Too Big To Fail

On September 10, 2008, as Fuld prepared for the “looming conference call” (253), he and others at Lehman found out that Goldman was considering buying it. This put them into a panic about sharing their information with a “direct competitor” (254). Meanwhile, when Lehman traders were filled in about the SpinCo plan, Mohammed Grimeh, global head of emerging markets, was “horrified” (255). He saw through the plan and realized that all “we’ve done is take a dollar out of our right pocket and put it in our left,” and that the “heavy debt load would make it insolvent before it started” (255).

Gregory J. Fleming, Merrill Lynch’s president and COO, read between the lines of the news about Lehman and realized that it must be up for sale and that Bank of America would be the likely buyer, which would have “enormous” (255) implications for Merrill Lynch, which he had thought might someday be acquired by Bank of America. While Fleming and John Thain were attending a board meeting for BlackRock, as the representatives of Merrill Lynch on the board, he tried to coax some information out of Lehman’s lawyer, Rodgin Cohen, but he was unsuccessful. Before the second day of the BlackRock board meeting, Thain held a conference call with his own board, which was concerned about “the shorts” (289) coming after Merrill next, if Lehman went down. Thain angrily brushed off this concern, saying, “We are not Lehman” (290).

Fuld handled the earnings call himself, even though he usually left it to his CFO. He knew there was “a lot riding on what he would say” (257). His remarks could be summarized: “Lehman Brothers will be just fine. We appreciate your concern, but we have the situation under control” (257). His CFO then explained how Lehman would sell 55% of its money-management business and also spin off “the bad stuff” (257)—much of its commercial real estate. The new real estate entity would be named REI Global. This plan seemed to be a “clean, elegant solution” (258) superficially, but the question was where Lehman would get the money to fund the new company. Michael Mayo of Deutsche Bank bluntly asked that question during the call, and Lehman’s CFO essentially responded that Lehman would have less leverage after the spin-off and therefore, “need less capital” (259).

Listening to this call, David Einhorn could not believe what he was hearing. He was certain the “assets in question were worth much less than Lehman was claiming” (259). He was convinced Lehman planned to “keep making up the numbers however they want” (259).

Steve Shafran and others at the New York Federal Reserve were also listening, many “in a state of utter disbelief” (259). Shafran noted that investment bankers “get paid by large corporations for tough advice in tough situations,” so this seems to validate the old saying that “a doctor should never treat himself” (259).

Senior executives at Barclays London were also listening to the call, under an assumed name, as the company was thinking about purchasing Lehman. Based on the call, they decided to go for it, “if they could get it for a song” (261). They were stymied when Tim Geithner refused to shepherd a deal because they did not want to call Fuld directly and appear to be “taking advantage of someone else’s misfortune,” even though that was “precisely what they were seeking to do” (263). Geithner did tell Fuld to call Bob Diamond at Barclays, who was “clearly flustered” because he “thought he had been explicit with Geithner that he didn’t want to talk directly with Fuld about a deal” (271). He did eventually agree to fly to New York to talk. As it turned out, Diamond had already reached an agreement with Paulson and Geithner to examine Lehman’s books. Fuld’s involvement was a “polite formality” (272) at that point.

Lehman shares were up 17.4% that morning, but a few hours later, Moody’s announced it would cut Lehman’s rating soon, if it did not enter into “a strategic transaction with a stronger financial partner” (261). Lehman shares had ended the day at $7.25/share, a 6.9% decline. Fuld called John Mack of Morgan Stanley for help, and Mack agreed to let the senior management of both firms meet without them to consider a deal. At that meeting, however, there was “no common ground” (268). It became clear that Morgan saw Lehman as “too far gone” (268).

Ben Bernanke was meeting with the St. Louis branch of the Federal Reserve when he was asked to help smooth things over with Bank of America, which was demanding “to have its capital ratio relaxed” (264). Bernanke called Lewis at Bank of America and assured him that the bank would get capital relief if it went ahead with discussions with Lehman. Meanwhile, Lehman’s talks with Goldman had shut down.

