Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

CHAPTER TWELVE

The news started crossing the tape late Monday night, and by 2:00 a.m., it had been picked up by every wire service in the world: The Korea Development Bank was no longer a bidder for Lehman. “Eyes on Lehman Rescue as Korea Lifeline Drifts,” the Reuters headline screamed.

Jun Kwang-woo, chairman of the Financial Services Commission in Korea, had held a briefing with reporters in Seoul that night and all but proclaimed that the summer-long talks with Lehman were dead: “Considering financial market conditions domestically and abroad, KDB should approach buying into Lehman at this point of time very carefully.”

Dick Fuld, alone in his office on Tuesday morning, sat staring at his computer screens, fixated in an unmitigated rage. To Fuld the talks had long since ended. KDB had returned briefly with an offer of $6.40 a share, though Fuld didn’t think they were serious. But to the public, which had heard about a rumored deal, the news would come as a shock. Shares of Lehman dropped precipitously from virtually the moment the stock market opened.

The timing of the report was especially embarrassing to Fuld in that it had come while Lehman was in the midst of holding its high-profile annual banking conference at the Hilton Hotel in Midtown Manhattan, just two blocks away from his headquarters. A CNBC van was parked out front to cover the second day of the event; Bob Steel, now of Wachovia, and Larry Fink, of BlackRock, were set to present that morning; Bob Diamond of Barclays Capital had spoken at the conference the day before.

Bart McDade walked into Fuld’s office just after the market’s open, but before he could say anything, Fuld started shouting and pointing to the TV. “Here we go again,” Fuld said. “Perception trumping reality once more.” McDade politely turned his attention to the screen.

CNBC’s headline warned: “Time Running Out for Lehman.” David Faber, the network’s seasoned reporter, elaborated on that theme, pointing out, “They need to do an awful lot between now and next Friday [sic], when the company reports earnings.” But then he added, somewhat prophetically: “Can they actually report the losses that are anticipated on Friday [sic] and simply say we’re continuing to review strategic alternatives? Perhaps they can, and perhaps they will have to. But there are certainly a lot of questions.”

As it happened, McDade had come to speak to Fuld about precisely the subject that Faber had raised. McDade told Fuld he thought they should preannounce earnings before the scheduled earnings call next Thursday—maybe as early as the next day. “We have to settle things down,” he told Fuld.

Fuld, nodding in agreement, said, “We’ve got to act fast so this financial tsunami doesn’t wash us away.”

McDade’s overture to Fuld was, at least in part, Kabuki theater, for at this juncture, asking Fuld’s permission was simply a courtesy. McDade had already told Ian Lowitt, Lehman’s CFO, to get the numbers ready. He was also thinking of announcing the SpinCo plan—the good bank-bad bank plan—at the same time.

Although McDade didn’t require Fuld’s blessing to release the numbers—he and his cohorts had already stripped Fuld of any real authority—he did need Fuld’s cooperation in leading the earnings call. For better or worse, he was still the public face of the firm, and his presence would be a key factor in helping to calm the markets.

Given the complexities of their current situation, however, McDade was worried about Fuld’s emotional state. “I don’t know if he can do it. He’s under an enormous amount of stress,” McDade told Gelband before he went to see Fuld. From a public relations point of view, however, they had few alternatives, and McDade knew Fuld would want to lead the earnings call. Fuld wouldn’t have it any other way.

Hank Paulson looked dispirited Tuesday morning as he walked into the main conference room across from his office in the Treasury Building, his team of advisers in tow: Tony Ryan, Jeremiah Norton, Jim Wilk inson, Jeb Mason, and Bob Hoyt. Their 10:00 a.m. meeting with Jamie Dimon and JP Morgan Chase’s operating committee had been set up weeks earlier as part of a series of all-day meetings the firm had scheduled to establish better relations with the government. That strategy had been devised by Rick Lazio, a former Republican representative from New York, whom Dimon had hired as executive vice president of global government relations and public policy. Internally, JP Morgan’s operating committee trips to Washington were jokingly referred to as “OC/DC.” With the financial system teetering, Dimon knew that there would be calls for tighter federal regulation of Wall Street and wanted to make certain that he had shaken all the right hands well in advance.

“Thanks for coming down here,” Paulson said somewhat sheepishly as he opened up the meeting. He was, in fact, still preoccupied with reaction to the takeover of Fannie and Freddie just forty-eight hours earlier. He believed that he had made exactly the right moves in orchestrating the affair, but investors hadn’t seemed to agree. Far from stabilizing them, as he thought they might, the markets seemed to be on the verge of tanking again.

