On the Brink (26 page)

Tim had suggested I phone Ken Lewis to see just how serious he was. He felt, as I did, that Bank of America was drifting away. I spoke briefly with Lewis while I was on board the flight. He was trying to outline the rudiments of a proposal, but our connection was poor in the stormy weather, and I agreed to call back once we were on the ground.

I thought glumly of the challenge before us. This crisis was far greater than what we’d faced with LTCM, a decade before, almost to the day. And the circumstances were more ominous than when we saved Bear Stearns in March. The financial system, and the global economy, were in much weaker shape.

The plane touched down a little before 5:00 p.m., and I jumped into a waiting car, accompanied by Dan, Jim, and Christal. As we made our way slowly into Manhattan I got back on the phone with BofA. Lewis laid out a tentative but complex proposal. He said his people had figured that Lehman had a capital hole of about $20 billion. For BofA to buy the investment bank, it would have to leave behind $40 billion of assets. The North Carolina bank would split the first $2 billion in losses with the U.S., 49 percent to BofA and 51 percent to the government. The U.S. would have to absorb 100 percent of all other losses on the assets left behind. In return, as a modest sweetener, BofA would give the government warrants to buy its shares. I reminded him that there would be no government money but that we were bringing together a private-sector consortium, and we agreed to meet in New York to discuss the matter further.

Dan Jester followed up with a phone call to BofA’s Greg Curl to get more details. I listened to snippets of the conversation and watched Dan’s unenthusiastic reaction to what he was hearing. I had suspected that Lewis didn’t really want to buy Lehman, but I had hoped that if he believed he could get some help, he might try to pick it up on the cheap.

When Dan hung up, he shook his head. BofA had only wanted to talk about Lehman’s bad assets and the size of the valuation hole.

“It’s a positive sign that they’ve come in with the outline of an offer,” I told him. “But it sure doesn’t sound like they really want this.”

“They don’t,” Dan agreed. “But do we have anything better?”

As we slowly made our way through the heavy rain and traffic to the New York Fed’s headquarters on Liberty Street in Lower Manhattan, I checked in with Tim. He said Barclays was having trouble getting access to all the information they wanted as quickly as they needed. I wasn’t completely surprised; when I had first told Dick Fuld about Barclays’s interest he had been hesitant—he clearly preferred BofA as a buyer.

Tim thought we should press Fuld on helping Barclays. We got hold of Dick and relayed our concern. We also outlined BofA’s proposal. Dick said he didn’t understand why BofA needed any assistance. He was still clinging to his belief in the value of his assets, but he was alone there, a point underscored by a subsequent conversation I had with Varley and Diamond. The Barclays executives were encouraging, but they had one important qualifier.

“We’ve been focusing on the most problematic assets, and we may need some help with the funding,” Varley said.

He reported that he’d spoken with Barclays’s board as well as the bank’s regulator, the U.K.’s Financial Services Authority (FSA), and he believed a deal could be made.

Reassuring him again that we would not embarrass his bank, I told him we wanted his best bid right away. “Your team needs to work through the night doing due diligence,” I said. “We need as much specificity as soon as possible.”

Built in the decade before the Great Crash of 1929, the New York Federal Reserve is a Renaissance Revival fortress with iron-barred windows, hunkered amid the skyscrapers of Wall Street. Its 14 stories of offices sit atop what is said to be the biggest pile of gold in the world. I’d walked its corridors many times in my career, but never before with such a sense of urgency.

Tim had called the meeting for 6:00 p.m., but it didn’t begin until closer to 7:00 p.m., because of the bad traffic. The weather, the delay, and the market conditions contributed to a gloomy atmosphere.

Tim, Chris, and I met upstairs on the 13th floor, where Tim had taken up temporary residence while the Fed’s 10th-floor executive offices were being renovated. We quickly went through our order of presentation, then rode the elevator down to a first-floor conference room where the meeting was being held. We took our seats at a long table, where Wall Street’s most prominent CEOs sat waiting for us. Among them were Jamie Dimon from JPMorgan, John Mack from Morgan Stanley, Lloyd Blankfein from Goldman Sachs, Vikram Pandit from Citigroup, John Thain from Merrill Lynch, Brady Dougan from Credit Suisse, and Robert Kelly from Bank of New York Mellon.

