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

CHAPTER THIRTEEN

The day’s papers for Wednesday, September 10, 2008, were strewn everywhere in Dick Fuld’s office, where a sleep-deprived Bart McDade and Alex Kirk had arrived at 6:30 a.m. for last-minute preparations for the looming conference call, scheduled to begin in only three and a half hours. The news was not good.

The lead of the New York Times read: “Only days after the Bush administration assumed control of the nation’s two largest mortgage finance companies, Wall Street was gripped by fears that another big financial institution, the investment bank Lehman Brothers, might founder—and that this time, the government might not come to the rescue.”

Several paragraphs down came the quote that succinctly stated the threat that now faced them: “Some may worry that Treasury has taken on so much taxpayer burden they don’t have any remaining capacity to take on the burdens of Lehman,” said David Trone, an analyst at Fox-Pitt Kelton.

The Wall Street Journal noted the differences between what had taken place during the final days of Bear Stearns and what was now occurring at Lehman. For one thing, Lehman could borrow from the Federal Reserve.

It wasn’t just the stock investors who were nervous; Fuld and McDade had already begun receiving reports from the trading floor that morning indicating that more hedge funds were pulling their money out of Lehman. A sign of just how desperate the situation had become was that GLG Partners of London—whose largest shareholder, with a 13.7 percent stake, was Lehman—reduced the amount of business it conducted with the firm.

As they were making yet another pass through the earnings call script, Kirk’s cell phone rang. It was Harvey Schwartz from Goldman Sachs, phoning about the confidentiality agreement that Kirk was preparing. Before Schwartz began to discuss that matter, however, he said that he had something important to tell Kirk: “For the avoidance of doubt, Goldman Sachs does not have a client. We are doing this as principal.”

For a moment Kirk paused, gradually processing what Schwartz had just said.

“Really?” he asked, trying to keep the shock out of his voice. Goldman is the buyer?

“Yes,” Schwartz replied calmly.

“Okay. I have to call you back,” Kirk said, nervously ending the conversation, and then almost shouted to Fuld and McDade, “Guys, they don’t have a client!”

“What do you mean?” Fuld asked, looking up bleary-eyed from his notes.

“They’re doing this for themselves. For Goldman. That’s what he told me.”

For the next few minutes the three men frantically brainstormed about their course of action. McDade, reasonably, was concerned about sharing information with a direct competitor: How much did they really want to divulge? At the same time, he felt they couldn’t take a stand against a plan that he believed had originated with Paulson.

Kirk was even more apprehensive. “Why are we letting Goldman Sachs in here? Haven’t you read When Genius Failed? The reference was to Roger Lowenstein’s bestselling book about the Long-Term Capital Management crisis. In it Goldman Sachs is depicted in one scene as trying to take advantage of the disaster by using its offer of assistance as a way to get inside Long-Term Capital’s books and download all its positions into a laptop—a charge Goldman fervently denied.

“They will rape us,” Kirk cautioned.

McDade, turning back to his preparations for the fast-approaching call, made his position clear: “We were told by Hank Paulson to let them in the door. We’re going to let them in the door.”

Twenty-seven floors below, Lehman traders gathered for a preview of SpinCo, the “bad-bank” spin-off that would be discussed an hour later during the earnings call. McDade had appointed Tom Humphrey and Eric Felder to explain what investors were about to hear.

After learning the details of the plan, the traders were unusually quiet, and the silence was broken only when Mohammed Grimeh, global head of emerging markets, stood up with a horrified look on his face.

“That’s it? That’s fucking it?” he asked. “Well, what the hell have those fucking idiots up on thirty-one been working on for the past two months? This? You have to be kidding me. If this is all we have, we’re toast!”

In the time it had taken Humphrey and Felder to describe SpinCo, Grimeh had already seen through it—had seen exactly what JP Morgan and Citigroup saw the night before, and what he feared the market would see as well.

“All we’ve done is to take a dollar out of our right pocket and put it in our left. The heavy debt load would make it insolvent before it started,” he said, backed by a growing chorus of angry muttering from the disconcerted bankers.

Gregory J. Fleming, Merrill Lynch’s president and chief operating officer, had one eye on CNBC as he jogged on a treadmill at the health club at the Ritz-Carlton hotel in downtown Dallas. He had spent the day before with clients in Houston and had scheduled a town hall session here with Merrill employees before hopping on a flight back to New York.

As he leaned into his jog, CNBC reported that Lehman Brothers had just announced its earnings ahead of its conference call. The firm, the reporter elaborated, had also described its extraordinary spin-off plans in its press release. When Fleming returned to his room, he got a colleague to send him the announcement, which included an important headline buried at the bottom: “The firm remains committed to examining all strategic alternatives to maximize shareholder value,” which meant that it was open to just about anything. He knew the company had been quietly shopping pieces of itself, but that statement effectively made it official, at least to those paying attention. Lehman, the entire firm, was up for sale.

From his days as a merger banker focusing on financial services, he knew that if Lehman was on the auction block, Bank of America would be the likely buyer. But if Lehman was sold to Bank of America, the implications for his own firm, Merrill Lynch, would be enormous. He had long believed that Bank of America was the natural buyer for Merrill; at a Merrill board meeting just a month earlier, Bank of America had been listed in a presentation as just one of a handful of compatible merger partners.

Fleming began trying to figure out whom he knew who might be working on a deal with Bank of America. Ed Herlihy of Wachtell, a longtime friend and one of the legal deans of banking M&A, immediately came to mind. Herlihy had worked on nearly every deal Bank of America had orchestrated over the past decade.

“This is getting ugly,” Fleming told Herlihy when he reached him on his cell. “How are my friends in Charlotte?”

Herlihy could see where this conversation was heading and took steps to deflect it immediately. “Let’s not go there, Greg,” he replied.

“Just tell me. If you’re thinking about Lehman, you have to tell me. We could be interested in talking at some point. You and I both know that would be a much better deal.”

Herlihy, clearly uncomfortable, said, “We’ve been down this road before. We’re not going to do anything unless we’re invited in. If you are serious, now would be a good time to get moving on that.”

That was all the confirmation Fleming needed to be convinced that Bank of America was indeed bidding for Lehman.

Fleming had one more call to make before his first meeting that morning. He wouldn’t contact John Thain just yet—Thain, he suspected, wouldn’t be interested at this point, for whenever Fleming had tried previously to discuss contingency plans to sell the bank, he had been dismissive. Instead he phoned Peter Kelly, Merrill’s deal lawyer, and recounted his conversation with Herlihy.

“Look, you have to make sure Bank of America is there for us,” Kelly instructed him after the two had discussed the ramifications. “You have to convince John.”

“That’s a high bar,” Fleming said. They both knew that he and Thain had a fundamentally antagonistic relationship.

“I know,” Kelly said, “ but that’s why you get paid the big bucks.” Before hanging up, he made one last point: They might have to go over Thain’s head. “If you can’t convince John—and I know this is subversive behavior, but this is in the interest of the shareholders—you need to reach out to the board.”

The conference room on the thirty-first floor of Lehman Brothers was more crowded than usual for an earnings call, but what was typically a fairly routine affair had lately begun to be perceived as something more akin to an impeachment trial. Lehman was taking the situation seriously enough to have stocked the room with additional lawyers. Lehman technicians, meanwhile, were scrambling to ensure that the conference call and Webcast would go off without a major hitch. The firm had ordered hundreds of extra phone lines to keep up with the demand. The press release issued that morning forecast a third-quarter loss of $3.9 billion—the firm’s biggest ever.

Fuld strode in assuredly, as if nothing was out of the ordinary. Everyone in the room, however, knew that for years he had always let his chief financial officer handle these calls, as he had never been truly comfortable participating in them. As he took his seat at the head of the table, Fuld looked around the room with his trademark disarming glare, trying to settle in with his script and papers. He knew what the stakes were. Moments earlier he had taken a quick glance at the Bloomberg terminal to see if U.S. stock index futures might be higher on the hopes that he, Dick Fuld, would be able to ease fears about Lehman. But overnight, Asian stocks had slid, and Europe was even lower. There was a lot riding on what he would say today; millions of dollars would either be made or lost on exchanges the world over depending on how his presentation was received.

Shaun Butler, the head of investor relations, looked over at her boss. “Are you ready?”

“Yeah,” answered Fuld, faintly growling.

As the call was engaged, he slowly lowered his head and launched into his script, intoning deliberately: “In light of these last two days, this morning we prereleased our quarterly results. We are also announcing several important financial and operating changes that amount to a significant repositioning of the firm, including aggressively reducing our exposure to both commercial real estate and residential real estate assets.

“These will accomplish a substantial de-risking of our balance sheet and reinforce the emphasis on our client-focused businesses. They are also meant to mitigate the potential for future write-downs, and to allow the firm to return to profitability and strengthen our ability to earn appropriate risk-unadjusted equity returns.”

