“Really?” he asked, trying to keep the shock out of his voice.
“Yes,” Schwartz replied calmly.
“Okay. I have to call you back,” Kirk said, nervously ending the conversation, and then almost shouted to Fuld and McDade, “Guys, they don’t have a client!”
“What do you mean?” Fuld asked, looking up bleary-eyed from his notes.
“They’re doing this for themselves. For Goldman. That’s what he told me.”
For the next few minutes the three men frantically brainstormed about their course of action. McDade, reasonably, was concerned about sharing information with a direct competitor: How much did they really want to divulge? At the same time, he felt they couldn’t take a stand against a plan that he believed had originated with Paulson.
Kirk was even more apprehensive. “Why are we letting Goldman Sachs in here? Haven’t you read
“They will rape us,” Kirk cautioned.
McDade, turning back to his preparations for the fast-approaching call, made his position clear: “We were told by Hank Paulson to let them in the door. We’re going to let them in the door.”
Twenty-seven floors below, Lehman traders gathered for a preview of SpinCo, the “bad-bank” spin-off that would be discussed an hour later during the earnings call. McDade had appointed Tom Humphrey and Eric Felder to explain what investors were about to hear.
After learning the details of the plan, the traders were unusually quiet, and the silence was broken only when Mohammed Grimeh, global head of emerging markets, stood up with a horrified look on his face.
“That’s it? That’s fucking
In the time it had taken Humphrey and Felder to describe SpinCo, Grimeh had already seen through it—had seen exactly what JP Morgan and Citigroup saw the night before, and what he feared the market would see as well.
“All we’ve done is to take a dollar out of our right pocket and put it in our left. The heavy debt load would make it insolvent before it started,” he said, backed by a growing chorus of angry muttering from the disconcerted bankers.
Gregory J. Fleming, Merrill Lynch’s president and chief operating officer, had one eye on CNBC as he jogged on a treadmill at the health club at the Ritz-Carlton hotel in downtown Dallas. He had spent the day before with clients in Houston and had scheduled a town hall session here with Merrill employees before hopping on a flight back to New York.
As he leaned into his jog, CNBC reported that Lehman Brothers had just announced its earnings ahead of its conference call. The firm, the reporter elaborated, had also described its extraordinary spin-off plans in its press release. When Fleming returned to his room, he got a colleague to send him the announcement, which included an important headline buried at the bottom: “The firm remains committed to examining all strategic alternatives to maximize shareholder value,” which meant that it was open to just about anything. He knew the company had been quietly shopping pieces of itself, but that statement effectively made it official, at least to those paying attention. Lehman, the entire firm, was up for sale.
From his days as a merger banker focusing on financial services, he knew that if Lehman was on the auction block, Bank of America would be the likely buyer. But if Lehman was sold to Bank of America, the implications for his own firm, Merrill Lynch, would be enormous. He had long believed that Bank of America was the natural buyer for Merrill; at a Merrill board meeting just a month earlier, Bank of America had been listed in a presentation as just one of a handful of compatible merger partners.
Fleming began trying to figure out whom he knew who might be working on a deal with Bank of America. Ed Herlihy of Wachtell, a longtime friend and one of the legal deans of banking M&A, immediately came to mind. Herlihy had worked on nearly every deal Bank of America had orchestrated over the past decade.
“This is getting ugly,” Fleming told Herlihy when he reached him on his cell. “How are my friends in Charlotte?”
Herlihy could see where this conversation was heading and took steps to deflect it immediately. “Let’s not go there, Greg,” he replied.
“Just tell me. If you’re thinking about Lehman, you have to tell me. We could be interested in talking at some point. You and I both know that would be a much better deal.”
Herlihy, clearly uncomfortable, said, “We’ve been down this road before. We’re not going to do anything unless we’re invited in. If you are serious, now would be a good time to get moving on that.”
That was all the confirmation Fleming needed to be convinced that Bank of America was indeed bidding for Lehman.
Fleming had one more call to make before his first meeting that morning. He wouldn’t contact John Thain just yet—Thain, he suspected, wouldn’t be interested at this point, for whenever Fleming had tried previously to discuss contingency plans to sell the bank, he had been dismissive. Instead he phoned Peter Kelly, Merrill’s deal lawyer, and recounted his conversation with Herlihy.
“Look, you have to make sure Bank of America is there for us,” Kelly instructed him after the two had discussed the ramifications. “You have to convince John.”
“That’s a high bar,” Fleming said. They both knew that he and Thain had a fundamentally antagonistic relationship.
“I know,” Kelly said, “ but that’s why you get paid the big bucks.” Before hanging up, he made one last point:
