credit facility.
Before the negotiating even began, Cohn, always blunt, told them: “I’m going to write down your mortgage portfolios to a place where I think they click.” In other words, he was going to value Merrill’s toxic assets at next to nothing.
“I know the way you think,” Kraus replied. “You
Just as Kraus began digging deeper into Merrill’s balance sheet, Kelly, the only non-Goldman-connected man in the room, stopped him. He was clearly anxious about providing Goldman with too much information. Kraus may have trusted his former colleagues, but Kelly was more circumspect. To him, the odds of pulling off a deal with Goldman were low, and given Cohn’s comments, if a deal did come together, Merrill would be sold for a song.
“Guys, nothing personal, but let’s just lay low here,” Kelly said. “If you want to do due diligence, let us talk to John and let’s figure out what we want to do.”
That was acceptable to Cohn and Viniar, who, in any case, had to get back to the NY Fed. They agreed they’d resume the talks once Kraus and Kelly could get their information in order.
As the meeting was breaking up, Kelly called Fleming to give him a progress report. He said that he and Kraus had made their pitch, but he acknowledged that simply getting a credit line in exchange for 9.9 percent might not be enough to save the firm.
“That’s not going to fill the gap if Lehman goes,” he told Fleming.
“It looks like we may have the outlines of a deal around the financing!” Steve Shafran, a senior adviser at Treasury, announced to Bart McDade and the Lehman team at the NY Fed. Brandishing a huge smile, Shafran told the Lehman bankers that the CEOs downstairs were close to agreeing to funding the spin-off of Lehman’s real estate assets.
The men felt as if an unimaginable burden had been lifted almost instantaneously from them. And McDade excitedly tapped out a message on his BlackBerry to Michael Gelband, who was at Simpson Thacher’s offices.
Standing in a conference room uptown, Gelband read McDade’s message and shouted, “We got it!” he said, a broad grin spreading across his face as he let out a sigh of relief.
Hector Sants, the deputy head of Britain’s Financial Services Authority, was driving along the A30 from Cornwall on the southwestern tip of England back to London on Sunday afternoon with his cell phone clutched precariously between his ear and his shoulder.
Sants had been on the phone for most of the weekend with his boss, Sir Callum McCarthy, head of the FSA and a former Barclays banker himself. McCarthy, at sixty-four years old, had only six days remaining in his tenure in the post and was scheduled to step down that Friday.
Sants and McCarthy had spent hours trying to assess the state of affairs between Barclays and Lehman. Sants had been in contact several times with Varley that day, but McCarthy’s efforts to contact Geithner, his counterpart in the United States, were proving more difficult. They had spoken briefly on Saturday, but he had heard nothing since.
“He hasn’t called me back,” McCarthy grumbled. “You can’t get hold of any of these people.”
They had no idea what Barclays’ Diamond had—or had not—communicated to the U.S. government about what conditions had to be met to receive their blessing back in Britain. Indeed, McCarthy was nervous that Diamond, an American who had never become part of Britain’s gentlemen’s club, may have been a bit reckless in the negotiations, like any aggressive Wall Streeter. Both men were especially concerned that Diamond, in his zeal to sign a deal, might not have fully explained the requirements that the British regulators would ask for before approving it. To them, buying Lehman could put the bank and the British financial system as a whole in jeopardy. Varley, who was supportive of pursuing Lehman but clearly less enthusiastic than Diamond, had assured Sants during a call on Friday that Barclays’ board would only pursue the deal if it could receive adequate help from the U.S. government or another source. “I would not recommend a transaction to my board unless I’m satisfied both in terms of the quality of the assets we’re purchasing and in respect to the funding positions,” Varley had said.
McCarthy and Sants also faced another looming problem, one that, in the grand scheme of things, may have seemed minor but was nonetheless important at that very moment: The London Clearing House (LCH, Clear-net), which clears many of the derivative counterparty trades across Europe, was scheduled to migrate its entire energy futures business—worth over 100 billion pounds—to a completely new computer system that weekend. They had instructed the London Clearing House on Saturday to hold off on proceeding with the upgrade until they knew more about the fate of Lehman and Barclays, but were now being badgered for a final answer, as dozens of technicians had been engaged to handle the switch-over.
“We shouldn’t allow this to drag on,” Sants said to McCarthy, hoping they could get an answer back to the London Clearing House. “We ought to try to contact Geithner and just make our position very clear.”
They scripted out what McCarthy would say: “We feel as the regulator [
McCarthy said he would try Geithner one last time.
On the thirteenth floor of the NY Fed, Hilda Williams, Geithner’s assistant, told him that Callum McCarthy was on the phone. Geithner finally took the call, explaining, brusque as ever, that he had been in back-to-back meetings trying to get a deal together for Lehman and apologizing for not returning his call sooner.
McCarthy stopped him, saying that he was very concerned that he didn’t know anything about the deal being contemplated. He had a list of questions that he needed answered.
“The capital requirements and, in particular, the transaction risk between the time of taking on the risk and the completion of the transaction leaves a very big open-ended exposure,” McCarthy said, keying in on his biggest problems with the deal. He explained that the FSA still needed to determine whether Barclays was properly capitalized enough to take on the risk of buying Lehman. And, he said, even if it was—which he suggested was a possibility—Barclays still would need to find a way to guarantee Lehman’s trades until the deal was completed. “I’m very doubtful Barclays can ever get to a position to fulfill the requirements, and it is far from clear that they will be able to do so,” he said.
