Skeptical about the answers he was getting, and perhaps a bit paranoid, Studzinski raced up to the senior security guard on the eighteenth floor, Nathan T. Harrison. “Listen,” he told him, “I want you to watch all these people like a hawk. If you see anything untoward, anything at all—people walking around the wrong floors, whatever—come find me immediately.”
Without a minute to spare the Bank of America team, which included Greg Curl, Joe Price, and Ed Herlihy, marched into the Fed building for their 10:30 a.m. meeting with Paulson and Geithner. Christopher Flowers had raced over on foot from AIG, two blocks away.
As they waited in a conference room outside Geithner’s office, Curl recounted to the group how Fuld had been phoning Lewis’s home all night.
“Dick … what an asshole!” Flowers said dismissively.
As Paulson, Geithner, and Dan Jester entered the room, the mood quickly turned chilly. Paulson hated Flowers, and the antipathy was mutual. They had been feuding for years, ever since Paulson passed over Flowers for the top job of running Goldman’s investment banking division back when the firm was planning to go public. Flowers—who was given to telling his peers that Paulson was an “idiot”—quickly left the firm. Paulson told him that his decision to quit, coming as it did at the critical time of the IPO, was a “disgrace.” Flowers was bought out of the partnership ahead of the offering, but when the IPO was canceled, he made overtures about trying to return to the firm. That conversation had ended in a near-shouting match.
Trying to break the tension, Geithner now asked, “So what’s the latest?”
Curl indicated in no uncertain terms that BofA was no longer interested in buying Lehman Brothers unless the government was prepared to help even more than they had asked for the day before. He said that they had identified at least $70 billion in problem assets that Bank of America would need guaranteed—the figure had grown from the $40 billion of a day earlier—and that it might be even larger. Given that, they were going to put their pencils down unless Paulson was willing to “step up.”
Curl also said that he was concerned that Fuld was still seeking a premium for the stock. “We think that’s bullshit,” Flowers remarked.
“You know, no one cares what they think. Don’t worry about what they think,” Paulson told them. “At this point, it doesn’t matter what Dick Fuld thinks.”
In the middle of the meeting, Herlihy’s cell phone began ringing, and he saw that it was Fleming. After ignoring his first two calls, Herlihy whispered to Curl that it was Fleming and excused himself from the meeting.
“What’s up?” Herlihy asked impatiently.
“Okay. He’ll do the meeting at two thirty p.m.!” Fleming exclaimed.
“Well, can you get Thain to call Lewis?” Herlihy asked.
“Not now,” Fleming said. “Thain can’t speak to him because he’s in a meeting with Paulson.”
Herlihy rolled his eyes. “No, he’s not, Greg. I’m in a meeting at the Fed with Paulson. I just stepped out of the room and can see him. He’s down the hall from me.”
Herlihy was growing increasingly concerned that Fleming didn’t have Thain’s blessing, and repeated, “Listen, this isn’t going to work. He’s got to call. If I can step out to take your call, he can step out and call Lewis.”
“He’s going to be there, I promise. I’m not risking my reputation by having Lewis fly up here and go to an empty meeting,” Fleming insisted.
“He’s got to make the call,” Herlihy insisted again.
By the time Herlihy stepped back into the room, it was clear that the meeting was winding down, and while the government was still refusing to become involved, Paulson was trying to keep Bank of America from dropping out altogether.
As everyone stood up to leave, Chris Flowers pulled Paulson aside and said, “I’ve got to talk to you about AIG.” He paused to make certain they weren’t being overheard and continued, “I’ve been over there working with them, and it’s just remarkable what we found.” He took out the same piece of paper that had been handed out the day before, showing the firm’s cash outflows and how by Wednesday it would be out of money.
“Here’s how big the hole is,” Flowers said, pointing to the negative $5 billion cash balance coming due that next week. “AIG is just totally out of control. They’re incompetent!” Flowers offered to come back to the Fed with Willumstad to go over the numbers in more detail, and while Paulson was shocked at the numbers, he tried not to give Flowers the satisfaction of knowing how unnerved he was.
When Flowers walked out of the meeting and rejoined the Bank of America team in the hallway, he smugly told them, “They’re not on top of it.”
As Paulson, Geithner, and Jester reassembled in Geithner’s office, Jester stressed that they had to somehow keep Bank of America “warm” so that it remained in the auction. And if Bank of America had dropped out, it had to be kept quiet—especially from Barclays.
Paulson, however, was focused on the AIG document that he had just seen, doing the math in his head. “It’s much worse than I thought,” he finally said. “These guys are in deep doo-doo.”
Geithner reached Willumstad on speakerphone and told him that they had just met with Chris Flowers, who had walked them through the numbers.
“He’s looking at buying some assets, putting together a deal,” Willumstad responded, and for a moment the confused government officials all looked at one another: Wasn’t Flowers advising AIG? But then Jester smiled knowingly at Paulson. This was classic Flowers, playing both sides. It quickly became evident to everyone that Flowers was likely trying to tee up a deal for his buyout shop with government assistance. “He’s frankly a troublemaker,” Paulson exclaimed. “He doesn’t want to save this country!”
The discussion returned to the numbers, and Willumstad explained that they had teams of bidders at his office and were hoping to sell enough assets over the weekend to cover the pending shortfall.
Geithner suggested Willumstad come over later that day to review the firm’s books so that they could get a better handle on what its plans were.
“Okay,” Willumstad said. With a laugh, he added, “I won’t be bringing Flowers.”
Downstairs the CEOs were now summoned from the dining room to the conference room to deliver a progress report to Paulson and Geithner.
Each of the groups offered up what they had accomplished, which amounted to very little. Part of the problem was that there was still huge disagreement over what Lehman’s assets were actually worth, especially its notorious commercial real estate assets. While Lehman had been valuing that portfolio at $41 billion, consisting of $32.6 billion in loans and $8.4 billion in investments, everyone knew it was worth far less. But how much less?
One set of estimates making the rounds was a spreadsheet called “Blue Writedowns” that cut the estimated value of Lehman’s commercial real estate loans by about one quarter, to less than $24 billion. Others thought the situation was much worse. A handwritten sheet with more estimations making the rounds had the numbers “17-20”—less than half the estimated value.
The story was much the same with residential mortgages, which Lehman had estimated at $17.2 billion. While the Blue spreadsheet placed the value at about $14 billion, others in the room put the real value at closer to $9.2 billion, or roughly half.