Too Big to Fail

by Andrew Ross Sorkin

  “There’s no consensus for the government to get involved; there is no will to do this in Congress,” he said, stammering and stuttering at one point about how Nancy Pelosi had been all over him about bailouts. “You will need to come up with a private-market solution. You have a responsibility to the marketplace.

  “I know it’s unpleasant to help a competitor do a deal, but it’s not going to be as unpleasant as it will be if Lehman goes,” Paulson stressed. “You need to do this.”

  For many in the room, the idea of coming to the assistance of a rival was more than unpleasant: It was anathema. What made the situation even worse was that the competitors they were being asked to aid were Bank of America and Barclays, the ultimate outsiders. Ken Lewis, Bank of America’s CEO, had disparaged them every chance he got, and they all viewed Barclays as a wannabe, a second-tier player trying to break into the big leagues. How was helping these firms going to do anything other than hurt everyone assembled in the room?

  Lehman wasn’t attracting much sympathy either. “Dick is in no condition to make any decisions,” Paulson announced, with a tinge of derision, explaining why Fuld wasn’t present. “He is in denial,” Paulson continued, before calling him “distant” and “dysfunctional.”

  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 coifed 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 manag
ement 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.”

  “Yeah, but I was supposed to meet another couple and my wife, and they’ve been sitting here for the last two hours,” Thain replied.

  “At least I called,” Black said with a laugh.

  As Thain went inside, Black returned to the conference call. “You’re never going to believe who I just ran into…”

  At Lehman’s headquarters, a stunned and livid Dick Fuld had just gotten off the phone with Bart McDade, who had the unenviable task of informing the CEO that a meeting had been held down at the Fed about his company, and that he hadn’t been invited.

  Rodgin Cohen had been notified by the Fed to instruct McDade to bring a team down to the Fed on Saturday morning—and had explicitly warned him not to bring Fuld, explaining, “The Fed doesn’t want him down there.”

  Trying to soften the blow, McDade prevaricated: He told Fuld that there would be a lot of grunt work to do downtown, and that his time would be better spent manning the office so that he could remain in constant contact with the regulators and his CEO brethren. What he didn’t relay to Fuld, of course, was that they would all be together at the Fed in person.

  As he ended the call with McDade, Fuld had another reason to be furious when he realized that he hadn’t heard back from Ken Lewis all day, and it was already past 9:00 p.m. Bank of America’s diligence teams over at Sullivan & Cromwell had left hours earlier, and from what he had heard, their body language suggested they weren’t leaving just for the night.

  “I can’t believe that goddamn son of a bitch won’t return my call,” Fuld complained to Russo. Fuld had phoned him at least a half dozen times, sometimes not leaving a voice-mail for fear of seeming desperate. He thought Lewis had practically shook his hand over the phone just twenty-four hours earlier; where the hell had he gone?

  Enough was enough. Fuld swallowed his pride and dialed Lewis’s home in Charlotte.

  Lewis’s wife, Donna, picked up in the kitchen.

  “Is Ken there?” Fuld asked.

  “Who is it?”

  “Dick Fuld.”

  There was a long pause as Linda looked over at her husband, who was sitting in the living room. When she mouthed Fuld is on the line, Lewis shook his finger, signaling to her to duck the call.

  Donna felt uncomfortable, but she had had plenty of experience in dodging unwanted callers for her husband.

  “You really have to stop calling,” she said sympathetically to Fuld. “Ken isn’t coming to the phone.”

  Crestfallen, Fuld replied, “I’m really sorry to have bothered you.”

  Fuld placed the phone down and put both hands on his head.

  “So, I’m the schmuck,” he shouted at nobody in particular.

  Harvey Miller, Lehman’s bankruptcy lawyer, walked into Weil, Gotshal’s conference room just down the hall from his office and told the associates to go home and have dinner. It was getting late, and he hadn’t heard anything new from anyone at Lehman. This is just a fire drill, he thought. Lehman Brothers isn’t going to have to file.

  Miller hopped into a cab to his apartment on Fifth Avenue. As he opened the door, his cell phone rang. James Bromley, a lawyer with Cleary Gottlieb Steen & Hamilton, which was advising the New York Fed, asked almost matter-of-factly, “Harvey, are there any plans for a bankruptcy?”

  Miller was taken aback. “It’s not the objective; it’s not in the forecast,” he replied decisively. “There certainly isn’t any intensive work being done on it. I’m at home. I can tell you that right now the company really believes it’s going to get a deal.”

  “Are you sure?” Bromley persisted.

  Miller related how the New York Fed had not seemed very worried during a presentation by one of his associates earlier that day.

  Bromley, uncertain what to make of this news, muttered, “Err, maybe we should meet again tomorrow morning,” and hung up.

  As Miller headed into the living room, he said to his wife, Ruth, bewilderedly, “I just got the strangest call…”

  Back at AIG, Willumstad was still searching for a quick fix. He and Braunstein decided to try Warren Buffett one last time. Perhaps they could sell him some assets—anything, really—that he might want in his portfolio. Buffett had already left the office, but his assistant patched the call through to his home, the same home he had purchased in 1958 for $31,500.

  “You said you’d be interested in assets. Anything in particular?” Willumstad asked, after greeting him and explaining the purpose of his call.

  Buffett, reticent, offered, “Well, we could be interested in the auto business.”

  “Would you be interested in taking all of the U.S. property and casualty business?” Willumstad suggested. That was a major piece of the company, representing $40 billion in annual revenue.

  “What’s it worth?” Buffett asked.

  “We’d say $25 billion; you’d probably say $20 billion,” Willumstad replied. “What information do you need to do that?”

  When Buffett told him to send what he could, Willumstad said, “Okay. Give us an hour and we’ll get a package of material together. Where can we e-mail it?”

  Buffett let out a loud laugh and informed him that he didn’t use e-mail.

  “Can I fax it to you?” Willumstad asked.

  “I don’t have a fax machine here,” Buffett said, still chuckling. “Why don’t you fax it to the office. I’ll go get in my car and drive back down to the office and pick it up.”

  An hour later, Buffett was back on the phone, politely rejecting the proposal: “It’s too big a deal; $25 billion is too big.” Willumstad never thought he’d hear Buffett call any prospective deal too big.

  “I’d have to use all my cash and can’t do anything to jeopardize Berkshire’s triple-A rating,” Buffett explained. For a moment, he alluded to the possibility of raising the money, but then acknowledged that he “didn’t want to have that kind of debt on my balance sheet.”

  “Okay, thanks a lot,” Willumstad said. “But, by the way, if there’s anything else in the pool that you’re interested in, let us know.”

  Merrill’s Greg Fleming was tossing and turning in bed that night, so much so that his wife, Melissa, finally insisted that he tell her what was bothering him. “It’s Friday night, and you’re not sleeping,” she mumbled. Wide awake, he turned to her. “This is a different kind of Friday night. The next week or so in this industry is going be epic.”

  After nodding off briefly, Fleming finally rose at 4:30 a.m., his mind racing. He recalled his conversation of the night before with John Finnegan, his closest confidant on Merrill’s board. Finnegan was clearly as anxious as Fleming about the firm’s mounting problems, and they agreed they had to persuade Thain to seek a deal with Ken Lewis.

  “You’ve got to push this, Greg,” Finnegan urged him. “There’s a way to get this done.”

  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 o 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.