First on the agenda was a report from the group examining Lehman’s financials to determine how much money would be needed. Their conclusion: Lehman would have to raise $15 billion to $20 billion to make it out of the hole. This was a stunning amount of money. Remember, JPMorgan bought Bear Stearns for $4 billion. Would anyone pay such big bucks for Lehman? The group examining Lehman’s assets had a grim report. The assets were worth about $20 billion less than Lehman had calculated.
The work groups were also finding some egregious examples of how bad it was at Lehman. These examples cut against the sense of entitlement that was prevalent at that time—that Lehman deserved a federal bailout. Clearly the firm had created the dire situation itself. “It was insane,” a participant in the meetings told me. “For example, in Dubai you had man-made islands that hadn’t been made, and people had bought houses on those islands and secured mortgages for them. But the islands didn’t even exist yet! There were a few situations like that and it was just devastating.”
A Treasury official who was also in the meetings could not disguise his disgust. “I was pissed off because they were pounding us over our refusal to save Lehman,” he told me. “Well, those assholes created the problem.”
There were too many holes in Lehman’s books, but Paulson urged them on. “We need to know where you guys stand,” he said. “If there’s a capital hole, the government can’t fill it. So how do we get this done?”
The men around the table were feeling the strain. The idea that they would finance a competitor was anathema to them. But the concern went deeper than the question of whether the banks would be altruistic. There were serious long-term practical considerations as well. “Let’s say we got together and saved Lehman,” one banker speculated. “Do we then get together and save the next firm and the next firm? And is saving a weak firm undermining our own position in the market?”
Lloyd Blankfein was particularly vocal. He assured Paulson that Goldman Sachs would do what was necessary and act responsibly. But what did that mean?
For Thain, the meetings at the Fed were instructive on two counts: First, they convinced him that Lehman would not survive the weekend. The report on the financials confirmed it. Thain was also clear that Lehman’s fall would have a devastating effect on other firms, and Merrill was particularly vulnerable.
At one point, Vikram Pandit looked down the length of the long table and pointed at Thain. “Who’s going to save them?” he asked. “Everyone knows if Lehman goes down, then it’ll be Merrill, and then it’ll be Morgan Stanley, and then Goldman.”
Thain ignored Pandit’s provocative comment, but he was thinking hard about where he could get an infusion of capital. Paulson pulled him aside. The two men knew each other quite well from their shared years at Goldman Sachs. They’d been in tight spots together before. “I think you should call Ken Lewis,” Paulson said. He was facing the reality that Lehman had no real franchise value, but Merrill could be saved. “You have the thundering herd,” Paulson said with a smile. “Merrill Lynch has a lot of real value.”
Thain considered what Paulson was telling him and nodded. “I know what I need to do,” he said.
Barely nine months into his term as chief of Merrill Lynch, Thain wasn’t thinking about selling the company. He thought he could strike a deal with Ken Lewis for Bank of America to buy a 9 to 10 percent stake in Merrill. That would give Merrill breathing room to get through the crisis of Lehman’s fall.
Determined, Thain stepped outside to Liberty Street, pulled his cell phone out of his pocket, and dialed Ken Lewis’s number in Charlotte. Lewis immediately took his call, although he’d been unwilling to take Fuld’s.
“We should talk,” he told Lewis when he reached him. “I think there are some strategic opportunities here.”
The two men didn’t know each other very well, but they were both speaking for their companies. Lewis, the consummate deal maker, had wanted to buy Merrill Lynch for a long time. Years earlier, Lewis had talked to the leadership of Merrill and had been willing to pay much more for the stock than it was currently trading. Now, in September 2008, he smelled a bargain. Perhaps this crisis was his opportunity.
“I can be in New York in about three hours,” Lewis said.
Saturday afternoon Thain and Lewis sat down together at Lewis’s corporate apartment at the Time Warner Center on Columbus Circle. It was just the two of them. Lewis confided to Thain that there would be no deal with Lehman. He’d made the decision the previous evening. Thain proposed that Bank of America buy a minority stake in Merrill—say, 9 or 10 percent.
Lewis shook his head no. “I want one hundred percent,” he said. “Or nothing.”
Quietly, in another room at the Federal Reserve, a separate drama was occurring, with a potential damage far greater than the failure of Lehman or Merrill. It had to do with American International Group (AIG), the mammoth insurance and financial services firm whose tentacles reached into nearly every corner of the economy. As negotiations surrounding Lehman continued hot and heavy on Saturday, Paulson was working on another floor at the Fed, addressing the looming crisis at AIG. Chris Flowers, who had been at the Fed studying Lehman’s books on behalf of Bank of America, had also turned his attention to AIG, which he believed was in dire straits. Flowers laid out his papers on the table and began walking Paulson through the numbers. Paulson listened closely, but he was aware that Flowers was by no means a neutral party. Paulson suspected that he was interested in buying pieces of AIG on the cheap, and the board of directors had been resistant.
Paulson and Flowers were former