The executive summary: Lehman Brothers will be just fine. We appreciate your concern, but we have the situation under control.

“This firm has a history [of facing adversity] and delivering,” he continued. “We have a long track record of pulling together when times are tough and then taking advantage of global opportunities… . We are on the right track to put these last two quarters behind us.”

Fuld now handed off to his CFO, Lowitt, who, in his clipped South African accent, outlined what Lehman billed as its “key strategic initiatives.” The firm would seek to sell a 55 percent stake in its money-management business, which included Neuberger Berman, and it would spin off much of its commercial real estate holdings—otherwise known as “the bad stuff.”

Shifting as much as $30 billion of Lehman’s commercial real estate holdings, including its investments in Archstone-Smith, the owner of 360 high-end apartment buildings, and SunCal, a property developer, was no small undertaking. One thing that would be changing immediately was how Lehman valued its real estate assets.

Lowitt continued: “The real estate held-for-sale portfolio, consisting of assets across the capital structure, is booked at lower of cost or market as we take write-downs on this book, but do not reflect market value gains until a sale event occurs. REI Global”—the new entity’s infelicitous acronym—“will account for its assets on a held-to-maturity basis and will be able to manage the assets without the pressure of marked-to-market volatility. REI Global will not be forced to sell assets below what it believes to be their intrinsic value.”

On the surface the spin-off appeared to be a clean, elegant solution. It removed the troubled assets from Lehman’s balance sheet, leaving a stronger firm, just as Fuld had indicated that it would. But what was left unsaid was precisely what had concerned the bankers at the meeting with JP Morgan and Citi the night before: The new company would likely need to be funded. Where was Lehman going to come up with the money to accomplish that when it needed to retain as much capital as possible?

Less than half a mile away, in his office near Grand Central Terminal, David Einhorn huddled with his team of analysts listening to the Lehman earnings call on a speakerphone. He could not believe what he was hearing. They were still trying to avoid writing this garbage—the toxic stuff—down. What did they hope to accomplish? It was clear to him that the assets in question were worth much less than what Lehman was claiming.

“There’s an admission right in the press release that they’re not writing these things down!” Einhorn told his analysts. He zeroed in on a sentence in the company’s statement: “‘REI Global will be able to manage the assets without the pressure of marked-to-market volatility.’ ” Instead, Lehman maintained, by spinning off the real estate assets they’d be able “to ‘account for its assets on a held-to-maturity basis.’ ”

In other words, as Einhorn continued to rail, “they can keep making up the numbers however they want.”

Downtown, Steven Shafran and a team of staffers at the New York Federal Reserve Building were also listening to the call, some of them also in a state of utter disbelief. Shafran, the special assistant from Treasury, had flown to New York the night before at Paulson’s urging to help coordinate communication among the Treasury, the Fed, and the SEC in the event that Lehman’s situation quickly deteriorated. He and most of the Fed team had already been given a preview of the plan the night before by Lehman but hearing it presented live proved to be a completely different experience. A former investment banker at Goldman, Shafran shook his head in exasperation and announced, “This isn’t going to work.”

As the investor call went on, Shafran observed to the staffers, “What’s really amazing about this is that these guys are investment bankers who get paid by large corporations for tough advice in tough situations. You know the old saying about how a doctor should never treat himself? It feels like one of those situations.”

About halfway into the question-and-answer portion of the call, Michael Mayo, the prominent analyst with Deutsche Bank, addressed the capitalization issue with blunt directness: “To the extent you might need $7 billion to capitalize that entity,” his voice boomed over the speakerphone, “and you’ll get $3 billion with the spin of part of IMD [the more viable investment management division], how would you get the other $4 billion?”

Lowitt paused as he recalled the explicit instructions, given the conversation the firm had had the night before with the JP Morgan and Citigroup bankers: Don’t get pinned down talking about any specific numbers. You will be crushed. He was now being asked the one question that he didn’t want to answer.

“Well, we don’t feel that we need to raise that extra amount to cover the $7 billion,” he replied, trying to sound confident about the firm’s capital position, “because you will have less sort of leverageable equity in core Lehman than in, you know, where you are at the end of this quarter.”

In other words, the plan was essentially an accounting gimmick: Lehman would be smaller and less leveraged as a result of the spin-off, and would therefore need less capital.

Mayo responded that he had his doubts about Lehman’s plan, but in adherence to Wall Street protocol, he left it at that. This was not the place for a showdown.

For a few moments it almost appeared as if Fuld would be able to claim victory: Shares of Lehman Brothers opened that morning up 17.4 percent. The rise might give him the breathing room he needed.

Across the Atlantic a group of senior executives from Barclays in London were likewise intently listening in on the call, taking meticulous notes as they sat in a conference room at the firm’s headquarters, known as “The Bungalow,” in Canary Wharf. They had registered for the call under an assumed name. Bob Diamond, Barclays Capital’s CEO, had been mulling buying Lehman for months, ever since he had received the call from Bob Steel, when he was still at Treasury in April. In June, Diamond had broached the idea with Barclays’ board, which had been discussing possible expansion plans in the United States. The group ultimately decided against pursuing Lehman—unless, as John Varley, the firm’s chairman, put it, “the firm could be bought at a distressed price.” Diamond had in turn communicated that message directly back to Steel.

But the timing now seemed ripe for a deal. “I’m surprised, given how shaky this is, that I actually haven’t had a call from Treasury, because it knows that we would be willing to do this at a distressed price, and it’s not that far off,” Diamond had told Varley only a day earlier. Diamond had been in the middle of giving a recruiting presentation at Wharton, the elite business school at the University of Pennsylvania, on Tuesday, when his cell phone vibrated. Seeing that it was Varley, he abruptly stopped his presentation and walked off the stage. “If we’re going to meet with the board, we’re going to meet with the board tomorrow,” Varley told him. Diamond found one of the only three direct overnight flights to Heathrow from Philadelphia.

He took the last-minute overnight return flight to London to resolicit support to buy Lehman. He would have to win over Varley and the board—and do so quickly.

Varley was a model of the conservative Englishman and had married into one of the bank’s founding Quaker families. Soft-spoken and courtly, he wore suspenders every day, listed table tennis and fishing as his hobbies, and had far less tolerance for risk than Diamond. Whatever his own professional predilections, however, Varley had always given Diamond a long leash, even if he did maintain a quiet uneasiness with his colleague’s appetite for deal making.

The two men had long had a complicated relationship, having both vied for the top job in 2003. Although Varley won the position, Diamond was paid nearly six times what Varley, his superior, made. (In 2007, Diamond earned $42 million to Varley’s $8.4 million.) For years, Diamond had avoided taking a seat on the Barclays’ board to avoid disclosure of his compensation agreement, which would have landed him squarely in the pages of the British tabloids as a “Fat Cat.” Despite his title, Diamond was to many the de facto CEO. In 2006 a Dresdner Kleinwort analyst wrote a report provocatively titled “Bob Diamond 3, John Varley 0.”

As soon as the Lehman call came to an end, the Barclays executives discovered they were in agreement: They’d make a play for the firm. But only—Varley reiterated the point—if they could get it for a song.

Diamond went back to his office and phoned Bob Steel at his new number at Wachovia. “Remember our conversation about Lehman?” he asked.

“Of course,” Steel answered.

“Well, we’re now interested.”

Lehman’s stock may have temporarily stabilized after the earnings call, but only hours later Fuld was faced with a new problem: Moody’s Investors Service announced that it was preparing to place Lehman’s credit rating on review, warning that if the firm did not soon enter into “a strategic transaction with a stronger financial partner,” it would cut its rating.

Fuld decided to call John Mack, CEO of Morgan Stanley; he needed options. And, unlike his relationships with Ken Lewis and Lloyd Blankfein, he actually trusted Mack.

“Listen, I really need to do something,” Fuld told him. “Let’s do something together.”

Mack had always genuinely liked Fuld and was concerned by the stress he could now hear in his voice. But he had no interest in entering into a deal and wondered if Fuld was deluding himself by even making the call.

“Dick, I want to help, but it just doesn’t make any sense. We’ve talked about this before,” Mack said, reminding him of the meeting they had had at his house over the summer. “There’s so much overlap.”

After getting off the phone, however, Mack continued to think about the possibility of a deal with Lehman and found that he was intrigued. His initial impulse about its unfeasibility may have been correct when Lehman’s stock was trading at $40 a share, but given its current price, a deal might well be financially attractive.

“I’ve been thinking,” he said, after calling Fuld back. “I agree with you. We should talk.”

After Fuld thanked him for reconsidering, Mack paused a moment and then said firmly, “Dick, I’m a very straightforward guy. I really like you, but let’s be clear, this is not a merger of equals. Only one person can run this. We have to get that up front now.”

After an awkward silence, Fuld finally responded, “I wasn’t thinking that way,” and then, after another brief hesitation, added, “Let me think about it. I’ll call you back.”

Twenty minutes later Fuld was back on the phone.

