Given that Bob Diamond of Barclays had already come to him, hat in hand, looking for a government assist in a Lehman deal, Paulson had fully expected Lewis would do the same.
But Paulson still wasn’t prepared to resort to drawing on federal money—at least not yet. It was politically unpalatable, especially with the Fannie and Freddie bailouts still making headlines. And if this was going to become a negotiation, Paulson didn’t want to show all his cards so early on.
He knew, however, that he needed to keep Bank of America in the hunt, so he offered, “Okay, if you need help on assets, you tell us what you need help on, and we will come up with a way to get there.”
Lewis, nonplussed, replied, “I thought you said there would be no public money.”
“I will work on this,” Paulson promised. “We will get the private sector to get involved.”
Private-sector involvement was a concept that Paulson and Geithner had been discussing all day—the assembly of a consortium of banks to help subsidize a sale of Lehman, if Bank of America or Barclays refused to do the deal on its own. But neither Paulson nor Geithner had completely fleshed out the idea yet, and even in the best of times, herding bankers was a feat far from easy.
Lewis paused, not at all pleased with what Paulson seemed to be suggesting. He didn’t want to get involved in a quasi-public-private rescue; he wanted a Jamie deal. And he knew full well that his rivals were unlikely to want to foot the bill so he could buy Lehman for a song.
Lewis nonetheless agreed that he would keep examining Lehman with an eye toward making a bid. With so much at stake, he assumed he would ultimately get some sort of assistance—whatever form it might take.
On Thursday afternoon, David Boies, Hank Greenberg’s lawyer, arrived at the offices of Simpson Thacher to meet with AIG’s lawyers: Dick Beattie, the chairman of the firm; and Jamie Gamble. Only a small circle knew about the meeting or what it was intended to accomplish. After four years of public battles, AIG was about to reach a settlement with Greenberg, one that would bring him back into the company fold. Willumstad had instructed Beattie and Gamble to get in a room with Boies and hammer out a deal once and for all.
Given the tumult in the market, Willumstad was eager to announce that Greenberg was returning to AIG as its chairman emeritus. The news would certainly come as a shock, but Willumstad was hoping the settlement might buy them some time and goodwill from investors, many of whom were still Greenberg loyalists.
Willumstad also knew that Greenberg was fervent about helping AIG raise capital, and given Greenberg’s deep relationships with wealthy investors in Asia and the Middle East, he could prove to be an asset.
They still had to work out the details, but they had come to an agreement in principle that would resolve the dispute. AIG would turn over $15 million worth of artwork, papers, and property that Greenberg believed was his and AIG would pay for Greenberg to defend himself in the dozens of shareholder lawsuits that had been brought against him. In return, Greenberg would turn over somewhere between 25 to 50 million AIG shares that had been held by Starr International in a trust and had been at the center of the dispute. In total, the settlement would cost Greenberg as much as $860 million based on AIG’s share price that day, but it would end AIG’s $4.3 billion lawsuit against him and would reinstall him within the company that he loved so dearly.
With the basics of the settlement agreed, Boies, wearing a blue blazer and casual black Merrell shoes, thanked the other men and suggested that they try to memorialize the arrangement by getting Willumstad and Greenberg in the same room to wrap it up the following week.
“Call me this weekend,” Boies said to them as he turned to leave.
Paolo Tonucci, Lehman’s global treasurer, looked horror-stricken as he set down his cell phone. “I’ve got to talk to you right now!” he said quietly to Bart McDade and Rodgin Cohen. “We’ve got a real problem.”
Everything had been going smoothly at Sullivan & Cromwell’s Midtown offices, where they had been helping Bank of America with its due diligence, but now, as Tonucci revealed, “JP Morgan is pulling another $5 billion in collateral from us! I just got off the phone with Jane Byers Russo [head of JP Morgan’s broker-dealer unit]. She says that we need to wire it by tomorrow. And she might pull another $10 billion by the weekend.”
“What?” Cohen asked, clearly dismayed by the demands. “This sounds unbelievable. I don’t understand this. I know everyone’s in panic mode, but this is too much.”
Tonucci shared the news with his boss, Ian Lowitt, Lehman’s CFO, and the rest of the room.
“This is bullshit,” McGee yelled out, breaking an awkward silence.
Tonucci and Lowitt called Fuld to tell him the news and to set up a conference call with Jamie Dimon. “Listen, we need you to send us the collateral,” Dimon told the group when he finally clicked into the call, saying it was a fair request to make given Lehman’s deteriorating position. Fuld calmly told Dimon he’d have his team work on it. Tonucci, however, whispered to the Lehman team, “Does Dick not understand? It’s almost operationally impossible for us to do that.” Dimon, too, worried that Fuld might be treating the matter far too casually. “Are you taking notes?” Dimon snapped. When the call ended, McDade was apoplectic. “We have to call the Fed,” he said. “Jamie can’t just do this.”
Cohen, who had had the most experience of any of them with Fed matters, wasn’t so sure. “I’m quite sure Jamie has been there before us,” he told them. “Jamie’s tough. He wouldn’t have done this without the tacit approval of the Fed.”
For the next ten minutes the room was a cacophony of different conversations taking place simultaneously, all on the common theme of They’re trying to put us out of business! Finally they decided that the best step to take was to call Tim Geithner.
When Cohen reached Geithner and put him on speakerphone, he quickly explained the situation to him. Geithner appeared unconcerned, as if he had been expecting their call. McGee shot a nervous glance at McDade, as if to say, We’re fucked. “I cannot advise a bank not to protect itself,” Geithner said unperturbedly.
Cohen, politely hoping to get Geithner to realize that he believed JP Morgan was doing this to undermine its rival, asked, “Do they need that protection?”
“I’m not in a position to judge that,” Geithner answered.
At 6:00 p.m. Paulson joined a strategy call with Geithner, Bernanke, and Cox. He felt they were about to go into crisis mode and feared another Bear Stearns-like weekend. This time, however, he was determined that it end differently. He believed they needed to prepare what he called a “LTCM-like solution”—in other words, he was committed to the idea of encouraging firms in the private sector to band together and put their own money up to somehow save Lehman Brothers. Geithner was supporting the concept, and apparently some Wall Street chiefs were as well. Geithner had received calls from both John Thain of Merrill Lynch and Vikram Pandit of Citigroup earlier in the day suggesting just such a solution.
Paulson was also deeply concerned about the apparent lack of resolve of both Bank of America and Barclays to “cross the finish line.” He had come to feel that Bank of America was merely going through the motions and was anxious that Barclays wasn’t especially serious about coming to an agreement either. “Listen, the thing about these Brits is that they always talk and they never close,” he told them. He also had a particular instinct about Barclays’ chairman, John Varley, whom he remembered from his Goldman days as a waffler. “Let me tell you,” Paulson said, “Varley is a weak man.”