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

BlackRock was in the middle of a two-day board meeting at its headquarters on Fiftieth Street, just off Madison Avenue, when the markets closed for the day. As a part owner of BlackRock, Merrill has two seats on BlackRock ’s board, and John Thain and Greg Fleming, who were attending that day, quickly consulted their BlackBerrys to check the closing prices. Merrill’s shares had fallen 16.6 percent to $19.43, the most of any investment bank that day besides Lehman, whose shares had tumbled 42 percent, to $4.22. If Lehman was in this much trouble, the general thinking seemed to be going, Merrill could well be next.

During a break in the meeting, Fleming stepped outside to make a phone call. He had been thinking all day about the conversation he had had with Herlihy about the possibility of a deal with Bank of America. He had yet to approach Thain about it, waiting for just the right opportunity to present itself.

He had, however, spoken privately with John Finnegan, a Merrill board member with whom he was close. Finnegan, who, like Fleming, tended to be nervous by nature, had worried that Thain would have little interest in selling the firm; he had, after all, only been named CEO ten months earlier.

The person Fleming needed to contact now was Rodgin Cohen, also a close friend and, he knew, Lehman’s lawyer. Fleming was eager to get a reading on how the talks with Bank of America were going and how desperate the situation had become for Lehman—and, consequently, for Merrill.

When Cohen, who had been in a conference room with the Lehman team meeting with Bank of America, stepped out to take the call, Fleming greeted him casually, as if this were merely a social communication. After the obligatory pleasantries, he offhandedly remarked on Merrill’s stock price decline and then told Cohen, “We’re thinking about our options. I don’t know how much runway we have.”

But Cohen was quickly on to Fleming; he knew Merrill was in no position to buy Lehman. And, being a student of the M&A business, he knew Fleming probably wanted to do a deal with Bank of America, thwarting Lehman’s own efforts.

“There’s not much I can say,” Cohen told him.

Abandoning any attempt to conceal his motives, Fleming confided in Cohen, “We’ve got to do a deal. The numbers are looking too risky. If Lehman goes, we’ll be next.”

Cohen didn’t know how to respond, other than to excuse himself as quickly as possible. For now, at least, he would keep the conversation confidential.

When Steve Black got back to his office at JP Morgan from AIG, he described the meeting to Dimon as “a fucking nightmare.” He asked Tim Main to call Brian Schreiber to get an update on AIG’s latest forecast and to see if Schreiber had signed the engagement letter—essentially a specification of JP Morgan’s terms for trying to put AIG back together again.

Main told Black that the document had not yet been signed but that he would call that afternoon to check on its status. “Can we schedule my weekly beating at two p.m.?” he asked, only half joking. His relationship with the AIG folks remained as frosty as ever.

When Main finally got through to Schreiber, he asked without any preamble, “So, where are you on the engagement letter?”

Schreiber had always believed that the terms of the engagement letter were excessive. Not only was JP Morgan asking for a $10 million fee, but the bank was also demanding that it be guaranteed work on any big AIG assignment over the next two years.

“Where are you on the repo commitment?” Schreiber retorted indignantly.

Main, who was already angry about rumors he’d heard that Schreiber had also been talking to Blackstone and Deutsche Bank, finally lost his temper. “Are you fucking kidding ? You think we’re going to lend you money?” he barked. But he was just getting warmed up. “You’re running a shitty process. Your company is fucked ! You’re working with other bankers that you’re not telling us about. You’re carving it all up.”

“Don’t scream at me,” Schreiber replied coldly. “I’m not going to take this from you. I’ve got to talk to Bob.”

Five minutes later Schreiber was angrily recounting the conversation to Willumstad, who in turn called Black to demand an explanation for Main’s behavior.

Instead of offering an apology, though, Black exploded at him as well. “There’s no sense of urgency down there; you guys don’t have anything close to the information that you need to be trying to make decisions,” Black said. “Every time we ask for something, you drag your feet. We sent an engagement letter three weeks ago, and Brian is still dickin’ around with signing it.

“We’ll do whatever you want us to do,” Black finally said wearily. “But if this is the way it’s going to go, then you might as well … we should probably resign. You should get somebody else. This has gotten to a poisonous point, and the people that work for you don’t get the position that you guys are in.”

“If you were that upset about it, why didn’t you just call me?” Willumstad asked.

When the call came in from Ken Lewis late Thursday afternoon, Paulson knew what he was about to hear.

“We’ve looked at it and we can’t do it—we can’t do it without government assistance,” Lewis said levelly. “We just can’t do it because we can’t get there.” Like many of Lehman’s critics at the time, including the anxious shareholders who were flooding the market with sell orders, Lewis said that the valuations that Lehman had placed on its assets were far too high. Buying them could expose Bank of America to huge risks.

Given that Bob Diamond of Barclays had already come to him, hat in hand, looking for a government assist in a Lehman deal, Paulson had fully expected Lewis would do the same.

But Paulson still wasn’t prepared to resort to drawing on federal money—at least not yet. It was politically unpalatable, especially with the Fannie and Freddie bailouts still making headlines. And if this was going to become a negotiation, Paulson didn’t want to show all his cards so early on.

He knew, however, that he needed to keep Bank of America in the hunt, so he offered, “Okay, if you need help on assets, you tell us what you need help on, and we will come up with a way to get there.”

Lewis, nonplussed, replied, “I thought you said there would be no public money.”

“I will work on this,” Paulson promised. “We will get the private sector to get involved.”

Private-sector involvement was a concept that Paulson and Geithner had been discussing all day—the assembly of a consortium of banks to help subsidize a sale of Lehman, if Bank of America or Barclays refused to do the deal on its own. But neither Paulson nor Geithner had completely fleshed out the idea yet, and even in the best of times, herding bankers was a feat far from easy.

Lewis paused, not at all pleased with what Paulson seemed to be suggesting. He didn’t want to get involved in a quasi-public-private rescue; he wanted a Jamie deal. And he knew full well that his rivals were unlikely to want to foot the bill so he could buy Lehman for a song.