“Look, you’re right,” he said, the toll that recent days had taken shading his voice. “I want to do the right thing. Let’s see what can be done.”

Fuld suggested that they set up a meeting between the senior managements of both firms, without Fuld or Mack present; let them be the ones to decide if it was a good or bad idea.

The gathering was arranged for that night at the apartment of Walid Chammah, Morgan Stanley’s co-president.

Bob Diamond drummed his fingers on the desk as he waited on hold for Tony Ryan at Treasury, whom Bob Steel had suggested he call. “Tony,” Diamond began, “do you recall the conversation I had with Steel?”

For a moment, Ryan was confused.

“Which?” he asked, trying to act as if he knew what Diamond was talking about.

“On Lehman.”

“Oh, yes, yes.”

“I wanted to call you because I thought it would be worthwhile for me to talk to Hank. If not, no big thing, but my sense is that we should have a conversation.”

Ryan said he’d get Paulson to contact him as soon as he could.

An hour later Diamond’s secretary informed him that Tim Geithner was on the line. “What can I do to help this along?” he asked.

Diamond explained that he was very interested in buying Lehman, if it could be had at a distressed price.

“Why don’t you call Fuld?” Geithner asked.

“You don’t understand,” Diamond said. “I am not trying to be provocative here.” He told Geithner about their experience trying to buy ABN AMRO—how the deal had fallen apart and how big an embarrassment it had been for the firm. “We don’t want to be seen as dabbling around,” Diamond said. “It would be inappropriate.”

To Geithner, such unnecessary delicacy seemed characteristically British, even if Diamond was an American, and he just listened.

“We need to be seen, to be invited by you and shepherded by you,” Diamond insisted. “You guys asked me if there was a price at which we’d be interested and you asked me, if so, ‘What do you need?’ That doesn’t mean I’m gonna call Fuld. That’s completely different.”

Geithner, growing frustrated with his equivocation, asked again, “Why can’t you just call Fuld? Why can’t you do it?”

“I’m not going to ask a guy if I can buy him, you know, at a distressed price,” Diamond said. “It only works if you guys are looking to arrange a deal. If you’re not, fine, no hard feelings, we’re okay.”

However much Barclays may have wished to avoid giving the impression that they might be taking advantage of someone else’s misfortune, it was, of course, precisely what they were seeking to do.

Ben Bernanke was finding it hard to focus as he sat in a meeting Wednesday afternoon with the local board of the Federal Reserve. Despite the chaos on Wall Street, he had continued making his regular visits to the Fed’s regional offices, and this particular trip had brought him to its St. Louis branch, located in a squat limestone building on North Broadway in the city’s downtown.

The Lehman crisis, however, was never far away. He had already been on the phone with Tim Geithner and Hank Paulson twice about it, once at 8:30 a.m. and again at 1:00 p.m., with another conversation scheduled for 6:00 p.m.

On the last call, Geithner and Paulson had informed Bernanke of their latest headache: Bank of America’s demand to have its capital ratio relaxed. “They are pissed off bigtime because they thought when they closed on Countrywide, they closed like big boys,” Paulson explained.

Geithner argued that they needed to get Bank of America to New York by whatever means necessary so that they could begin their due diligence; he was concerned that they were losing critical time.

Paulson asked Bernanke to call Ken Lewis himself and see if he could smooth the situation over, stressing again, “We need to get them a glide path.”

From a temporary office at the St. Louis Fed, Bernanke dialed Lewis.

“You really ought to come look at Lehman,” Bernanke urged him, still slightly uncomfortable about his new role as deal maker. “We’ll work with you on capital relief and anything you might need.”

Lewis thanked him for the call and said he planned to send his men up to New York to start discussions with Lehman.

Believing he had solved that problem, Bernanke returned to the reason for his trip to St. Louis: to visit with the staffers and spend more time with the St. Louis branch’s new president, James Bullard. Bullard had taken over in April from William Poole, one of the more outspoken Fed presidents, who, as it happened, was in Washington that day giving a speech about the Fed’s bailouts. Given the ongoing speculation in the market about the need for a government rescue of Lehman, Poole’s comments had been attracting an inordinate amount of attention.

“Unless I’ve missed something, the Fed and Treasury have been silent about who might have access to Fed resources, except to say that Fannie and Freddie would have access,” Poole said during his speech.

“The Fed said no to New York City in 1975 and no to Chrysler in 1979,” he reminded his audience, but “with the Bear Stearns precedent, it will not be so easy to say no next time.

“What I anticipate is that we will not know the limits to Fed lending until the Fed says no to a large, influential firm seeking help.”

Ken Lewis was leaning hard on the Fed. No sooner had he gotten off the phone with Bernanke than he placed a call to Tim Geithner. Lewis explained that he had had an encouraging call with Mr. Bernanke, but he still couldn’t send his team up to New York until the credit situation was officially settled.

“We’re working to help you on this,” Geithner said, politely but firmly .

Lewis, however, was beyond accepting such assurances. “We’ve been dicked around on this for too long,” he complained. “If you want us to get involved in Lehman, we’re going to need something in writing.”

Geithner, taken aback at being presented with such an ultimatum, replied, “You’ve heard what the chairman said he would do. If you don’t believe the word of the chairman of the Federal Reserve, we have a larger problem.”

Realizing that Geithner would not budge on the issue, Lewis finally backed down and agreed to send a team of executives up to begin due diligence that Thursday morning.

As Wednesday wore on, Fuld tirelessly continued to work the phones—his call log was a list of virtually every major Wall Street and Washington player—while keeping a watchful eye on the markets for any further signs of panic.

The news, it was becoming ever clearer, was grim: After holding up for most of the day, Lehman’s shares sank in the last hour of trading, ending at $7.25 a share, a 6.9 percent decline. Lehman’s CDS had also blown out, rising by 135 basis points, to 610, which meant that the cost of buying insurance against its going bankrupt had just risen to $610,000 a year to protect $10 million of bonds. Investors were effectively betting that the situation was only going to worsen. Any hope that the SpinCo plan was going to turn Lehman’s fortunes around was quickly vanishing.

Nor were the results of Fuld’s phone blitz encouraging. Earlier in the day he had had a tough conversation with Lloyd Blankfein, who had called to express his frustration that Lehman had ended discussions with Goldman. Alex Kirk and Mark Walsh had held a two-hour-long meeting with Harvey Schwartz of Goldman and his team at a Midtown law firm that morning, but both Kirk and Walsh were skittish about opening up all their books to Goldman and quickly had shut down the talks.

Fuld had also spoken to Paulson, who had tried to convince him of the merits of a deal with Barclays. But Fuld was uneasy with that prospect, he explained: With Bank of America already in the hunt, he didn’t want to do anything to jeopardize a deal with them.

“Dick,” Paulson patiently reminded him, “Ken Lewis has turned you down multiple times; the other guys have expressed an interest. We need to pursue both of these options.”

Fuld, however, seemed more interested in returning to the topic that had so long obsessed him: denouncing the short-sellers who, he told Paulson, “are going to ruin this firm.” He spent ten minutes again imploring Paulson to call Christopher Cox at the SEC to press him to instate a short-selling ban, to announce an investigation—anything that would give him an opportunity to recover. By late afternoon, Fuld was channeling Steven Berkenfeld, a Lehman managing director, whose office was just down the hallway, using his favorite catchphrase about the raids on Lehman’s stock: “Short and distort!”

In London, Bob Diamond of Barclays was waiting in the bar of Fifty, a private club on St. James St., just off of Piccadilly. He had invited Jeremy Isaacs, the former head of Lehman’s European operations, for drinks. If there was anyone who could give him an accurate insider view of Lehman, if there was anyone who knew the numbers and culture, it was Isaacs, who had officially announced his plans to “retire” from the firm just four days earlier.

Isaacs had left when it became clear that McDade was ascending. In truth, he probably ought not to have come to this drinks engagement, as he was in the midst of negotiating a $5 million severance agreement with Lehman that would literally be approved the following day. As part of the arrangement he agreed he would not “engage in detrimental activity” or “disparage the firm,” and would “keep company information confidential.”

Tonight he would come as close as he could to breaking every provision in that document with the intention of helping Lehman survive.

Walid Chammah’s apartment is one of only three town houses on Manhattan’s Upper East Side with its own doorman. The beaux arts limestone structure just off Fifth Avenue contains only nine apartments. Tucked away a safe distance from Midtown and the banker riffraff on Park Avenue, it was the perfect place to hold a secret meeting to discuss a merger between Lehman and Morgan Stanley. Chammah’s wife and children were in London, where he was normally based, so the group had the place to themselves.

By 9:00 p.m., Chammah; James Gorman, Morgan Stanley’s other co-president; and the rest of the Morgan Stanley team were milling around his kitchen, waiting for Bart McDade and the Lehman contingent to appear. “Let’s at least go through the motions,” Chammah instructed his colleagues, “but acknowledge that this meeting wouldn’t likely lead to anything.”

