Ruth Porat, a Morgan Stanley banker who was present at the Fed, also doubted the speculation, especially the price. She called Jonathan Pruzan, Morgan Stanley’s banking industry expert, to tell him the latest buzz.
“The rumor is $29 a share, and it’s going to get announced in the morning,” she told him. “I can’t believe it, because they didn’t have time to do due diligence. It’s an absurd price.”
Without missing a beat, Pruzan replied, “Then it’s absolutely Ken. It’s true. That’s what Ken does.”
“Are you getting all this?”
Gary Lynch, the chief legal officer of Morgan Stanley, was barking into the phone as Paul Calello, the chief executive of Credit Suisse’s investment bank, paced nearby. With no access to a computer at the New York Fed, Lynch was in the process of dictating the text of an important press release to Jeanmarie McFadden, a Morgan Stanley spokeswoman, who was typing frantically to keep up.
The plan was to let the markets know that while Lehman might fail, Wall Street banks were cooperating to keep the whole financial system from imploding.
The release would open: “Today, a group of global commercial and investment banks initiated a series of actions to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets.”
It would go on to say that the world’s biggest financial institutions were creating a $100 billion borrowing facility for themselves—over and above what the Federal Reserve was providing through its Primary Dealer Credit Facility. Any one bank would be able to borrow up to $35 billion from the pool.
So far, ten banks were lined up to provide $7 billion each, for a total of $70 billion. The individual banks were a Who’s Who of the global financial system: Goldman Sachs, Merrill Lynch, Morgan Stanley, Bank of America, Citigroup, JP Morgan, Bank of New York, UBS, Credit Suisse, Deutsche Bank, and Barclays. In normal times, many of them were the fiercest of rivals.
The press release ended by stating assuredly that “the industry is doing everything it can to provide additional liquidity and assurance to our capital markets and banking system.”
Panic was starting to build within the Lehman ranks. George H. Walker IV, head of the firm’s investment management unit, sat in his office at 399 Park Avenue, scrambling to find a way to save the division. He had received bids for it on Friday from two separate private-equity firms, Bain Capital and TPG, and was in the middle of trying to bring them together when he received a telephone call from Eric Felder, one of McDade’s traders.
Felder was talking so fast that it sounded as if he were hyperventilating.
“You have to call your cousin,” he insisted. “If there was ever a time to call the president, now is the time.”
Walker, a second cousin to President Bush, was hesitant about using his family connections.
“I don’t know,” he said.
“You’ve got to do it, George,” Felder said to him. “The whole fucking firm is going down. Someone’s got to stop this!”
He placed the call but ended up leaving a message with the White House operators. The call would go unreturned.
With bankruptcy seemingly less than hours away, a new problem suddenly confronted Steven Berkenfeld, Lehman’s managing director: $18.5 million in unpaid bills from Weil Gotshal, the law firm he had hired to work on the bankruptcy filing. The debt, which was for previous legal work, was minuscule compared to the billions of dollars Lehman owed all over Wall Street. But it would prevent Weil and Harvey Miller from representing Lehman in Chapter 11. Since Weil was officially a creditor of Lehman, it would constitute a conflict of interest that a judge could use to throw Weil off the assignment.
To Berkenfeld, it was critical that Weil be involved in the case. After all, its lawyers knew the firm the best, and Lehman’s filing was due in almost record time. For Stephen Dannhauser, Weil’s chairman, the assignment was also of paramount importance: Judging from the size and complexity of the Lehman filing, which promised to be even bigger than Enron’s, the fees were likely to be well over $100 million.
Dannhauser had instructed Berkenfeld to pay Weil immediately, in advance of the bankruptcy, with cash sent by wire directly into the law firm’s accounts. Even this approach had risks: Being on the receiving end of such a payment could result in a law firm’s being disqualified from a case.
Still, with all of the pressure Lehman was under, Berkenfeld made the effort.
Because it was Sunday, there was only one place that the firm had cash available to wire——JP Morgan—and Berkenfeld had accordingly called over and made the request.
But now Dannhauser had called to say that the transfer hadn’t gone through: JP Morgan had frozen Lehman’s account, a decision that, Dannhauser was told, “came from the top.”
Berkenfeld immediately dialed JP Morgan’s general counsel, Stephen Cutler, and furiously demanded what it meant that the decision had “come from the top.”
“Look, I don’t know what that means,” Berkenfeld said, his voice rising. “I don’t know if that’s Jamie Dimon or someone outside of the firm. But one day, we’ll take your deposition and find out what happened.”
Cutler agreed he would try to make the payment.
When Bob Diamond got back to his room at the Carlyle Hotel, tired and deflated, he had a surprise waiting for him. His wife, Jennifer, and daughter, Nellie, a sophomore at Princeton, were there. Nellie, who had been scanning the news wires on her laptop, gasped when she read that the deal her father had been trying to broker had fallen apart and headed for New York.
They decided to go for dinner at the Smith & Wollensky steak house. Just as they were approaching the restaurant Diamond’s cell phone rang. He looked down at the caller ID and saw that it was McDade.
“I can’t answer it,” he told his daughter, who was puzzled by his uncharacteristic timidity. “I can’t do it anymore.”
“Dad, answer your phone!” she insisted.
Reluctantly, he took the call.
“I’ve got a question,” McDade said immediately when he picked up. “If we go into bankruptcy, would you consider taking the U.S. broker-dealer out of bankruptcy?”
Diamond whispered to Jennifer and Nellie, “I have to take this for a second.”
As the women entered the restaurant, he asked, “Is that what’s going to happen? Is this going to be Chapter 11?”
“We don’t know for sure,” McDade replied, “but if it goes into Chapter 11, if that’s the result, would you consider taking the U.S. broker-dealer?”
“Bart,” Diamond told him, “that’s exactly the part we want. So absolutely. We would consider it. But I have to tell you, I know nothing about bankruptcy law and I don’t know where to start. I have to talk to my board, I have to talk to John, but I’m pretty sure our answer would be yes.”
“Why don’t we do this,” Diamond continued. “I’ll get up early and get my team together, and we’ll meet you at five a.m. But leave me an e-mail if you haven’t declared bankruptcy. You get your team, and we’ll get our team.”
Bob Willumstad, with his advisers from JP Morgan, returned to the Fed on Sunday night to offer the latest update.
After Paulson, Geithner, and Jester took their seats around a conference table, Willumstad told the group somberly, “We’re in the same place, actually maybe a worse place than before.” He explained that the hole had since grown to $60 billion and detailed what they considered to be the “shenanigans” of Chris Flowers’s bid, to everyone’s amusement.