Greg Curl of Bank of America flew to New York with a team of over one hundred executives to begin their due diligence, with the assistance of Chris Flowers, a former Goldman banker “whose specialty was the arcana of the banking industry” (269). Curl also thought Flowers might be interested in investing in Lehman. Flowers also brought in Jacob Goldfield, another Goldman alum.

With Bank of America and Barclays “in competition” (272), Barclays was seeking assurances that it could be the exclusive bidder. Paulson did not agree but said that Barclays was “in a strong position” and that he would make sure Barclays was not “embarrassed” (272).

Wall Street analysts turned against Lehman “en masse” (270) following its announcement of its SpinCo plan. Geithner also asked Fuld to resign from the board of the Federal Reserve of New York, which he did.

Meanwhile, Bob Willumstad of AIG was preparing to meet with Moody’s about a potential downgrade, and Geithner was too busy with Lehman to help. It was becoming clear that JP Morgan would not provide any additional funds, and Jamie Dimon was urging him to come up with a plan to reassure the markets. At the meeting, it was clear that Moody’s would “downgrade AIG by one notch and possibly two” (275). If Standard & Poor’s did the same and AIG could not raise the extra capital, “it would be a virtual death sentence” (275). A lawsuit against Hank Greenberg was also looming over the company, and AIG lawyers met with Greenberg’s lawyer, David Boies, to “hammer out a deal once and for all,” in part because Willumstad wanted Greenberg to return as “chairman emeritus,” which might “buy them some time and goodwill from investors” (281). Willumstad also called Dimon directly, and Dimon ended up agreeing to help AIG “rais[e] capital […] over the weekend (291).

Harvey Miller, a “legendary bankruptcy lawyer” (275) with Weil, Gotshal & Manges, was confidentially asked to do some preliminary work on Lehman “just in case” (276). Lehman was the firm’s biggest client. A few hours later, he received a cautionary call from Lehman’s chief legal officer, reminding him not to talk to anyone about it and to “keep it contained” (277).

Dick Fuld decided to call Ken Lewis of Bank of America directly, but Lewis was not sure how to respond because he felt he was negotiating with the government, not Fuld. Bank of America decided it could not do a deal “without government assistance,” but “Paulson still wasn’t prepared to resort to drawing on federal money—at least not yet” (280). It was “politically unpalatable, especially with the Fannie and Freddie bailouts still making headlines” (280). Paulson suggested to Lewis that he would “get the private sector to get involved” (280) by asking a consortium of banks to help subsidize the sale, but Lewis “didn’t want to get involved in a quasi-public-private rescue; he wanted a Jamie deal” (281). However, he agreed to keep examining Lehman.

Paulson was concerned that neither Bank of America nor Barclays would reach a deal to buy Lehman, they did not want a repeat of the “backlash of the Bear deal” (284). Paulson, Geithner, Bernanke, and Cox decided to work to “come up with a private solution” (285). Paulson’s head of communications, Michele Davis, knew that rumors of a bailout would be “politically problematic” (286), especially with President Bush’s brother and cousin having ties to Lehman. She suggested “leaking to the press word that the government wouldn’t be pursuing any bailout of Lehman” (286), but the press didn’t seem to pick up on the leak. Even the Wall Street Journal “didn’t go far enough” (287) to dispel the idea that there might be a bailout in Lehman’s future.

Davis decided to call Steve Liesman, CNBC’s economics reporter, known as “The Professor,” to whom Davis had “successfully leaked other information” (287). Liesman ended up reporting that there would be “no government money” (288) in the resolution of the Lehman situation. Herlihy at Bank of America was shocked and told Curl, but Curl believed CNBC was just a “professional rumor mill” (289). Herlihy, on the other hand, believed Treasury was sending Bank of America “a message,” and Curl “acknowledged that Herlihy had a point” (289). Rodgin Cohen noticed that something had changed, as if Bank of America “had already decided against bidding” (297). Cohen called Geithner to say he did not think the deal could be done without government assistance, but Geithner said not to count on it—he and Paulson had decided that something needed to be done.

