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

Ken Lewis was leaning hard on the Fed. No sooner had he gotten off the phone with Bernanke than he placed a call to Tim Geithner. Lewis explained that he had had an encouraging call with Mr. Bernanke, but he still couldn’t send his team up to New York until the credit situation was officially settled.

“We’re working to help you on this,” Geithner said, politely but firmly .

Lewis, however, was beyond accepting such assurances. “We’ve been dicked around on this for too long,” he complained. “If you want us to get involved in Lehman, we’re going to need something in writing.”

Geithner, taken aback at being presented with such an ultimatum, replied, “You’ve heard what the chairman said he would do. If you don’t believe the word of the chairman of the Federal Reserve, we have a larger problem.”

Realizing that Geithner would not budge on the issue, Lewis finally backed down and agreed to send a team of executives up to begin due diligence that Thursday morning.

As Wednesday wore on, Fuld tirelessly continued to work the phones—his call log was a list of virtually every major Wall Street and Washington player—while keeping a watchful eye on the markets for any further signs of panic.

The news, it was becoming ever clearer, was grim: After holding up for most of the day, Lehman’s shares sank in the last hour of trading, ending at $7.25 a share, a 6.9 percent decline. Lehman’s CDS had also blown out, rising by 135 basis points, to 610, which meant that the cost of buying insurance against its going bankrupt had just risen to $610,000 a year to protect $10 million of bonds. Investors were effectively betting that the situation was only going to worsen. Any hope that the SpinCo plan was going to turn Lehman’s fortunes around was quickly vanishing.

Nor were the results of Fuld’s phone blitz encouraging. Earlier in the day he had had a tough conversation with Lloyd Blankfein, who had called to express his frustration that Lehman had ended discussions with Goldman. Alex Kirk and Mark Walsh had held a two-hour-long meeting with Harvey Schwartz of Goldman and his team at a Midtown law firm that morning, but both Kirk and Walsh were skittish about opening up all their books to Goldman and quickly had shut down the talks.

Fuld had also spoken to Paulson, who had tried to convince him of the merits of a deal with Barclays. But Fuld was uneasy with that prospect, he explained: With Bank of America already in the hunt, he didn’t want to do anything to jeopardize a deal with them.

“Dick,” Paulson patiently reminded him, “Ken Lewis has turned you down multiple times; the other guys have expressed an interest. We need to pursue both of these options.”

Fuld, however, seemed more interested in returning to the topic that had so long obsessed him: denouncing the short-sellers who, he told Paulson, “are going to ruin this firm.” He spent ten minutes again imploring Paulson to call Christopher Cox at the SEC to press him to instate a short-selling ban, to announce an investigation—anything that would give him an opportunity to recover. By late afternoon, Fuld was channeling Steven Berkenfeld, a Lehman managing director, whose office was just down the hallway, using his favorite catchphrase about the raids on Lehman’s stock: “Short and distort!”

In London, Bob Diamond of Barclays was waiting in the bar of Fifty, a private club on St. James St., just off of Piccadilly. He had invited Jeremy Isaacs, the former head of Lehman’s European operations, for drinks. If there was anyone who could give him an accurate insider view of Lehman, if there was anyone who knew the numbers and culture, it was Isaacs, who had officially announced his plans to “retire” from the firm just four days earlier.

Isaacs had left when it became clear that McDade was ascending. In truth, he probably ought not to have come to this drinks engagement, as he was in the midst of negotiating a $5 million severance agreement with Lehman that would literally be approved the following day. As part of the arrangement he agreed he would not “engage in detrimental activity” or “disparage the firm,” and would “keep company information confidential.”

Tonight he would come as close as he could to breaking every provision in that document with the intention of helping Lehman survive.

Walid Chammah’s apartment is one of only three town houses on Manhattan’s Upper East Side with its own doorman. The beaux arts limestone structure just off Fifth Avenue contains only nine apartments. Tucked away a safe distance from Midtown and the banker riffraff on Park Avenue, it was the perfect place to hold a secret meeting to discuss a merger between Lehman and Morgan Stanley. Chammah’s wife and children were in London, where he was normally based, so the group had the place to themselves.

By 9:00 p.m., Chammah; James Gorman, Morgan Stanley’s other co-president; and the rest of the Morgan Stanley team were milling around his kitchen, waiting for Bart McDade and the Lehman contingent to appear. “Let’s at least go through the motions,” Chammah instructed his colleagues, “but acknowledge that this meeting wouldn’t likely lead to anything.”

When McDade finally arrived with Skip McGee, Mark Shafir, Alex Kirk, and several others, the strain of the day was evident from their drawn and pale faces.

Gorman had known McDade from when they were both directors on the board of SIFMA, the Securities Industry and Financial Markets Association. Only a week earlier they had had a tense conversation about Morgan Stanley’s exploiting Lehman’s turmoil by recruiting away its talent, including the firm’s best private-wealth advisers. Outraged, McDade had called Gorman and told him, “You have to back off. We got really big problems here, and this is killing us.” Ultimately, Gorman stopped the recruiting effort, and the two were seasoned enough professionals to have moved on.

Chammah poured a bottle of Tenuta dell’Ornellaia 2001, a $180-a-bottle Bordeaux blend, in an effort to settle the mood while keeping things proceeding. Everyone quickly took a seat in the living room.

McDade told the group that being there tonight all felt a bit déjà vu; only a few months earlier nearly every person in the room had met to discuss the very same topic. Only now—an observation he left unspoken—Lehman was desperate. He then began to explain that Lehman was exploring various options for raising capital: selling assets, or perhaps selling the entire firm. In case that wasn’t clear enough, he indicated that if Morgan Stanley was interested in buying the company, he wouldn’t press them on terms. He then added that “social issues” shouldn’t hold up a potential deal—code for the question of who would run the combined businesses. McDade had effectively just given up Fuld.

“If you want any of us involved, we’ll be involved; if you don’t want us, we don’t have to be. It’s not about us anymore,” he said.