Team:
Given the recent press reports regarding Lehman, I wanted to communicate that we are counting on you to be at work on Monday and ready for business as usual. In fact, I ask that you take the extra time necessary to coordinate with your teams to conduct a “ready for business” check on all mission critical activities before the day begins. Thanks as always for your commitment.
Things were a little better over at Merrill Lynch, where the final details of an agreement between John Thain and Ken Lewis were being worked out—although many people did not know what to make of a sale to Bank of America and what it would mean to them. The terms surprised me a bit. This was no fire sale. At $29 a share, it looked as if Bank of America was paying a huge premium, since Merrill had closed Friday at $17.05. Clearly, Lewis really wanted to own Merrill Lynch.
When I learned that there would be a press conference at Bank of America’s New York offices Monday morning, I reached out to Lewis, hoping to do a one-on-one afterward. My producer Lulu Chiang had cameras at the press conference and followed up on the interview with Lewis.
At the Federal Reserve, Chris Cox and a team of lawyers were outlining the basic mechanics of bankruptcy to Lehman’s people. The SEC had a role to play in bankruptcy, but only as a facilitator. He couldn’t force Fuld to declare. “It’s important that you make an announcement before the Asian markets open [8:00 p.m. Sunday, New York time],” he told Fuld. But Lehman was dragging its feet. Watching the clock, Cox grew increasingly concerned. Finally, at 8:00 p.m., with Lehman’s board gathered, Cox put in a call. “It’s time for you to do the right thing,” he said.
The board wasn’t sure what he meant. “Are you telling us to go into bankruptcy?” one member asked.
“No,” Cox hedged, “I’m telling you what the situation is.” As their regulator, he couldn’t order them to go into bankruptcy, but he was letting them know that they were out of options.
An executive who was on the call told me, “There was no doubt what the intention was. And the Lehman board was scared and shocked. It was a very big deal.” He added that everyone thought Cox had stepped over the line by calling the board. “Our board was outraged that Cox butted into the board meeting. That had never been done before. Everyone’s nerves were so frayed that they briefly let anger get the better of them.”
It took Lehman until 1:45 a.m., long after the Asian markets had opened, to declare bankruptcy.
A Treasury official acknowledged to me the difficulty of the outcome but defended the Treasury’s stance on Lehman. “People have said, ‘But why couldn’t you have done something to facilitate a purchase? They forget that everyone who might be a potential buyer knew how bad things were at Lehman. Companies weren’t jumping up and down, saying, ‘Let me buy it!’ They weren’t lined up outside the door saying, ‘I’d buy Lehman if only the government would help me.’ If you have no buyer, you have no buyer. The government can’t compel someone to buy.”
Many people were confused on this point. What was the proper role of the federal government. “For one thing,” a source in Washington explained, “the Treasury just didn’t have the money to rescue institutions. This was before Congress authorized TARP [Troubled Asset Relief Program] funds. The Treasury couldn’t buy or bail out institutions. It wasn’t a question of whether Hank Paulson wanted to do it or not.”
Another source in the Treasury spoke with me, the sadness and frustration clear in his voice. “It wasn’t like a decision was made on Friday that these guys were just doomed and we were going to let them go. There was an attempt over that entire weekend to save them. And the fact is, we didn’t. So in that sense it was a failure, and once Barclays pulled out, we didn’t have any other options. We didn’t have the legal authority to do anything differently. So, I don’t blame us for failing that weekend. I blame the fact that we didn’t have mechanisms set up in advance to deal with these sorts of contingencies.” He sighed and added, “It would be great if we were all smarter, but we’re not.”
Late Sunday, September 14, the CEOs pulled their chairs back from the table and began to pack their briefcases. They had failed at the core mission of the weekend, which was to save Lehman Brothers. But their minds were elsewhere. “When we walked out of there Sunday night, a few of us commented that there was still a big elephant in the room,” one of them told me. “And that was AIG. When we mentioned AIG to Geithner, he kind of brushed us off, saying, ‘Yeah, we’re taking care of that, but it’s not part of this discussion.’ Some of us disagreed. We thought if there was an announcement that Lehman went under, but Merrill was saved and AIG was taken care of, maybe the markets wouldn’t be so negatively affected. But with the big elephant of AIG still in the room, no one felt at ease.”
It was well into the evening when I reached a source at Lehman Brothers. The adrenaline shot provided by hope had worn off, and he was dragging with exhaustion. He could spare me only a minute because he was immersed in the details of the bankruptcy filing. “This is my family,” he said, and I could