It was an extraordinary moment: These were the people who controlled Wall Street and global finance. They had fought for years, sometimes bitterly, to lead their institutions to the forefront of the business, and now they had gathered to save a rival—and their own skins.

Tim opened the meeting by noting the seriousness of the occasion and the fragility of the markets. He said it was crucial for everyone to work together to save Lehman and to find a way to contain the damage if that could not be done. A failure would be catastrophic, and we couldn’t completely insulate the banks from the fallout. Tim had crafted his speech to get the CEOs focused, and when he handed the meeting over to me, I had their full attention.

I was straightforward: We all knew why we were there. Without their help, Lehman would not open for business on Monday, and the consequences for the markets—and for everyone sitting around the table—would be dire. I explained that we had two potential buyers for Lehman; with no one from Bank of America or Barclays in the room, it was clear to everyone who the potential buyers were.

I stressed that a Lehman sale was possible but not probable. The industry had to find its own solution. Both bids had capital holes whose sizes were still unclear. What was clear, however, was that there could be no government money involved in any rescue. I knew that unless I explicitly said this, some of them might think that Good Old Hank would come to the rescue.

After Chris Cox explained how the SEC had been planning to manage a bankruptcy, I concluded that we needed to work together to avert a Lehman failure—if we could fashion a deal—and to manage one if we couldn’t.

Tim said the Fed was considering many options to make liquidity available to the markets. And to help prevent the market from tightening even more, he encouraged the CEOs not to keep pulling back from one another.

Immediately the questions flew: How much money did we expect the bankers to put in? Why should they risk their capital? What difference would saving Lehman make, given the problems wracking the entire industry?

All the attendees knew how fraught the market was and that its problems went way beyond Lehman. By now, everyone knew that AIG was in trouble. The insurance giant’s problems had been all over the news that day. Apart from the dramatic plunge in its shares, Standard & Poor’s had warned that it might downgrade the company’s credit rating; this would force AIG to produce billions in additional collateral. Then what? What was the point of having the private sector weaken itself further to save Lehman if someone else was going to need help afterward?

But when Pandit asked if the group was also going to talk about AIG, Tim said simply: “Let’s focus on Lehman.”

Tim went on to outline a plan for three main groups to work through potential outcomes for Lehman. One group would plan ways to minimize the repercussions of what Tim called the “lights out” scenario of a Lehman bankruptcy, focusing on Lehman’s vast skeins of derivatives, secured funding, and triparty repo transactions. A second set of firms would look into how the industry might buy all of Lehman with the intention of liquidating it over time—an approach similar to what Wall Street had done in the 1998 LTCM bailout. A third group of firms would examine how to finance the part of Lehman that a prospective buyer didn’t want.

In the end, the meeting turned out to be much less contentious than I had feared. I could see that the CEOs weren’t all convinced that they would solve anything by risking their own capital. No doubt, they also questioned the government’s resolve in saying we wouldn’t put any taxpayer money in. But it was also clear they had come to the meeting with a purpose: they were committed to working with us and wanted to find a solution that would avoid market chaos.

“Come back in the morning,” Tim told the CEOs. “And be prepared to do something.”

C
HAPTER 9

Saturday, September 13, 2008

E
arly Saturday morning, Jim, Christal, and I, accompanied by my Secret Service detail, left the Waldorf-Astoria Hotel in Midtown Manhattan, climbed into a car, and sped down a deserted Park Avenue, arriving at the New York Fed just after 7:00 a.m. It was quiet in the gray light and early enough that the television crews had not yet set up. Though everything had been hush-hush the night before, the news of our meeting was all over the morning’s papers. By the time Dan Jester arrived a few minutes later, reporters had begun to swarm outside the building.

We rode the elevator up to the 13th floor, where Tim Geithner had arranged for me to work in an office borrowed from his Information Technology department, just down the hall from his own suite. I went straight to work and called Ken Lewis, who reported that after closer inspection his people now believed that Lehman’s assets were in even worse shape than they had thought the previous evening—when they had said they wanted to leave $40 billion behind. I wasn’t surprised to hear Lewis put forward a new obstacle: it was increasingly obvious that he didn’t really want to buy Lehman. Nonetheless, we arranged for his team to come over to brief me later that morning.

