Dimon furrowed his brow.
“I just had the most surreal conversation with a guy at Lehman,” Dimon said. “He seems to be in denial.”
Mack just shook his head. “This is bizarre.”
Over at AIG, Chris Flowers, taking a break from working with Bank of America, had stationed himself at one of the secretarial desks in the hallway, waiting to meet with Willumstad. Accompanying him was Dr. Paul Achleitner of Allianz; together they had prepared an offer for the company.
When they were invited into a conference room, they found Willumstad there with Schreiber and a group of his advisers, including Doug Braunstein from JP Morgan, Michael Wiseman from Sullivan & Cromwell, and several others.
“We have an offer,” Flowers announced, producing a one-page term sheet that he handed to Willumstad.
Flowers, who hadn’t yet heard about the additional $20 billion hole that JP Morgan’s bankers had discovered, explained that he had put together a deal that valued AIG at $40 billion. (The company’s actual market value on Friday had been about $31 billion.) Given the company’s problems, he asserted, it was the best estimate he could come up with quickly.
He then spelled out the rough terms: His own firm and Allianz would put up about $10 billion of equity—$5 billion each—and they planned to raise $20 billion from banks; they would also sell $10 billion of assets. The investment they’d be making would be directly in AIG’s regulated subsidiaries, but they’d gain control of the parent company. That condition was a move to protect Flowers and Allianz: If the parent company were to falter, they’d still own the subsidiaries. Finally, Flowers said they would have to be able to convince the Federal Reserve to turn AIG into a broker-dealer, so that it had the same access to the discount window that investment banks like Goldman Sachs and Morgan Stanley had.
Before ending his presentation, Flowers added that he had one other term that hadn’t been noted on the deal memo: “Bob, we would replace you as CEO.”
The silence that greeted the offer reflected the fact that Willumstad and his advisers thought the bid had to be a joke—not because Flowers had the audacity to tell Willumstad that he would be fired, but because the deal was also filled with potential pitfalls; Flowers was putting up scarcely any of his own money, and he hadn’t lined up 80 percent of the funds needed to do the deal. They also thought the price ludicrously low. In their minds the company was worth at least twice that.
“That’s fine,” Willumstad said calmly. “We have an obligation, we’ll take it to the board, but I have to tell you, you know, you’ve got contingencies in here that none of us can agree to,” he said, referring to the need for Flowers to still receive bank financing. “Thank you,” Willumstad said and stood, trying to get them to leave as quickly as possible. As soon as Flowers departed the room, Achleitner closed the door and took his seat again.
“I don’t approve of what he just did,” Achleitner said, almost whispering.
“Well, you read the letter before you came,” Willumstad said, his temper in check.
“No, no, no, that’s not how we do business,” Achleitner said apologetically.
“Okay. Whatever,” Willumstad responded. “Thank you very much.”
When the entire group had finally left, Willumstad turned to Schreiber and whispered, “Don’t let those guys back in the building!”
For a brief moment Dick Fuld allowed himself to smile. Ian Lowitt, Lehman’s CFO, had just gotten word that the Federal Reserve was planning to open the discount window even wider, a move that would enable broker-dealers like Lehman to pledge even more of their assets—including some of their most toxic assets—as collateral in exchange for cash.
“Okay, here we go!” Fuld said, believing they might be able to hang on a bit longer as they sorted out their options.
“This is great, great news,” Lowitt said, already tallying in his head the tens of billions of dollars of real estate assets he thought they might be able to pledge to the Fed. “We have enough collateral!”
“Lehman’s got to file immediately,” Paulson, leaning back in his chair, instructed Geithner and Cox. He made it clear that he didn’t want Lehman adding to the uncertainty in the marketplace by dragging the situation out any longer.
Paulson had another reason for insisting that Lehman file: If the Fed was going to open its discount window even wider to the remaining broker-dealers, he didn’t intend that Lehman be granted that access; doing so would represent another opportunity for moral hazard.
Cox said that he wanted to hold a press conference to announce the bankruptcy. As the sole regulator with formal authority over the firm, he felt he needed to communicate the news to the public before it crept out on its own and panic ensued.
He summoned Calvin Mitchell, the head of communications for the NY Fed, and Jim Wilkinson, Paulson’s chief of staff, into his temporary office and asked when a conference could be scheduled.
“Well, can’t you do it at the SEC office somewhere? Isn’t that more appropriate?” Mitchell asked, clearly uncomfortable about arranging a media event in the middle of such chaos.
“It’s easier to do it here; no one is there,” Cox insisted. “The journalists are here,” pointing out the window at the scrum of press lined up on Liberty Street.
“Okay, so, we could do it on this floor,” Mitchell said. “Or, if we do it on the main floor, we have a podium we can bring down.”
Cox liked the idea of holding the press conference downstairs and added, “That’s a good backdrop.”
As they began discussing the substance of what Cox would say at the conference about Lehman’s bankruptcy, Erik Sirri, the SEC’s head of markets and trading, pointed out a slight problem with the plan.
“We can’t announce this,” Sirri said. “We can’t say a company has filed for bankruptcy until they decide to file. And that’s a decision for Lehman’s board.”
Just after 1:00 p.m., Stephen Berkenfeld of Lehman called Stephen Dannhauser of Weil Gotshal, the firm’s bankruptcy lawyer, frantically explaining that a group of Lehman executives—led by Bart McDade—had just been ordered to appear at the New York Fed. “You’d better get down there,” he urged, and said nothing further.
Seconds later, Dannhauser grabbed three senior partners—Harvey Miller, Thomas Roberts, and Lori Fife—and dashed to the street to find a cab. As the four sat sweating in gridlocked traffic, Roberts took a call from a partner back at the Weil Gotshal office who told him that Citigroup had just asked about the firm’s availability to represent it as a creditor in a Lehman bankruptcy.
“That doesn’t make any sense,” Roberts told the partner. “We’re on our way to discuss a deal with Barclays.”
An hour after leaving the General Motors Building, the cab finally approached the New York Federal Reserve Building. News camera crews were still camped outside, watched over by uniformed Fed security. As the lawyers finally entered the building, they encountered Vikram Pandit of Citigroup hurrying out, looking as if he was late for another appointment.
Bart McDade and other Lehman representatives had already arrived upstairs and were sitting across from several rows of government officials and lawyers. Baxter, the general counsel for the New York Fed, was clearly running the meeting, as were lawyers from Cleary Gottlieb, representing the Securities and Exchange Commission.
McDade was just then telling Baxter, “You don’t understand the consequences. You don’t understand what is going to happen!”
Baxter, on noticing the arrival of the Weil Gotshal team, politely stopped the conversation to explain what was going on. “Harvey, we have had a great deal of deliberations and we’ve been thinking about this a lot, and it’s clear now that there isn’t going to be a Barclays transaction. We’ve come to the conclusion that Lehman has to go into bankruptcy.”