“Where do you stand on the capital raise?” Geithner asked without preamble.
Willumstad said that he believed that they were making progress. A half dozen bidders were still at the building, including Flowers, KKR, and Allianz.
But, Willumstad said, the bigger news—the good news—was that he had persuaded Eric R. Dinallo, superintendent of the New York State Insurance Department, to release some $20 billion in collateral from AIG’s regulated insurance entities, which would help it meet its capital requirement. Dinallo had made the agreement contingent on AIG’s raising another $20 billion to fill the hole. Willumstad intimated that he thought he had another $5 billion loan commitment coming from Ajit Jain, who ran Berkshire Hathaway’s reinsurance business. That left him with a $15 billion gap, but he told the regulators that the company had assets up for sale that were worth more than $25 billion.
With that, Paulson and Geithner rose and abruptly left the meeting. They had heard all they needed to; progress was being made.
The doorman opened the cast-iron and glass doors to allow Thain, Kraus, and their colleague Tom Montag into the lobby of Walid Chammah ’s apartment building. It was the second secret merger meeting to take place there in one week. Thain was a little worried about being spotted: Among others, Larry Fink of Black Rock lived at the same address.
Mack, Chammah, and Gorman were waiting for them in Chammah’s living room.
Gorman, who had run Merrill Lynch’s private client business for five years before joining Morgan Stanley, was immediately struck by the fact that no one in the group representing Merrill had been with the company for more than ten months. The firm Gorman helped to build, and where his brother, Nick, still worked, was going to be sold out from under it by bankers with no sense of the firm’s heritage.
Thain opened the discussion by indicating that he was looking to do a deal. “With what’s going on with Lehman,” he said, “we recognize this is the right time to look at our options.”
Kraus began to go over the numbers, flipping through the pages of a book he had brought along with him. For someone who had only a few days on the job, Chammah and Gorman thought, he seemed to know his stuff. (Kraus had, in fact, stayed up till 3:00 a.m. earlier that week poring over the firm’s balance sheet.)
But the gaps in his knowledge soon became apparent. When Gorman started asking him about Merrill’s retail business—the part of the company in which Morgan Stanley was most interested—neither Thain, Kraus, nor Montag knew the numbers.
Still, Mack said he was interested and asked what the next step was. “We have a board meeting scheduled for Monday night,” he explained, “and Tuesday we could probably start diligence and take a look then. It’s obviously intriguing but this is complicated.”
Thain gave Kraus an anxious glance and then turned to Mack: “No, no. You don’t understand. We would need to have a decision before Asia opens.”
Gorman was confused: “What do you mean by ‘decision’?”
“We’re looking to have a signed deal by then,” Thain said calmly.
“We can keep talking,” Mack answered, shocked by the request, “but I don’t know that that’s physically possible.”
After they saw themselves out of the apartment, Thain looked at Kraus and said, “Well, it’s pretty clear that they don’t have the same sense of urgency that we do.”
Greg Curl of Bank of America was already at Wachtell, Lipton when Greg Fleming of Merrill Lynch arrived. While he waited, Curl had been on the telephone trying to undo his decision from four hours earlier: He had sent more than a hundred bankers back to Charlotte, assuming they were no longer needed, because as far as he had been concerned, the Lehman deal was dead. Now, with the possibility of a deal with Merrill, he needed them on the next plane back to New York. He recognized that the situation was almost comical and had assigned several people to coordinate looking into chartering flights, because the three remaining direct US Airways flights to New York that night were already full.
Curl invited Fleming into one of the law firm’s conference rooms that he had commandeered, grabbing a handful of cookies from the catering cart that was parked there. He quickly asked him for his assessment of where he thought they were in terms of pursuing a deal.
“I’m thinking we announce Monday morning,” Fleming said.
“That’s very quick,” Curl replied, taken aback by the timetable.
“You know the company really well,” Fleming answered. He was one of the few people who were aware that Merrill’s former CEO Stanley O’Neal had talked to Lewis about a merger, though he didn’t know all the details. “I know all the work you’ve already done. I’ll open up everything. Just tell me what you need.”
For the next half hour they drew up a process that would enable Bank of America to examine Merrill’s books within literally twenty-four hours. Curl, who dusted off the work he had done a year ago for the talks with O’Neal, said he was going to bring Chris Flowers in to advise him, as Flowers had recently looked into buying some of Merrill’s toxic assets over the summer (assets that were ultimately sold to Lone Star National Bank), so he would have a head start. Bank of America already even had a code name for the deal: “Project Alpha.”
Before the meeting broke, the issue of price was raised. Fleming boldly declared that he was looking for “something with a three-handle,” by which he meant $30 a share or more, which represented a 76 percent premium over Merrill’s share price of $17.05 on Friday. It was a shockingly high number, especially in the context of the greatest financial crisis of the firm’s history, but Fleming felt he had no choice: Merrill had just sold $8.55 billion of convertible stock a month earlier to big investors like Singapore’s state-owned Temasek, at $22.50 a share. He needed to get them a reasonable premium.
For most bankers, a number that high would have stopped the talks in their tracks, but Curl understood the rationale behind the price that Fleming was seeking. Fleming argued that Merrill’s shares were temporarily depressed and that he needed a price that reflected a “normalized basis.” Just a year and a half ago, he reminded him, Merrill’s shares were trading at more than $80.
Curl had a strong view about takeovers: You never want to overpay, but if you believe in the business, you’re better off paying more to guarantee you own it than to lose it to a competitor.
“Okay,” Curl said, not committing to Fleming’s number, but clearly indicating that he wasn’t going to reject it
