In London, Bob Diamond of Barclays was waiting in the bar of Fifty, a private club on St. James St., just off of Piccadilly. He had invited Jeremy Isaacs, the former head of Lehman’s European operations, for drinks. If there was anyone who could give him an accurate insider view of Lehman, if there was anyone who knew the numbers and culture, it was Isaacs, who had officially announced his plans to “retire” from the firm just four days earlier.
Isaacs had left when it became clear that McDade was ascending. In truth, he probably ought not to have come to this drinks engagement, as he was in the midst of negotiating a $5 million severance agreement with Lehman that would literally be approved the following day. As part of the arrangement he agreed he would not “engage in detrimental activity” or “disparage the firm,” and would “keep company information confidential.”
Tonight he would come as close as he could to breaking every provision in that document with the intention of helping Lehman survive.
Walid Chammah’s apartment is one of only three town houses on Manhattan’s Upper East Side with its own doorman. The beaux arts limestone structure just off Fifth Avenue contains only nine apartments. Tucked away a safe distance from Midtown and the banker riffraff on Park Avenue, it was the perfect place to hold a secret meeting to discuss a merger between Lehman and Morgan Stanley. Chammah’s wife and children were in London, where he was normally based, so the group had the place to themselves.
By 9:00 p.m., Chammah; James Gorman, Morgan Stanley’s other co-president; and the rest of the Morgan Stanley team were milling around his kitchen, waiting for Bart McDade and the Lehman contingent to appear. “Let’s at least go through the motions,” Chammah instructed his colleagues, “but acknowledge that this meeting wouldn’t likely lead to anything.”
When McDade finally arrived with Skip McGee, Mark Shafir, Alex Kirk, and several others, the strain of the day was evident from their drawn and pale faces.
Gorman had known McDade from when they were both directors on the board of SIFMA, the Securities Industry and Financial Markets Association. Only a week earlier they had had a tense conversation about Morgan Stanley’s exploiting Lehman’s turmoil by recruiting away its talent, including the firm’s best private-wealth advisers. Outraged, McDade had called Gorman and told him, “You have to back off. We got really big problems here, and this is killing us.” Ultimately, Gorman stopped the recruiting effort, and the two were seasoned enough professionals to have moved on.
Chammah poured a bottle of Tenuta dell’Ornellaia 2001, a $180-a-bottle Bordeaux blend, in an effort to settle the mood while keeping things proceeding. Everyone quickly took a seat in the living room.
McDade told the group that being there tonight all felt a bit déjà vu; only a few months earlier nearly every person in the room had met to discuss the very same topic. Only now—an observation he left unspoken—Lehman was desperate. He then began to explain that Lehman was exploring various options for raising capitaclass="underline" selling assets, or perhaps selling the entire firm. In case that wasn’t clear enough, he indicated that if Morgan Stanley was interested in buying the company, he wouldn’t press them on terms. He then added that “social issues” shouldn’t hold up a potential deal—code for the question of who would run the combined businesses. McDade had effectively just given up Fuld.
“If you want any of us involved, we’ll be involved; if you don’t want us, we don’t have to be. It’s not about us anymore,” he said.
Shafir told the men that a deal “might feel like a stretch,” but he thought there was an opportunity to remove a good deal of cost from both firms, which was, after all, the baseline logic behind any corporate merger.
Despite Shafir’s optimistic spin on a potential deal, Chammah was well aware that an agreement of this magnitude would result in a bloodbath, with probably hundreds if not thousands of layoffs. He also knew that the upside in any merger could prove elusive.
Then, for a good hour, the bankers went over the numbers and the various assets that Lehman owned to determine if there was anything among its holdings that Morgan Stanley might want. But as the discussion went on and papers were passed back and forth, it became clear there was no common ground. Chammah then acknowledged that he didn’t think Morgan’s board could move quickly enough to be of any real assistance to Lehman in any case—a signal that everyone in the room recognized meant that he believed that Lehman Brothers was simply too far gone.
Soon after McDade’s team left, Gorman looked solemnly at his group, as if to remind them, It could be us, but said only, “We just watched guys who are staring into the abyss.”
Shortly after sunrise, Greg Curl walked across the plaza of the Seagram Building, the thirty-eight-story masterpiece of architectural modernism and a Park Avenue landmark. He entered the lobby, checked his watch, and waited for his go-to adviser to arrive.
Curl, Bank of America’s point man for a possible Lehman Brothers deal, had flown from Charlotte to New York with a team of over one hundred executives on Wednesday night to begin their diligence at Sullivan & Cromwell’s Midtown conference center. To assist them Curl had enlisted Chris Flowers, a private-equity investor whose specialty was the arcana of the banking industry. The two made for an odd couple, given that Curl was a Bank of America veteran with a low profile and had few Wall Street connections, while Flowers was a fast-talking, and often profane, former Goldman Sachs banker whose daring deals often landed him in the headlines.
But as Curl had considered what to do about Lehman, his first thought was that he wanted Flowers at his side. Flowers could read a balance sheet in less than thirty seconds and was bold enough to offer an articulate and well-reasoned judgment of it. He had left Goldman in the late 1990s and started his own private-equity firm to invest in banks, a business in which he had done very well indeed, personally pocketing some $540 million from an investment in Shinsei Bank in Japan. He was regularly listed as one of the wealthiest men in America, and when he purchased a town house on the Upper East Side for $53 million, it set a record for Manhattan real estate.
Curl trusted very few bankers, but Flowers was an exception. He particularly admired Flowers’s dispassionate, no-bullshit approach to deal making—and to life. In 2007, just before the credit crisis hit, they had bid together on Sallie Mae, the student-loan company. They soon realized the deal was a mistake, and for the rest of the year, they worked together to try to undo it. Curl hadn’t held the Sallie Mae investment against Flowers, largely because Flowers was ultimately able to get them out of it by invoking an escape hatch in the merger agreement, with ensuing legal fireworks.
Flowers could be useful for more than just providing advice, as Curl knew that he might be eager to invest in Lehman alongside Bank of America. Curl thought that he might even be willing to take Lehman’s riskiest assets.
When he had sought out Flowers just twenty-four hours earlier, Curl had found him in Tokyo, where Flowers had been in the middle of a board meeting of Shinsei. “You’ll want to look at Lehman Brothers, and we want to look at it in partnership with you,” Curl told him. “Can you get back to New York for this purpose?” Flowers hardly needed persuading and quickly arranged for a car to the airport to make the fourteen-hour flight back to Manhattan.
When Flowers arrived, clearly wearing the jetlag on his face, he had brought along Jacob Goldfield, a fellow Goldman alum. (Goldfield happened to be the banker depicted in Roger Lowenstein’s When Genius Failed as surreptitiously downloading all of Long-Term Capital Management’s information into a laptop during Goldman’s attempt to assist the beleaguered firm; it was Goldfield whom Alex Kirk of Lehman had mentioned in his nervous comment to Fuld about providing information to Goldman Sachs a day earlier.)