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

“He knows you’ll be calling,” Geithner assured him.

“I understand I’m supposed to call you,” Fuld said when he later reached Diamond.

Diamond, however, was clearly flustered, as he thought he had been explicit with Geithner that he didn’t want to talk directly with Fuld about a deal. A deal would have to be brokered by the U.S. government.

“I think we should talk,” Fuld said, trying to engage with him.

“I don’t see an opportunity for us here,” Diamond answered.

Fuld couldn’t understand what was going on. He had been told by Geithner to make this contact, and now Diamond was telling him that he wasn’t interested?

Unwilling to force the issue, he ended the conversation and called back Geithner.

“I just got off the phone with Bob Diamond,” he told Geithner heatedly. “He says he’s not interested. I thought you said he wanted to talk to us?”

“Yes, he does,” Geithner insisted. “You should call him back.”

Five minutes later, he tried Diamond again.

“I just told you that we’re not interested,” Diamond repeated.

Fuld, by now feeling as if he were part of some kind of charade, again phoned Geithner. “I don’t know what’s going on here. I’ve called him twice, and both times he says he doesn’t want to talk to me. You tell me he’s interested. He says he’s not.”

Geithner promised he’d reach out to Diamond and urged Fuld to try him one last time.

On his final attempt, Diamond was suddenly willing to talk.

“We’re going to be flying over tonight,” Diamond said. “I’ll have a team ready to go by Friday morning.”

With that sentence, it was official: Barclays and Bank of America were now in competition.

What Fuld hadn’t been aware of was that for the entire morning, Diamond and his team had already been in contact with Geithner and Paulson and had come to an agreement that Barclays would examine Lehman’s books as soon as possible. Fuld’s role in any rescue effort was becoming a polite formality.

Before he left for New York that night, Diamond had hoped to receive some assurances that his trip would be worthwhile. On his call with Paulson, Diamond had specifically asked if Barclays could be the exclusive bidder for Lehman. He had read the news about Bank of America’s interest, and he knew firsthand that it could be a formidable rival—and a potential spoiler.

A year earlier, Bank of America had jumped into the takeover battle for the Dutch bank ABN AMRO, a duel that pitted Barclays against a group that included the Royal Bank of Scotland. By agreeing to buy Chicago’s LaSalle Bank from ABN for $21 billion, Bank of America had effectively snatched the crown jewel of the deal, which the RBS group was particularly coveting and whose absence from the portfolio made it more difficult to outbid Barclays. In the end, Barclays lost the bidding war for ABN, but Bank of America still got LaSalle. The failed deal was a blow for Diamond and his expansionist dreams, and he had always believed that Bank of America had hugely overpaid for the property.

“If BofA is going to be there, don’t embarrass us,” Diamond told Paulson. “Don’t get us to do a deal and have BofA top us.”

“You can’t have an exclusive,” Paulson responded. “But let me tell you, you’re in a strong position, and I’ll make sure you’re not embarrassed.”

Before the call ended, Diamond wanted to make another thing clear: He was looking for a “Jamie” deal—in other words, he might come looking for some form of government help.

Paulson stated firmly that no assistance from the government would be forthcoming, but added, “We’ll figure out how to get you help.”

As Tom Russo burst into Dick Fuld’s office, the glum look on his face got Fuld’s immediate attention, which was fairly remarkable, considering the general somberness on the thirty-first floor.

“What?” Fuld barked.

“I just got off the phone with Tom Baxter,” Russo said, referring to the general counsel of the Federal Reserve of New York. “He said that Geithner wants you to resign from the board of the NY Fed.” Russo paused to allow Fuld to take that news in before adding, “That given our position, it’s too complicated, too many conflicts.”

Geithner’s request should not have come as a shock, for if there was even the possibility that the government was going to have to put up money as part of a deal to find Lehman a buyer, the last thing he would have wanted was to be seen as helping a member of his own board, an insider. The slightest appearance of favoritism could prove disastrous.

Fuld, even so, took the message as a personal slight and stared morosely down at the table. For a moment it looked as if he might cry, but he steadied himself and whispered, “I can’t believe this.”

Together Fuld and Russo dictated a resignation letter addressed to Stephen Friedman, chairman of the board of directors:

Dear Steve,

It is with deep regret that I hereby tender my resignation as a member of the Board of Directors of the Federal Reserve Bank of New York. In light of my current business situation at Lehman Brothers, I unfortunately do not have the time to devote to Board matters and, therefore, feel it is in the best interests of the Board that I resign, effective immediately. I have very much enjoyed my time on the Board and have enormous respect for both the Board and the institution. Thank you.

Sincerely,

With a restrained but heavy sigh, Fuld added his signature, scribbling a huge “D” in place above “Dick.”

At 70 Pine Street the pressure was building as Bob Willumstad paced his office ahead of a crucial meeting that morning with the credit-rating agency, which had been making menacing noises about downgrades. He had just gotten off the phone with Geithner to follow up on their meeting about turning AIG into a broker-dealer, and to apply a little additional pressure. “We’re a little busy right now with Lehman,” Geithner apologized. “But let’s talk again tomorrow morning.”

It was only 10:30 a.m., but the marketplace was already sensing the nervousness that Willumstad had been trying his best to conceal all week. The cost to insure the debt of AIG had jumped by 15 percent to 612 basis points, the highest level in its history. That meant that it would cost investors $612,000 to insure $10 million of AIG’s debt every year for the next five years. With Lehman clearly desperate to raise money, investors were betting AIG was soon going to face the same struggle. It might also have to pay out astronomical amounts to investors who were loading up on insurance to protect themselves from a potential Lehman default.

To make matters worse, Hank Greenberg, being deposed that day by the New York State attorney general about previous questionable accounting practices at AIG, badgered Willumstad at every chance. “What the hell are you people waiting for?” he demanded, wanting to know why efforts to shore up the company hadn’t been moving more quickly.

Amid all the other pressures, Willumstad was still pressing to settle the long-running lawsuit that Greenberg had brought against the firm after he had been ousted. He had been counting on Greenberg’s helping the firm raise some capital by leveraging his relationships in Asia, where he had built AIG into a powerhouse that dominated the tricky and semitransparent Japanese and Chinese markets. He told Greenberg he’d have his lawyer, Jamie Gamble, at Simpson Thacher, set up a meeting with Greenberg’s lawyer, David Boies, to try to come up with a settlement Greenberg could live with.