Incredulous, Miller leaned forward until he was inches from Baxter. “Why? Why is bankruptcy necessary?” Miller demanded. “Can you explain, can you please elaborate on this?”
“Well, I’m not sure it’s really necessary, given all the circumstances,” Baxter responded, sheepishly. “But, ah, there’s not going to be any kind of bailout, so we think it’s appropriate that Lehman go into bankruptcy.”
Miller looked at his colleagues. “I’m sorry, Tom, but we don’t understand.”
Alan Beller, a lawyer at Cleary Gottlieb, cut in peremptorily. “You need to do this, and it should be done before midnight tonight. We have a program to calm the markets.”
Miller raised his voice. “Oh, you have a program to calm the markets, do you? Could you possibly tell me what that program is?”
“No, it’s not necessary for your decision making,” Baxter shot back.
“Tom,” Miller persisted, “this makes no sense. Yesterday, no one from the Fed was talking to us about bankruptcy, and now we have to have a filing ready before midnight. And what is the magic of midnight? The only way we could ever file, and it won’t be by midnight, is with a skinny Chapter 11 petition. What will that accomplish?”
“Well, we have our program,” Baxter repeated.
Miller stood up, his six-foot-two frame looming over the other lawyers.
“What,” he slowly bellowed, “is this program?”
Baxter just stared uneasily, offering no immediate answer.
“If Lehman goes into bankruptcy, totally unprepared, there’s going to be Armageddon,” Miller warned. “I’ve been a trustee of broker-dealers, little cases, and the effect of their bankruptcies on the market was significant. Here, you want to take one of the largest financial companies, one of the biggest issuers of commercial paper, and put it in bankruptcy in a situation where this has never happened before. What you’re going to do now is take liquidity out of the market. The markets are going to collapse.” Miller waved his finger and repeated, “This will be Armageddon!”
Baxter looked at the SEC lawyers, and, considering for a moment, finally said, “Okay, I’ll tell you what we’re going to do, we’re going to caucus.”
“This is insane,” Miller said to Roberts as soon as the Lehman team was alone in the conference room. “They’re telling us to fucking file. The government is telling us to file.”
“I don’t even know what to say,” Roberts replied. “This has got to be illegal.”
About a half hour later, Baxter and the other government lawyers returned to the room, and the meeting resumed. “Well,” Baxter announced, “we’ve considered everything you said, and it hasn’t changed our position. We are convinced that Lehman has to go into bankruptcy, but what we are prepared to do is keep the Fed window open for Lehman so that the broker-dealer can continue operating the business.”
Baxter was making the case for compromise, that there could be a way for an orderly winding down of Lehman. The Fed would loan money to Lehman’s broker-dealer unit, but not indefinitely, only as part of a bankruptcy.
Sandra C. Krieger, executive vice president at the NY Fed, asked, “How much cash are you going to need us to provide you tomorrow to fund yourself on Monday night?”
“It’s impossible to know the answer to that,” Kirk told her.
“Well, that seems highly irresponsible!” she replied edgily.
“Really?” Kirk said, growing angry. “You want to tell me on the $50 billion of trades selling tomorrow how many of our counterparties are going to send us the money when we file for bankruptcy?”
Seeing that the conversation was quickly devolving, Miller jumped in and asked again why this measure was necessary.
“We’ve listened to your comments and we have concluded that our decision is correct, and we don’t have to discuss this any further,” Baxter said.
Miller still persisted. “You are asking this company to make a very momentous decision. It is entitled to all the information it can get.”
“You’re not going to get that information,” Baxter replied.
Alan Beller interrupted to say, “Look, we will have a series of releases that we are fairly confident will calm the markets tomorrow.”
“I’m sorry,” Miller responded sardonically, “you’re talking to me about press releases?”
At that the meeting was brought to a close.
Greg Fleming saw Peter Kelly in the hallway at Wachtell Lipton and gave him a big bear hug. As he did, he whispered into Kelly’s ear: “It’s done. Twenty-nine dollars. You owe me a beer,” he said with a big smile.
Fleming had just gotten off the phone with Thain, who had given him the green light to go ahead with the deal at $29 a share.
After an afternoon of haggling with Greg Curl, Fleming had persuaded him not only to accept the agreement but to fund Merrill’s bonus pool, up to the amount paid out in 2007. Nobody would get an employment contract, including Fleming and Thain—a point that Curl admired. To ensure that the deal would be completed, Fleming had convinced Curl to agree to a virtually airtight MAC agreement—meaning that even if Merrill’s business continued to deteriorate, Bank of America couldn’t later wiggle out of the transaction by claiming a “material adverse change” had occurred.
By Curl’s thinking, as he explained to Ken Lewis before agreeing to the price, “We might be able to get it for cheaper later, but if we don’t do the deal today, we could lose the opportunity entirely.” For Curl, a journey-man dealmaker, this was his crowning achievement.
Bank of America scheduled a board call for 5:00 p.m., while Merrill set up a board meeting at the St. Regis hotel at 6:00 p.m. to approve the deal. In a matter of hours, Merrill Lynch, with a history of nearly one hundred years as one of the most storied names on Wall Street, would be sold to Bank of America for the biggest premium in the history of banking mergers. It was, as one newspaper later put it, as if Wal-Mart were buying Tiffany’s.
At the NY Fed the banks had just finished trying to unwind their Lehman positions, an effort that had not gone particularly well. The Fed had passed out a memo to the CEOs earlier in the day explaining the program, which would be an extraordinary two-hour trading session in New York and London, during which firms that had opposing trades with Lehman tried to pair up and cut out the middleman.
The process was based on the assumption that Lehman was going under: “All trades conducted will be done on a contingency basis, contingent on the filing of bankruptcy of the Lehman parent,” the Fed memo said. “Trades will ‘knock in’ if the Lehman Brothers Holding Inc. files for bankruptcy before 9am ET on Monday.” The memo was intentionally never distributed to anyone at Lehman.
However neatly laid out the Fed proposal might have been, the various banks struggled to find matching trades that could remove Lehman from the picture. When frustrated traders left their desks at 4:00 p.m. in New York, many of them faced as much exposure to Lehman as they had on Friday afternoon.
“The extraordinary trading session held today to facilitate a partial unwind of these positions saw very little trading—perhaps $1 billion total—but at much wider spread levels for corporate bonds,” Bill Gross, head of PIMCO, told reporters that afternoon. “It appears that Lehman will file for bankruptcy and the risk of an immediate tsunami is related to the unwind of derivative and swap-related positions worldwide in the dealer, hedge fund, and buy-side universe.”
Word was also starting to spread that Merrill was about to be sold to Bank of America, a rumor that Gross, one of the nation’s most respected investors, said that he heavily discounted. “To some extent, the rumored bid for Merrill by Bank of America lends some confidence to all markets, although I am skeptical that BofA would pay such a premium on such short notice,” he said.