Perhaps most grating of all was the reaction from Congress. He was particularly upset with Senator Dodd, whom he had personally briefed on Sunday, soon after the announcement. Dodd, he thought, had tacitly signaled his support, but the following day had publicly mocked him, quipping that his request for temporary powers—which Paulson had clearly indicated that he didn’t intend to utilize—was merely a big ruse. “[A]ll he wanted was the bazooka, he didn’t want to use it,” Dodd wryly observed to reporters in a conference call on Monday.

“We certainly accepted him at his word that that was all that was going to be necessary,” Dodd said. “Fool me once, your fault. Fool me twice, my fault.” And then Dodd openly raised the question that until then had only been whispered around Washington: “Is this action going to produce the desired results, or are there other actions being contemplated?”

Senator Jim Bunning, who had sparred with Paulson over the summer, going as far as to brand him a Socialist, was even more pointed: “Secretary Paulson knew more than he was telling us during his appearance before the Banking Committee. He knew that Fannie and Freddie were in an irreversible state of damage. He knew all along he was going to have to use this authority despite what he was telling Congress and the American people at the time.”

Paulson had allotted less than an hour to the JP Morgan meeting, even though he knew how important it was to Dimon. “I’ve been trying to encourage opening up the lines of communication between Wall Street and Capitol Hill,” he now told the bankers, explaining that when he ran Goldman, he hadn’t “appreciated how important it was to establish the right relationships in Washington.”

“Trying to get things done here ain’t as easy as it seems,” he said, his audience laughing at the clear reference to the nationalization of Fannie and Freddie.

He asked Dimon what he thought of the move. Dimon, who had encouraged Paulson to pursue the conservatorship, responded positively but diplomatically: “It was the right thing to do. We could see just how big the problem was becoming over the weekend,” and added that it had become clear that certain Fannie and Freddie bonds wouldn’t roll on Monday. Dimon tactfully avoided mentioning the fact that the stock market didn’t seem to be steadying.

“If you guys believe that, share it,” Paulson said before they got up to leave. “I could use the help. No one around here wants to listen to my analysis.”

After that singular plea for help from the Treasury secretary, JP Morgan’s top executives splintered into smaller groups to make several obligatory courtesy drop-bys on the Hill to their federal overseers. Charlie Scharf, head of the firm’s consumer business, and Michael Cavanagh, its new CFO, went to see Sheila Bair, head of the FDIC; Steve Black paid a visit to James Lock hart; and later in the day, there was a meeting scheduled with Barney Frank for several members of the team.

But the most important of the visits was Dimon’s, with the Federal Reserve’s Ben Bernanke. Dimon brought Barry Zubrow, the firm’s chief risk officer, along with him. Zubrow, a relative newcomer to JP Morgan, was quickly becoming one of its key executives. A former banker at Goldman Sachs, where he had worked for more than twenty-five years, he was a close friend of Jon Corzine, the deposed Goldman boss who had gone on to become governor of New Jersey. If anyone at JP Morgan understood the risks in the market as well as Dimon, it was Zubrow.

As Dimon and Zubrow entered the Federal Reserve’s Eccles Building on Constitution Avenue, Zubrow sneaked a quick look at his BlackBerry before passing through the security X-ray machine. He was alarmed at what he saw: Lehman’s stock had plunged 38 percent, dipping to about $8.50 a share.

In Lower Manhattan’s financial district, Robert Willumstad, AIG’s CEO, sat on the thirteenth floor of the Federal Reserve Bank of New York waiting to meet with Tim Geithner. With the markets in turmoil, he had returned to see Geithner to press him again to consider making the discount window available to his company. While Geithner may have spurned his abstract request last month, this time Willumstad had come with a more detailed proposal to turn AIG into the equivalent of a primary dealer like Goldman Sachs or Morgan Stanley—or Lehman Brothers. “It’s going to be a few minutes. He’s on the phone,” Geithner’s assistant told him.

“No problem, I have time,” Willumstad replied.

Five minutes passed, then ten. Willumstad looked at his watch, trying to keep from getting annoyed. The meeting had been scheduled to start at 11:15.

After about fifteen minutes, one of Geithner’s staffers, clearly embarrassed, came to speak with him. “I don’t want to hide the ball on you,” he said. “He’s on the phone with Mr. Fuld,” he revealed with a knowing smile, as if to indicate that Willumstad might be waiting a while longer. “He’s up to his eyeballs in Lehman.”

Finally, a half hour later, Geithner appeared and greeted Willumstad. Geithner was clearly overwhelmed, his eyes darting around his office as he nervously twisted a pen between his fingers. He had also just flown back from an international banking conference in Basel, Switzerland.