I joined Tim in his office for a conference call with Barclays at about 8:00 a.m. Bank chairman Marcus Agius and CEO John Varley were on the line from London, and Bob Diamond was at Barclays’s Midtown Manhattan offices. Varley said they were working hard on a possible deal but needed to hear that Tim and I were serious. Barclays did not want to be used as a decoy. Varley said he had serious concerns about some of Lehman’s assets and indicated that Barclays would need to leave $52 billion of them behind. In addition to the problematic commercial mortgages, the list of dubious holdings included undeveloped land and Chrysler bonds that hadn’t been marked down.

I told Varley to focus on the biggest problems first—the assets he thought were going to be the most troubled—and tell us what he needed to take care of them. If Barclays gave us its best offer that day, we believed we could deliver a private-sector consortium that would fund whatever shortfall there was. Even as we spoke, I explained, the leaders of virtually the entire banking industry were assembling downstairs at the Fed. The Barclays bankers said they would keep working, and I ended the call encouraged that Lehman might have found its buyer.

We were scheduled to meet the Wall Street CEOs in the first-floor conference room at 9:00 a.m., but just before then Dick Fuld called. I briefed him on my unpromising conversation with Lewis and told him that it was more important than ever that he work with Barclays. He expressed great disappointment, bordering on disbelief, at BofA’s findings. He wanted to know more, but I had to cut him off to get to the meeting.

Addressing the CEOs for the second time in 12 hours, I tried to be totally open. I knew I had to give them crucial information as soon as I received it so that we could all quickly make informed judgments. I told them that Barclays appeared to be the most likely buyer for Lehman. I added that we had a meeting scheduled with BofA for later that morning, but I didn’t dwell on the prospects of a deal with the U.S. bank, and it must have been clear to the group that those talks weren’t going anywhere. I emphasized that we couldn’t do anything without their help.

“We’re working hard on a transaction, and we need to know where you guys stand,” I said. “If there’s a capital hole, the government can’t fill it. So how do we get this done?”

I can only imagine what was going through their minds. These were smart, tough businessmen, and they were in a difficult spot. We were asking them to rescue one competitor by helping to finance its sale to yet another competitor. But they had no idea of the true state of Lehman’s books or how much they would have to cough up to support such a deal. Without this information, they were flying blind: they couldn’t possibly predict the consequences of any course of action they chose. They knew how important it was to maintain a smoothly functioning market and how much we needed them to keep lending to one another if Lehman did go down. But their own institutions were all under grave pressure, and they had no idea what tests they might face in the days ahead—or whether they would be strong enough to survive this crisis.

As a group, the CEOs were nonetheless working hard to agree on a plan, but there was, understandably, some pushback. John Mack wanted to know why the government couldn’t arrange another assisted transaction, like the Bear Stearns rescue.

Tim quickly dismissed the possibility. “It’s not a feasible option,” he said. “We need to put another plan in place.” He made clear that the Fed could not lend against Lehman’s dubious assets but asserted that it wasn’t the government’s place to dictate the terms of any deal.

The three groups that Tim had organized to examine Lehman scenarios had worked through the night and reported on their progress. Citi, Merrill Lynch, and Morgan Stanley had been looking into an LTCM-type rescue, but that approach faded quickly as an option because it was impractical to liquidate Lehman without incurring huge losses, given the poor quality of its assets.

The team looking into how the industry might assist an independent buyer had spawned a series of subgroups to, among other things, scour Lehman’s books, identifying and valuing its toxic assets, and devise a deal structure that would allow an industry consortium to finance the purchase of, and absorb the losses on, those assets. Credit Suisse and Goldman Sachs led the way on valuing Lehman’s dubious real estate (Goldman had taken a look at the portfolio on its own earlier in the week). Credit Suisse’s Brady Dougan reported that private-equity assets carried by Lehman at $11 billion were worth around $10 billion, while real estate assets carried at $41 billion were more accurately valued at between $17 billion and $20 billion.