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

CHAPTER FOURTEEN

Lloyd Blankfein was milling about the greenroom at the Hilton Hotel on Fifty-third Street at Sixth Avenue, waiting to make a speech at the Service Nation Summit, an annual conference coordinated by a coalition of nonprofits that promotes volunteerism in America. Dressed in his customary blue suit and pressed white shirt and blue tie, he had come to give one of the keynote addresses—following Governor Arnold Schwarzenegger and preceding Hillary Clinton—to discuss Goldman’s 10,000 Women nonprofit program, which fostered business and management education for women in developing and emerging economies.

Clinton, who had been at the other side of the greenroom returning phone calls, now strolled over to him and politely asked if she might speak before him; she had to get to a dinner, she explained. Blankfein was a big fan; he had given her some $4,600 in donations and had endorsed her in the Democratic primaries over Barack Obama. Since he had no pressing business himself, Blankfein gladly agreed to the switch.

Two minutes later, however, Blankfein’s cell phone rang. “We got a call from the Fed. There’s a meeting at six p.m. for all the bank CEOs,” his assistant told him, sounding simultaneously excited and nervous. “Paulson, Geithner, and Cox are supposed to be there.”

This is it, Blankfein thought. The big one. Paulson was going to have “the families” meet to try to save Lehman.

Blankfein looked at his watch. It was already getting close to 5:00 p.m., Schwarzenegger was still chattering away, and he had just given his spot away to Clinton.

He tried to reach Gary Cohn, Goldman’s co-president, to find out what was going on but didn’t get an answer—Cohn was likely still on the shuttle back from D.C. after testifying at a hearing for the Committee on Energy and Natural Resources.

Blankfein sheepishly walked over to Clinton. “Remember I told you that you could go ahead of me?” he asked. “Well, I have an emergency. I just got a call that I have to go to the Fed.”

Clinton looked at him as if she didn’t understand what he was saying.

Embarrassed, he tried to explain: “They usually don’t call me up when it’s something really pleasant, since they’ve done this a total of never.”

She half smiled sympathetically and let him speak first.

Jamie Dimon could hardly believe his bad luck. He was supposed to be home by 7:00 p.m. to have dinner with his daughter Julia’s boyfriend’s parents, whom he and his wife were meeting for the first time. Julia, his eldest daughter, had been begging her father all week to be on his best behavior and to make a good impression. And now the Fed was calling an all-hands-on-deck meeting of Wall Street’s top brass.

Dimon called his wife, Judy, who was well accustomed to receiving calls like this from her husband. “Geithner’s called us down to the Fed,” Dimon told her. “I don’t know how long it’ll go. I’ll try to get there as soon as I can.”

Dimon hung up the phone and hurried down the hallway to tell Steve Black the news. Black had just confirmed his plans to play in a tournament at the Golf Club of Purchase in Westchester, teeing off the next morning at 7:00.

“We’re going down to the Fed,” Dimon told him.

“You’ve got to be fucking kidding me,” he replied.

Black immediately called the Purchase club back. “Sorry,” he said with a weary sigh, “I was only kidding. Take me out.”

Brian Moynihan, Bank of America’s president of global corporate and investment banking, was reviewing some of Lehman’s asset valuations at Sullivan & Cromwell’s Midtown offices when Ken Lewis phoned from Charlotte.

“We got a call from Geithner’s office,” Lewis told him. “You have to go down to the Fed. They’re going to do a meeting to figure out what to do about this whole situation.”

Moynihan rushed downstairs, bolted without an umbrella through the revolving doors and into the pouring rain, and commandeered one of Sullivan & Cromwell’s Town Cars to take him down to the New York Federal Reserve.

Just as the car was making its way into Park Avenue traffic and he dried himself off, Moynihan’s cell phone rang again.

“There’s been some crossed wires, Mr. Moynihan,” one of Tim Geithner’s assistants told him. “I know we had invited your firm to this meeting—”

“Yes, I’m on my way down right now,” he assured her.

After a brief pause she said, “Given your bank’s role in the merger discussions, we believe it would be inappropriate for you to attend the meeting.”

Moynihan had gotten no farther than eight blocks before turning around and calling Lewis to tell him the news.