After some pleasantries, Willumstad explained the purpose of his request for this meeting: He wanted to change—no, very much needed to have—AIG’s role in the finance sector codified. He said that he wanted AIG to be anointed a primary dealer, which would give it access to the emergency provision enacted after Bear Stearns’ sale, and thus enable it to tap the same extremely low rates for loans available only to the government and other primary dealers.

Geithner stared poker-faced at Willumstad and asked why AIG FP deserved access to the Fed window, which, as Willumstad was well aware, was reserved for only the neediest of financial institutions, of which there were now far more than usual.

Willumstad made his case again, this time with a litany of figures to back up his argument: AIG was as important to the financial system as any other primary dealer—with $89 billion in assets, it was actually larger than some of those dealers—and should therefore be granted the same kind of license. And he mentioned that AIG FP owned $188 billion worth of government bonds. But most of all, he told Geithner, AIG had sold what was known as CDS protection—essentially unregulated insurance for investors—to all of the major Wall Street firms.

“Since I’ve been here, we’ve never issued any new primary dealer licenses, and I’m not even sure what the process is,” Geithner said. “Let me talk to my guys and find out.” Before Willumstad turned to leave, however, Geithner posed the question that really concerned him, the one that had been occupying his thoughts all morning: “Is this a critical or emergency situation?”

Willumstad, fortunately, had been prepared to address this very topic. In meetings with AIG’s lawyers and advisers, including Rodgin Cohen at Sullivan & Cromwell and Anthony M. Santomero, the former president of the Federal Reserve Bank of Philadelphia, he had been guided on how to field the question with the advice, “Tread carefully.” If he acknowledged that AIG had a true liquidity crisis, Geithner would almost certainly reject its petition to become a primary dealer, denying the company access to the low-priced funds it so badly needed.

“Well, you know, let me just say that it would be very beneficial to AIG,” Willumstad carefully replied.

He left Geithner with two documents. One was a fact sheet that listed all the attributes of AIG FP and argued why it should be given the status of a primary dealer. The other—a bombshell that Willumstad was confident would draw Geithner’s attention—was a report on AIG’s counterparty exposure around the world, which included “$2.7 trillion of notional derivative exposures, with 12,000 individual contracts.” About halfway down the page, in bold, was the detail that Willumstad hoped would strike Geithner as startling: “$1 trillion of exposures concentrated with 12 major financial institutions.” You didn’t have to be a Harvard MBA to instantly comprehend the significance of that figure: If AIG went under, it could take the entire financial system along with it.

Geithner, his mind still consumed with Lehman, glanced at the document cursorily and then put it away.

At Treasury, Dan Jester, Paulson’s special assistant, had just returned to his office when his assistant announced something surprising: David Viniar, Goldman Sachs’ chief financial officer, was on the telephone.

Any call from Goldman would mean an awkward conversation for Jester, given that he used to work there. Unlike Paulson, Jester hadn’t been required to sell all his Goldman Sachs stock when he took the job in Washington. And, unlike Paulson, who had had to run the congressional gauntlet before joining Treasury, Jester, as a special assistant to the secretary, didn’t require that official confirmation. Although Viniar had been a longtime friend and colleague from their days together at Goldman, he surely wanted to talk business. With the markets going wild, it was no time for social calls. After a short pause, Jester picked up the phone, and Viniar, after quickly greeting him, got right to the point.

“Could we be helpful on Lehman?”

While the question itself was carefully phrased, Viniar’s timing was curious: Jester had just learned from Geithner that Lehman was likely to preannounce a $3.9 billion loss on Wednesday. Fuld had given the government a private heads-up—and less than an hour later, here was Goldman, sniffing around.

Anxious about running afoul of the rules, Jester stepped gingerly around the issue. But he did learn just enough to determine that Viniar was serious about its offer of assistance. Viniar told him that Goldman would be interested in buying some of Lehman’s most toxic assets; of course, it was clear that Goldman would only do so if it could buy the assets on the cheap. Viniar asked if Treasury could be helpful in arranging an entrée.

As soon as they hung up the phone, Jester reported the call to Robert Hoyt, Treasury’s general counsel. With all the conspiracy theories circulating about Goldman and the government, any leaks about the call could be explosive; he needed to cover his ass.

Now it was time to tell Paulson.

At the Lehman tower, Alex Kirk sprinted down the hall to McDade’s office. “Something strange is going on,” he said, catching his breath. “I just got off the phone with Pete Briger.”

