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

Just after noon he sent out an e-mail to a handful of colleagues with an apocalyptic subject line: “Urgent. Code name: Equinox. Have desperate need for help on an emergency situation.”

Thain was in the middle of a conversation strategizing with Peter Kraus when Fleming called.

“I’ve set it up,” Fleming told him excitedly. “You’ll meet with Lewis this afternoon.”

Thain knew that the meeting was a good idea, but there was one complication: “Paulson’s not going to like this,” he warned Fleming. A merger, he thought, would be a death sentence for Lehman, as he’d have stolen Lehman’s sole potential savior. He didn’t know that Bank of America had dropped its bid for Lehman.

“Paulson’s constituency is the taxpayer,” Fleming responded. “Ours is Merrill Lynch shareholders. Paulson has the ability to step in. We’re going to have to listen to him, but we don’t have to anticipate that. He may not like it, but unless he tells us we can’t do it, if we think this is in the best interest of Merrill Lynch shareholders, we need to do it.”

Thain still hesitated, wanting to make certain that he wasn’t putting the company into play.

“I’ve set the meeting for two thirty p.m.,” Fleming pressed, and then carefully added, “But you have to call Ken first.”

“Why?” Thain asked, perplexed at the request.

“Because he wants to hear your voice,” Fleming answered.

“What do you mean?”

“I don’t know, just tell him the weather is nice in New York and you’re looking forward to seeing him.”

“I don’t understand why I need to make the call,” Thain persisted.

“John, you just have to call him.”

“You’re getting on my nerves,” Thain said, annoyance straining his voice.

“You know what? That’s probably going to happen again this weekend,” Fleming said, raising his own voice to his boss for the first time. “But call the guy. He’s not going to fly until you call him.”

“Okay,” Thain agreed. They decided that they’d meet at Merrill’s Midtown office in thirty minutes to plan for the meeting.

Soon after Thain hung up with Fleming, John Mack walked over to him.

“We should talk,” Mack said quietly. He didn’t have to elaborate—the phrase was accepted code for We should talk about doing a deal together.

“You’re right,” Thain said, and they agreed to organize a meeting later that day. It was becoming a busy day.

On the fourth floor of the Fed, Bob Diamond of Barclays was tapping his foot impatiently.

For most of the morning, it seemed to him that Lehman and the government were exclusively focused on Bank of America. He had come to suspect that he was being used, that he was the government’s stalking horse so that they could coax out a higher bid for Lehman from Bank of America.

But then, just past 2:00 p.m., Diamond had an indication that his bid might be taken seriously when someone at the Fed taped a piece of paper on Barclays’ conference room door that said “Bidder.” The Fed’s kitchen staff had also finally shown up with food. All small gestures, but encouraging signals, nonetheless.

Still, Diamond knew he had a big problem to deal with before a Lehman deal could take place—a problem that he had yet to share with Paulson or anyone in the U.S. government. His general counsel in London, Mark Harding, had informed him on an internal conference call that morning that if Barclays were to announce plans to acquire Lehman, the deal would require a shareholder vote—a vote that might take as long as thirty to sixty days to complete. That meant that it would be critical that Barclays find a way to guarantee Lehman’s trading from the time they signed the deal until it was approved by its shareholders—or the acquisition would be worthless. Without the guarantee, Lehman’s trading partners would stop doing business with it, swiftly draining its resources and destroying any value for Barclays. This was about confidence: Counterparties needed to know that there was someone standing behind Lehman in the same way that JP Morgan had stepped up to the plate for Bear Stearns and guaranteed all of its trades even before the deal closed. The problem was that legally Barclays could not guarantee any more than about $3.5 billion of Lehman’s trades without seeking permission from shareholders first, a process that could take as long as completing the deal.

Paulson and Geithner had repeatedly told Diamond in no uncertain terms that the U.S. government was not going to help, but he hadn’t been able to determine if that was just a negotiating stance. As for the British government, there was no mystery there to him: It was perfectly clear that it wouldn’t get involved.

What Barclays needed was a partner—a big, rich one—and it was a matter that Diamond knew he had to discuss with his brain trust, which was led by Archibald Cox Jr., Barclays Capital’s chairman (and the son of the Watergate prosecutor), Rich Ricci, the firm’s COO, and Jerry del Missier, Barclays Capital’s co-president. Diamond had also hired his own outside adviser, Michael Klein, a smart former senior banker at Citigroup. Klein had resigned from Citigroup months earlier rather than be marginalized by Pandit’s new team, but he was still a hot commodity. To keep him from going to work for a competitor, Citigroup had agreed to pay him out $28 million in deferred compensation that he would have lost by leaving. In exchange, he had to stay “on the beach” for an entire year. Diamond, convinced he needed Kein on his side, had called Pandit earlier in the week to get his on the beach status temporarily suspended so that he could work for Barclays on an emergency basis.

As they began brainstorming about the trading-guarantee problem, Klein asked aloud, “Who could possibly do this?”

“This is the kind of thing that, a year ago, you’d go to AIG, and they would have wrapped this for you, right?” del Missier asked.

That clearly was no longer possible, and Klein offered, “What about Buffett?” “Yeah, but Buffett only does deals if it’s a fantastic deal for Buffett,” del Missier pointed out.

Klein had done some deals with the Omaha Oracle when he was at Citigroup and had all his phone numbers. He called and found Buffett at the Fairmont Hotel Macdonald in Edmonton, Alberta, as he and his second wife, Astrid Menks, were about to leave for a gala, unbeknownst to them, as the surprise guests.

Klein put him on speakerphone with Diamond and his team. Del Missier began to explain to Buffett why the guarantee was so important. “If Lehman trades dollars for yen with somebody, that bank needs to know that Lehman is going to deliver the dollars before they deliver the yen,” he told Buffett. “If there are worries that they’re going to be able to settle that trade, the whole thing is going to unravel.”

Buffett understood what was at stake but couldn’t fathom guaranteeing Lehman’s books for up to two months. But wanting to be polite, he suggested, “If you fax me something written out about it, when I get back, I’ll be glad to read it.”

As he shut his cell phone and strolled to his car on the way to the gala, Buffett remembered the last time he had received a call like this. What a mess that turned out to be. In 1998, the week before the rescue of Long-Term Capital, Jon Corzine of Goldman Sachs called asking if he’d consider joining a group interested in buying the giant, troubled hedge fund. Buffett was about to leave on a trip to Alaska with Bill and Melinda Gates, so he asked Corzine to send him some information on that deal. Then he ended up spending a day trying in vain to get his satellite phone to connect while he viewed grizzly bears in Pack Creek. He tried to orchestrate a deal between himself, Goldman, and AIG, but failed. It was a big waste of time and energy. Maybe he had to stop being so polite to these Wall Street boys.