“On Lehman.”
“Oh, yes, yes.”
“I wanted to call you because I thought it would be worthwhile for me to talk to Hank. If not, no big thing, but my sense is that we should have a conversation.”
Ryan said he’d get Paulson to contact him as soon as he could.
An hour later Diamond’s secretary informed him that Tim Geithner was on the line. “What can I do to help this along?” he asked.
Diamond explained that he was very interested in buying Lehman, if it could be had at a distressed price.
“Why don’t you call Fuld?” Geithner asked.
“You don’t understand,” Diamond said. “I am not trying to be provocative here.” He told Geithner about their experience trying to buy ABN AMRO—how the deal had fallen apart and how big an embarrassment it had been for the firm. “We don’t want to be seen as dabbling around,” Diamond said. “It would be inappropriate.”
To Geithner, such unnecessary delicacy seemed characteristically British, even if Diamond was an American, and he just listened.
“We need to be seen, to be invited by you and shepherded by you,” Diamond insisted. “You guys asked me if there was a price at which we’d be interested and you asked me, if so, ‘What do you need?’ That doesn’t mean I’m gonna call Fuld. That’s completely different.”
Geithner, growing frustrated with his equivocation, asked again, “Why can’t you just call Fuld? Why can’t you do it?”
“I’m not going to ask a guy if I can buy him, you know, at a distressed price,” Diamond said. “It only works if you guys are looking to arrange a deal. If you’re not, fine, no hard feelings, we’re okay.”
However much Barclays may have wished to avoid giving the impression that they might be taking advantage of someone else’s misfortune, it was, of course, precisely what they were seeking to do.
Ben Bernanke was finding it hard to focus as he sat in a meeting Wednesday afternoon with the local board of the Federal Reserve. Despite the chaos on Wall Street, he had continued making his regular visits to the Fed’s regional offices, and this particular trip had brought him to its St. Louis branch, located in a squat limestone building on North Broadway in the city’s downtown.
The Lehman crisis, however, was never far away. He had already been on the phone with Tim Geithner and Hank Paulson twice about it, once at 8:30 a.m. and again at 1:00 p.m., with another conversation scheduled for 6:00 p.m.
On the last call, Geithner and Paulson had informed Bernanke of their latest headache: Bank of America’s demand to have its capital ratio relaxed. “They are pissed off bigtime because they thought when they closed on Countrywide, they closed like big boys,” Paulson explained.
Geithner argued that they needed to get Bank of America to New York by whatever means necessary so that they could begin their due diligence; he was concerned that they were losing critical time.
Paulson asked Bernanke to call Ken Lewis himself and see if he could smooth the situation over, stressing again, “We need to get them a glide path.”
From a temporary office at the St. Louis Fed, Bernanke dialed Lewis.
“You really ought to come look at Lehman,” Bernanke urged him, still slightly uncomfortable about his new role as deal maker. “We’ll work with you on capital relief and anything you might need.”
Lewis thanked him for the call and said he planned to send his men up to New York to start discussions with Lehman.
Believing he had solved that problem, Bernanke returned to the reason for his trip to St. Louis: to visit with the staffers and spend more time with the St. Louis branch’s new president, James Bullard. Bullard had taken over in April from William Poole, one of the more outspoken Fed presidents, who, as it happened, was in Washington that day giving a speech about the Fed’s bailouts. Given the ongoing speculation in the market about the need for a government rescue of Lehman, Poole’s comments had been attracting an inordinate amount of attention.
“Unless I’ve missed something, the Fed and Treasury have been silent about who might have access to Fed resources, except to say that Fannie and Freddie would have access,” Poole said during his speech.
“The Fed said no to New York City in 1975 and no to Chrysler in 1979,” he reminded his audience, but “with the Bear Stearns precedent, it will not be so easy to say no next time.
“What I anticipate is that we will not know the limits to Fed lending until the Fed says no to a large, influential firm seeking help.”
Ken Lewis was leaning hard on the Fed. No sooner had he gotten off the phone with Bernanke than he placed a call to Tim Geithner. Lewis explained that he had had an encouraging call with Mr. Bernanke, but he still couldn’t send his team up to New York until the credit situation was officially settled.
“We’re working to help you on this,” Geithner said, politely but firmly .
Lewis, however, was beyond accepting such assurances. “We’ve been dicked around on this for too long,” he complained. “If you want us to get involved in Lehman, we’re going to need something in writing.”
Geithner, taken aback at being presented with such an ultimatum, replied, “You’ve heard what the chairman said he would do. If you don’t believe the word of the chairman of the Federal Reserve, we have a larger problem.”
Realizing that Geithner would not budge on the issue, Lewis finally backed down and agreed to send a team of executives up to begin due diligence that Thursday morning.
As Wednesday wore on, Fuld tirelessly continued to work the phones—his call log was a list of virtually every major Wall Street and Washington player—while keeping a watchful eye on the markets for any further signs of panic.
The news, it was becoming ever clearer, was grim: After holding up for most of the day, Lehman’s shares sank in the last hour of trading, ending at $7.25 a share, a 6.9 percent decline. Lehman’s CDS had also blown out, rising by 135 basis points, to 610, which meant that the cost of buying insurance against its going bankrupt had just risen to $610,000 a year to protect $10 million of bonds. Investors were effectively betting that the situation was only going to worsen. Any hope that the SpinCo plan was going to turn Lehman’s fortunes around was quickly vanishing.
Nor were the results of Fuld’s phone blitz encouraging. Earlier in the day he had had a tough conversation with Lloyd Blankfein, who had called to express his frustration that Lehman had ended discussions with Goldman. Alex Kirk and Mark Walsh had held a two-hour-long meeting with Harvey Schwartz of Goldman and his team at a Midtown law firm that morning, but both Kirk and Walsh were skittish about opening up all their books to Goldman and quickly had shut down the talks.
Fuld had also spoken to Paulson, who had tried to convince him of the merits of a deal with Barclays. But Fuld was uneasy with that prospect, he explained: With Bank of America already in the hunt, he didn’t want to do anything to jeopardize a deal with them.
“Dick,” Paulson patiently reminded him, “Ken Lewis has turned you down multiple times; the other guys have expressed an interest. We need to pursue both of these options.”
Fuld, however, seemed more interested in returning to the topic that had so long obsessed him: denouncing the short-sellers who, he told Paulson, “are going to ruin this firm.” He spent ten minutes again imploring Paulson to call Christopher Cox at the SEC to press him to instate a short-selling ban, to announce an investigation—anything that would give him an opportunity to recover. By late afternoon, Fuld was channeling Steven Berkenfeld, a Lehman managing director, whose office was just down the hallway, using his favorite catchphrase about the raids on Lehman’s stock: “Short and distort!”