When McDade finally arrived with Skip McGee, Mark Shafir, Alex Kirk, and several others, the strain of the day was evident from their drawn and pale faces.

Gorman had known McDade from when they were both directors on the board of SIFMA, the Securities Industry and Financial Markets Association. Only a week earlier they had had a tense conversation about Morgan Stanley’s exploiting Lehman’s turmoil by recruiting away its talent, including the firm’s best private-wealth advisers. Outraged, McDade had called Gorman and told him, “You have to back off. We got really big problems here, and this is killing us.” Ultimately, Gorman stopped the recruiting effort, and the two were seasoned enough professionals to have moved on.

Chammah poured a bottle of Tenuta dell’Ornellaia 2001, a $180-a-bottle Bordeaux blend, in an effort to settle the mood while keeping things proceeding. Everyone quickly took a seat in the living room.

McDade told the group that being there tonight all felt a bit déjà vu; only a few months earlier nearly every person in the room had met to discuss the very same topic. Only now—an observation he left unspoken—Lehman was desperate. He then began to explain that Lehman was exploring various options for raising capital: selling assets, or perhaps selling the entire firm. In case that wasn’t clear enough, he indicated that if Morgan Stanley was interested in buying the company, he wouldn’t press them on terms. He then added that “social issues” shouldn’t hold up a potential deal—code for the question of who would run the combined businesses. McDade had effectively just given up Fuld.

“If you want any of us involved, we’ll be involved; if you don’t want us, we don’t have to be. It’s not about us anymore,” he said.

Shafir told the men that a deal “might feel like a stretch,” but he thought there was an opportunity to remove a good deal of cost from both firms, which was, after all, the baseline logic behind any corporate merger.

Despite Shafir’s optimistic spin on a potential deal, Chammah was well aware that an agreement of this magnitude would result in a bloodbath, with probably hundreds if not thousands of layoffs. He also knew that the upside in any merger could prove elusive.

Then, for a good hour, the bankers went over the numbers and the various assets that Lehman owned to determine if there was anything among its holdings that Morgan Stanley might want. But as the discussion went on and papers were passed back and forth, it became clear there was no common ground. Chammah then acknowledged that he didn’t think Morgan’s board could move quickly enough to be of any real assistance to Lehman in any case—a signal that everyone in the room recognized meant that he believed that Lehman Brothers was simply too far gone.

Soon after McDade’s team left, Gorman looked solemnly at his group, as if to remind them, It could be us, but said only, “We just watched guys who are staring into the abyss.”

Shortly after sunrise, Greg Curl walked across the plaza of the Seagram Building, the thirty-eight-story masterpiece of architectural modernism and a Park Avenue landmark. He entered the lobby, checked his watch, and waited for his go-to adviser to arrive.

Curl, Bank of America’s point man for a possible Lehman Brothers deal, had flown from Charlotte to New York with a team of over one hundred executives on Wednesday night to begin their diligence at Sullivan & Cromwell’s Midtown conference center. To assist them Curl had enlisted Chris Flowers, a private-equity investor whose specialty was the arcana of the banking industry. The two made for an odd couple, given that Curl was a Bank of America veteran with a low profile and had few Wall Street connections, while Flowers was a fast-talking, and often profane, former Goldman Sachs banker whose daring deals often landed him in the headlines.

But as Curl had considered what to do about Lehman, his first thought was that he wanted Flowers at his side. Flowers could read a balance sheet in less than thirty seconds and was bold enough to offer an articulate and well-reasoned judgment of it. He had left Goldman in the late 1990s and started his own private-equity firm to invest in banks, a business in which he had done very well indeed, personally pocketing some $540 million from an investment in Shinsei Bank in Japan. He was regularly listed as one of the wealthiest men in America, and when he purchased a town house on the Upper East Side for $53 million, it set a record for Manhattan real estate.

Curl trusted very few bankers, but Flowers was an exception. He particularly admired Flowers’s dispassionate, no-bullshit approach to deal making—and to life. In 2007, just before the credit crisis hit, they had bid together on Sallie Mae, the student-loan company. They soon realized the deal was a mistake, and for the rest of the year, they worked together to try to undo it. Curl hadn’t held the Sallie Mae investment against Flowers, largely because Flowers was ultimately able to get them out of it by invoking an escape hatch in the merger agreement, with ensuing legal fireworks.

Flowers could be useful for more than just providing advice, as Curl knew that he might be eager to invest in Lehman alongside Bank of America. Curl thought that he might even be willing to take Lehman’s riskiest assets.

When he had sought out Flowers just twenty-four hours earlier, Curl had found him in Tokyo, where Flowers had been in the middle of a board meeting of Shinsei. “You’ll want to look at Lehman Brothers, and we want to look at it in partnership with you,” Curl told him. “Can you get back to New York for this purpose?” Flowers hardly needed persuading and quickly arranged for a car to the airport to make the fourteen-hour flight back to Manhattan.

When Flowers arrived, clearly wearing the jetlag on his face, he had brought along Jacob Goldfield, a fellow Goldman alum. (Goldfield happened to be the banker depicted in Roger Lowenstein’s When Genius Failed as surreptitiously downloading all of Long-Term Capital Management’s information into a laptop during Goldman’s attempt to assist the beleaguered firm; it was Goldfield whom Alex Kirk of Lehman had mentioned in his nervous comment to Fuld about providing information to Goldman Sachs a day earlier.)

Goldfield also knew Lehman well—he had helped Hank Greenberg examine the firm back in the spring when Greenberg was part of a group of investors who bought $6 billion of common and preferred shares.

On the flight over, Flowers had studied Lehman’s second-quarter report from the day before and had focused on what he knew was going to be the big discussion point: the value of Lehman’s real estate assets. Could they possibly be worth $25 to $30 billion?

Curl, Flowers, and Goldfield set up operations in a conference room that Sullivan & Cromwell provided, laid out with coffee and pastries.

This was going to be a long day.

With twenty-four hours to mull over Lehman’s SpinCo plan, Wall Street analysts turned against it—and the firm—en masse. They blasted out skeptical e-mails to clients on Thursday morning, adding to the weight that was already dragging down Lehman’s shares. The stock price had ended the previous day down 7 percent at $7.25; it was about to sink even lower.

“Management did not successfully put to rest the issues that had been pressuring the stock,” William Tanona, an analyst at Goldman Sachs, declared in his e-mail.

Michael Mayo, an analyst who had kept a buy rating on Lehman shares since April 2007, sent out an even bleaker prognosis, given his concerns about the possible fallout as credit-rating firms grew more bearish about Lehman: “The change in rating agency posture is an unexpected negative that may create a distressed sale situation.” In other words, a fire sale could be next. His buy rating was summarily removed.

Guy Moszkowski of Merrill Lynch was also grim on the subject of Lehman’s sale prospects, writing that the firm could be forced to accept a “take-under”—Wall Street parlance for a takeover at a price below where a company’s shares are trading.

Even analysts who believed that Lehman was basically sound were beginning to see that it had become a matter of perception trumping fundamentals: Lehman’s tumbling stock price inflamed the market’s fears, creating a self-fulfilling prophecy that was forcing Lehman to find a buyer, and fast.

As Wall Street analysts seemed poised to write the epitaph for Dick Fuld’s firm, the only person to come to his public defense was John Mack, the man who Fuld had hoped would be his merger partner. Mack was quoted in the Times that morning as saying, “He is as feisty as ever, but there is no question this is wearing on him, as it would wear on anyone.”

In private, however, Mack had just delivered shattering news in a phone call to Fuld: He didn’t believe there was a good reason for Morgan Stanley to move forward with the talks.

However, there were still signs of life. Tim Geithner confirmed to Fuld that Barclays was indeed interested in bidding for the company, even though they had not contacted Fuld directly, and gave him Diamond’s phone number in London.

“He knows you’ll be calling,” Geithner assured him.

“I understand I’m supposed to call you,” Fuld said when he later reached Diamond.

Diamond, however, was clearly flustered, as he thought he had been explicit with Geithner that he didn’t want to talk directly with Fuld about a deal. A deal would have to be brokered by the U.S. government.

“I think we should talk,” Fuld said, trying to engage with him.

“I don’t see an opportunity for us here,” Diamond answered.

Fuld couldn’t understand what was going on. He had been told by Geithner to make this contact, and now Diamond was telling him that he wasn’t interested?

Unwilling to force the issue, he ended the conversation and called back Geithner.

“I just got off the phone with Bob Diamond,” he told Geithner heatedly. “He says he’s not interested. I thought you said he wanted to talk to us?”

“Yes, he does,” Geithner insisted. “You should call him back.”

Five minutes later, he tried Diamond again.

“I just told you that we’re not interested,” Diamond repeated.

Fuld, by now feeling as if he were part of some kind of charade, again phoned Geithner. “I don’t know what’s going on here. I’ve called him twice, and both times he says he doesn’t want to talk to me. You tell me he’s interested. He says he’s not.”

