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
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.
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.
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. “
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
