Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the FinancialSyst

The two executives were close—Fink, a fifty-five-year-old financier, had lent Fleming and his banking team office space after the September 11 attacks drove Merrill employees out of their downtown headquarters—and their two firms were now partners, as Fleming had helped broker a 2006 deal to merge Merrill’s $539 billion asset- management business with BlackRock in exchange for a stake of nearly 50 percent in the firm. The deal had vaulted BlackRock, long known as a bond house, into the $1 trillion-asset club and had established Fink, who had helped create the mortgage-backed security market in the 1980s, as an even more influential power broker on Wall Street.

“What the fuck is going on?” Fink, nearly breathless with anger, screamed into the phone as soon as Fleming greeted him. “Just tell me what the fuck is going on! How could he do this? How could he do this to me?”

“Larry, Larry,” Fleming tried to calm him, “what are you talking about?”

“Thain!” Fink bellowed, referring to John Thain, Merrill Lynch’s chief executive. “CNBC says he’s putting BlackRock on the block. What the fuck is he thinking?”

“Larry, I know nothing about it,” Fleming replied, genuinely baffled. “When did he say this?”

“In a speech! Today he announces to the whole world that the stake is up for sale. What fucking idiot does that?” Fink shouted, still at the same pitch of fury.

“I didn’t know John was giving a speech, but—”

“We have a lockup, Greg! You know that; John knows. He has to ask my permission. He hasn’t called me— nothing! He has no fucking right to sell BlackRock!”

“Larry, I know we have a lockup agreement. Just take a deep breath and listen,” Fleming urged him.

“Think about it,” Fink continued. “What seller announces to the world he’s selling? Just think about the stupidity of this.”

“As far as I know, no one at Merrill wants to change the relationship we have with you,” Fleming replied. “BlackRock is a strategically critical asset for us. Let me find John, find out what happened, and the three of us will talk this out,” he promised, and ended the conversation.

The only speaking engagement of Thain’s of which Fleming was aware had taken place the previous day, at a conference hosted by the Wall Street Journal; in it, he had made no notable mention of BlackRock. Indeed, Fleming had been impressed with Thain’s objective assessment of the state of the industry during his talk. “Everyone is shrinking their balance sheet. There was too much leverage in the system, too much credit, for too long,” Thain had said, assuming the role of the industry elder statesman. “We all have concerns about what we read in the papers.”

Fleming called Thain’s office but was told that he was away. Fleming knew that Merrill’s balance sheet had continued to deteriorate—it was loaded with subprime loans the company had been unable to get rid of, and it likely needed to raise more money. But Fleming didn’t expect that Thain would actually want to sell BlackRock, which many considered Merrill’s most solid asset. Announcing a sale would only put more pressure on Merrill.

Like Lehman Brothers, Merrill had been struggling with its own crisis of confidence. For the past several months, Thain had repeatedly told investors that the firm had marked—or valued—its assets conservatively and wouldn’t need to raise additional capital. But investors had been skeptical, knocking Merrill’s shares down 32 percent for the year.

Thain, Paulson’s former number two at Goldman Sachs, had been brought in to run Merrill just seven months earlier to help restore some semblance of order after the firm reported its biggest loss in history and ousted its chief executive, Stan O’Neal. At the time, Larry Fink actually thought he was the top candidate for the job, only to find out by reading the New York Post’s Web site that he had lost out to Thain. His own job interview was supposed to have been later that week, which might explain some of his frustration with Thain.

An ultra-straitlaced executive who was sometimes referred to as “I-Robot,” Thain had appealed to Merrill’s board because of his newly minted reputation as a turnaround artist. After rising rapidly through the ranks at Goldman, he left to overhaul the New York Stock Exchange after the extravagant compensation package for its CEO, Richard Grasso, caused an outrage. Fink, ironically, had led the exchange’s search committee that selected him. At the NYSE, Thain (who, perhaps not surprisingly, took a post-Grasso $16 million pay cut) unleashed a radical transformation, shaking the world’s largest stock exchange out of its clubby, anachronistic ways. He cut perks— shutting the wood-paneled Luncheon Club and firing the exchange’s barber—and turned the exchange into a for- profit, publicly traded company. He took on the powerful, entrenched constituency of floor traders and specialists, who protested in vain as Thain dragged them into the electronic trading age.

Thain, who had grown up in Antioch, Illinois, a small town just west of Lake Michigan, had always been considered a talented problem solver. In his junior year at the Massachusetts Institute of Technology, when he interned at Procter & Gamble, he made a simple but highly significant observation of an assembly line he was supervising. The workers were making Ivory soap, and whenever technical problems forced the line to come to a halt, they would wait for it to start up again before getting back to work. The college boy persuaded the workers that there was no reason to stop—they could keep making soap and stack the boxes on the side until the line came back on. That way their bonuses, which were based on production, would not be affected. Thain won them over, especially after he pitched in and stacked boxes himself.

While his public image as a callous technocrat may not have been entirely fair, Thain did have his weaknesses. With an engineering background, he could come across as a purely linear thinker who sometimes seemed remarkably tone deaf. “When he made conversation, he would explain the things in detail to almost the point that I didn’t know what the hell he was talking about,” Steve Vazquez, one of his peers from high school, said. At a meeting at Goldman in 1999, Thain told a roomful of bankers and lawyers, “Would it hurt you to suck up to me once in a while?” He thought he was being funny; others couldn’t tell.

The incident that had so enraged Fink turned out to be just another example of his tin ear, as Fleming ultimately discovered. Thain had been taking part in a conference call with Deutsche Bank investors when Michael Mayo, the analyst running the call, asked him, “So, I think you said before that you’re comfortable with BlackRock and Bloomberg. Is that still the case? Under what circumstances would you say it doesn’t make sense to have those investments anymore?”

Thain, reasonably enough, took the question to be a hypothetical. Of course Merrill needed to look at all its assets and figure out which ones could be turned into cold, hard cash, he said; in this environment, any investment bank needed to do that. “At the end of last year when we were looking to raise capital, we looked at various options, which included selling common, selling converts,” Thain replied. “But also included using some of the valuable assets that we have on our balance sheet, like Bloomberg and BlackRock.