Meanwhile, JP Morgan pulled $5 billion in collateral from Lehman and said it might pull another $10 billion by the weekend. This would be “almost operationally impossible” (282) for Lehman. They called Geithner, but he said he could not “advise a bank not to protect itself” (283).

Brian Schreiber of AIG called Chris Flowers for help, but he was still working with Bank of America on Lehman. Geithner ended up getting back to Willumstad and saying that he was sending some “market guys” (291) over to help. Flowers did arrive to help, and his “eyes widened as he studied the numbers” (294). He asked if they had considered Chapter 11 bankruptcy, noting that people were “not going to be happy” (294) if AIG did not pay them on Wednesday. Dimon also called and “scoffed” (295) at AIG’s plan. He told them they needed to “sit down with those numbers and figure out the size of the real hole, not the made-up hole” (295). Willumstad knew that the “worst part of Dimon’s tirade […] was that he might be right” (295). Flowers suggested calling Warren Buffett, which he did, but Buffett was not “interested in getting mixed up in such a mess” (295). He said he might look only at AIG’s property and casualty business.

Paulson received a call from Alistair Darling, the chancellor of the Exchequer of Britain, who expressed concerns about a Barclay’s deal. Paulson dismissed his concerns.

Rumors began flying that Fuld would be fired, and Lehman employees—who could not freely sell their shares and held 25% of the total shares—were furious that the stock had continued to decline and had lost 93% of its value since January 31. Despite this, Lehman’s board was still behind Fuld.

Lloyd Blankfein of Goldman, Jamie Dimon of JP Morgan, Brian Moynihan of Bank of America (who was then uninvited because of BofA’s role in the merger talks), John Mack and Colm Kelleher of Morgan Stanley, Vikram Pandit of Citigroup, John Thain and Peter Kraus of Merrill Lynch, and representatives of Credit Suisse and Deutsche Bank all got calls to meet at the Fed with Paulson, Geithner, and Cox. While Paulson was on his way to the meeting, he got a call from BofA saying that they would “agree to a deal only if the government was willing to take $40 billion of losses on Lehman’s assets” (302). Paulson knew a deal was “never going to happen” (302) on those terms. At the meeting, he told the bank CEOs that they were going to have to figure out what to do about Lehman because it was not going to be “government money” (303). This was “anathema” to many in the room, especially because they were being asked to help the “ultimate outsiders” (304), Barclays and Bank of America. Lehman also wasn’t “attracting much sympathy” (304). Geithner reiterated that everyone would suffer if they did not come up with a solution, but Blankfein and Dimon thought the risk in a Lehman bankruptcy was “overstated” (305). Geithner nevertheless asked them to form three respective groups to: “value Lehman’s toxic assets,” “look at developing a structure for the banks to invest in Lehman,” and look at how they could “contain the damage” (305) if Lehman did go bankrupt. Cox talked about their “patriotic duty,” and many “rolled their eyes at the sentiment, as they regarded Cox as a lightweight” (305). Pandit also questioned why they were looking at Lehman “in isolation” and not also talking about AIG, but Geithner “insisted that the Fed had AIG under control” (305-06). Paulson ended the session with what sounded like a threat: “We will remember anyone who is not seen as helpful” (306).

Fuld was “stunned and livid” (307) when he found out there had been a meeting at the Fed about his company that he was not invited to. A team led by McDade was invited to the next day’s meeting, but not Fuld.

Harvey Miller, who had been working on the potential Lehman bankruptcy, sent his team home since he had not heard anything from Lehman. Miller then got a call from an advisor to the New York Fed, James Bromley of Cleary Gottlieb, asking if there were plans for a bankruptcy. Miller ended up meeting with the New York Fed and was frustrated that he couldn’t answer any of their questions because he didn’t have access to information. He ended up deciding to “move forward” (324) with bankruptcy paperwork, just in case. Meanwhile, Jamie Dimon had told his team to “prepare for the bankruptcies of Lehman Brothers, Merrill Lynch, AIG, Morgan Stanley, and even Goldman Sachs” (311).

