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

“Boss, that bike lane on the right, where does it go?” John asked, craning his neck back at them.

Mack’s face lit up. “It goes all the way down to the Battery.”

“Fuck it!” the driver said as he found a break in the street divider and inched the car onto the bike lane, speeding down it.

Hank Paulson’s Cessna Citation X touched down on runway 1-19 at New Jersey’s Teterboro Airport at 4:40 p.m. The pilot, navigating through a torrential downpour and fifty-mile-an-hour winds, threw the switch on the flaps and taxied to the main gate, where the Secret Service was waiting in two black Chevrolet Suburbans.

Now, as they inched their way through the Holland Tunnel toward Manhattan in rush-hour traffic, Paulson took a call from Greg Curl of Bank of America and Chris Flowers, the firm’s banker, who had completed their assessment of the Lehman numbers.

“We’re going to need the government to help to make this work,” Curl told Paulson bluntly and then launched into a series of proposed deal terms, conditions that would have to be met in order for this transaction to take place.

Paulson listened patiently, even if he had a hard time understanding why Curl felt he had the upper hand to the point that he could dictate the conditions. But, as Paulson himself liked to say, “You only need two girls at the dance to call it an auction,” and under the circumstances, he needed BofA to be one of them. If he could just keep Bank of America around long enough to close a deal with Barclays, he’d have succeeded. Paulson handed his cell phone over to Dan Jester (who had, ironically, worked for Flowers at Goldman in the financial services group in the 1990s), who took notes.

Curl told Jester that Bank of America would agree to the deal only if the government was willing to take $40 billion of losses on Lehman’s assets. “We’ve been through the books, and they’re a mess,” Curl explained, referring to Lehman’s bountiful toxic assets. Bank of America, he said, would be willing to split the first $1 billion of losses with the government, but after that, the next $40 billion, the government would have to guarantee. In exchange, Curl told him, the bank would give the government warrants (the option to buy shares at a later date) for Bank of America, with a strike price of $45 a share. (BofA shares closed that day at $33.74.) Jester mouthed the figures to Paulson as Curl relayed them. Both men shook their heads, knowing full well that under these terms a deal was never going to happen.

As the Suburban made its way through downtown Manhattan, Paulson called Geithner to strategize. It was already past 6:00 p.m., when the meeting was set to begin; they figured they would let the CEOs stir for a bit until Paulson arrived, just to let them know they meant business.

Thirty-three Liberty Street, the New York Federal Reserve Building, is an imposing, fortresslike sanctuary of old-fashioned, traditional finance. In 1927 Margaret Law, a critic for Architecture magazine, wrote that the three-year-old building had “a quality which, for lack of a better word, I can best describe as epic.” Deep below the limestone and sandstone building, which was modeled after the Strozzi Palace of Florence, lies a three-level vault built into the bedrock of Manhattan, fifty feet below sea level. It holds more than $60 billion of gold. Real hard assets, with real value.

If Lehman’s fate was going to be resolved—if Wall Street was going to be saved—the matter would be decided at 33 Liberty Street. While modern finance may have allowed investors to zip money across continents in milliseconds, the New York Federal Reserve stood as one of the last bastions of tangible values.

As John Thain’s black GMC Yukon pulled up to the building, he couldn’t help but recall the last time he had come there, as a partner at Goldman, in response to another such cataclysmic event, the rescue of Long-Term Capital Management in 1998. For three straight days, he had worked around the clock to come up with a solution.

And had they not saved Long-Term Capital, the next domino back in 1998 was clearly Lehman Brothers, which was suffering from a similar crisis of confidence.

The irony of the situation was rich. Ten years earlier, on a Saturday morning just past 7:30 a.m., Thain had run into Fuld in the Fed hallways and asked, “How’s it going?”

“Not so well,” Fuld had said. “People are spreading nasty rumors.”

“I can’t imagine that,” Thain had replied, trying to be polite, but knowing full well that the rumors were everywhere.

“When I find out who it is,” Fuld had said furiously, “I’m going to reach down his throat and tear out his heart.”

They were back where they started.

The meeting of “the families” did not begin until 6:45 p.m., when Paulson, Geithner, and Cox finally emerged, briskly walking down a long hall on the first floor, almost as if they were marching in a formation, toward a conference room in the south corner of the building overlooking Liberty and Williams streets.

The CEOs had all been milling about, tapping away on their BlackBerrys, and pouring themselves cups of ice water to cool themselves from the miasma of humidity that hung in the building. If there had been any question about the subject of this gathering, it was readily apparent before Paulson ever said a word: Conspicuous by his absence was the longest-running member of their tribe, Dick Fuld.

“Thanks for coming down here on such short notice,” Paulson began.

He explained that Lehman Brothers was in a “precarious position” and told the group, “We’re going to need to find a solution before the weekend is out.”

And then to make it perfectly clear what the parameters of that solution were going to be, he stated flatly: “It’s not going to be government money; you’re going to have to figure this out.”

“We’ve got two buyers that are each going to need help in my judgment,” he continued. He did not mention Bank of America or Barclays by name, but everyone knew who the players were—the names had crossed the tape twenty-four hours earlier. He revealed to the men arrayed around the table that each bidder had already indicated to him that it would not buy Lehman Brothers unless the government—or someone—consented to finance at least part of the deal.

“There’s no consensus for the government to get involved; there is no will to do this in Congress,” he said, stammering and stuttering at one point about how Nancy Pelosi had been all over him about bailouts. “You will need to come up with a private-market solution. You have a responsibility to the marketplace.

“I know it’s unpleasant to help a competitor do a deal, but it’s not going to be as unpleasant as it will be if Lehman goes,” Paulson stressed. “You need to do this.”

For many in the room, the idea of coming to the assistance of a rival was more than unpleasant: It was anathema. What made the situation even worse was that the competitors they were being asked to aid were Bank of America and Barclays, the ultimate outsiders. Ken Lewis, Bank of America’s CEO, had disparaged them every chance he got, and they all viewed Barclays as a wannabe, a second-tier player trying to break into the big leagues. How was helping these firms going to do anything other than hurt everyone assembled in the room?

Lehman wasn’t attracting much sympathy either. “Dick is in no condition to make any decisions,” Paulson announced, with a tinge of derision, explaining why Fuld wasn’t present. “He is in denial,” Paulson continued, before calling him “distant” and “dysfunctional.”