Briger, the president of Fortress Partners, a giant hedge fund and private-equity firm, was well wired into the rumor mill, a carryover from his days as a Goldman Sachs partner. He was calling, Kirk recounted, with what sounded like an ominous proposal.

“I know you’re really loyal to Bart and to Lehman Brothers, and I would never make this call in any other circumstance,” Briger had told Kirk. “But if you happen to be taken over this weekend by another financial institution, and you’re not sure whether you want to go work at that financial institution as opposed to Lehman Brothers, I really want you to come talk to me.”

Kirk, taken aback, managed to reply, “I’m flattered,” his mind racing all the while. “I hope that actually doesn’t happen,” he continued. “I didn’t even think you liked me.”

“I was talking to Wes about you the other day,” Briger said, referring to Wesley R. Edens, Fortress’s CEO, “and I said—you know, not that I don’t like you, but I was saying to Wes—‘I would much rather have partners that are really, really smart motherfuckers than guys that I like.’ ”

Kirk laughed as he related the conversation to McDade, repeating the punchline twice.

But it wasn’t Briger’s back handed compliment that was the odd part; it was his timing, which could hardly have been coincidental; Kirk was convinced that it was the result of a leak. “Why the hell is he calling me now?” Kirk asked McDade, throwing his hands in the air. Lehman wasn’t in merger talks with anyone, at least not yet.

Then, after McDade stared at him without answering, Kirk answered his own question: “I guarantee they know something that we don’t.”

Jamie Dimon and Barry Zubrow sat in the Anteroom of the Federal Reserve waiting for Chairman Bernanke and his colleagues to appear. Their meeting was scheduled to run from 11:15 a.m. to 11:45 a.m.—which meant that the two JP Morgan officers would have to speak quickly in order to tell the Keeper of the Secrets of the Temple everything they had planned to in the half hour they had been allotted.

Overlooking Constitution Avenue, the Anteroom, despite its name, is a capacious space with thirty-foot-high ceilings standing just off the boardroom, where the nation’s main fiscal policies are hammered out, and steps from Bernanke’s office.

Looking around as he sat waiting, Dimon studied the portraits of all the former Fed chairmen, including Marriner S. Eccles, who was appointed the first chairman of the Board of Governors of the Federal Reserve System in 1934, when he noticed the conspicuous omission of Alan Greenspan among them. “Maybe that’s appropriate,” he joked, given what had been transpiring in the economy. (Greenspan’s portrait had, in fact, not yet been completed.)

Bernanke finally arrived and took his seat. He, too, had just been privately briefed that Lehman might preannounce a staggering loss the following day but had decided that he would keep that news to himself during his meeting with the JP Morgan executives.

Dimon informed Bernanke that they had just come from a visit with Paulson at Treasury, and the conversation turned to the blowback he had been facing for orchestrating the Fannie Mae and Freddie Mac takeover. “The negative publicity is really getting to him,” Bernanke acknowledged of Paulson, who had spoken to him yesterday morning and gotten an earful about the press coverage.

Dimon then launched into his semiprepared remarks, glancing down occasionally at a paper on which he had scribbled some notes during the car ride over.

“There’s a broad lack of confidence out there,” he said. “We’re hearing it from our clients, our customers; we’re seeing it in our prime brokerage.” He pointed out that despite the fact that the turmoil was, temporarily and perversely, helping JP Morgan’s business—since customers trusted it as one of the most solid banks—it was bad for everyone else and ultimately would be bad for his firm, too.

This, of course, was hardly news to Bernanke, who sat politely nodding in his best professorial manner.

Dimon then told the chairman—who had been joined by late-arriving Kevin Warsh, one of the Fed governors—that he was particularly worried about Lehman Brothers. He praised the decision to nationalize Fannie and Freddie, but noted the move had not helped calm the markets. “There’s confusion about the role government will play going forward,” he said, looking for the answer to the question on everyone’s mind: Would the Fed back additional bailouts?

Bernanke, however, wasn’t prepared to show his hand, and as the meeting came to an end would say only, “We’re working on a number of initiatives. We’re just trying to stay ahead of this thing.”

At Lehman, the air on the thirty-first floor seemed to only grow thicker as the day advanced. To some of his colleagues, Fuld looked as if he were having trouble breathing. He had been debating all weekend about whether to call Bank of America, and Treasury’s Ken Wilson had phoned him at least three times that morning to press that case. “You gotta make the call,” Wilson instructed him. Wilson knew Bank of America well; during his stint at Goldman, he had been its banker for more than a decade. It’s a good strategic fit,” Wilson urged. What Wilson hadn’t told Fuld was that he had already worked over Greg Curl of Bank of America to tee up the phone call. During an earlier conversation, Wilson had informed Fuld that the only way a deal was going to take place was if he was willing to take price off the table as a bargaining point. That was an indirect way of warning Fuld that he didn’t have much negotiating power—or time.

