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

Liesman was Steve Liesman, CNBC’s economics reporter, known popularly as “The Professor.” Davis had a good relationship with him and had successfully leaked other information to him; Paulson considered him both intelligent and sympathetic to their cause. He could get the word out quickly and accurately.

Yes, the Professor, Paulson smiled. He’ll know what to do with this.

As Ed Herlihy sat in his office working on Bank of America’s bid, he kept his TV on mute, until at around 9:15 a.m. he saw the headline crawl across the bottom of CNBC’s screen—“Breaking News: Source: There will be no government money in the resolution of LEH situation”—and quickly turned up the volume to hear what Steve Liesman was telling David Faber, the network ’s mergers reporter.

“Let me start here with a comment that I just got from a person familiar with Paulson, State Secretary Treasurer [ sic ] Hank Paulson,” Liesman explained. “He’s saying there will be no government money in the resolution of this situation.”

Herlihy turned the volume even higher.

“They’re saying there are two things that make the Lehman deal different,” Liesman continued. “The market’s been aware and had time to prepare for over six months, and the second is the PDCF, that is, the access of the investment banks to the Fed’s emergency window that exists now, to allow for an orderly process.”

It was a lot to take in, and the Professor turned the floor over to his colleague. “David, what do you think of that?”

“An interesting gamble,” Faber replied. “Would the government be willing to say, ‘Hey, you’re on your own?’ There’s divided opinion in terms of what the ultimate risk will be to the creditors, to everybody involved in the credit default swap market where Lehman certainly is a counterparty on many trades.”

Liesman added: “I’m sure the Federal Reserve is looking for a situation where it can say, ‘There is moral hazard out there. You will take a hit if you did not pay attention for the last six months.’”

Herlihy couldn’t believe what he was hearing and ran into the conference room across the way where an army of bankers and Bank of America executives was mulling over documents.

“Did you just see what they just said on CNBC?” Herlihy asked Curl, almost out of breath. Curl not only hadn’t, but seemed slightly annoyed that he’d even been asked the question.

“Look, guys, we got a real problem here,” Herlihy insisted, after noticing he wasn’t getting much of a reaction from anyone in the room.

After Herlihy recounted the details of the Liesman interview, Curl only rolled his eyes. Why was Herlihy taking the CNBC report so seriously? To him, the channel was a professional rumor mill.

“It’s coming from Treasury,” Herlihy stressed again. “That’s Paulson. They’re trying to send us a message!”

Herlihy was media-savvy enough to know how the game worked: When he had been at Treasury just a week earlier during the takeover of Fannie-Freddie, he had watched the department deftly leak news out to the public through its favorite reporter, Liesman.

The room turned sour, as even Curl acknowledged that Herlihy had a point.

“How serious do you think they are?” Curl asked.

Before heading back uptown for the second day of the BlackRock board meeting, John Thain decided to hold a conference call with his own board. With the markets gyrating and rumors flying, he wanted to make it clear publicly that Merrill was solid. Already there was a news report that morning quoting Malcolm Polley, chief investment officer at Stewart Capital Advisors, saying, “I think the market’s telling you that if Lehman is going to go away, Merrill is probably the next victim.”

Thain first briefed the board on recent market swings, which showed no sign of stopping. One look at the futures made it clear that stocks were likely to sink at the opening bell. With Merrill down 16 percent the previous day, things were only going to get worse.

The discussion quickly turned to Lehman. Thain told the board what he knew, which wasn’t too different from what had been reported in the papers, except that Thain was getting his information directly from Geithner: Bank of America and Barclays were both vying to buy Lehman.

John Finnegan, a chief executive of the insurer Chubb, sounded worried. “Lehman is going down, and the shorts are coming after us next,” he told Thain. “Tell me how this story is going to end differently.”

Thain, frustrated by the remark, had never liked being challenged. “We are not Lehman,” he said, his eyes flashing behind his glasses, and then repeated for emphasis, “ We’re not Lehman. ”

Regaining his usual composure, Thain calmly rehearsed the virtues of Merrill. “We have a wealth-management business that’s going to have value no matter what,” he told the board. “And we own half of BlackRock, which would also have value no matter what—so our stock’s not going to zero.”

Fuld was growing restless. It was 9:30 a.m., Lehman’s stock opened down 9 percent to $3.84, and he hadn’t heard from Diamond in over twelve hours.

“So where are we?” Fuld asked Diamond when he finally reached him.

“I’ve literally just gotten the okay from my board that we can pursue this,” said Diamond, who had arrived in New York from London after midnight the night before. “We’ve just begun doing diligence with your public filings.”

Before he continued, however, Diamond decided that he needed to be blunt with Fuld. “To be honest,” he said stiffly, “this is a horrible situation for you, because we’re only going to be interested if the price is quite distressed.”

Fuld, leaning back in his desk chair, looked at Russo, who had taken a seat across the desk for the call. He understood.

“You and I should talk, because you should know exactly what my ideas are, what my plans are,” Diamond said. He suggested meeting at noon at the Racquet and Tennis Club, a members-only establishment on Park Avenue and Fifty-second Street, where they would be able to get a private meeting room.

“No, no, no. You don’t understand. I can’t walk out of here,” Fuld insisted. “There’s photographers all over the place. Why don’t you come over here? We can sneak you in the back. I’ll send my car for you.”

“AIG Shares Fall 20 Percent on Mortgage Woes” proclaimed the Reuters headline at 10:14 a.m.

Catherine Seifert, a Standard & Poor’s analyst, had just released a research note saying that the stock was falling on “concerns about AIG’s ability to shed its troubled mortgage-related assets, and we expect the shares to remain volatile as investors await news from the company.”

As he followed these stories with increasing alarm, Bob Willumstad decided to call Jamie Dimon. He was increasingly frustrated with the JP Morgan team and needed assurances.