Together Fuld and Russo dictated a resignation letter addressed to Stephen Friedman, chairman of the board of directors:
Dear Steve,
It is with deep regret that I hereby tender my resignation as a member of the Board of Directors of the Federal Reserve Bank of New York. In light of my current business situation at Lehman Brothers, I unfortunately do not have the time to devote to Board matters and, therefore, feel it is in the best interests of the Board that I resign, effective immediately. I have very much enjoyed my time on the Board and have enormous respect for both the Board and the institution. Thank you.
Sincerely,
With a restrained but heavy sigh, Fuld added his signature, scribbling a huge “D” in place above “Dick.”
At 70 Pine Street the pressure was building as Bob Willumstad paced his office ahead of a crucial meeting that morning with the credit-rating agency, which had been making menacing noises about downgrades. He had just gotten off the phone with Geithner to follow up on their meeting about turning AIG into a broker-dealer, and to apply a little additional pressure. “We’re a little busy right now with Lehman,” Geithner apologized. “But let’s talk again tomorrow morning.”
It was only 10:30 a.m., but the marketplace was already sensing the nervousness that Willumstad had been trying his best to conceal all week. The cost to insure the debt of AIG had jumped by 15 percent to 612 basis points, the highest level in its history. That meant that it would cost investors $612,000 to insure $10 million of AIG’s debt every year for the next five years. With Lehman clearly desperate to raise money, investors were betting AIG was soon going to face the same struggle. It might also have to pay out astronomical amounts to investors who were loading up on insurance to protect themselves from a potential Lehman default.
To make matters worse, Hank Greenberg, being deposed that day by the New York State attorney general about previous questionable accounting practices at AIG, badgered Willumstad at every chance. “What the hell are you people waiting for?” he demanded, wanting to know why efforts to shore up the company hadn’t been moving more quickly.
Amid all the other pressures, Willumstad was still pressing to settle the long-running lawsuit that Greenberg had brought against the firm after he had been ousted. He had been counting on Greenberg’s helping the firm raise some capital by leveraging his relationships in Asia, where he had built AIG into a powerhouse that dominated the tricky and semitransparent Japanese and Chinese markets. He told Greenberg he’d have his lawyer, Jamie Gamble, at Simpson Thacher, set up a meeting with Greenberg’s lawyer, David Boies, to try to come up with a settlement Greenberg could live with.
Perhaps the most pressing problem weighing on Willumstad was the result of a conversation he had had with Jamie Dimon earlier in the week. “We seem to be not getting enough done,” Willumstad had told him, urging him to help raise capital or lend the firm the money himself.
“Well, you know, you got a bigger problem than we had anticipated,” Dimon replied. “Our models show you’re running out of money next week.”
It was then that Willumstad accepted the fact that JP Morgan might well not be willing to provide any further funds. AIG’s treasurer, Robert Gender, had already warned him that that might be the case, but Willumstad hadn’t fully believed him. “JP Morgan’s always tough,” he reminded Gender. “Citi will do anything you ask them to do; they just say yes.” But the prudent Gender only acidly replied, “Quite frankly, we can use some of the discipline that JP Morgan is pushing on us.”
Dimon had been encouraging Willumstad to just come up with a plan, even if it wasn’t perfect. “It doesn’t have to be in place,” Dimon told him. “You just have to tell the markets what you’re going to do and then go and do it. If you need to raise capital, tell them you need to raise capital.”
A lot of good that did Lehman yesterday, Willumstad thought.
Finally, the time came for the dreaded meeting with Moody’s. Steve Black from JP Morgan had come downtown to lend some credibility to the affair and to help answer questions about AIG’s plans to raise capital. It was one thing for Willumstad to state that he had every intention of raising capital and quite another entirely to have the president of JP Morgan affirm that he intended to support the company in that effort. The stakes were high: If the agency cut AIG’s credit rating by even one notch, it could trigger a collateral call of $10.5 billion. If Standard & Poor’s followed suit, which was likely—“the blind leading the blind,” Willumstad said of them—the figure would rise to $13.3 billion. Should that happen, and AIG be unable to come up with the extra capital, it would be a virtual death sentence.
No more than fifteen minutes into the meeting, the Moody’s analyst made it clear that the agency would downgrade AIG by at least one notch and possibly two. By Willumstad’s calculations, if they did so on Monday, the company would have at least three days before it would have to post the collateral. That meant he had until Wednesday, or at the latest, Thursday, to come up with an astronomical amount of money.
JP Morgan’s Black feared they had even less time; by his count, Tuesday morning would be their deadline. After the meeting, he pulled Willumstad aside and warned him, “You guys are going to get downgraded, so you better start figuring out now what to do.”
Willumstad nodded. “We need to prepare for that. I totally agree with that.”
Black left the building even more down on the company than when he had arrived. Nobody, he thought, is moving nearly as fast as he needs to.
In the General Motors Building, which occupies an entire block on Fifth Avenue and Fifty-ninth Street, Harvey Miller, the legendary bankruptcy lawyer at Weil, Gotshal & Manges, got up from his desk and began pacing. As he made a circuit of his office, he gazed at the miniature Texaco trucks and Eastern Airlines jets that dotted his bookshelves, mementos of two of his most famous cases.
At seventy-five, Miller was considered the dean of bankruptcy law, and he billed clients nearly $1,000 an hour for his services. Besides Texaco and Eastern, he had been involved in the bankruptcies of Sunbeam, Drexel Burnham Lambert, and Enron, and was also among the lawyers who’d represented the city of New York during its financial crisis in the 1970s.
Always reassuringly calm, he was also known for his deftly tailored suits, his love of opera, and his ability to speak in long, eloquent paragraphs. He had grown up in the Gravesend neighborhood of Brooklyn, the son of a wood-flooring salesman, and was the first in his family to receive an education beyond high school, attending Brooklyn College. After a stint in the army, he went to Columbia Law.
At that time, bankruptcy was one of the few areas of corporate finance that smaller, predominantly Jewish law firms dominated in the still-WASP-infested industry. In 1963 Miller joined the small bankruptcy shop Seligson & Morris; six years later, Ira Millstein, the governance guru, recruited Miller to start a bankruptcy and restructuring practice at Weil Gotshal.
Earlier that afternoon, the firm’s chairman, Stephen J. Dannhauser, had phoned him and posed a startling question: Would the firm be available to do some preliminary work on Lehman—just in case? Miller said he understood; he had been reading the financial press. Lehman was a very important client—the firm’s biggest, in fact, and the source of more than $40 million in fees annually. He knew the company very well.
Dannhauser had received a call from Steven Berkenfeld, a Lehman managing director, who told him they should get their ducks in order if things didn’t go well in the next seventy-two hours. Before Berkenfeld ended the call, he insisted that Dannhauser keep their conversation confidential—Berkenfeld hadn’t even told Fuld that he was contacting Weil Gotshal.