Rodgin Cohen, who has a bad back, was standing at the computer in his corner office on the thirtieth floor of Sullivan & Cromwell’s offices overlooking the New York Harbor when the phone rang. It was Dick Fuld, giving him the instructions to call Bank of America’s Curl. Cohen scribbled out a script for himself as Fuld was speaking; the stakes on this one were too high to do a presentation off the top of his head.

“Got it. I’ll call you back after I’ve talked to him.”

Cohen studied his script one final time and got Curl on the line. “Look,” he said amiably, “the world has moved a lot. We’d like to reengage.”

“O … kay,” Curl said slowly, making it clear that, while he agreed to listen to Cohen’s pitch on behalf of his client, he remained wary.

“We have two priorities. Preserving Lehman’s brand and reputation and doing well by the Lehman people,” Cohen said.

Then, checking the next sentence in the script, he paused for effect. “You will notice price is not a priority,” he said, “ but there is, of course, a price at which we could not do a transaction.”

“We could be interested,” Curl replied cautiously. “Let me talk to the boss and call you back.”

“Greg, we’d be looking to do something quickly,” Cohen told him.

“Got it.”

Dimon and Zubrow hopped out of their black Town Car in front of 601 Pennsylvania Avenue, a six-story modern limestone building northwest of the White House that serves as JP Morgan’s Washington headquarters. It was here that all of the government-relations people worked, so a constant stream of Gucci-clad lobbyists was a familiar sight.

By the time Dimon and Zubrow arrived most members of the operating committee had already finished their morning meetings and were eating lunch in a conference room on the second floor. Sandwiches and sodas were being passed around as Cavanagh was recounting how his conversation with Sheila Bair had gone and Black was regaling the group with anecdotes from his encounter with James Lockhart.

As the conversation inevitably turned to Lehman and its falling stock price, Dimon told the group about their discussion with Bernanke. “I think he gets it,” Dimon said, but when a banker asked if the Fed was likely to bail out Lehman, Dimon’s reply was unequivocal: “Not going to happen.”

Black had long been bearish on Lehman. At an internal leadership forum at JP Morgan in January 2007, he had predicted: “Dick Fuld will end up selling that company when he has to sell instead of when he should have sold it.” Reminding the group of his earlier prognostication, he announced: “I told you they would be fucked!”

The mood grew more somber, however, as they all realized what an upheaval of that order would mean to them. If Lehman went down—and the government elected not to intervene—JP Morgan itself could suffer colossal losses. Zubrow informed the group that John Hogan, chief risk officer for JP Morgan’s investment bank, had sought more than $5 billion in collateral from Lehman the week before, and again during the weekend, but had received nothing as of yet. Zubrow had also been to see Lehman’s CFO, Ian Lowitt, and put him on notice that JP Morgan was worried about them.

Black suggested that they call Fuld and demand that he send the collateral immediately. Just as important, the group decided that they should probably broaden the collateral agreement so that they’d be able to ask for even more money if other parts of Lehman’s business were to falter.

Everyone agreed that this was the best course of action, so Black and Zubrow slowly rose from their seats and left the conference room. Their faces told the story: It was not going to be a pleasant conversation.

Black dialed Fuld on the speakerphone and when the connection was made immediately explained their plight: “We got, you know, $6 to $10 billion worth of intraday exposure to you, and we don’t have enough collateral,” Black said. He reminded him that JP Morgan had asked for $5 billion the week before.

“We understand that that’s a tough ask for you guys,” he continued, “so let’s spend some time on how we might solve our issue without creating a major issue for you.” In the back of Black’s mind he knew he was being far too generous; he could easily have said, If you don’t, we’ll shut you down tomorrow morning, which we have every right to do.

Initially, it seemed as if Fuld had understood the veiled threat. “Let me get my guys, and we’ll take a look at it,” he said resignedly. Fuld proceeded to conference Lowitt into the call and calmly explained the situation to him. The four men discussed a handful of options that would enable Lehman to provide the collateral. Perhaps Lehman could move all its cash over to JP Morgan and just leave it on deposit, so it wouldn’t count against the firm’s capital?

Fuld tried to turn the call around, using it as an opportunity to ask Black if JP Morgan might be willing to offer Lehman some amount of cash, perhaps in the form of a loan that could be converted into Lehman stock. After all, Dimon had always told Fuld to call if he needed anything.