Geithner promised he’d reach out to Diamond and urged Fuld to try him one last time.

On his final attempt, Diamond was suddenly willing to talk.

“We’re going to be flying over tonight,” Diamond said. “I’ll have a team ready to go by Friday morning.”

With that sentence, it was official: Barclays and Bank of America were now in competition.

What Fuld hadn’t been aware of was that for the entire morning, Diamond and his team had already been in contact with Geithner and Paulson and had come to an agreement that Barclays would examine Lehman’s books as soon as possible. Fuld’s role in any rescue effort was becoming a polite formality.

Before he left for New York that night, Diamond had hoped to receive some assurances that his trip would be worthwhile. On his call with Paulson, Diamond had specifically asked if Barclays could be the exclusive bidder for Lehman. He had read the news about Bank of America’s interest, and he knew firsthand that it could be a formidable rival—and a potential spoiler.

A year earlier, Bank of America had jumped into the takeover battle for the Dutch bank ABN AMRO, a duel that pitted Barclays against a group that included the Royal Bank of Scotland. By agreeing to buy Chicago’s LaSalle Bank from ABN for $21 billion, Bank of America had effectively snatched the crown jewel of the deal, which the RBS group was particularly coveting and whose absence from the portfolio made it more difficult to outbid Barclays. In the end, Barclays lost the bidding war for ABN, but Bank of America still got LaSalle. The failed deal was a blow for Diamond and his expansionist dreams, and he had always believed that Bank of America had hugely overpaid for the property.

“If BofA is going to be there, don’t embarrass us,” Diamond told Paulson. “Don’t get us to do a deal and have BofA top us.”

“You can’t have an exclusive,” Paulson responded. “But let me tell you, you’re in a strong position, and I’ll make sure you’re not embarrassed.”

Before the call ended, Diamond wanted to make another thing clear: He was looking for a “Jamie” deal—in other words, he might come looking for some form of government help.

Paulson stated firmly that no assistance from the government would be forthcoming, but added, “We’ll figure out how to get you help.”

As Tom Russo burst into Dick Fuld’s office, the glum look on his face got Fuld’s immediate attention, which was fairly remarkable, considering the general somberness on the thirty-first floor.

“What?” Fuld barked.

“I just got off the phone with Tom Baxter,” Russo said, referring to the general counsel of the Federal Reserve of New York. “He said that Geithner wants you to resign from the board of the NY Fed.” Russo paused to allow Fuld to take that news in before adding, “That given our position, it’s too complicated, too many conflicts.”

Geithner’s request should not have come as a shock, for if there was even the possibility that the government was going to have to put up money as part of a deal to find Lehman a buyer, the last thing he would have wanted was to be seen as helping a member of his own board, an insider. The slightest appearance of favoritism could prove disastrous.

Fuld, even so, took the message as a personal slight and stared morosely down at the table. For a moment it looked as if he might cry, but he steadied himself and whispered, “I can’t believe this.”

Together Fuld and Russo dictated a resignation letter addressed to Stephen Friedman, chairman of the board of directors:

Dear Steve,

It is with deep regret that I hereby tender my resignation as a member of the Board of Directors of the Federal Reserve Bank of New York. In light of my current business situation at Lehman Brothers, I unfortunately do not have the time to devote to Board matters and, therefore, feel it is in the best interests of the Board that I resign, effective immediately. I have very much enjoyed my time on the Board and have enormous respect for both the Board and the institution. Thank you.

Sincerely,

With a restrained but heavy sigh, Fuld added his signature, scribbling a huge “D” in place above “Dick.”

At 70 Pine Street the pressure was building as Bob Willumstad paced his office ahead of a crucial meeting that morning with the credit-rating agency, which had been making menacing noises about downgrades. He had just gotten off the phone with Geithner to follow up on their meeting about turning AIG into a broker-dealer, and to apply a little additional pressure. “We’re a little busy right now with Lehman,” Geithner apologized. “But let’s talk again tomorrow morning.”

It was only 10:30 a.m., but the marketplace was already sensing the nervousness that Willumstad had been trying his best to conceal all week. The cost to insure the debt of AIG had jumped by 15 percent to 612 basis points, the highest level in its history. That meant that it would cost investors $612,000 to insure $10 million of AIG’s debt every year for the next five years. With Lehman clearly desperate to raise money, investors were betting AIG was soon going to face the same struggle. It might also have to pay out astronomical amounts to investors who were loading up on insurance to protect themselves from a potential Lehman default.

To make matters worse, Hank Greenberg, being deposed that day by the New York State attorney general about previous questionable accounting practices at AIG, badgered Willumstad at every chance. “What the hell are you people waiting for?” he demanded, wanting to know why efforts to shore up the company hadn’t been moving more quickly.

Amid all the other pressures, Willumstad was still pressing to settle the long-running lawsuit that Greenberg had brought against the firm after he had been ousted. He had been counting on Greenberg’s helping the firm raise some capital by leveraging his relationships in Asia, where he had built AIG into a powerhouse that dominated the tricky and semitransparent Japanese and Chinese markets. He told Greenberg he’d have his lawyer, Jamie Gamble, at Simpson Thacher, set up a meeting with Greenberg’s lawyer, David Boies, to try to come up with a settlement Greenberg could live with.

Perhaps the most pressing problem weighing on Willumstad was the result of a conversation he had had with Jamie Dimon earlier in the week. “We seem to be not getting enough done,” Willumstad had told him, urging him to help raise capital or lend the firm the money himself.

“Well, you know, you got a bigger problem than we had anticipated,” Dimon replied. “Our models show you’re running out of money next week.”

It was then that Willumstad accepted the fact that JP Morgan might well not be willing to provide any further funds. AIG’s treasurer, Robert Gender, had already warned him that that might be the case, but Willumstad hadn’t fully believed him. “JP Morgan’s always tough,” he reminded Gender. “Citi will do anything you ask them to do; they just say yes.” But the prudent Gender only acidly replied, “Quite frankly, we can use some of the discipline that JP Morgan is pushing on us.”

Dimon had been encouraging Willumstad to just come up with a plan, even if it wasn’t perfect. “It doesn’t have to be in place,” Dimon told him. “You just have to tell the markets what you’re going to do and then go and do it. If you need to raise capital, tell them you need to raise capital.”

A lot of good that did Lehman yesterday, Willumstad thought.

Finally, the time came for the dreaded meeting with Moody’s. Steve Black from JP Morgan had come downtown to lend some credibility to the affair and to help answer questions about AIG’s plans to raise capital. It was one thing for Willumstad to state that he had every intention of raising capital and quite another entirely to have the president of JP Morgan affirm that he intended to support the company in that effort. The stakes were high: If the agency cut AIG’s credit rating by even one notch, it could trigger a collateral call of $10.5 billion. If Standard & Poor’s followed suit, which was likely—“the blind leading the blind,” Willumstad said of them—the figure would rise to $13.3 billion. Should that happen, and AIG be unable to come up with the extra capital, it would be a virtual death sentence.

No more than fifteen minutes into the meeting, the Moody’s analyst made it clear that the agency would downgrade AIG by at least one notch and possibly two. By Willumstad’s calculations, if they did so on Monday, the company would have at least three days before it would have to post the collateral. That meant he had until Wednesday, or at the latest, Thursday, to come up with an astronomical amount of money.

JP Morgan’s Black feared they had even less time; by his count, Tuesday morning would be their deadline. After the meeting, he pulled Willumstad aside and warned him, “You guys are going to get downgraded, so you better start figuring out now what to do.”

Willumstad nodded. “We need to prepare for that. I totally agree with that.”

Black left the building even more down on the company than when he had arrived. Nobody, he thought, is moving nearly as fast as he needs to.

In the General Motors Building, which occupies an entire block on Fifth Avenue and Fifty-ninth Street, Harvey Miller, the legendary bankruptcy lawyer at Weil, Gotshal & Manges, got up from his desk and began pacing. As he made a circuit of his office, he gazed at the miniature Texaco trucks and Eastern Airlines jets that dotted his bookshelves, mementos of two of his most famous cases.

At seventy-five, Miller was considered the dean of bankruptcy law, and he billed clients nearly $1,000 an hour for his services. Besides Texaco and Eastern, he had been involved in the bankruptcies of Sunbeam, Drexel Burnham Lambert, and Enron, and was also among the lawyers who’d represented the city of New York during its financial crisis in the 1970s.

Always reassuringly calm, he was also known for his deftly tailored suits, his love of opera, and his ability to speak in long, eloquent paragraphs. He had grown up in the Gravesend neighborhood of Brooklyn, the son of a wood-flooring salesman, and was the first in his family to receive an education beyond high school, attending Brooklyn College. After a stint in the army, he went to Columbia Law.