John Mack and Colm Kelleher, Morgan Stanley’s chief financial officer, were sitting in the backseat of Mack’s Audi, having hurried to the car just ten minutes earlier after Mack’s secretary had instructed them to get down to the Fed as soon as possible. “This must be Lehman,” Kelleher had said as they rushed out.

Not only was the rain pelting the roof furiously, but they were now sitting in bumper-to-bumper traffic on the West Side Highway, still miles away from their destination.

“We’re not fucking moving,” Mack said, repeatedly checking his watch.

“We’re never going to get there,” Kelleher agreed.

Mack’s driver, John, a former police officer, noticed the bicycle lane running alongside the highway—a project of the Bloomberg administration to encourage walking and cycling.

“Boss, that bike lane on the right, where does it go?” John asked, craning his neck back at them.

Mack’s face lit up. “It goes all the way down to the Battery.”

“Fuck it!” the driver said as he found a break in the street divider and inched the car onto the bike lane, speeding down it.

Hank Paulson’s Cessna Citation X touched down on runway 1-19 at New Jersey’s Teterboro Airport at 4:40 p.m. The pilot, navigating through a torrential downpour and fifty-mile-an-hour winds, threw the switch on the flaps and taxied to the main gate, where the Secret Service was waiting in two black Chevrolet Suburbans.

Now, as they inched their way through the Holland Tunnel toward Manhattan in rush-hour traffic, Paulson took a call from Greg Curl of Bank of America and Chris Flowers, the firm’s banker, who had completed their assessment of the Lehman numbers.

“We’re going to need the government to help to make this work,” Curl told Paulson bluntly and then launched into a series of proposed deal terms, conditions that would have to be met in order for this transaction to take place.

Paulson listened patiently, even if he had a hard time understanding why Curl felt he had the upper hand to the point that he could dictate the conditions. But, as Paulson himself liked to say, “You only need two girls at the dance to call it an auction,” and under the circumstances, he needed BofA to be one of them. If he could just keep Bank of America around long enough to close a deal with Barclays, he’d have succeeded. Paulson handed his cell phone over to Dan Jester (who had, ironically, worked for Flowers at Goldman in the financial services group in the 1990s), who took notes.

Curl told Jester that Bank of America would agree to the deal only if the government was willing to take $40 billion of losses on Lehman’s assets. “We’ve been through the books, and they’re a mess,” Curl explained, referring to Lehman’s bountiful toxic assets. Bank of America, he said, would be willing to split the first $1 billion of losses with the government, but after that, the next $40 billion, the government would have to guarantee. In exchange, Curl told him, the bank would give the government warrants (the option to buy shares at a later date) for Bank of America, with a strike price of $45 a share. (BofA shares closed that day at $33.74.) Jester mouthed the figures to Paulson as Curl relayed them. Both men shook their heads, knowing full well that under these terms a deal was never going to happen.

As the Suburban made its way through downtown Manhattan, Paulson called Geithner to strategize. It was already past 6:00 p.m., when the meeting was set to begin; they figured they would let the CEOs stir for a bit until Paulson arrived, just to let them know they meant business.

Thirty-three Liberty Street, the New York Federal Reserve Building, is an imposing, fortresslike sanctuary of old-fashioned, traditional finance. In 1927 Margaret Law, a critic for Architecture magazine, wrote that the three-year-old building had “a quality which, for lack of a better word, I can best describe as epic.” Deep below the limestone and sandstone building, which was modeled after the Strozzi Palace of Florence, lies a three-level vault built into the bedrock of Manhattan, fifty feet below sea level. It holds more than $60 billion of gold. Real hard assets, with real value.

If Lehman’s fate was going to be resolved—if Wall Street was going to be saved—the matter would be decided at 33 Liberty Street. While modern finance may have allowed investors to zip money across continents in milliseconds, the New York Federal Reserve stood as one of the last bastions of tangible values.

As John Thain’s black GMC Yukon pulled up to the building, he couldn’t help but recall the last time he had come there, as a partner at Goldman, in response to another such cataclysmic event, the rescue of Long-Term Capital Management in 1998. For three straight days, he had worked around the clock to come up with a solution.