On the second day of the Fed meeting with the bank CEOs, Geithner told them he would be back in two hours and they needed to “figure out a solution” (313). They found his tone “patronizing” and were left “simultaneously daunted and deflated” (313). Lehman’s team had brought binders of materials known as “decks” to the meeting, but even in those, “Lehman seemed to be in denial” (314), as it had only marked down its toxic commercial real estate assets an average of 15 percent. When the groups were “summoned” to deliver a “progress report” to Paulson and Geithner, they had accomplished “very little,” partly because there was still “huge disagreement over what Lehman’s assets were actually worth” (323). Pandit also again raised AIG and added Merrill (with Thain in the room), but Paulson said, “I’ll make sure I can take care of AIG and Merrill” (323)—if they got a Lehman deal done. At one point, John Mack “questioned the whole idea of bailouts and ruminated aloud about whether they should just let Merrill fail, too” (328). The others in the room did not know that Mack had already set up a meeting with Thain.

Merrill Lynch decided it needed to talk to BofA about a deal if it looked like Lehman would go down. Fleming called Herlihy and Curl, who said they had to hear directly from Thain to talk about it. They “had reason to be wary” (324) because Ken Lewis had been in secret talks with Merrill Lynch a year earlier that had fallen through. Fleming ended up arranging a meeting between Thain and Lewis, but Thain knew Paulson would not be happy, because a BofA/Merrill merger would “be a death sentence for Lehman, as he’d have stolen Lehman’s sole potential savior” (324). He didn’t know that BofA had already decided not to go forward with Lehman. When Thain and Lewis met, Thain offered to sell 9.9% of the company, but Lewis was adamant that he was interested in buying the entire company. Both men ended up telling Paulson, who was “thrilled” (330) because he believed that Barclays was about to buy Lehman. BofA representatives had also already met with Geithner and told him they were no longer interested in buying Lehman “unless the government was prepared to help even more than they had asked for the day before” (321). Meanwhile, Peter Kraus of Merrill told Gary Cohn and David Viniar of Goldman Sachs that Merrill might consider selling about 10% of the company in exchange for a credit line to “get over the hump of their liquidity crisis” (331).

John Mack of Morgan Stanley also met with Merrill and was interested in a potential deal, but Merrill said it was looking for “a signed deal” before the Asian market opened, which he did not think was “physically possible” (333). Mack considered approaching BofA but thought it “wasn’t meant to be” (336). He and his team thought about reaching out to Wachovia, JP Morgan Chase, HSBC, China Investment Corporation, or Mitsubishi, but Mack didn’t want to be “rushed into anything” (337). At the same time, “he recognized that if Lehman was sold to Barclays, and Merrill was sold to Bank of America, his firm would be in the hot seat” (337).

At AIG, Willumstad was “searching for a quick fix” (309). He tried Warren Buffett again, who said he might be interested in the auto business. He said he would consider the US property and casualty business, but he ended up rejecting the idea. Willumstad was then told that AIG might have to raise more like $40 billion if Lehman went bankrupt, and he was “flabbergasted; the challenge he faced had almost immediately doubled in size” (318). As he met with various potential bidders, he worried that they were “there to suck AIG dry” (319).

Chris Flowers ended up telling Paulson that AIG was “totally out of control,” but Paulson “tried not to give Flowers the satisfaction of knowing how unnerved he was” (321). He also viewed Flowers as a “troublemaker” who was “playing both sides” (322).

Willumstad and his advisors went to the New York Fed to meet with Paulson and Geithner and said he thought he was “making progress” (332) on raising capital. His report satisfied them for the time being. But as JP Morgan’s team was continuing to look through AIG’s books, it discovered that AIG’s securities lending business had lost $20 billion more than anyone realized, so it would need $60 billion. This was because “AIG had been engaged in a dubious practice: They had been issuing long-term mortgages and financing them with short-term paper” (339). Therefore, whenever the underlying mortgage lost value, “they needed to pony up more promissory notes” (339).