“We’re getting ready to preannounce tomorrow,” Fuld told Black. “Maybe we need to hold that up for a day if you guys seriously think Jamie would consider doing a convert and taking a piece of us.”

To the JP Morgan bankers, it was a ludicrous suggestion, like someone’s asking the repo man if he had any spare change.

Black looked at Zubrow as if to say, Fuld has lost it, and replied carefully, “I don’t have any ideas, any brilliant ideas off the top of my head, but if you’re telling me you’re at that point where you would consider … that you’re at the point where it’s really getting difficult, then let us still talk and come back and see if there’s anything we can do.”

Five minutes later, after a quick and sober discussion with his colleagues, Black was back on the phone with Fuld.

“Dick, there’s nothing that anybody’s gonna … there’s nothing we can do, and frankly, there’s nothing anybody’s gonna do other than what might be in their own self-interest,” Black explained. “I’m sorry to say this, but my suggestion is to call the Fed and see if they might try and put together a Long-Term Capital-type proposal, and herd all the cats into one room.”

There was a pause at the other end of the line, and then Fuld said icily, “That would be terrible for our shareholders.”

Black could hardly keep from laughing. “No one is going to give a shit about your shareholders,” he replied.

Stilling his frustration, Fuld tried to reengage Black. “I just talked to Vikram,” he announced. “Citi is sending a bunch of guys over to meet with our capital markets guys, and some of our management team, to see if there is some type of a capital market solution that we could announce at the same time that we’re pronouncing earnings.”

Citi? Was Fuld joking? “OK,” Black said guardedly. “We can send over some of our guys.”

Black immediately called Doug Braunstein, head of JP Morgan’s investment banking practice: “I’d like you to go and John [Hogan] to go,” he told him after explaining the situation. “I have no idea what they want. The fact that Citi has an idea probably means it doesn’t work,” he said with a chuckle. “But see what is up and see what they’re talking about.”

Hank Paulson had his eyes fixed on his Bloomberg terminal as he watched Lehman’s share price carefully. It was 2:05 p.m., and the stock was down 36 percent, to $9, its lowest level since 1998.

He had just gotten off the phone with Fuld, who had called with an update on his approach to Bank of America. Paulson was pleased to hear Fuld was now taking this seriously but afraid it was all too late.

On Paulson’s television that moment, tuned to CNBC, the speculation among the network ’s commentators was illuminating.

“The stock is coming down at the rate it’s coming down because a number of people believe strongly that the company is headed for bankruptcy,” explained Dick Bove, a veteran banking analyst at Ladenburg Thalmann. “I think that that belief is what is driving the short selling.”

Erin Burnett, the anchor of Street Signs, countered: “But if people are still using the company as a counterparty, trusting the company, isn’t that a significant statement?”

“The key thing you have to understand is it’s not in anyone’s interest for Lehman to fail,” replied Bove, who, oddly enough, had a buy on the stock and a $20 price target. “It’s not in the interest of its competitors—Goldman Sachs, Morgan, Citigroup, JP Morgan—because if Lehman were to fail, then the pressure moves to Merrill Lynch and then it moves to who knows who else?

“It’s also, you know, not in the interest of the U.S. government for Lehman to fail,” Bove stressed again. “You have to believe, although I can’t tell you this is true, that Lehman has been talking to the Federal Reserve of New York, to Ben Bernanke, probably to Hank Paulson, because they don’t want this company to fail.”

How true. Paulson picked up the phone to call Geithner to discuss what other options they might pursue.

By the time the closing bell rang at the New York Stock Exchange, Lehman’s shares had taken a brutal beating, ending the day at $7.79, having fallen 45 percent. McDade’s secretary could hardly keep up with the calls. McDade himself had to help his new CFO, Ian Lowitt, prepare the numbers for the following day’s earnings call. They’d officially decided they had to preannounce something—anything, really—as investors needed to hear from them.

McDade also had to brief Larry Wieseneck and Brad Whitman, whom he had designated to meet with JP Morgan and Citigroup executives at Simpson Thacher’s Midtown offices later that day. They would ask for one or both banks to extend a credit line or perhaps to consider helping them raise capital. Finally, perhaps the trickiest task of all, he had to figure out how the firm would position its good bank-bad bank plan to investors. The reason that was such a challenging proposition was that nobody could or would put a price on the firm’s abundance of toxic assets.

If all that weren’t enough to deal with, McDade had just had a baffling conversation with Fuld, who informed him that Paulson had called him directly to suggest that the firm open up its books to Goldman Sachs. The way Fuld described it, Goldman was effectively advising Treasury. Paulson was also demanding a thorough review of Lehman’s confidential numbers, courtesy of Goldman Sachs.

