FIVE
Death Sentence and Champagne
“This company’s going to be a thing of beauty as we get to the other side of this economic downturn. It will be the envy of the financial services industry.”
—KEN LEWIS, CEO OF BANK OF AMERICA, IN AN INTERVIEW WITH MARIA BARTIROMO, SEPTEMBER 15, 2008
SEPTEMBER 14, 2008
By Sunday morning I realized that the developments in New York were so significant that I couldn’t leave to attend the CME conference. I sent my regrets to the chairman, Terrence Duffy. He was quite understanding. I was hardly the only one to bail on his conference. In fact, when Paul Volcker gave the keynote Monday afternoon to a half-filled room, he joked, “I want to congratulate you for the timing of this conference.”
On Sunday I was following two tracks. The first and most significant was the fate of Lehman Brothers. I could feel the tick, tick, ticking of this time bomb as we headed into the final twelve hours. The deadline was set for the opening of the Asian markets. The second track was the emerging—and unexpected—story of a developing agreement between Bank of America and Merrill Lynch. I got ready for a busy day.
Bob Diamond and his team had worked through the night, trying to put together the pieces of the deal. It was 4:00 a.m. before they left the Fed, and Diamond didn’t go to bed. He had a call scheduled with his board; it was 10:00 a.m. in London. He was sleepy but optimistic. All that remained was for the deal to be sent to the British regulatory body, the Financial Services Authority, for its approval. But the call jolted him—and not in a good way. For the first time he was hearing that the FSA was probably going to reject the purchase, even if the consortium covered Lehman’s bad debt. It was, they felt, just too risky. Diamond knew that he wouldn’t be getting any sleep.
It wasn’t just the failure of his arduous efforts over the past few days that upset Diamond, or even the prospect of not getting Lehman, which he wanted more than his superiors, his board, or the British government. He felt blindsided and embarrassed. His counterparts had expected him to act in good faith, and he had, but he knew it wouldn’t look that way on the Street.
At 8:00 a.m. Diamond joined a conference call with Geithner and Paulson at the Fed, and John Varley in London. Varley broke the news to Geithner and Paulson that the FSA was balking. They were shocked but immediately went into action. Geithner placed a call to Callum McCarthy, the FSA chairman. McCarthy repeated the British government’s concern that they would be taking on too much risk. He didn’t exactly say no, but he asked for more time for due diligence, and there just wasn’t any. He also mentioned the requirement that Barclays’ shareholders vote on big acquisitions and said that if the American government could cover Lehman for thirty to sixty days prior to a vote, maybe they could do the deal.
Geithner already knew that was impossible, but it also made absolutely no sense. Let’s say the federal government lent Lehman Brothers enough to carry it for sixty to ninety days. Investors would surely bolt in large numbers in response to the uncertainty, and the problems with Lehman’s balance sheet would grow much worse. By the time the Barclays shareholders considered a purchase, it would be a real mess, and they would likely say no. It just wasn’t going to happen.
Paulson got on the phone with Chancellor of the Exchequer Alistair Darling, whose response was chilly. He asked Paulson why the British government and taxpayers should take on Lehman’s problems if the American government would not.
Paulson got it but he was deeply disappointed. “They kind of strung us along,” one of Paulson’s aides told me. “It felt like the British government never had any intention of doing this deal without a promise from the American government, which Hank could not give. We had been living on pure adrenaline for days, and now we felt deflated. It was awful.”
As noon approached, it became clear that the British would not budge. It was over.
Paulson retreated to a private office and called Fuld. “Dick,” he said, “I feel terrible about this, but the British government is not going to approve the sale. We’re out of options.”
“No!” Fuld cried. “You’ve got to do something.” But there was nothing that could be done. Fuld looked out of his office where board members had begun drifting onto the thirty-first floor, waiting while executives continued working on a Barclays deal. When the word came down that the British government said a sale to Barclays was too risky, all the wind went out of their efforts. Now what?
A source told me, “You know, this whole weekend has been a roller coaster—‘We’re done.’ ‘We’re not done.’ ‘We’re done.’ ‘We’re not done.’ Now we really were done.”
At the Federal Reserve, unaware of the drama, the CEOs were working on an arrangement to put up $30 billion. It was a remarkable act of collaboration—and, one may even say, of generosity. To be sure, they all felt jeopardized by the prospect of a Lehman failure, but it was still impressive that they were able to finalize such a huge commitment in less than two days.
At 1:00 p.m., Paulson, Geithner, and Cox entered the room. Paulson delivered the news to the CEOs. “The British screwed us,” he said. Christopher Cox said he had notified Dick Fuld that Lehman should file for bankruptcy.
“I actually thought there was going to be a solution for Lehman, up until the moment there wasn’t,” BlackRock’s Larry Fink told me. “At one time during the weekend it felt as if everything was going to be resolved. Everybody said Lehman was too big to fail. But we didn’t have time to figure it out.”
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