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

It was now Geithner’s turn to speak. As one of his assistants passed around copies of a document charting Lehman Brothers’ balances, he said sternly, “If you don’t find a solution, it’s only going to make the situation worse for everybody here.” The problem was evident: Lehman had virtually no cash left. If there was no solution by Monday, the risk was that investors would demand what little money was left and put the firm out of business within minutes of the opening bell. That in turn would put the financial system as a whole at risk, as counterparties—investors on the other side of a trade with Lehman—wouldn’t be able to settle their trades, creating a cascading problem that could soon turn into a catastrophe. As sophisticated as the world’s markets have become, the glue that holds the entire arrangement together remains old-fashioned trust. Once that vanishes, things can unravel very quickly.

Both Blankfein and Dimon countered that they believed that the risk inherent in a Lehman bankruptcy was being overstated, at least from their respective firms’ points of view. They had already told Paulson privately that they had reduced most of their risk to Lehman Brothers, and Blankfein didn’t mind now bringing that fact up in front of the group. “We’ve all seen this coming from miles,” he told the room.

Geithner, taking their opinions in without responding, instructed the bankers to break up into three working groups. The first would value Lehman’s toxic assets, the portion of the business that it had announced it would spin off into the company called SpinCo. The bankers in the room quickly renamed it ShitCo, offering a bit of much-needed comic relief.

The second group, Geithner continued, would look at developing a structure for the banks to invest in Lehman. And finally, there was what he had described in private meetings earlier that day as the “lights-out scenario”: If Lehman was forced to file for bankruptcy, he wanted all the banks that traded with it to see if they could contain the damage in advance by trading around Lehman to “net down their positions.”

In case there was any confusion, Geithner reiterated Paulson’s decree: “There is no political will for a federal bailout.” As he spoke those words, a subway train passed underneath the room, rumbling ominously as if to underscore his point.

Christopher Cox, as impeccably dressed and coiffed as ever, made a brief statement, telling everyone in the room that they were “great Americans” and impressing upon them “the patriotic duty they were undertaking.”

Most of the bankers in the room rolled their eyes at the sentiment, as they regarded Cox as a lightweight and would later describe him as “cryogenically frozen.”

The conversation quickly turned to both the philosophical and the practical as the bankers talked over one another.

“I assume we are going to talk about AIG?” Vikram Pandit of Citigroup asked, as the room grew quiet.

Geithner shot him a harsh look. “Let’s focus on Lehman,” he said firmly, trying to avoid losing control of the meeting.

“You can’t deal with Lehman in isolation,” Pandit persisted. “We can’t find ourselves back here next weekend.”

Dimon jumped in. “We’re there at AIG, our team is there,” he said, explaining that JP Morgan was advising the insurer, and suggesting that they were working to find a solution.

“You know, Jamie,” Pandit replied brusquely, “we’ve got a team there, too, and I don’t think it’s as under control as you think.”

Pandit and Dimon continued to trade barbs, and the mounting tension began to remind many in the room of a conference call that Geithner had coordinated among the big-bank CEOs the night that JP Morgan acquired Bear Stearns. “Stop being such a jerk,” Dimon had yelled at Pandit then when he questioned him about Citi’s exposure to Bear, now that he had bought the firm.

Geithner insisted that the Fed had AIG under control and again attempted to move the conversation along. What remained unacknowledged was that JP Morgan and Citigroup, as advisers to AIG, were the only parties in the room that had any true appreciation for the depth of the problems that the firm faced.

Thain, whose bank was likely the next to fall, as everyone in the room understood all too well, remained notably silent during the exchanges.

Before ordering the roomful of bankers to get their teams together and be back at the Fed by 9:00 the next morning, Paulson made one last pitch that to many in the room sounded more like a threat: “This is about our capital markets, our country. We will remember anyone who is not seen as helpful.”

The room emptied as the bankers left, expressionless and mute, dumbstruck at the magnitude of the work that lay before them.

John Mack pulled out his cell phone the moment he left the New York Fed Building to report back to the office.

“Guys, it’s going to be a long night,” he told his lieutenants, James Gorman, Walid Chammah, and Paul Taubman, and ordered them to prepare for Lehman to go under. “We’re going to need lots of bodies this weekend.” The Morgan Stanley bankers had two related tasks: self-preservation and helping the Fed. They’d once again have to review the extent of their exposure to Lehman, looking through their derivatives book and also examining their clients’ exposures to Lehman. Investment banking, meanwhile, should start looking through Lehman’s client list to see whom they could pick off. A board call would have to be arranged to keep everyone updated. Another team would have to run numbers on Lehman’s asset values. They would finally get a chance to see Lehman’s finances; if nothing else, it could prove to be an interesting education.

Mack directed his driver to his favorite Italian restaurant, San Pietro, to pick up some food for the team, who would need to be fortified for the sleepless night they all faced. Everyone would have to start acting like a first-year analyst.

Upon leaving the meeting, John Thain, who had been joined at the meeting by his colleague Peter Kraus, immediately phoned Peter Kelly, the firm’s deal lawyer, and told him to be at the Fed on Saturday. He followed up with a call to Greg Fleming as his Yukon made its way up the Merritt Parkway; he had planned to have dinner with his wife and two friends and was already an hour late. “It’s a food fight down here,” Thain told Fleming. “It looks like Lehman isn’t getting saved.”

As he related, with surprise, how Paulson had refused to offer any government help, he knew how Fleming was going to respond.

“We have to start thinking about ourselves. We have to think about our options,” Fleming said. “Really, John. We’re going to run out of time.”

Thain, still noncommittal, said only, “Let’s go get some sleep, and we’ll talk in the morning.”

When Thain finally arrived for his dinner engagement at Rebecca’s restaurant in Greenwich, he saw Steve Black of JP Morgan, who had been on his cell phone for the past half hour with the firm’s management team, standing out front, still talking. As it happened, he was in the middle of a conversation speculating about what might happen to Merrill Lynch.

Black, who was aghast to see Thain— His company is next! What’s he doing here? —nonchalantly greeted him with, “Great minds think alike.”