McDade, though never much of a Goldman conspiracy theorist, found Fuld’s report discomfiting, but moments later was on the phone with Harvey Schwartz, Goldman’s head of capital markets. “I’m following up on Hank’s request,” he began.

After another perplexing conversation, McDade walked down the hall and told Alex Kirk to immediately call Schwartz at Goldman, instructing him to set up a meeting and get them to sign a confidentiality agreement.

“This is coming directly from Paulson,” he explained.

At 4:30 p.m. Paulson asked Christal West, his assistant, to get Ken Lewis on the phone. Ken Wilson had just briefed Paulson on his most recent call with Fuld—his seventh of the day—about Bank of America again. Now, Wilson told Paulson that all he needed to do was to make the case directly to its CEO. Paulson and Lewis did not know each other well, and the only real time they had spent together was a lunch in Charlotte several years back, when Paulson was still at Goldman. Ken Wilson had brought Paulson down to meet Lewis then to demonstrate Goldman’s loyalty to their acquisitive client.

“I’ve got Lewis on the line,” West finally called out to Paulson, who picked up the receiver.

“Ken,” he began gravely, “I’m calling about Lehman Brothers,” and after pausing said, “I’d like you to take another look at it.”

The receiver was silent for a few seconds. Lewis agreed to consider it, but added: “I don’t know how much it will do for us strategically.” He made it clear, however, that the price would have to be right. “If there’s a good financial deal there, I could see doing it.”

Lewis’s biggest concern about a potential deal, as he told Paulson, was Fuld, who Lewis worried would be unrealistic about his asking price. He recounted to Paulson how badly their meeting had gone back in July.

“This is out of Dick ’s hands,” Paulson assured him. It was a powerful statement that could be interpreted only one way: You can negotiate directly with me.

By 7:30 p.m., the conference room on the thirtieth floor of Simpson Thacher was packed with executives from JP Morgan and Citigroup, who were milling about impatiently. “This is going to be a waste of two hours of our time,” John Hogan of JP Morgan whispered to his colleague, Doug Braunstein, who just smiled wryly.

Larry Wieseneck greeted Gary Shedlin—co-head of global financial institutions M&A of Citigroup and one of his closest friends and regular golf partners at Crestmont, their club in New Jersey—then assessed the crowd. Realizing that he wasn’t even certain who everyone was, he passed around a piece of paper asking them all to sign in. If he was going to share confidential information with them, he wanted to know precisely with whom he’d be dealing.

Wieseneck was particularly worried about the imbalance of people from JP Morgan’s risk department, compared to the deal-making bankers he had expected would be coming to help them think through their options. “These are all risk guys,” he told his colleague Brad Whitman, as the two chatted in the corner, plotting strategy. This was supposed to be a meeting on how to save Lehman, he thought, not a due diligence session for JP Morgan to figure out the extent of its exposure if Lehman fails.

Apologizing for the delay, Wieseneck announced to the room that they were waiting for Skip McGee, Lehman’s head of investment banking, to arrive.

“We’ve got a lot of people here,” Braunstein, who had brought his whole team along, complained. “We can’t wait here all night.”

As tension in the room continued to rise, Whitman finally received an e-mail from McGee, who told him to go ahead and begin, as it was unlikely that he would be able to make it at all.

After calling the group to order, Wieseneck walked it through Lehman’s plan to spin offits real estate assets as a “bad bank.” Everyone agreed the plan was a good one, but there was general concern that it might have come too late, given that it would take months to put into effect. And Lehman would need to infuse the entity with at least a modicum of capital to prevent it from toppling immediately.

Wieseneck then opened up the meeting to questions, and almost immediately became annoyed by the sheer volume of them posed by the JP Morgan bankers—most of which had nothing to do with helping Lehman raise capital. “How big is the book? What assumptions are you using around the models?” Hogan asked. “It sounds like you probably need some capital to make this whole thing work.” The Lehman representatives didn’t have any answers, suggesting that he get in touch with their CFO.

To Wieseneck it was obvious that what the queries were really about was determining Lehman’s liquidity position: whether counterparties were trading with it and the status of its cash position. These were all legitimate concerns that any prudent investor might have, but in this case, Wieseneck and Whitman suspected that they were intended more as a means to protect JP Morgan. Shedlin’s questions, in contrast, were directed at various possible structures of deals that could help Lehman, but he was getting drowned out by the other bankers around the table.

