Goldfield also knew Lehman well—he had helped Hank Greenberg examine the firm back in the spring when Greenberg was part of a group of investors who bought $6 billion of common and preferred shares.
On the flight over, Flowers had studied Lehman’s second-quarter report from the day before and had focused on what he knew was going to be the big discussion point: the value of Lehman’s real estate assets. Could they possibly be worth $25 to $30 billion?
Curl, Flowers, and Goldfield set up operations in a conference room that Sullivan & Cromwell provided, laid out with coffee and pastries.
This was going to be a long day.
With twenty-four hours to mull over Lehman’s SpinCo plan, Wall Street analysts turned against it—and the firm—en masse. They blasted out skeptical e-mails to clients on Thursday morning, adding to the weight that was already dragging down Lehman’s shares. The stock price had ended the previous day down 7 percent at $7.25; it was about to sink even lower.
“Management did not successfully put to rest the issues that had been pressuring the stock,” William Tanona, an analyst at Goldman Sachs, declared in his e-mail.
Michael Mayo, an analyst who had kept a buy rating on Lehman shares since April 2007, sent out an even bleaker prognosis, given his concerns about the possible fallout as credit-rating firms grew more bearish about Lehman: “The change in rating agency posture is an unexpected negative that may create a distressed sale situation.” In other words, a fire sale could be next. His buy rating was summarily removed.
Guy Moszkowski of Merrill Lynch was also grim on the subject of Lehman’s sale prospects, writing that the firm could be forced to accept a “take-under”—Wall Street parlance for a takeover at a price below where a company’s shares are trading.
Even analysts who believed that Lehman was basically sound were beginning to see that it had become a matter of perception trumping fundamentals: Lehman’s tumbling stock price inflamed the market’s fears, creating a self-fulfilling prophecy that was forcing Lehman to find a buyer, and fast.
As Wall Street analysts seemed poised to write the epitaph for Dick Fuld’s firm, the only person to come to his public defense was John Mack, the man who Fuld had hoped would be his merger partner. Mack was quoted in the Times that morning as saying, “He is as feisty as ever, but there is no question this is wearing on him, as it would wear on anyone.”
In private, however, Mack had just delivered shattering news in a phone call to Fuld: He didn’t believe there was a good reason for Morgan Stanley to move forward with the talks.
However, there were still signs of life. Tim Geithner confirmed to Fuld that Barclays was indeed interested in bidding for the company, even though they had not contacted Fuld directly, and gave him Diamond’s phone number in London.
“He knows you’ll be calling,” Geithner assured him.
“I understand I’m supposed to call you,” Fuld said when he later reached Diamond.
Diamond, however, was clearly flustered, as he thought he had been explicit with Geithner that he didn’t want to talk directly with Fuld about a deal. A deal would have to be brokered by the U.S. government.
“I think we should talk,” Fuld said, trying to engage with him.
“I don’t see an opportunity for us here,” Diamond answered.
Fuld couldn’t understand what was going on. He had been told by Geithner to make this contact, and now Diamond was telling him that he wasn’t interested?
Unwilling to force the issue, he ended the conversation and called back Geithner.
“I just got off the phone with Bob Diamond,” he told Geithner heatedly. “He says he’s not interested. I thought you said he wanted to talk to us?”
“Yes, he does,” Geithner insisted. “You should call him back.”
Five minutes later, he tried Diamond again.
“I just told you that we’re not interested,” Diamond repeated.
Fuld, by now feeling as if he were part of some kind of charade, again phoned Geithner. “I don’t know what’s going on here. I’ve called him twice, and both times he says he doesn’t want to talk to me. You tell me he’s interested. He says he’s not.”
Geithner promised he’d reach out to Diamond and urged Fuld to try him one last time.
On his final attempt, Diamond was suddenly willing to talk.
“We’re going to be flying over tonight,” Diamond said. “I’ll have a team ready to go by Friday morning.”
With that sentence, it was officiaclass="underline" Barclays and Bank of America were now in competition.
What Fuld hadn’t been aware of was that for the entire morning, Diamond and his team had already been in contact with Geithner and Paulson and had come to an agreement that Barclays would examine Lehman’s books as soon as possible. Fuld’s role in any rescue effort was becoming a polite formality.
Before he left for New York that night, Diamond had hoped to receive some assurances that his trip would be worthwhile. On his call with Paulson, Diamond had specifically asked if Barclays could be the exclusive bidder for Lehman. He had read the news about Bank of America’s interest, and he knew firsthand that it could be a formidable rival—and a potential spoiler.
A year earlier, Bank of America had jumped into the takeover battle for the Dutch bank ABN AMRO, a duel that pitted Barclays against a group that included the Royal Bank of Scotland. By agreeing to buy Chicago’s LaSalle Bank from ABN for $21 billion, Bank of America had effectively snatched the crown jewel of the deal, which the RBS group was particularly coveting and whose absence from the portfolio made it more difficult to outbid Barclays. In the end, Barclays lost the bidding war for ABN, but Bank of America still got LaSalle. The failed deal was a blow for Diamond and his expansionist dreams, and he had always believed that Bank of America had hugely overpaid for the property.
“If BofA is going to be there, don’t embarrass us,” Diamond told Paulson. “Don’t get us to do a deal and have BofA top us.”
“You can’t have an exclusive,” Paulson responded. “But let me tell you, you’re in a strong position, and I’ll make sure you’re not embarrassed.”
Before the call ended, Diamond wanted to make another thing clear: He was looking for a “Jamie” deal—in other words, he might come looking for some form of government help.
Paulson stated firmly that no assistance from the government would be forthcoming, but added, “We’ll figure out how to get you help.”
As Tom Russo burst into Dick Fuld’s office, the glum look on his face got Fuld’s immediate attention, which was fairly remarkable, considering the general somberness on the thirty-first floor.
“What?” Fuld barked.
“I just got off the phone with Tom Baxter,” Russo said, referring to the general counsel of the Federal Reserve of New York. “He said that Geithner wants you to resign from the board of the NY Fed.” Russo paused to allow Fuld to take that news in before adding, “That given our position, it’s too complicated, too many conflicts.”
Geithner’s request should not have come as a shock, for if there was even the possibility that the government was going to have to put up money as part of a deal to find Lehman a buyer, the last thing he would have wanted was to be seen as helping a member of his own board, an insider. The slightest appearance of favoritism could prove disastrous.
Fuld, even so, took the message as a personal slight and stared morosely down at the table. For a moment it looked as if he might cry, but he steadied himself and whispered, “I can’t believe this.”