Bob Diamond of Barclays had concluded that he “was being used, that he was the government’s stalking horse so that they could coax a higher bid for Lehman from Bank of America” (325). He also had been informed that buying Lehman would require a shareholder vote, which could take up to sixty days, which meant it would have to “find a way to guarantee Lehman’s trading from the time they signed the deal until it was approved by its shareholders—or the acquisition would be worthless” (326). But legally, Barclays could only guarantee about $3.5 billion of Lehman’s trades without shareholder permission. Barclays ended up asking Warren Buffett to guarantee Lehman’s books during that time period, but he “couldn’t fathom” (327) doing it.

Michael Klein, Diamond’s advisor, proposed that Barclays would buy “good” Lehman for $3.5 billion, with the group of Wall Street banks (and the $3.5 billion) helping to finance the “bad” (338) Lehman’s debt. That would mean the other banks would have to come up with around $33 billion. This would be “less an investment in Lehman or Barclays than it would be in themselves, hoping to stave off the impact of a Lehman failure,” but this idea “was not received with enthusiasm” (338). The group eventually “agreed that it might be the best of many bad options” (339).

BofA had sent its team home because it believed the “Lehman deal was dead” (333), but they were called back because of the possibility of a deal with Merrill. Fleming pressed Curl to get a deal done so that they could announce it on Monday morning, and Curl was “taken aback by the timetable” (334), but Merrill agreed to open its books within 24 hours. Fleming, however, “boldly declared” (334) that he was looking for about $30/share, which would be a 76% premium over Merrill’s share price on Friday. This was a “shockingly high number, especially in the context of the greatest financial crisis in the firm’s history,” but Fleming felt he had to get the firm “a reasonable premium” (334-35). Curl did not outright reject this number because his view was that “if you believe in the business, you’re better off paying more to guarantee you own it than to lose it to a competitor” (335). Peter Kelly, Merrill’s deal lawyer, was dubious, but Fleming insisted that the deal would happen.

The next morning, the Wall Street CEOs again met at the New York Fed, and Paulson and Geithner announced that Barclays had put together a deal to buy Lehman, if the other banks put together a plan to contribute the money to finance the “bad bank” (342). Dimon asked who in the room would “kick in $1 billion […] to stop Lehman from going down” (342). He said he would, and when the “tally was added up, they were close to saving Lehman—or so they thought” (343).

When Peter Kraus and Peter Kelly of Merrill Lynch met with Gary Cohn and David Viniar of Goldman, Kraus told Goldman that Merrill was “looking to sell a 9.9 percent stake” and also looking for a “$20 billion credit facility” (344). Cohn had already told them that he was going to write down “Merrill’s toxic assets at next to nothing” (344). They agreed to resume talks once Kraus and Kelly got them the information they would need.

Meanwhile, British officials were worried that Diamond, “an American who had never become part of Britain’s gentlemen’s club, may have been a bit reckless in the negotiations” (346) for Lehman. They were especially concerned that Diamond “might not have fully explained the requirements that the British regulators would ask for before approving it” (346). In addition, the London Clearing House was planning to “migrate its entire energy futures business” (346) to a new computer system, but they had been asked to hold off while the Lehman Barclays deal was being negotiated. The regulators did not want to keep them waiting forever. One of them, Sir Callum McCarthy, the head of Britain’s Financial Services Authority, called Geithner and expressed his concerns, which surprised Geithner, as he had “no idea that the FSA would take such an aggressive position” (347). Upon hearing about the call, Paulson was “beside himself” (348). Paulson ordered Cox to call McCarthy, but the call did not go well, as McCarthy was “agitated” that they had not been “properly kept in the loop” (348).

Paulson called Alistair Darling, the Chancellor of the Exchequer, who had “deep misgivings” (349) about the Lehman transaction. Darling explained that he did not object to the deal “in principle,” but they would need to know “what the US government is willing to do” (350). Paulson concluded that the deal was dead. They decided to begin planning for Lehman’s bankruptcy instead by pressing the banks to “unwind trading positions they had with Lehman and with one another in a way that minimized the impact on the markets” (350). That meant they also had to deal with Merrill. And when they told the assembled bank CEOs that the deal was dead, they felt “blindsided” (352) after all their work. Geithner told them they needed to develop contingency plans because Lehman’s holding company would file for bankruptcy that day, and he also proposed a “revolving credit facility” that would be set up to help “the next bank in trouble” (352), funded with $10 billion contributions from each bank in the room.

