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

Fleming had had essentially the same conversation with Peter Kelly. “You just need to get the imprimatur of John” to approach Bank of America, Kelly had told him. “We’ve got to start getting things going. If the meeting tomorrow morning doesn’t go right, we have thirty-six hours to put a trade together.”

It was coming up on 6:30 on Saturday morning when Fleming finally decided it was late enough to phone Thain’s home. Thain was just leaving and returned the call five minutes later from the backseat of his SUV.

“I’ve been thinking about this,” Fleming said resolutely. “We have to call Ken Lewis.”

Thain, taken aback, had spent much of the night thinking about whether such a deal made sense—and had come to the opposite conclusion, at least for the time being. Merrill might want to try to raise some money over the weekend by selling a small stake in the firm to raise market confidence, but there was no reason to sell the entire company immediately, he told Fleming. As he had always warned his troops before entering talks, “Once you initiate, you’re in motion.” Negotiations could quickly spiral beyond your control.

“They are our best partner,” he said dejectedly of Bank of America. “Where are we going to be if we lose them?”

As his SUV barreled down the FDR Drive, Thain promised to consider the issue further, but for now, he needed to focus on the meetings ahead of him.

Jamie Dimon’s black Lexus pulled away from the curb of his Park Avenue apartment to head down to the Fed just before 8:00 a.m. Dimon, who sat in the backseat returning e-mails on his BlackBerry, had just gotten off a conference call with his management team. He had dropped a bombshell on them, telling them to prepare for the bankruptcies of Lehman Brothers, Merrill Lynch, AIG, Morgan Stanley, and even Goldman Sachs. He knew he might have been overstating the case, but he figured they needed to be prepared. Dimon was anxious—fearful, really. He was the Man Who Knew Too Much. As the “clearing bank” for both Lehman and Merrill—all trades for those firms passed through JP Morgan—he could see how quickly their businesses were crumbling. And as the adviser to AIG, well, that had been a nightmare for weeks. He probably knew more than Paulson.

He just hoped he was wrong.

Pacing in his kitchen, Fleming decided to try one last time to impress upon Thain that talking to Bank of America wasn’t just a good plan, it was perhaps the only way to save Merrill Lynch. If Bank of America bought Lehman instead, Merrill faced an onslaught of unimaginable proportions. The math was clear: If Lehman was swallowed up, there would be a run on the next biggest broker-dealer—and that was his firm. Merrill Lynch, perhaps the most iconic investment bank in the nation, was on the brink of ruin.

Thain picked up Fleming’s call just as his SUV was winding down Maiden Lane and about to enter the underground parking lot at the Fed Building. A half dozen photographers had already camped out and were snapping away.

“This is our time to move,” Fleming insisted. “We don’t even necessarily have to do the deal, but we should at least examine it now, and we should see if we can put it together.

“We should use the weekend to do that,” Fleming pressed on, before Thain could interrupt him. “We shouldn’t try to do this potentially under duress next week.”

As a longtime deal maker, Fleming certainly knew how valuable even a weekend could be. The biggest deals on Wall Street had always been finalized when the markets were closed on Saturday and Sunday, so that the details could be refined without worrying that a leak could quickly affect stock prices and potentially scuttle an agreement.

Thain still counseled patience. “If Lehman doesn’t make it, if they file for Chapter 11, Bank of America will still be there,” he told Fleming. But he assured him: “I hear you loud and clear. I’m keeping an open mind, and if we need to make the call, we’ll make the call.”

That was all Fleming needed to hear. He was making progress.

By 8:00 a.m., the grand lobby of the New York Federal Reserve was teeming with bankers and lawyers. They had gathered not far from a giant bronze statue of young Sophocles, his outstretched arm holding a tortoiseshell-and-horn lyre. The statue was a symbol of victory after the Battle of Salamis, a clash that saved Greece and perhaps Western civilization from the East. On this day the bankers assembled at the Fed had their own historic battle to wage, with stakes that were in some ways just as high: They were trying to save themselves from their own worst excesses, and, in the process, save Western capitalism from financial catastrophe.

An hour later the group shuffled into the same boardroom at the end of the corridor where they had sat, mostly shell-shocked, the night before.

By morning they had settled on the working groups: Citi, Merrill, and Morgan Stanley were put in charge of analyzing Lehman’s balance sheet and liquidity issues; Goldman Sachs, Credit Suisse, and Deutsche Bank were assigned to study Lehman’s real estate assets and determine the size of the hole. Goldman had had a jump start as a result of its mini-diligence session earlier in the week, and both Vikram Pandit and Gary Shedlin of Citigroup were so nervous that Goldman would try to buy the assets themselves on the cheap that they attached themselves to their group.

“As you know, the government’s not doing this, you’re on your own, figure it out, make it happen,” Geithner said. “I’m going to come back in two hours; you guys better figure out a solution and get this thing done.”

His tone struck many in the room as patronizing if not ridiculous. “This is fucking nuts,” Pandit said to John Mack; it was as if they had all been handed a test without the customary number 2 pencils.

Lloyd Blankfein raised a question: “Tim, I understand what you want to do, but how do I get in the other room?” In other words, he wanted to know how he could become a buyer subsidized by his competitors. Blankfein wasn’t serious—he had no interest in buying Lehman, but he was clearly trying to make a point. Why are we helping our competition?

Geithner deflected the question and left the room, followed by the bankers, who were simultaneously daunted and deflated.

Thain, Peter Kraus, and Peter Kelly of Merrill found a corner to talk in.

“So, what do you think?” Kelly asked.

“Lehman’s not going to make it,” Thain said.

“Then we’re not going to make it either,” Kelly replied calmly.

“We have to start thinking about options,” Kraus said.

Thain nodded in agreement. Maybe Fleming was right after all .

Thain dialed Fleming and, after telling him about the conversation, said: “Set up the meeting with Lewis.”

Upstairs, on the seventh floor of the Fed, Lehman’s Bart McDade and Alex Kirk felt a little bit like mail-order brides as they waited to meet the bankers from the firms that they hoped would save them. This, they knew, would be the ultimate “road show.”

They had brought binders of materials, including what were perhaps the two most important documents, known as decks. One described the spin-off that Lehman referred to as REI Global; the other was labeled “Commercial Real Estate Business Overview”—in other words, the worst of the worst holdings, the toxic assets that no one knew precisely how to value and that everyone was nonetheless certain that Lehman was overvaluing.