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

In the middle of the meeting, Herlihy’s cell phone began ringing, and he saw that it was Fleming. After ignoring his first two calls, Herlihy whispered to Curl that it was Fleming and excused himself from the meeting.

“What’s up?” Herlihy asked impatiently.

“Okay. He’ll do the meeting at two thirty p.m.!” Fleming exclaimed.

“Well, can you get Thain to call Lewis?” Herlihy asked.

“Not now,” Fleming said. “Thain can’t speak to him because he’s in a meeting with Paulson.”

Herlihy rolled his eyes. “No, he’s not, Greg. I’m in a meeting at the Fed with Paulson. I just stepped out of the room and can see him. He’s down the hall from me.”

Herlihy was growing increasingly concerned that Fleming didn’t have Thain’s blessing, and repeated, “Listen, this isn’t going to work. He’s got to call. If I can step out to take your call, he can step out and call Lewis.”

“He’s going to be there, I promise. I’m not risking my reputation by having Lewis fly up here and go to an empty meeting,” Fleming insisted.

“He’s got to make the call,” Herlihy insisted again.

By the time Herlihy stepped back into the room, it was clear that the meeting was winding down, and while the government was still refusing to become involved, Paulson was trying to keep Bank of America from dropping out altogether.

As everyone stood up to leave, Chris Flowers pulled Paulson aside and said, “I’ve got to talk to you about AIG.” He paused to make certain they weren’t being overheard and continued, “I’ve been over there working with them, and it’s just remarkable what we found.” He took out the same piece of paper that had been handed out the day before, showing the firm’s cash outflows and how by Wednesday it would be out of money.

“Here’s how big the hole is,” Flowers said, pointing to the negative $5 billion cash balance coming due that next week. “AIG is just totally out of control. They’re incompetent!” Flowers offered to come back to the Fed with Willumstad to go over the numbers in more detail, and while Paulson was shocked at the numbers, he tried not to give Flowers the satisfaction of knowing how unnerved he was.

When Flowers walked out of the meeting and rejoined the Bank of America team in the hallway, he smugly told them, “They’re not on top of it.”

As Paulson, Geithner, and Jester reassembled in Geithner’s office, Jester stressed that they had to somehow keep Bank of America “warm” so that it remained in the auction. And if Bank of America had dropped out, it had to be kept quiet—especially from Barclays.

Paulson, however, was focused on the AIG document that he had just seen, doing the math in his head. “It’s much worse than I thought,” he finally said. “These guys are in deep doo-doo.”

Geithner reached Willumstad on speakerphone and told him that they had just met with Chris Flowers, who had walked them through the numbers.

“He’s looking at buying some assets, putting together a deal,” Willumstad responded, and for a moment the confused government officials all looked at one another: Wasn’t Flowers advising AIG? But then Jester smiled knowingly at Paulson. This was classic Flowers, playing both sides. It quickly became evident to everyone that Flowers was likely trying to tee up a deal for his buyout shop with government assistance. “He’s frankly a troublemaker,” Paulson exclaimed. “He doesn’t want to save this country!”

The discussion returned to the numbers, and Willumstad explained that they had teams of bidders at his office and were hoping to sell enough assets over the weekend to cover the pending shortfall.

Geithner suggested Willumstad come over later that day to review the firm’s books so that they could get a better handle on what its plans were.

“Okay,” Willumstad said. With a laugh, he added, “I won’t be bringing Flowers.”

Downstairs the CEOs were now summoned from the dining room to the conference room to deliver a progress report to Paulson and Geithner.

Each of the groups offered up what they had accomplished, which amounted to very little. Part of the problem was that there was still huge disagreement over what Lehman’s assets were actually worth, especially its notorious commercial real estate assets. While Lehman had been valuing that portfolio at $41 billion, consisting of $32.6 billion in loans and $8.4 billion in investments, everyone knew it was worth far less. But how much less?

One set of estimates making the rounds was a spreadsheet called “Blue Writedowns” that cut the estimated value of Lehman’s commercial real estate loans by about one quarter, to less than $24 billion. Others thought the situation was much worse. A handwritten sheet with more estimations making the rounds had the numbers “17-20”—less than half the estimated value.

The story was much the same with residential mortgages, which Lehman had estimated at $17.2 billion. While the Blue spreadsheet placed the value at about $14 billion, others in the room put the real value at closer to $9.2 billion, or roughly half.

But Pandit had another issue to raise: He wanted to talk again about AIG. And then he added: “What about Merrill?”

It made for an awkward moment, as John Thain was only seats away.

“You guys get this done for me, and I’ll make sure I can take care of AIG and Merrill,” Paulson replied. “I’m a little uncomfortable talking about Merrill Lynch with John in the room.”

Harvey Miller, Lehman’s bankruptcy lawyer, had just had a terrible meeting with representatives of the New York Fed. He couldn’t answer any of their questions, and frankly, he was embarrassed at having continually to resort to the same answer: “We don’t have access to information. Everybody at Lehman is either working on Bank of America or Barclays.” After they left, Miller complained to his colleague, Lori Fife, “That was bullshit.”

Miller had dealt with tough clients before—bankruptcy was always a parlous transaction—but he had never been shut out like this. When he called Steve Berkenfeld, Lehman’s general counsel, to complain, Berkenfeld tried to explain why the information had not been as forthcoming as he had hoped. “The problem is that many of our financial team have gone downtown to give an update to the Fed.”

“I see,” replied Miller frostily. “And what is the latest with Barclays?”

“We’re still hopeful, but there’s not much new to report at this moment.”

“And with BofA?”

Berkenfeld paused before answering. “They’ve gone radio silent.”

That didn’t sound very encouraging to Miller, who had developed a keen ear for detecting a tone that indicated the end was near. His team of lawyers had been operating on the assumption that the bankruptcy work was a contingency; no one was expecting Lehman to have to make a filing immediately. But as the clouds over the firm grew darker, Miller decided to move forward. He told Fife that if Lehman were to need to file for bankruptcy, it would take them at least two weeks to get the paperwork in order. They might as well begin now.