And had they not saved Long-Term Capital, the next domino back in 1998 was clearly Lehman Brothers, which was suffering from a similar crisis of confidence.

The irony of the situation was rich. Ten years earlier, on a Saturday morning just past 7:30 a.m., Thain had run into Fuld in the Fed hallways and asked, “How’s it going?”

“Not so well,” Fuld had said. “People are spreading nasty rumors.”

“I can’t imagine that,” Thain had replied, trying to be polite, but knowing full well that the rumors were everywhere.

“When I find out who it is,” Fuld had said furiously, “I’m going to reach down his throat and tear out his heart.”

They were back where they started.

The meeting of “the families” did not begin until 6:45 p.m., when Paulson, Geithner, and Cox finally emerged, briskly walking down a long hall on the first floor, almost as if they were marching in a formation, toward a conference room in the south corner of the building overlooking Liberty and Williams streets.

The CEOs had all been milling about, tapping away on their BlackBerrys, and pouring themselves cups of ice water to cool themselves from the miasma of humidity that hung in the building. If there had been any question about the subject of this gathering, it was readily apparent before Paulson ever said a word: Conspicuous by his absence was the longest-running member of their tribe, Dick Fuld.

“Thanks for coming down here on such short notice,” Paulson began.

He explained that Lehman Brothers was in a “precarious position” and told the group, “We’re going to need to find a solution before the weekend is out.”

And then to make it perfectly clear what the parameters of that solution were going to be, he stated flatly: “It’s not going to be government money; you’re going to have to figure this out.”

“We’ve got two buyers that are each going to need help in my judgment,” he continued. He did not mention Bank of America or Barclays by name, but everyone knew who the players were—the names had crossed the tape twenty-four hours earlier. He revealed to the men arrayed around the table that each bidder had already indicated to him that it would not buy Lehman Brothers unless the government—or someone—consented to finance at least part of the deal.

“There’s no consensus for the government to get involved; there is no will to do this in Congress,” he said, stammering and stuttering at one point about how Nancy Pelosi had been all over him about bailouts. “You will need to come up with a private-market solution. You have a responsibility to the marketplace.

“I know it’s unpleasant to help a competitor do a deal, but it’s not going to be as unpleasant as it will be if Lehman goes,” Paulson stressed. “You need to do this.”

For many in the room, the idea of coming to the assistance of a rival was more than unpleasant: It was anathema. What made the situation even worse was that the competitors they were being asked to aid were Bank of America and Barclays, the ultimate outsiders. Ken Lewis, Bank of America’s CEO, had disparaged them every chance he got, and they all viewed Barclays as a wannabe, a second-tier player trying to break into the big leagues. How was helping these firms going to do anything other than hurt everyone assembled in the room?

Lehman wasn’t attracting much sympathy either. “Dick is in no condition to make any decisions,” Paulson announced, with a tinge of derision, explaining why Fuld wasn’t present. “He is in denial,” Paulson continued, before calling him “distant” and “dysfunctional.”

It was now Geithner’s turn to speak. As one of his assistants passed around copies of a document charting Lehman Brothers’ balances, he said sternly, “If you don’t find a solution, it’s only going to make the situation worse for everybody here.” The problem was evident: Lehman had virtually no cash left. If there was no solution by Monday, the risk was that investors would demand what little money was left and put the firm out of business within minutes of the opening bell. That in turn would put the financial system as a whole at risk, as counterparties—investors on the other side of a trade with Lehman—wouldn’t be able to settle their trades, creating a cascading problem that could soon turn into a catastrophe. As sophisticated as the world’s markets have become, the glue that holds the entire arrangement together remains old-fashioned trust. Once that vanishes, things can unravel very quickly.

Both Blankfein and Dimon countered that they believed that the risk inherent in a Lehman bankruptcy was being overstated, at least from their respective firms’ points of view. They had already told Paulson privately that they had reduced most of their risk to Lehman Brothers, and Blankfein didn’t mind now bringing that fact up in front of the group. “We’ve all seen this coming from miles,” he told the room.