The one point on which bankers from both sides agreed was that Lehman should not announce its SpinCo plan unless it could identify the exact “hole” that it needed to fill—that is, how big a capital infusion was necessary. “You don’t know how much money you’re going to need,” Hogan told them. “By going out and announcing this, you’d only add uncertainty to the market,” he warned. “You’d get crushed.”

Shedlin was even blunter. “Look, we think it’s very dangerous for you guys to lay out a strategy with a SpinCo where people basically will conclude that you guys still have a very significant capital hole,” he said. “Going out with a story that suggests you have a big capital hole and no solution to raising it is only gonna put you at the mercy of the market even more.”

As the meeting broke up, two messages were clear as day to Wieseneck and Whitman. The first: Forget about announcing the plan, but if you feel you must do so, be very careful about talking about raising new capital and don’t get pinned down to a specific number.

It was the other, however, that made them appreciate the true depth of their predicament: You’re on your own. None of the banks volunteered to offer any new credit lines.

As soon as Braunstein and Hogan left the building and crossed Lexington Avenue, they called Jamie Dimon and Steve Black.

“Here’s the story,” Hogan said, virtually shouting into his cell phone. “I think these guys are fucked.” They proceeded to walk Dimon and Black through all of the details of what Lehman was preparing to announce the following day.

“We have to go back and tie everything up and line up all of our contingent risks,” Hogan insisted. “I don’t want to take a hickey on this.”

From the Bank of America headquarters in Charlotte, North Carolina, Greg Curl dialed Treasury’s Ken Wilson, who was still in his office, frantically fielding calls. Wilson had been expecting to hear from Curl, notifying him that he was getting on a plane to New York to begin his due diligence on Lehman.

Curl, however, was phoning with very different news. “We’re having an issue with the Richmond Fed,” he explained. Jeff Lacker, the president of the Federal Reserve of Richmond, Bank of America’s regulator, had been concerned about the bank’s health and had been putting pressure on it to raise new capital ever since it had closed its acquisition of Countrywide in July. As the official overseer of banks in Virginia, Maryland, North Carolina, South Carolina, the District of Columbia, and part of West Virginia, the Richmond Fed wielded considerable power through its regulation of capital reserves.

“They’ve been screwing around,” Curl complained to Wilson, who was hearing of this for the first time. Curl told him that at the time that Bank of America was considering acquiring Countrywide back in January—a purchase that the government had quietly encouraged to help keep that firm from imploding—the Fed had quietly promised to relax its capital requirements if it proceeded with the deal. Or at least that’s what Ken Lewis thought.

Now, two months after the Countrywide acquisition had been completed, Lacker was threatening to force the bank to slash its dividend. Bank of America had not disclosed the conversations, hoping they’d be able to resolve the matter before the news ever leaked. The bank had been working the phones that afternoon with the Richmond Fed to try to figure out where the bank now stood with Lacker, but it was having little luck. “We’re going to need your help,” he told Wilson. “Otherwise, we can’t move forward.”

Wilson recognized the gambit all too clearly: Bank of America was using the Lehman situation as a bargaining chip. The bank would help Lehman, but only if the government would do it a favor in return. Lewis, through Curl, was playing hardball.

Wilson promised to look into the matter and then immediately called Paulson. “You’re not going to believe this …”

At 10:00 p.m., a frustrated Bart McDade was still holding court in the boardroom on the thirty-first floor at Lehman Brothers. He had just learned that Bank of America wasn’t coming up to New York in the morning, though he didn’t yet understand exactly why. “We’re playing against the clock,” he railed.

Hours earlier, McDade had implored Fuld to go home and get some sleep before tomorrow’s earnings call, for which he needed to be in his best form. Since Fuld left, he had been reviewing various drafts of the press release. What should they say? What could they say? How should they say it?

McDade had just finished coaching Lowitt, his CFO, through his part of the presentation when Wieseneck and Whitman returned from their meeting with JP Morgan and Citigroup.

Before joining everyone in the boardroom, they huddled with Jerry Donini and Matt Johnson, along with a half dozen other bankers. Whitman described the entire meeting to them. “It was unbelievable,” he concluded his account, shaking his head. “It was like a JP Morgan risk convention!”

The group then joined McDade in the conference room, where, after Wieseneck and Donini walked the group through the SpinCo plan, Wieseneck shared the advice that JP Morgan and Citigroup had given them earlier. “We’ve got to be careful how we message if we intend to raise capital or not,” Donini warned.

It was about 1:30 a.m. before everyone finally packed it in. A small fleet of black Town Cars lined Seventh Avenue in front of the building to whisk the bankers home. They’d need to be back at the office only five hours later, giving them time for perhaps a brief nap and a shower, before a day that they suspected would determine the course of their futures.