At that time, bankruptcy was one of the few areas of corporate finance that smaller, predominantly Jewish law firms dominated in the still-WASP-infested industry. In 1963 Miller joined the small bankruptcy shop Seligson & Morris; six years later, Ira Millstein, the governance guru, recruited Miller to start a bankruptcy and restructuring practice at Weil Gotshal.

Earlier that afternoon, the firm’s chairman, Stephen J. Dannhauser, had phoned him and posed a startling question: Would the firm be available to do some preliminary work on Lehman—just in case? Miller said he understood; he had been reading the financial press. Lehman was a very important client—the firm’s biggest, in fact, and the source of more than $40 million in fees annually. He knew the company very well.

Dannhauser had received a call from Steven Berkenfeld, a Lehman managing director, who told him they should get their ducks in order if things didn’t go well in the next seventy-two hours. Before Berkenfeld ended the call, he insisted that Dannhauser keep their conversation confidential—Berkenfeld hadn’t even told Fuld that he was contacting Weil Gotshal.

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.

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.”

Perhaps most important, Paulson stressed, was that they couldn’t afford the political liability of putting up government money for Lehman as they had for Bear Stearns. “I can’t be Mr. Bailout,” he insisted. He had been getting calls from politicians all week suggesting as much. Senator Dodd had called earlier to tell Paulson, “Fuld is a friend. Try to help, but don’t bail Lehman out.” Given that everyone on the conference call had already lived through the backlash of the Bear deal, they hardly needed convincing about not wanting to repeat it.

Still, Geithner was a bit hesitant about taking such a severe stance in public, but only because, as he explained, “we don’t want to scare people away. We need as many bidders in this as possible.”

Nonetheless, he quickly fell in line, and the four men made a pact: Unless something miraculous happened, they would plan to place calls to the CEOs of the major Wall Street houses late on Friday and have them all come down to the NY Fed, where they’d press them to come up with a private solution.

In the meantime, Paulson instructed them, the message should be clear: No bailouts.

Brian Schreiber, removing his thick-framed glasses to rub his eyes, could see from his examination of AIG’s daily cash tally that the firm could soon be out of money if it didn’t start selling assets quickly. He nervously began working through the list of people whom he could call whose companies would be capable of providing assistance almost immediately.

The first name that occurred to him was Chris Flowers. His fund had several billion dollars available to buy financial-services assets, and as a former financial-services banker he understood the insurance business well enough that he could move instantly if he was interested. They had also worked together before; Flowers had sought to partner with the firm to buy some smaller insurance companies in the past.

Schreiber tracked down Flowers over at Sullivan & Cromwell, still doing diligence on Lehman’s books.

“We have a huge problem,” Schreiber told him. “We’re going to run out of cash shortly, um, and, you know, we only have, you know, one or two shots to get this right.”

“Well, I’m in the middle of Lehman here,” Flowers replied. “I’m working with BofA.”

“Is there any way you could come down here tomorrow?” Schreiber persisted.

“We’ll come take a look,” he said somewhat noncommittally, uncertain whether he’d be finished with Lehman by then, and then added, “I see this is really important.”

After ending his conference call with Geithner and Bernanke, Paulson summoned Michele Davis, his head of communications, to his office.

“So, I talked to Lewis and Diamond. They’re, of course, all saying that they want government money,” he told her. “And we’ve got Pelosi and everybody else all over us,” he added, referring to rumblings that the Speaker of the House had made expressing her disapproval of any more bailouts.

Davis had brought with her a handful of articles that had already been published by the major papers on the Internet, and it was clear that a possible bailout would be the primary focus of the following day’s news cycle.

A Dow Jones article published at 7:03 p.m., just minutes earlier, opened: “With a beleaguered Lehman Brothers Holdings Inc. likely to be sold, one key issue is what a backstop from the Federal Reserve, if it materialized, would look like.”

“You cannot have this in tomorrow’s headlines, tomorrow’s newspapers saying this,” Davis said, shaking her head. “Everyone is going to think, Oh, Hank is coming with his checkbook. That is not the way you want to start this negotiation.” As a former staffer herself, she was also aware of the Bush administration’s stand on the matter, and knew how politically problematic it would be if the possibility of a bailout of a major Wall Street firm were even being entertained.

Although the subject was left unspoken, both she and Paulson knew another reason a Lehman bailout could quickly become a public relations nightmare: Bush’s brother, Jeb, the former governor of Florida, worked as an adviser to Lehman’s private-equity business. Bush’s cousin, George H. Walker IV, was on the firm’s executive committee. And then there was Paulson’s brother, Richard. The press, needless to say, would have a field day.

“We should make some calls,” she urged him, subtly suggesting they begin leaking to the press word that the government wouldn’t be pursuing any bailout of Lehman.

Paulson mulled over his dilemma. He had always opted to be cautious with the press and hated the very idea of leaking as a tactic. But he trusted Davis’s instincts, and in any case, he preferred not to get his own hands dirty in the matter.

“Do what we need to do,” he told her. “Just, you know, don’t have it be me on the record.”

As soon as Paulson awoke on Friday, he began poring through the morning papers, looking for evidence of Davis’s handiwork. The message was supposed to have been made clear: Read Our Lips: No More Bailouts.

The mood in Washington was not hard to discern: There was no desire whatsoever for any further Wall Street rescues. All punditry could talk about was moral hazard, as if it were some sort of emerging disease that had just reached pandemic proportions. Bail out Lehman, the thinking went, and you will make bailouts the default solution at a time when no firm seems safe.

And what could be more satisfying than having your decision—the buck stopped there, thank you very much—manifested on the front pages of the country’s leading publications? Paulson first turned expectantly to the newspaper of financial record, the Wall Street Journal, and was sorely disappointed. The A1 article about the financial crisis merely tiptoed around the issue without ever being forceful enough about it, he thought as he read the piece. As close as the reporter got to explaining his position was this sentence: “Federal officials currently aren’t expected to structure a bailout along the lines of the Bear transaction or this past weekend’s rescue of mortgage giants Fannie Mae and Freddie Mac.”

The New York Times was even worse: “But while the Treasury Department and Fed were working to broker an orderly sale of Lehman, it was unclear whether the Fed would stand behind any deal, particularly after the Bush administration took control of the nation’s two largest mortgage finance companies only days ago.”

No, that doesn’t quite capture what they have been trying to convey, Paulson thought.

He turned to the Journal’s editorial page, where the air was typically more rarefied, and was able to take solace, as conservatives so often had, in its hyperintellectual and at times harsh right-wing opinions. The typically unsigned editorial was called “Lehman’s Fate,” and its position was right out of Paulson’s playbook.

“At least in the Bear case,” the Journal editorial read, “there was some legitimate fear of systemic risk. The Federal Reserve’s discount window hadn’t yet been opened to investment banks, and so there was some chance of a larger liquidity panic.

“That’s far less likely with Lehman. The discount window is now wide open to Merrill Lynch and Morgan Stanley, among others, and federal regulators have had months to inspect the value of Lehman’s assets and its various counterparties. If the feds step in to save Lehman after Bear and Fannie Mae, we will no longer have exceptions forged in a crisis. We will have a new de facto federal policy of underwriting Wall Street that will encourage even more reckless risk taking.”

Yes, yes, all true, Paulson thought as he finished the editorial. Still, it didn’t go far enough. He needed somehow to make it clear to all the banks that there would be no handouts, no more “Jamie Deals.” And he needed to do so in a way that would leave no room for misunderstanding.

When he arrived at the office Paulson walked down the hall into Michele Davis’s office and asked sullenly, “What do we do?”

“I’d rather say today that we don’t want to use our money and on Sunday night have to explain why we were backed into a corner,” Davis told him. “You want me to call Liesman?” she asked.

Liesman was Steve Liesman, CNBC’s economics reporter, known popularly as “The Professor.” Davis had a good relationship with him and had successfully leaked other information to him; Paulson considered him both intelligent and sympathetic to their cause. He could get the word out quickly and accurately.

Yes, the Professor, Paulson smiled. He’ll know what to do with this.

As Ed Herlihy sat in his office working on Bank of America’s bid, he kept his TV on mute, until at around 9:15 a.m. he saw the headline crawl across the bottom of CNBC’s screen—“Breaking News: Source: There will be no government money in the resolution of LEH situation”—and quickly turned up the volume to hear what Steve Liesman was telling David Faber, the network ’s mergers reporter.

“Let me start here with a comment that I just got from a person familiar with Paulson, State Secretary Treasurer [sic] Hank Paulson,” Liesman explained. “He’s saying there will be no government money in the resolution of this situation.”

Herlihy turned the volume even higher.

“They’re saying there are two things that make the Lehman deal different,” Liesman continued. “The market’s been aware and had time to prepare for over six months, and the second is the PDCF, that is, the access of the investment banks to the Fed’s emergency window that exists now, to allow for an orderly process.”

It was a lot to take in, and the Professor turned the floor over to his colleague. “David, what do you think of that?”

