Darling asked in return.
Paulson reiterated that he was hoping the private consortium was coming together, but now Darling shifted the conversation and began peppering Paulson with questions about the United States’ contingency plans for Lehman’s bankruptcy. “Well, if Lehman is going into administration, we need to know because it will have implications over here,” Darling said before ending the call.
“He’s not going to do it,” Paulson told Geithner in amazement. “He said he didn’t want to ‘import our cancer.’”
For the next two minutes in Geithner’s office, a half dozen excited voices were speaking at once, until he finally quieted the group and asked, raising his voice for the first time the entire weekend, “Why didn’t we know this earlier? This is fucking crazy.”
Paulson began to wonder aloud if President Bush should call Gordon Brown personally, but almost before finishing the question, he answered it himself. “There’s no chance,” he said, explaining that he thought that Darling had implied he had already spoken to Gordon Brown about the situation. “He was so far away from, ah, wanting Barclays to do anything,” he remarked of Darling.
“Okay. Let’s go to Plan B,” Geithner said after a moment’s reflection.
In case it wasn’t clear what all of this meant, Shafran of Treasury spelled it out in simple terms in a text message to his colleagues: “We lost the patient.”
They agreed to assemble downstairs to relate the news to the bankers so that they could begin preparing for Lehman’s bankruptcy. Plan B was simple: Regulators would press the banks to unwind trading positions they had with Lehman and with one another in a way that minimized the impact on the markets.
And then there was the next critical issue to address, Geithner said: “We have to deal with Merrill.”
As they got up to leave, Paulson, clearly depressed, remarked drily: “If you’re going to ride the pony, sometimes you have to step in the shit.”
A NY Federal Reserve security guard who had been searching for Bart McDade and Rodgin Cohen eventually found them on the first floor. “Secretary Paulson would like to see you,” he announced before escorting them to Geithner’s waiting room.
Cohen was already uneasy, for while McDade had been sending out enthusiastic e-mails about the near- consummation of the deal, Cohen had overheard a number of government officials who seemed to be more circumspect about its prospects. McDade now also sensed that something was amiss and sent a message to Gelband while he was waiting, telling him, “There might be a holdup.”
The door to Geithner’s office opened and out walked Geithner, Paulson, and Cox, all looking alarmingly dour.
“We got the banks to agree to fund, but the U.K. government has said no,” Paulson announced.
“Why? Who?” Cohen asked, incredulous.
“It came from Downing Street. They don’t want U.S. problems infecting the U.K. system,” Paulson said.
While McDade just stood mutely in shock, Cohen, who was famous for his equanimity, virtually shouted, “I cannot believe this! You have to do something!”
“Look,” Paulson said sternly, “I’m not going to cajole them and I’m not going to threaten them.”
Cohen was not finished.
“I know a lever we can pull with the U.K. government,” Cohen offered. “I have a friend I can call.”
Paulson just stared at him, shaking his head. “You’re wasting your time. The decision was made at the highest levels.”
Cohen walked to a corner and dialed Callum McCarthy directly. They had known each other for years; Cohen had been Barclays’ lawyer in the 1990s when McCarthy worked there. But the look on Cohen’s face as he explained the situation told the story unequivocally: McCarthy was clearly not able to help his friend.
“You’ve really got this wrong if you don’t think this is going to infect you,” Cohen told McCarthy, nearly begging him to reverse his decision. “By
Downstairs, Paulson, Geithner, and Cox entered the main conference room where the CEOs were still trying to coordinate funding of Lehman’s real estate assets. The mood in the room had been noticeably upbeat as they continued to make progress.
“Those of you who do not want to assist a Barclays deal can breathe a sigh of relief,” Paulson announced, somewhat awkwardly, and a number of bankers in the room did not understand what he was trying to convey until he formally announced that the deal was dead. “The British are not allowing for this type of guarantee; they can’t get it done by tonight; they need a shareholder vote.”
“But we have the money!” Jamie Dimon said.
“Isn’t this our closest ally in the world?” one of the bankers asked.
“Guys, trust me,” Paulson said. “I know how to be a tough guy. I’ve done everything I can. There is no deal.”
The general opinion in the room was that they had been blindsided; Paulson merely shook his head and declared that the British had “grinfucked us.”
Geithner steered the conversation to the necessity of setting up contingency plans. He said that Lehman’s holding company would file for bankruptcy that day. He also indicated that the government would open up an emergency trading session in the afternoon for all of the biggest banks to unwind positions with the firm.
Finally, Geithner broached the idea of creating a revolving credit facility, which would effectively serve to help the next bank in trouble. The proposal was for a $100 billion emergency fund, with each bank in the room putting up $10 billion: $7 billion funded and $3 billion unfunded. Any one bank could withdraw up to $35 billion from it in the case of an emergency.
