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

Even now Lehman seemed to be in denial: The decks revealed that it had marked down the value of its commercial real estate assets by an average of only 15 percent. Most Wall Street bankers had already assumed the reduction would be far greater.

“Okay, let’s just make sure you and I agree exactly on all of these issues and how they’re financed,” McDade said to Kirk. They reviewed each line in order: how the balance sheet was broken down by liabilities, their derivatives, receivables, payables, repo lines, and long-term debt.

If they were confused about any given detail, McDade phoned Ian Lowitt, who was a veritable financial encyclopedia. “ He should be the one down here,” McDade blurted during one of his explanations of an especially obtuse passage.

As they completed their preparations, Steve Shafran, Hank Paulson’s top lieutenant, phoned and instructed the two men to go and meet their possible saviors. A security guard escorted them downstairs to the main dining room, where several dozen bankers waited. Wall Street’s most elite firms were effectively about to go shopping in the equivalent of a government-sponsored Turkish bazaar.

The Lehman executives were seated at a table in the farthest corner of the huge room, where everyone stopped to look—to gawk, in fact. “Do you know what this is like?” Kirk asked McDade when they were finally settled. “We’re the kid with the dunce cap in the corner!”

McDade let out a big laugh just as a group of bankers they did not know from Credit Suisse wandered over, flashing wide grins, and started eyeing them. “What’s going on?” one of them asked. Kirk rolled his eyes in a way that clearly indicated, Please, do not mess with us . “What the fuck do you think is going on?” he replied. Before things could get too ugly, the cream of Wall Street suddenly appeared: Vikram Pandit, John Mack, John Thain, and Peter Kraus came over to the table and got down to business. Mack, who had met McDade at his home over the summer when they had considered merging, struck a sympathetic note: “Oh, God, I feel awful for you guys. This is just terrible.” Thain sat quietly, sipping a coffee, with every reason to think, This could be me . McDade pulled out his documents and began walking them through the numbers. As Kraus began to question some of the assumptions, Pandit stopped him. “Okay, okay,” he said, impatiently waving his hand in the air. “You have a homework assignment,” he told the Lehman bankers. “Give me a full business plan on how you would run this thing, so we can consider whether we’re going to finance it. You have two hours to complete it.”

Five minutes later a security guard came over to McDade and Kirk and told them, “We’re going to take you up to another floor so you can work.” The Fed had hoped to provide them with an actual conference room, but because there wasn’t any space available, they were escorted to the Fed’s medical center, where a makeshift office had been prepared. It was, if nothing else, all too apt a metaphor, as the Lehman executives immediately realized. Kirk looked at the defibrillator on the wall and deadpanned, “Well, this is appropriate. We’re clearly the heart attack victim.”

Greg Curl and Joe Price of Bank of America were on their way downtown with their lawyer, Ed Herlihy, for a 10:00 a.m. meeting with Paulson and Geithner. They had by now resolved not to pursue a deal with Lehman; Curl had already sent some of his people back to Charlotte.

Before they arrived, Herlihy’s cell rang; he could see from the caller ID that it was Fleming. For a moment, he hesitated answering.

Before they had left, the group had discussed what to do if Fleming called again. Chris Flowers had advised Curl, “Let’s not waste another fucking minute on this until John Thain himself calls Ken Lewis and says the words out of his own mouth: ‘I want to do this deal.’ Otherwise, it’s just a bunch of bullshit.”

Exasperated, Herlihy finally answered the phone.

“We’re going to make this happen,” Fleming said excitedly. “John says we should set it up.”

Herlihy had heard this before and had grown tired of the routine.

“Greg, I’ve said it once and I’ll say it again: We’re not doing this without being invited in. I’m actually in the car with Greg Curl now. I’ll put him on. He’ll tell you we’re serious about that.”

“Listen, we’re interested,” Curl said after being handed the phone. “But we do need to hear from Thain directly on this.”

“Okay, okay,” Fleming told him. “I’ll call you back.”

For all their interest in acquiring Merrill Lynch, Curl, Price, and Herlihy had reason to be wary of Fleming’s overtures. The three men knew something that no one else knew, a bizarre turn of events that had never leaked out— and thank god for that, they thought to themselves, for it would have left them the laughingstocks of Wall Street.

Ken Lewis had, in fact, already been through this dance with Merrill Lynch a year ago almost to the week with Stan O’Neal. No one outside of O’Neal and a handful of BofA executives even knew the talks had taken place, and not even Merrill’s or Bank of America’s board had been informed of them.

On the last Sunday of September, O’Neal had driven down to Manhattan from his weekend home in Westchester to meet with Lewis at his plush corporate apartment in the new Time Warner Center. The meeting had been set up by Herlihy, who had acted as an intermediary. O’Neal showed up alone, though—Lewis had brought Curl with him.

As a precondition of the meeting, O’Neal had indicated that he wanted $90 a share for Merrill Lynch, a substantial premium over its then stock price of slightly more than $70 a share. Lewis and Curl got right down to business, handing O’Neal a bound presentation of what a combination of Bank of America and Merrill would look like from a numbers and operational standpoint. As Lewis went through the proposal and was ready to start a discussion, O’Neal jumped out of his chair, excusing himself to go to the bathroom. After what felt like twenty minutes, as Lewis and Curl waited anxiously for him to return, they wavered between concern for O’Neal’s health and frustration that he seemed to have vanished.

Finally, O’Neal returned, as if nothing unusual had occurred. Lewis shrugged it off and continued going through the presentation. As he continued, O’Neal stopped him.

“Look, if we’re going to do a deal, it’s going to have to be at a reasonable premium,” O’Neal said, raising the price he wanted for the firm to $100 a share. “I’ve done some subsequent analysis and thought about it more,” he said, explaining how he justified the higher price by a sum-of-the-parts analysis of Merrill’s asset management, retail, and investment banking businesses.

The number took Lewis aback. At first he almost ended the conversation. But then he allowed that he would continue the talks, but suggested if O’Neal wanted more money, “it would require more cuts.”

“How much cost reduction do you have baked into the numbers that you have?” O’Neal asked.

Lewis’s presentation projected $6 billion in cuts over two years.

To O’Neal that was a huge number, even for someone who had been famous for his own cost cutting. And if he wanted $100 a share, it would be even more.

O’Neal asked, “So, how would you see me fitting into this?”

“Well, you’d be part of the management team, but I haven’t really thought about a structure,” Lewis told him.