That was all Fleming needed to hear. He was making progress.
By 8:00 a.m., the grand lobby of the New York Federal Reserve was teeming with bankers and lawyers. They had gathered not far from a giant bronze statue of young Sophocles, his outstretched arm holding a tortoiseshell-and-horn lyre. The statue was a symbol of victory after the Battle of Salamis, a clash that saved Greece and perhaps Western civilization from the East. On this day the bankers assembled at the Fed had their own historic battle to wage, with stakes that were in some ways just as high: They were trying to save themselves from their own worst excesses, and, in the process, save Western capitalism from financial catastrophe.
An hour later the group shuffled into the same boardroom at the end of the corridor where they had sat, mostly shell-shocked, the night before.
By morning they had settled on the working groups: Citi, Merrill, and Morgan Stanley were put in charge of analyzing Lehman’s balance sheet and liquidity issues; Goldman Sachs, Credit Suisse, and Deutsche Bank were assigned to study Lehman’s real estate assets and determine the size of the hole. Goldman had had a jump start as a result of its mini-diligence session earlier in the week, and both Vikram Pandit and Gary Shedlin of Citigroup were so nervous that Goldman would try to buy the assets themselves on the cheap that they attached themselves to their group.
“As you know, the government’s not doing this, you’re on your own, figure it out, make it happen,” Geithner said. “I’m going to come back in two hours; you guys better figure out a solution and get this thing done.”
His tone struck many in the room as patronizing if not ridiculous. “This is fucking nuts,” Pandit said to John Mack; it was as if they had all been handed a test without the customary number 2 pencils.
Lloyd Blankfein raised a question: “Tim, I understand what you want to do, but how do I get in the other room?” In other words, he wanted to know how he could become a buyer subsidized by his competitors. Blankfein wasn’t serious—he had no interest in buying Lehman, but he was clearly trying to make a point. Why are we helping our competition?
Geithner deflected the question and left the room, followed by the bankers, who were simultaneously daunted and deflated.
Thain, Peter Kraus, and Peter Kelly of Merrill found a corner to talk in.
“So, what do you think?” Kelly asked.
“Lehman’s not going to make it,” Thain said.
“Then we’re not going to make it either,” Kelly replied calmly.
“We have to start thinking about options,” Kraus said.
Thain nodded in agreement. Maybe Fleming was right after all.
Thain dialed Fleming and, after telling him about the conversation, said: “Set up the meeting with Lewis.”
Upstairs, on the seventh floor of the Fed, Lehman’s Bart McDade and Alex Kirk felt a little bit like mail-order brides as they waited to meet the bankers from the firms that they hoped would save them. This, they knew, would be the ultimate “road show.”
They had brought binders of materials, including what were perhaps the two most important documents, known as decks. One described the spin-off that Lehman referred to as REI Global; the other was labeled “Commercial Real Estate Business Overview”—in other words, the worst of the worst holdings, the toxic assets that no one knew precisely how to value and that everyone was nonetheless certain that Lehman was overvaluing.
Even now Lehman seemed to be in deniaclass="underline" The decks revealed that it had marked down the value of its commercial real estate assets by an average of only 15 percent. Most Wall Street bankers had already assumed the reduction would be far greater.
“Okay, let’s just make sure you and I agree exactly on all of these issues and how they’re financed,” McDade said to Kirk. They reviewed each line in order: how the balance sheet was broken down by liabilities, their derivatives, receivables, payables, repo lines, and long-term debt.
If they were confused about any given detail, McDade phoned Ian Lowitt, who was a veritable financial encyclopedia. “He should be the one down here,” McDade blurted during one of his explanations of an especially obtuse passage.
As they completed their preparations, Steve Shafran, Hank Paulson’s top lieutenant, phoned and instructed the two men to go and meet their possible saviors. A security guard escorted them downstairs to the main dining room, where several dozen bankers waited. Wall Street’s most elite firms were effectively about to go shopping in the equivalent of a government-sponsored Turkish bazaar.
The Lehman executives were seated at a table in the farthest corner of the huge room, where everyone stopped to look—to gawk, in fact. “Do you know what this is like?” Kirk asked McDade when they were finally settled. “We’re the kid with the dunce cap in the corner!”
McDade let out a big laugh just as a group of bankers they did not know from Credit Suisse wandered over, flashing wide grins, and started eyeing them. “What’s going on?” one of them asked. Kirk rolled his eyes in a way that clearly indicated, Please, do not mess with us. “What the fuck do you think is going on?” he replied. Before things could get too ugly, the cream of Wall Street suddenly appeared: Vikram Pandit, John Mack, John Thain, and Peter Kraus came over to the table and got down to business. Mack, who had met McDade at his home over the summer when they had considered merging, struck a sympathetic note: “Oh, God, I feel awful for you guys. This is just terrible.” Thain sat quietly, sipping a coffee, with every reason to think, This could be me. McDade pulled out his documents and began walking them through the numbers. As Kraus began to question some of the assumptions, Pandit stopped him. “Okay, okay,” he said, impatiently waving his hand in the air. “You have a homework assignment,” he told the Lehman bankers. “Give me a full business plan on how you would run this thing, so we can consider whether we’re going to finance it. You have two hours to complete it.”
Five minutes later a security guard came over to McDade and Kirk and told them, “We’re going to take you up to another floor so you can work.” The Fed had hoped to provide them with an actual conference room, but because there wasn’t any space available, they were escorted to the Fed’s medical center, where a makeshift office had been prepared. It was, if nothing else, all too apt a metaphor, as the Lehman executives immediately realized. Kirk looked at the defibrillator on the wall and deadpanned, “Well, this is appropriate. We’re clearly the heart attack victim.”
Greg Curl and Joe Price of Bank of America were on their way downtown with their lawyer, Ed Herlihy, for a 10:00 a.m. meeting with Paulson and Geithner. They had by now resolved not to pursue a deal with Lehman; Curl had already sent some of his people back to Charlotte.
Before they arrived, Herlihy’s cell rang; he could see from the caller ID that it was Fleming. For a moment, he hesitated answering.
Before they had left, the group had discussed what to do if Fleming called again. Chris Flowers had advised Curl, “Let’s not waste another fucking minute on this until John Thain himself calls Ken Lewis and says the words out of his own mouth: ‘I want to do this deal.’ Otherwise, it’s just a bunch of bullshit.”
Exasperated, Herlihy finally answered the phone.
“We’re going to make this happen,” Fleming said excitedly. “John says we should set it up.”
Herlihy had heard this before and had grown tired of the routine.