“An interesting gamble,” Faber replied. “Would the government be willing to say, ‘Hey, you’re on your own?’ There’s divided opinion in terms of what the ultimate risk will be to the creditors, to everybody involved in the credit default swap market where Lehman certainly is a counterparty on many trades.”

Liesman added: “I’m sure the Federal Reserve is looking for a situation where it can say, ‘There is moral hazard out there. You will take a hit if you did not pay attention for the last six months.’”

Herlihy couldn’t believe what he was hearing and ran into the conference room across the way where an army of bankers and Bank of America executives was mulling over documents.

“Did you just see what they just said on CNBC?” Herlihy asked Curl, almost out of breath. Curl not only hadn’t, but seemed slightly annoyed that he’d even been asked the question.

“Look, guys, we got a real problem here,” Herlihy insisted, after noticing he wasn’t getting much of a reaction from anyone in the room.

After Herlihy recounted the details of the Liesman interview, Curl only rolled his eyes. Why was Herlihy taking the CNBC report so seriously? To him, the channel was a professional rumor mill.

“It’s coming from Treasury,” Herlihy stressed again. “That’s Paulson. They’re trying to send us a message!”

Herlihy was media-savvy enough to know how the game worked: When he had been at Treasury just a week earlier during the takeover of Fannie-Freddie, he had watched the department deftly leak news out to the public through its favorite reporter, Liesman.

The room turned sour, as even Curl acknowledged that Herlihy had a point.

“How serious do you think they are?” Curl asked.

Before heading back uptown for the second day of the BlackRock board meeting, John Thain decided to hold a conference call with his own board. With the markets gyrating and rumors flying, he wanted to make it clear publicly that Merrill was solid. Already there was a news report that morning quoting Malcolm Polley, chief investment officer at Stewart Capital Advisors, saying, “I think the market’s telling you that if Lehman is going to go away, Merrill is probably the next victim.”

Thain first briefed the board on recent market swings, which showed no sign of stopping. One look at the futures made it clear that stocks were likely to sink at the opening bell. With Merrill down 16 percent the previous day, things were only going to get worse.

The discussion quickly turned to Lehman. Thain told the board what he knew, which wasn’t too different from what had been reported in the papers, except that Thain was getting his information directly from Geithner: Bank of America and Barclays were both vying to buy Lehman.

John Finnegan, a chief executive of the insurer Chubb, sounded worried. “Lehman is going down, and the shorts are coming after us next,” he told Thain. “Tell me how this story is going to end differently.”

Thain, frustrated by the remark, had never liked being challenged. “We are not Lehman,” he said, his eyes flashing behind his glasses, and then repeated for emphasis, “We’re not Lehman.”

Regaining his usual composure, Thain calmly rehearsed the virtues of Merrill. “We have a wealth-management business that’s going to have value no matter what,” he told the board. “And we own half of BlackRock, which would also have value no matter what—so our stock’s not going to zero.”

Fuld was growing restless. It was 9:30 a.m., Lehman’s stock opened down 9 percent to $3.84, and he hadn’t heard from Diamond in over twelve hours.

“So where are we?” Fuld asked Diamond when he finally reached him.

“I’ve literally just gotten the okay from my board that we can pursue this,” said Diamond, who had arrived in New York from London after midnight the night before. “We’ve just begun doing diligence with your public filings.”

Before he continued, however, Diamond decided that he needed to be blunt with Fuld. “To be honest,” he said stiffly, “this is a horrible situation for you, because we’re only going to be interested if the price is quite distressed.”

Fuld, leaning back in his desk chair, looked at Russo, who had taken a seat across the desk for the call. He understood.

“You and I should talk, because you should know exactly what my ideas are, what my plans are,” Diamond said. He suggested meeting at noon at the Racquet and Tennis Club, a members-only establishment on Park Avenue and Fifty-second Street, where they would be able to get a private meeting room.

“No, no, no. You don’t understand. I can’t walk out of here,” Fuld insisted. “There’s photographers all over the place. Why don’t you come over here? We can sneak you in the back. I’ll send my car for you.”

“AIG Shares Fall 20 Percent on Mortgage Woes” proclaimed the Reuters headline at 10:14 a.m.

Catherine Seifert, a Standard & Poor’s analyst, had just released a research note saying that the stock was falling on “concerns about AIG’s ability to shed its troubled mortgage-related assets, and we expect the shares to remain volatile as investors await news from the company.”

As he followed these stories with increasing alarm, Bob Willumstad decided to call Jamie Dimon. He was increasingly frustrated with the JP Morgan team and needed assurances.

“Jamie, we’re going to get downgraded,” he told him. “You need to help me figure out how to get $18 billion. There’s no plan for the end of September anymore,” he added, referring to his plan to announce the results of his firmwide review and a new strategy at the end of the month. He stopped to let that sink in and then continued, “You know, if you guys can’t help us, tell me now, but we’ve got to do something this weekend. We hired you guys to do this,” he said, his voice rising ever so slightly. “Listen, just tell me if you can’t, just tell me now.”

“Look, we want to make this work,” Dimon said, sounding a contrite note. “Give me five minutes and I’ll call you back.”

When he phoned back he apologized on behalf of the firm and said that he would take Black off the case; his other lieutenant, Doug Braunstein, who ran the firm’s investment banking practice, would now be in charge. Braunstein, a no-nonsense deal maker, had been entrusted with some of the firm’s biggest transactions after working his way up the ranks, initially at First Boston in the 1980s, and then at Chase. He helped negotiate the firm’s acquisition of JP Morgan, its purchase of Bank One (bringing Dimon with it), and then the Bear Stearns deal. “We’re going to send Braunstein down with the team, and we’re going to see what we can do about raising capital for you over the weekend.” Dimon promised him that he’d keep “the trains on the tracks.”

As he ended the conversation with Dimon, another call came in—Tim Geithner, who was finally getting back to Willumstad.

“So, where are we?” Geithner asked.

“We’re working on a capital raise,” Willumstad explained. “And we’re talking to some bidders for assets that may come in this weekend. We expect to have some more information later in the day.”

“We’re going to send over some of our market guys this morning to help,” Geithner told him in a tone that made it clear that this was not an offer but an order. “Keep me posted,” Geithner said before hanging up.

The conversation had lasted no more than thirty seconds.

By now Hank Paulson had become so agitated by the problems at Lehman that he scarcely noticed his assistant, Christal West, trying to get his attention. Alistair Darling, the chancellor of the Exchequer of Britain, was on the line.

Paulson had gotten to know Darling over the past two years, and though they had visited each other on both sides of the Atlantic, they had not grown close. Paulson considered Darling more a politician than a businessman, and he had nothing like the experience that Paulson himself had had in financial markets. But he respected Darling’s judgment and admired the quick and decisive action he had taken a year earlier when Northern Rock, one of Britain’s biggest mortgage lenders, was on the brink of failing. Darling has prevented a run on the bank by authorizing the Bank of England to lend Northern Rock billions of dollars to guarantee its deposits. That incident had been an early wake-up call for Paulson.

Darling, who had just ended a daylong meeting in Nice with other European finance ministers, made a bit of chitchat and, after an awkward pause, said that he was calling about Barclays. “You should know that we have serious concerns about this deal,” he told Paulson sternly.

Paulson tried to assuage him, explaining that there was another bidder, Bank of America, involved in the matter as well. He also spoke about the systemic importance of Lehman Brothers to the global economy and stressed how a deal between Barclays and Lehman would turn Barclays into an international giant with the might of Wall Street behind it. Paulson explained that he was trying to put together an industry consortium to aid a bid by either Barclays or Bank of America.

Nonetheless, with characteristic British understatement, Darling continued to express apprehension about any potential purchase and said adamantly, “Barclays shouldn’t take on any more risk than they could possibly manage.”

Paulson, confidently dismissing his concerns, promised him he’d keep him updated throughout the weekend.

Bob Diamond arrived at Lehman’s headquarters in Fuld’s Mercedes and was taken through the back entrance, avoiding the battalion of cameras stationed out front. Hoping to keep any of Lehman’s staff from seeing the visitor, the firm’s security team shuttled him up in the building’s freight elevator and hurriedly led him to Fuld’s office.

Fuld offered him a cup of coffee, and between Fuld’s anxiety and Diamond’s not having slept, they both looked like hell.

Diamond was clearly in a rush to get to Simpson Thacher, where his team of bankers had just begun diligence, and he wanted to dig into the numbers himself. He walked Fuld through the day’s plan and then discussed the various synergies and overlaps between the two firms.

In the middle of Diamond’s presentation, Fuld interrupted him and told him there was something he wanted to get off his chest. An almost frightening intensity came over him as he began to speak.

“Look into the whites of my eyes,” he said. “There isn’t enough room for both of us at the top here. We both know that.” He paused and stared at Diamond intently. “I’m willing to step aside to make this work for the firm.”

For Fuld, it was the biggest concession he could offer: to give up the firm he loved.

