As a bankruptcy lawyer, Miller was well accustomed to engaging in these delicate pas de deux with clients. “Bankruptcy,” he once said, “is like dancing with an eight-hundred-pound gorilla. You dance as long as the gorilla wants to dance.”
Just a few hours later, however, Miller received another call from the embattled bank.
“I’m Tom Russo, the chief legal officer of Lehman Brothers,” the voice on the other end of the line bellowed. “Are you working on Lehman?”
Miller, who did not know Russo, was taken aback. “Well, yes, as it happens.”
Russo had no interest in discussing any details but wanted to deliver a message: “You know you can’t talk about this to anybody. It’s a very tense situation. We can’t have any rumors coming out.”
Miller was about to assure him that he appreciated the urgency of the matter when Russo asked anxiously, “How many people do you have working on it?”
“Ah, maybe four,” Miller told him. “It’s ah, preliminary at this point.”
“Yes, preliminary,” Russo insisted. “Don’t add any more people. We’ve got to keep it contained.”
Russo ended the call, leaving a baffled Miller to wonder precisely what was going on.
With his team over at Sullivan & Cromwell working with Bank of America, Dick Fuld decided to call Ken Lewis in Charlotte. After all, if they were going to do a deal, he figured that they should start talking CEO to CEO.
When Fuld reached Lewis, he launched into a heartfelt soliloquy about working together and how excited he was about the merger, marrying Lehman Brothers’ top-flight investment banking franchise with Bank of America’s massive commercial bank. The resources of the combined entity, he suggested, could match those of JP Morgan and Citigroup, finally making Bank of America a true financial supermarket.
Lewis listened patiently, not exactly certain how to respond. In his mind he wasn’t negotiating with Fuld; he was negotiating with the government. Whatever Fuld had to say was, frankly, irrelevant.
Before ending the call, Fuld, feeling confident, said: “You and I both know we’re doing this deal. Glad we’re partners.”
BlackRock was in the middle of a two-day board meeting at its headquarters on Fiftieth Street, just off Madison Avenue, when the markets closed for the day. As a part owner of BlackRock, Merrill has two seats on BlackRock ’s board, and John Thain and Greg Fleming, who were attending that day, quickly consulted their BlackBerrys to check the closing prices. Merrill’s shares had fallen 16.6 percent to $19.43, the most of any investment bank that day besides Lehman, whose shares had tumbled 42 percent, to $4.22. If Lehman was in this much trouble, the general thinking seemed to be going, Merrill could well be next.
During a break in the meeting, Fleming stepped outside to make a phone call. He had been thinking all day about the conversation he had had with Herlihy about the possibility of a deal with Bank of America. He had yet to approach Thain about it, waiting for just the right opportunity to present itself.
He had, however, spoken privately with John Finnegan, a Merrill board member with whom he was close. Finnegan, who, like Fleming, tended to be nervous by nature, had worried that Thain would have little interest in selling the firm; he had, after all, only been named CEO ten months earlier.
The person Fleming needed to contact now was Rodgin Cohen, also a close friend and, he knew, Lehman’s lawyer. Fleming was eager to get a reading on how the talks with Bank of America were going and how desperate the situation had become for Lehman—and, consequently, for Merrill.
When Cohen, who had been in a conference room with the Lehman team meeting with Bank of America, stepped out to take the call, Fleming greeted him casually, as if this were merely a social communication. After the obligatory pleasantries, he offhandedly remarked on Merrill’s stock price decline and then told Cohen, “We’re thinking about our options. I don’t know how much runway we have.”
But Cohen was quickly on to Fleming; he knew Merrill was in no position to buy Lehman. And, being a student of the M&A business, he knew Fleming probably wanted to do a deal with Bank of America, thwarting Lehman’s own efforts.
“There’s not much I can say,” Cohen told him.
Abandoning any attempt to conceal his motives, Fleming confided in Cohen, “We’ve got to do a deal. The numbers are looking too risky. If Lehman goes, we’ll be next.”
Cohen didn’t know how to respond, other than to excuse himself as quickly as possible. For now, at least, he would keep the conversation confidential.
When Steve Black got back to his office at JP Morgan from AIG, he described the meeting to Dimon as “a fucking nightmare.” He asked Tim Main to call Brian Schreiber to get an update on AIG’s latest forecast and to see if Schreiber had signed the engagement letter—essentially a specification of JP Morgan’s terms for trying to put AIG back together again.
Main told Black that the document had not yet been signed but that he would call that afternoon to check on its status. “Can we schedule my weekly beating at two p.m.?” he asked, only half joking. His relationship with the AIG folks remained as frosty as ever.
When Main finally got through to Schreiber, he asked without any preamble, “So, where are you on the engagement letter?”
Schreiber had always believed that the terms of the engagement letter were excessive. Not only was JP Morgan asking for a $10 million fee, but the bank was also demanding that it be guaranteed work on any big AIG assignment over the next two years.
“Where are you on the repo commitment?” Schreiber retorted indignantly.
Main, who was already angry about rumors he’d heard that Schreiber had also been talking to Blackstone and Deutsche Bank, finally lost his temper. “Are you fucking kidding? You think we’re going to lend you money?” he barked. But he was just getting warmed up. “You’re running a shitty process. Your company is fucked! You’re working with other bankers that you’re not telling us about. You’re carving it all up.”
“Don’t scream at me,” Schreiber replied coldly. “I’m not going to take this from you. I’ve got to talk to Bob.”
Five minutes later Schreiber was angrily recounting the conversation to Willumstad, who in turn called Black to demand an explanation for Main’s behavior.
Instead of offering an apology, though, Black exploded at him as well. “There’s no sense of urgency down there; you guys don’t have anything close to the information that you need to be trying to make decisions,” Black said. “Every time we ask for something, you drag your feet. We sent an engagement letter three weeks ago, and Brian is still dickin’ around with signing it.
“We’ll do whatever you want us to do,” Black finally said wearily. “But if this is the way it’s going to go, then you might as well … we should probably resign. You should get somebody else. This has gotten to a poisonous point, and the people that work for you don’t get the position that you guys are in.”
“If you were that upset about it, why didn’t you just call me?” Willumstad asked.
When the call came in from Ken Lewis late Thursday afternoon, Paulson knew what he was about to hear.
“We’ve looked at it and we can’t do it—we can’t do it without government assistance,” Lewis said levelly. “We just can’t do it because we can’t get there.” Like many of Lehman’s critics at the time, including the anxious shareholders who were flooding the market with sell orders, Lewis said that the valuations that Lehman had placed on its assets were far too high. Buying them could expose Bank of America to huge risks.