Geithner, taking their opinions in without responding, instructed the bankers to break up into three working groups. The first would value Lehman’s toxic assets, the portion of the business that it had announced it would spin off into the company called SpinCo. The bankers in the room quickly renamed it ShitCo, offering a bit of much-needed comic relief.

The second group, Geithner continued, would look at developing a structure for the banks to invest in Lehman. And finally, there was what he had described in private meetings earlier that day as the “lights-out scenario”: If Lehman was forced to file for bankruptcy, he wanted all the banks that traded with it to see if they could contain the damage in advance by trading around Lehman to “net down their positions.”

In case there was any confusion, Geithner reiterated Paulson’s decree: “There is no political will for a federal bailout.” As he spoke those words, a subway train passed underneath the room, rumbling ominously as if to underscore his point.

Christopher Cox, as impeccably dressed and coiffed as ever, made a brief statement, telling everyone in the room that they were “great Americans” and impressing upon them “the patriotic duty they were undertaking.”

Most of the bankers in the room rolled their eyes at the sentiment, as they regarded Cox as a lightweight and would later describe him as “cryogenically frozen.”

The conversation quickly turned to both the philosophical and the practical as the bankers talked over one another.

“I assume we are going to talk about AIG?” Vikram Pandit of Citigroup asked, as the room grew quiet.

Geithner shot him a harsh look. “Let’s focus on Lehman,” he said firmly, trying to avoid losing control of the meeting.

“You can’t deal with Lehman in isolation,” Pandit persisted. “We can’t find ourselves back here next weekend.”

Dimon jumped in. “We’re there at AIG, our team is there,” he said, explaining that JP Morgan was advising the insurer, and suggesting that they were working to find a solution.

“You know, Jamie,” Pandit replied brusquely, “we’ve got a team there, too, and I don’t think it’s as under control as you think.”

Pandit and Dimon continued to trade barbs, and the mounting tension began to remind many in the room of a conference call that Geithner had coordinated among the big-bank CEOs the night that JP Morgan acquired Bear Stearns. “Stop being such a jerk,” Dimon had yelled at Pandit then when he questioned him about Citi’s exposure to Bear, now that he had bought the firm.

Geithner insisted that the Fed had AIG under control and again attempted to move the conversation along. What remained unacknowledged was that JP Morgan and Citigroup, as advisers to AIG, were the only parties in the room that had any true appreciation for the depth of the problems that the firm faced.

Thain, whose bank was likely the next to fall, as everyone in the room understood all too well, remained notably silent during the exchanges.

Before ordering the roomful of bankers to get their teams together and be back at the Fed by 9:00 the next morning, Paulson made one last pitch that to many in the room sounded more like a threat: “This is about our capital markets, our country. We will remember anyone who is not seen as helpful.”

The room emptied as the bankers left, expressionless and mute, dumbstruck at the magnitude of the work that lay before them.

John Mack pulled out his cell phone the moment he left the New York Fed Building to report back to the office.

“Guys, it’s going to be a long night,” he told his lieutenants, James Gorman, Walid Chammah, and Paul Taubman, and ordered them to prepare for Lehman to go under. “We’re going to need lots of bodies this weekend.” The Morgan Stanley bankers had two related tasks: self-preservation and helping the Fed. They’d once again have to review the extent of their exposure to Lehman, looking through their derivatives book and also examining their clients’ exposures to Lehman. Investment banking, meanwhile, should start looking through Lehman’s client list to see whom they could pick off. A board call would have to be arranged to keep everyone updated. Another team would have to run numbers on Lehman’s asset values. They would finally get a chance to see Lehman’s finances; if nothing else, it could prove to be an interesting education.

Mack directed his driver to his favorite Italian restaurant, San Pietro, to pick up some food for the team, who would need to be fortified for the sleepless night they all faced. Everyone would have to start acting like a first-year analyst.

Upon leaving the meeting, John Thain, who had been joined at the meeting by his colleague Peter Kraus, immediately phoned Peter Kelly, the firm’s deal lawyer, and told him to be at the Fed on Saturday. He followed up with a call to Greg Fleming as his Yukon made its way up the Merritt Parkway; he had planned to have dinner with his wife and two friends and was already an hour late. “It’s a food fight down here,” Thain told Fleming. “It looks like Lehman isn’t getting saved.”

