embarrassment it had been for the firm. “We don’t want to be seen as dabbling around,” Diamond said. “It would be inappropriate.”

To Geithner, such unnecessary delicacy seemed characteristically British, even if Diamond was an American, and he just listened.

“We need to be seen, to be invited by you and shepherded by you,” Diamond insisted. “You guys asked me if there was a price at which we’d be interested and you asked me, if so, ‘What do you need?’ That doesn’t mean I’m gonna call Fuld. That’s completely different.”

Geithner, growing frustrated with his equivocation, asked again, “Why can’t you just call Fuld? Why can’t you do it?”

“I’m not going to ask a guy if I can buy him, you know, at a distressed price,” Diamond said. “It only works if you guys are looking to arrange a deal. If you’re not, fine, no hard feelings, we’re okay.”

However much Barclays may have wished to avoid giving the impression that they might be taking advantage of someone else’s misfortune, it was, of course, precisely what they were seeking to do.

Ben Bernanke was finding it hard to focus as he sat in a meeting Wednesday afternoon with the local board of the Federal Reserve. Despite the chaos on Wall Street, he had continued making his regular visits to the Fed’s regional offices, and this particular trip had brought him to its St. Louis branch, located in a squat limestone building on North Broadway in the city’s downtown.

The Lehman crisis, however, was never far away. He had already been on the phone with Tim Geithner and Hank Paulson twice about it, once at 8:30 a.m. and again at 1:00 p.m., with another conversation scheduled for 6:00 p.m.

On the last call, Geithner and Paulson had informed Bernanke of their latest headache: Bank of America’s demand to have its capital ratio relaxed. “They are pissed off bigtime because they thought when they closed on Countrywide, they closed like big boys,” Paulson explained.

Geithner argued that they needed to get Bank of America to New York by whatever means necessary so that they could begin their due diligence; he was concerned that they were losing critical time.

Paulson asked Bernanke to call Ken Lewis himself and see if he could smooth the situation over, stressing again, “We need to get them a glide path.”

From a temporary office at the St. Louis Fed, Bernanke dialed Lewis.

“You really ought to come look at Lehman,” Bernanke urged him, still slightly uncomfortable about his new role as deal maker. “We’ll work with you on capital relief and anything you might need.”

Lewis thanked him for the call and said he planned to send his men up to New York to start discussions with Lehman.

Believing he had solved that problem, Bernanke returned to the reason for his trip to St. Louis: to visit with the staffers and spend more time with the St. Louis branch’s new president, James Bullard. Bullard had taken over in April from William Poole, one of the more outspoken Fed presidents, who, as it happened, was in Washington that day giving a speech about the Fed’s bailouts. Given the ongoing speculation in the market about the need for a government rescue of Lehman, Poole’s comments had been attracting an inordinate amount of attention.

“Unless I’ve missed something, the Fed and Treasury have been silent about who might have access to Fed resources, except to say that Fannie and Freddie would have access,” Poole said during his speech.

“The Fed said no to New York City in 1975 and no to Chrysler in 1979,” he reminded his audience, but “with the Bear Stearns precedent, it will not be so easy to say no next time.

“What I anticipate is that we will not know the limits to Fed lending until the Fed says no to a large, influential firm seeking help.”