Meanwhile, Thain was still working on selling a small stake in Merrill Lynch to Goldman or the entire firm to BofA. Paulson told him, “If you don’t find a buyer by this weekend, heaven help you and heaven help our country” (353). Paulson had been trying to remain calm, but “he was getting increasingly anxious that the market could end up toppling” (353).

When Diamond heard the deal was off, he was “deflated, furious, and embarrassed” (354). Likewise, when Fuld heard, he was “speechless” (354).

Greg Fleming of Merrill Lynch and Greg Curl of BofA were also getting close to a deal. Kraus asked him to send part of the due diligence team to Goldman, but he refused, saying he had a “good deal in hand” (355). Kraus felt he was making a “big mistake” (355) by limiting their options, but Fleming and Curl eventually reached an agreement at $29/share. Curl considered this his “crowning achievement” (361). Merrill Lynch was to be sold to Bank of America “for the biggest premium in the history of banking mergers” (361). It was “as if Wal-Mart were buying Tiffany’s” (361).

At AIG, Chris Flowers met with Willumstad and his advisors and told them he had put together a deal that valued AIG at $40 billion, under which his firm and Allianz would put up $5 billion each and they would raise $20 billion from banks and sell $10 billion in assets. They would also have to “convince the Federal Reserve to turn AIG into a broker-dealer, so that it had the same access to the discount window” (356) as investment banks like Goldman and Morgan Stanley. They would also be replacing Willumstad. AIG thought this offer was “ludicrously low” (357), not to mention that the majority of the funds had not yet been raised. Willumstad relayed this offer to the Fed while also informing them that “the hole had since grown to $60 billion” (366). Although it was clear to everyone that AIG was “in a bind” (366), the Fed refused to lend AIG any money.

Fuld heard that the Fed was planning to “open the discount window even wider,” which would allow Lehman to “pledge even more of their assets—including some of their most toxic assets—as collateral in exchange for cash” (357). Fuld believed this might allow Lehman to “hang on a bit longer as they sorted out their options” (357), but Paulson was insisting that Lehman file for bankruptcy immediately. In part, this was because he did not want Lehman to have access to the wider discount window. The SEC’s head of markets and trading, Erik Sirri, pointed out that they couldn’t “say a company has filed for bankruptcy until they decide to file,” and that was a “decision for Lehman’s board” (358).

Lehman was summoned to the Fed, thinking this was to discuss the deal with Barclays, not declaring bankruptcy. Lehman thought this made “no sense” (359)—especially being pressured to declare bankruptcy before midnight. They even thought it might be “illegal” (360) for the government to pressure them to file. The Fed proposed that it would keep the window open for Lehman, lending money to its broker-dealer unit “only as part of a bankruptcy” (360). However, the Fed refused to provide any other details to Lehman about its decision, and the meeting ended without a clear resolution.

The Wall Street banks’ efforts to unwind their Lehman positions “had not gone particularly well” (362). The idea was that “firms that had opposite trades with Lehman” would “pair up and cut out the middleman,” but the banks “struggled to find matching trades that could remove Lehman from the picture” (362). Word was also spreading that Merrill was about to be sold to BofA, but there was a lot of skepticism that “BofA would pay such a premium on such short notice” (363). At the same time, Morgan Stanley planned to issue a press release letting the markets know that “while Lehman might fail, Wall Street banks were cooperating to keep the whole financial system from imploding” (363).

Meanwhile, the head of Lehman’s investment management unit, George Walker, was trying to find a way to save the division when he received a call from one of McDade’s traders, Eric Felder, insisting that he call President Bush, his second cousin, for help. He left a message, but his call went unreturned. Lehman also had another problem: It owed its law firm $18.5 million, which made it a creditor. That would mean that Harvey Miller and the firm could not represent it in the bankruptcy proceedings due to a conflict of interest and receiving that amount as a lump sum could also disqualify the firm. Lehman nevertheless tried to pay, but JP Morgan froze its account, so the payment did not go through. JP Morgan’s general counsel agreed to try to make the payment, after receiving a furious call from Lehman.