As he related, with surprise, how Paulson had refused to offer any government help, he knew how Fleming was going to respond.

“We have to start thinking about ourselves. We have to think about our options,” Fleming said. “Really, John. We’re going to run out of time.”

Thain, still noncommittal, said only, “Let’s go get some sleep, and we’ll talk in the morning.”

When Thain finally arrived for his dinner engagement at Rebecca’s restaurant in Greenwich, he saw Steve Black of JP Morgan, who had been on his cell phone for the past half hour with the firm’s management team, standing out front, still talking. As it happened, he was in the middle of a conversation speculating about what might happen to Merrill Lynch.

Black, who was aghast to see Thain—His company is next! What’s he doing here?—nonchalantly greeted him with, “Great minds think alike.”

“Yeah, but I was supposed to meet another couple and my wife, and they’ve been sitting here for the last two hours,” Thain replied.

“At least I called,” Black said with a laugh.

As Thain went inside, Black returned to the conference call. “You’re never going to believe who I just ran into …”

At Lehman’s headquarters, a stunned and livid Dick Fuld had just gotten off the phone with Bart McDade, who had the unenviable task of informing the CEO that a meeting had been held down at the Fed about his company, and that he hadn’t been invited.

Rodgin Cohen had been notified by the Fed to instruct McDade to bring a team down to the Fed on Saturday morning—and had explicitly warned him not to bring Fuld, explaining, “The Fed doesn’t want him down there.”

Trying to soften the blow, McDade prevaricated: He told Fuld that there would be a lot of grunt work to do downtown, and that his time would be better spent manning the office so that he could remain in constant contact with the regulators and his CEO brethren. What he didn’t relay to Fuld, of course, was that they would all be together at the Fed in person.

As he ended the call with McDade, Fuld had another reason to be furious when he realized that he hadn’t heard back from Ken Lewis all day, and it was already past 9:00 p.m. Bank of America’s diligence teams over at Sullivan & Cromwell had left hours earlier, and from what he had heard, their body language suggested they weren’t leaving just for the night.

“I can’t believe that goddamn son of a bitch won’t return my call,” Fuld complained to Russo. Fuld had phoned him at least a half dozen times, sometimes not leaving a voice mail for fear of seeming desperate. He thought Lewis had practically shook his hand over the phone just twenty-four hours earlier; where the hell had he gone?

Enough was enough. Fuld swallowed his pride and dialed Lewis’s home in Charlotte.

Lewis’s wife, Donna, picked up in the kitchen.

“Is Ken there?” Fuld asked.

“Who is it?”

“Dick Fuld.”

There was a long pause as Donna looked over at her husband, who was sitting in the living room. When she mouthed Fuld is on the line, Lewis shook his finger, signaling to her to duck the call.

Donna felt uncomfortable, but she had had plenty of experience in dodging unwanted callers for her husband.

“You really have to stop calling,” she said sympathetically to Fuld. “Ken isn’t coming to the phone.”

Crestfallen, Fuld replied, “I’m really sorry to have bothered you.”

Fuld placed the phone down and put both hands on his head.

“So, I’m the schmuck,” he shouted at nobody in particular.

Harvey Miller, Lehman’s bankruptcy lawyer, walked into Weil Gotshal’s conference room just down the hall from his office and told the associates to go home and have dinner. It was getting late, and he hadn’t heard anything new from anyone at Lehman. This is just a fire drill, he thought. Lehman Brothers isn’t going to have to file.

Miller hopped into a cab to his apartment on Fifth Avenue. As he opened the door, his cell phone rang. James Bromley, a lawyer with Cleary Gottlieb Steen & Hamilton, which was advising the New York Fed, asked almost matter-of-factly, “Harvey, are there any plans for a bankruptcy?”

Miller was taken aback. “It’s not the objective; it’s not in the forecast,” he replied decisively. “There certainly isn’t any intensive work being done on it. I’m at home. I can tell you that right now the company really believes it’s going to get a deal.”

“Are you sure?” Bromley persisted.

Miller related how the New York Fed had not seemed very worried during a presentation by one of his associates earlier that day.