For Diamond, the moment was somewhat baffling. He had never imagined Fuld would stay; he didn’t want him to.

“If there’s a way for me to help with a transition, help with clients, you know, I will do that,” Fuld offered.

“I’ve always heard you were a good man,” Diamond told Fuld consolingly. “Now you’ve proven that.”

After a twenty-minute crawl through traffic on the FDR Drive, Chris Flowers finally arrived at AIG’s offices just before noon. He was led to a meeting room where Willumstad, Schreiber, Steven J. Bensinger (the firm’s CFO), and a team of others were waiting. Schreiber immediately passed around a one-page summary of the firm’s cash outflows that was set up like a calendar: Each day from Friday through the next Wednesday was marked with various scenarios, depending on the outcome of Moody’s decision about its credit rating. If the executives hadn’t yet come to appreciate the full extent of the conundrum in which they now found themselves, Schreiber’s document put it into stark relief. By next Wednesday, the calendar indicated, the parent company would be negative $5 billion, with the shortfall each successive day only growing worse.

Flowers’s eyes widened as he studied the numbers. “You guys have a real problem here.”

“Yes. But we should be okay if we can make the capital raise work,” Willumstad said.

“Have you guys thought about Chapter 11?” Flowers blurted out. It was as if he had touched the third rail.

“Why are you using words like that?” Bensinger asked, clearly upset.

“Um, I can assure you,” Flowers told him, “that if you don’t pay people $5 billion on Wednesday, they’re going to be really, really upset, so you can call it whatever you want, but they are not going to be happy if you don’t pay them on Wednesday.”

Just then Jamie Dimon called back and was patched into the conference room’s speakerphone.

Schreiber described the potential cash-flow problems and their plans to fix them. “I’ve begun putting together a process for the weekend,” he said, explaining how they’d reach out to possible suitors beginning that afternoon. He also walked through the company’s various divisions and the amount of cash that each had on hand.

Before Schreiber could continue with his inventory, Dimon cut him off. “You’re a smart guy but you’re running a fucked-up process.” The worst-case scenario that Schreiber was describing wasn’t anywhere near bad enough, Dimon insisted, and scoffed, “You guys have no idea what you’re doing. This is amateurish, it’s pathetic.”

Even worse, Dimon didn’t think that they had an accurate read of their financial data. As far as he could tell, Schreiber was simply reading off a sheet of siloed information that had never been aggregated and analyzed in one piece.

“You guys need to get a handle on the numbers,” he said. “The real numbers. You need to sit down with those numbers and figure out the size of the real hole, not the made-up hole. How big is the securities lending? You have to go contract by contract, like bottoms-up, real work. Then you need to make a list of who can help you fill it. This isn’t like, you know, you’re going to be late on your credit card bill.”

Willumstad just stared at the speakerphone in silence. He knew this routine well from their days with Sandy Weill: This was Jamie the hot-head. Better to shrug it off, Willumstad thought. The worst part of Dimon’s tirade, he knew, was that he might be right.

As the AIG team awkwardly attempted to get the conversation back on a less hostile footing, Flowers suggested they call Warren Buffett. He didn’t know Buffett well, and the last time they had spoken, Flowers had tried to get him interested in buying Bear Stearns during that fateful weekend in March. In times of crisis—when a big check had to be written almost immediately—Buffett was the obvious man to turn to.

“Warren!” Flowers said enthusiastically, after reaching Buffett, as if they were best friends. He reminded him of their past dealing and then immediately explained the purpose of his call. He was staring at a piece of paper, he said, that showed that AIG would soon run out of money. He told Buffett that the spreadsheet was so basic, and so poorly done, that “I might have used it to track my grocery bill.”

Hearing that Buffett was amused by the comment, Flowers continued, “They’re a bunch of morons!” and paused meaningfully before saying, “but there’s a lot of value here.” He explained that he was looking for Buffett to invest $10 billion of capital in AIG; he hoped, in fact, that they could make an investment together.

Buffett, however, wasn’t especially interested in getting mixed up in such a mess. “You know, I don’t have as much money as I used to,” he said with a laugh. “I’m kind of low on cash.” He also wasn’t exactly sure he wanted to step into a battle between Hank Greenberg and Eli Broad, who were both waging war against the company. The only thing he might be willing to take a look at, he told Flowers, was AIG’s property and casualty business.

“Listen, there might be a real opportunity here,” Flowers agreed. “Let me get Willumstad to at least call you.”

Flowers returned to the room and told them Buffett was an unlikely candidate but urged Willumstad to contact him.

Willumstad, who had never met Buffett, called and began his pitch, but before he could get very far into it, Buffett stopped him.

“I’ve looked over the 10-K,” he said. “The company is too complicated. I don’t have enough confidence to do that. Look, nothing is going to work with us, so don’t waste your time. You’ve got plenty to do.”

But then he held out one glimmer of hope. “If you wanted to sell some assets that I might have some interest in … but I don’t know.”

Willumstad thanked him for his time and consideration and slammed the phone down in frustration.

By midday, rumors were now rampant at Lehman Brothers that the board might be about to fire Fuld. With the stock trading down another 9.7 percent to $3.71 a share, the possibility was being discussed openly not only throughout the office but in the media as well.

By now the anger was also becoming increasingly palpable on the trading floor among the firm’s staff. Lehman’s employees were unique on Wall Street in that they owned a quarter of the company’s shares. For all the complaints about Wall Street being short-term oriented, most Lehman employees had a five-year vesting period, which meant huge sums of their own wealth were tied up in the firm without the ability to sell their shares. And as of Friday, those shares had lost 93 percent of their value since January 31; $10 billion had disappeared. (Fuld, who owned 1.4 percent of the company—some 10.9 million shares—had lost $649.2 million.) To make matters worse, in a cruel irony, Lehman employees were sent a memorandum that morning saying that the unrestricted shares that they did own outright, they could not sell; it was the standard blackout notice they received around earnings every quarter preventing them from selling shares for several weeks.

Reports of Fuld’s possible ouster reached new heights when word spread that morning that John D. Macomber, one of Lehman’s board members and the former CEO of the chemical giant Celanese Corporation, had arrived at the building and was headed for the thirty-first floor. Almost a dozen people were milling about Fuld’s corner office when they saw Macomber, who was eighty years old, hobbling down the hallway toward them. Several began to leave as Macomber got to the door, expecting they would soon be asked to excuse themselves.

“Stay,” Macomber ordered them.

Fuld, looking haggard, greeted Macomber with a handshake. He didn’t think he was getting fired, but he could sense the nervousness in the room.

“I want to talk to you,” Macomber said, and though for a moment some of the bankers thought he indeed intended to tell Fuld that his services were no longer required, he instead launched, to everyone’s surprise, into a rousing speech to rally the troops.

“I want everyone in the room to know that I know that you guys have done a good job,” he said. “This was just bad luck. We’re one hundred percent behind all of you.”

Fuld’s board, it seemed, was still loyally Fuld’s board.

Rodgin Cohen was still over at Sullivan & Cromwell’s Midtown offices trying to coax Bank of America into buying Lehman. But he could tell something had gone wrong; Greg Curl’s body language had changed, and the BofA team seemed as if it had slowed down, as if it had already decided against bidding.

Cohen, who was one of the few lawyers in the city who had direct access to Tim Geithner, dialed his office to report his suspicions that the government’s hard line against offering any help had scared Bank of America away.

“I don’t think this deal can get done without government assistance,” Cohen stressed to Geithner. “They may be bluffing us, and they may be bluffing you. But we can’t afford to call that bluff.”

Geithner, who had expressed similar worries to Paulson the day before but had been told to stand down, was succinct in his response: “You can’t count on government assistance.”

At about 2:20 p.m., just as Lehman’s shares fell another 6 percent to $3.59, Hank Paulson, visibly frazzled, ran downstairs and out of the Treasury Building to head to the airport. Dan Jester, Jim Wilkinson, and Paulson’s assistant, Christal West, jumped in his Suburban with him. Christopher Cox was planning to meet them at the airplane.

On a call just hours earlier, he and Geithner had officially determined that something needed to be done about Lehman.

If they really were going to convene all the CEOs on Wall Street and try to urge them to come up with a private-market solution, now was the time to do it. Otherwise, by Monday, Lehman would be unsalvageable. “We have the weekend,” he reminded them.

They settled on setting up a meeting at 6:00 p.m. at the New York Fed. Geithner’s office wouldn’t start calling all the CEOs until just past 4:00 p.m., after the market had closed. The last thing they could afford was for news of the meeting to leak.

Paulson, who usually made the trip to New York on US Airways, which offered a government discount—Wendy had always given him grief about flying in a private jet—arranged to charter a plane to New York, using his NetJets account. He couldn’t afford to be delayed; the matter at hand was too important, and the weather was atrocious. If anything, he was worried the plane wouldn’t even be able to take off.

As they sped toward Dulles to catch the flight, Paulson, almost inaudibly, said, “God help us.”