Meanwhile, Diamond, still fatigued, received a call from McDade, asking if they would consider taking the US broker-dealer if it declared bankruptcy. He said he would, but he would have to consult his board. At the same time, Jamie Dimon was thinking that possibly JP Morgan should consider buying AIG.

When the Asian markets opened, Lehman still had not declared bankruptcy. Cox was proving to be “over his head,” in Paulson’s view, but Cox was “reticent about using his position in government to direct a company to file for bankruptcy,” so he “sheepishly offered that he wasn’t certain it was appropriate” (368) for him to call Lehman. Paulson ordered him to. Lehman’s board was surprised to receive this call because “no one could recall a time when the chairman of the SEC asked to address a corporate board” (369). Cox proceeded to tell them that a Lehman bankruptcy would “help calm the market” and would be in the “best interests of the nation” (369). Tom Baxter, the general counsel of the New York Fed, then told them that the New York Fed and the SEC were in agreement that they should file for bankruptcy. They would not give further details, and the “directors grew increasingly and visibly frustrated by the vagueness” of their answers (369). They asked if they were being ordered to put Lehman into bankruptcy—something they did not believe the government had ever done before. They would not go that far, but they said they had “made quite clear what the preference of the government is” (370). The directors were “dumbfounded” (370). They knew the government had “plenty of leverage” (370), such as closing the window and forcing Lehman into liquidation. Lehman voted on whether to file for bankruptcy, and the resolution passed.

On September 15, 2008, an oversized Wall Street Journal headline read: “Crisis on Wall Street as Lehman Totters, Merrill Is Sold and AIG Seeks to Raise Cash” (376). It had gone to press before Lehman declared bankruptcy. Paulson received a call from President Bush, which would be his “first opportunity to explain fully where things stood with the economy and to strategize with him about the administration’s message to the American people” (376). Bush said he was “unhappy about the bankruptcy, but that allowing Lehman Brothers to fail would send a strong signal to the market that his administration wasn’t in the business of bailing out Wall Street firms any longer” (376). However, as they spoke, “the first clues that the market wasn’t going to take the news especially well began appearing” (377).

Meanwhile, the government was asking JP Morgan and Goldman to help with a “private-market solution for AIG” (378). When they met with Willumstad, it was clear that AIG “didn’t have a firm grip on its finances” (384). They left believing that AIG would not “last the week” (384).

At Morgan Stanley, John Mack told his “top lieutenants” that the “good news” was that “Morgan Stanley had survived” (379). He stressed that there were likely to be “unbelievable” (380) opportunities going forward.

Fuld had called Geithner, “pleading with him to undo the bankruptcy filing” (380). Lehman’s employees were angry, at the government and at management. Photos of Fuld and Gregory had been labeled “Dumb and Dumber” (380), and Fuld’s security detail feared employees might attack him. With Lehman officially in bankruptcy, Barclays “arrived […] to pick over the assets it wanted and leave the worst ones behind” (380), this time with the British government’s support and with no need for a shareholder vote.

When the bank CEOs and their lawyers reassembled at the New York Fed, they were joined by Eric Dinallo, the superintendent of the New York State Insurance Department, who had “formally agreed to allow AIG to use some of its regulated insurance company assets—up to $20 billion—as collateral to help stabilize the company” (384). The bankers were left to see if they could come up with a private-sector solution. They decided to “start their work with a round of basic due diligence” (387).

Paulson had returned to Washington, DC to give a White House press briefing, and when he was asked why Bear Stearns was bailed out and not Lehman, he said he thought the facts were “very, very different” and that he “never once considered that it was appropriate to put taxpayer money on the line […] in resolving Lehman Brothers” (388). That answer “would come back to haunt him” (388).

At AIG, more than 100 bankers, led by Goldman and JP Morgan, were trying to conduct due diligence, but no one seemed to have AIG’s numbers. AIG’s Brian Schreiber finally gave them a “less than inspiring” (389) presentation. They seemed to make some progress, but Ruth Porat of Morgan Stanley privately expressed the concern that the bankers present were “going to try to steal the business” (390). The group went to the New York Fed to update Geithner, telling him that the hole was now “some $60 billion” and “possibly more” (390). They all believed any solution would require “financial help from the Fed” (390), but Geithner reiterated that it would not be forthcoming.

Willumstad, meanwhile, “railed” about Dan Jester of Treasury, calling him “as useless as tits on a bull” (390) in connection with a call they made to Moody’s to try to convince it not to downgrade AIG. Jester had clearly been “uncomfortable with playing the heavy” (390).

Paulson received positive press for not bailing out Lehman or subsidizing the sale of Merrill Lynch, but it was looking more and more likely that “AIG and the global financial system were now in such peril that the government would have no choice but to intervene” (392). In fact, in a meeting with the bankers who had been unsuccessful in finding a solution to AIG’s problems, Geithner asked them confidentially, “What would it look like if we said the Fed was going to do this? (394). The assembled group was stunned, given that the “government had been insisting that it would not bail out any financial institution” (394). Geithner asked them to work on it and left.

On a call with Geithner, Willumstad said AIG was preparing to file for bankruptcy, and Geithner brusquely said not to but did not offer much explanation. He did say, confidentially, that he was “working on some help” for AIG, but there were “no guarantees” (395). Nevertheless, Geithner ordered Willumstad to “try and undo” (395) whatever he had done. Geithner believed that “if the Fed made a big, bold deal to backstop AIG, it could help restore confidence in the markets” (397). AIG had “effectively become a linchpin of the global financial system,” so he proposed using a provision that allowed the Fed to lend to institutions other than banks under “unusual and exigent” (397) circumstances. Bernanke told Geithner to develop a plan.

In preparation for potentially bailing out AIG, which would require installing new management, Paulson asked Ken Wilson, his special advisor, to work on finding a new potential CEO for AIG. Wilson thought of Ed Liddy, the former CEO of Allstate and a Goldman board member, and Liddy tentatively accepted. Bernanke was anxious about the government being involved, but with “Geithner’s insistence that this was the only way to avert financial Armageddon,” there was no longer “any discussion of moral hazard, and no talk of Lehman Brothers” (401).

With AIG potentially “minutes away from bankruptcy,” Geithner had told Willumstad that the plan was for the Fed to lend AIG $14 billion “to keep the firm in business through the rest of the trading day” (402), if AIG immediately posted collateral. They gathered the $14 billion from the “unofficial vaults” where there were stock certificates that had been “untouched for years” (403).

Meanwhile, Hank Greenberg had been telling the press that he “planned to mount a proxy contest or a takeover” (400) of AIG. Additionally, Blankfein called Paulson in a panic because hedge funds that had traded through Lehman’s London “were suddenly being cut off, sucking billions of dollars out of the market” (396). Blankfein feared that “so much money was clogged up inside Lehman that investors would panic and start pulling their money out of Goldman Sachs and Morgan Stanley, too” (397).

Paulson and Bernanke briefed President Bush on the plan, and Bush “clearly looked perplexed” (403). As they explained all the ways that AIG was deeply entwined in the banking system and in everyone’s lives, Bush “went directly to the heart of the problem” by asking, “An insurance company does all this?” (403).

Under the deal, the Fed was providing AIG with $85 billion in exchange for 79.9% of the company in the form of “equity participation notes” (404). The deal also came with a “significant debt burden” amounting to interest of more than 11%, which “at the time was considered usurious” (404). To pay back the government, AIG would have to sell off its assets: “To AIG loyalists, the loan was proving to be less a bridge to insolvency than a plank to an organized breakup” (404). Willumstad was also informed that he would be replaced the next day, and he was “stunned by the speed of events” (405). AIG’s board decided to accept the Fed’s deal, and Congressmen and senators were “none too pleased with the AIG bailout news” (409).