Bromley, uncertain what to make of this news, muttered, “Err, maybe we should meet again tomorrow morning,” and hung up.

As Miller headed into the living room, he said to his wife, Ruth, bewilderedly, “I just got the strangest call …”

Back at AIG, Willumstad was still searching for a quick fix. He and Braunstein decided to try Warren Buffett one last time. Perhaps they could sell him some assets—anything, really—that he might want in his portfolio. Buffett had already left the office, but his assistant patched the call through to his home, the same home he had purchased in 1958 for $31,500.

“You said you’d be interested in assets. Anything in particular?” Willumstad asked, after greeting him and explaining the purpose of his call.

Buffett, reticent, offered, “Well, we could be interested in the auto business.”

“Would you be interested in taking all of the U.S. property and casualty business?” Willumstad suggested. That was a major piece of the company, representing $40 billion in annual revenue.

“What’s it worth?” Buffett asked.

“We’d say $25 billion; you’d probably say $20 billion,” Willumstad replied. “What information do you need to do that?”

When Buffett told him to send what he could, Willumstad said, “Okay. Give us an hour and we’ll get a package of material together. Where can we e-mail it?”

Buffett let out a loud laugh and informed him that he didn’t use e-mail.

“Can I fax it to you?” Willumstad asked.

“I don’t have a fax machine here,” Buffett said, still chuckling. “Why don’t you fax it to the office. I’ll go get in my car and drive back down to the office and pick it up.”

An hour later, Buffett was back on the phone, politely rejecting the proposal: “It’s too big a deal; $25 billion is too big.” Willumstad never thought he’d hear Buffett call any prospective deal too big.

“I’d have to use all my cash and can’t do anything to jeopardize Berkshire’s triple-A rating,” Buffett explained. For a moment, he alluded to the possibility of raising the money, but then acknowledged that he “didn’t want to have that kind of debt on my balance sheet.”

“Okay, thanks a lot,” Willumstad said. “But, by the way, if there’s anything else in the pool that you’re interested in, let us know.”

Merrill’s Greg Fleming was tossing and turning in bed that night, so much so that his wife, Melissa, finally insisted that he tell her what was bothering him. “It’s Friday night, and you’re not sleeping,” she mumbled. Wide awake, he turned to her. “This is a different kind of Friday night. The next week or so in this industry is going be epic.”

After nodding off briefly, Fleming finally rose at 4:30 a.m., his mind racing. He recalled his conversation of the night before with John Finnegan, his closest confidant on Merrill’s board. Finnegan was clearly as anxious as Fleming about the firm’s mounting problems, and they agreed they had to persuade Thain to seek a deal with Ken Lewis.

“You’ve got to push this, Greg,” Finnegan urged him. “There’s a way to get this done.”

Fleming had had essentially the same conversation with Peter Kelly. “You just need to get the imprimatur of John” to approach Bank of America, Kelly had told him. “We’ve got to start getting things going. If the meeting tomorrow morning doesn’t go right, we have thirty-six hours to put a trade together.”

It was coming up on 6:30 on Saturday morning when Fleming finally decided it was late enough to phone Thain’s home. Thain was just leaving and returned the call five minutes later from the backseat of his SUV.

“I’ve been thinking about this,” Fleming said resolutely. “We have to call Ken Lewis.”

Thain, taken aback, had spent much of the night thinking about whether such a deal made sense—and had come to the opposite conclusion, at least for the time being. Merrill might want to try to raise some money over the weekend by selling a small stake in the firm to raise market confidence, but there was no reason to sell the entire company immediately, he told Fleming. As he had always warned his troops before entering talks, “Once you initiate, you’re in motion.” Negotiations could quickly spiral beyond your control.

“They are our best partner,” he said dejectedly of Bank of America. “Where are we going to be if we lose them?”

As his SUV barreled down the FDR Drive, Thain promised to consider the issue further, but for now, he needed to focus on the meetings ahead of him.

Jamie Dimon’s black Lexus pulled away from the curb of his Park Avenue apartment to head down to the Fed just before 8:00 a.m. Dimon, who sat in the backseat returning e-mails on his BlackBerry, had just gotten off a conference call with his management team. He had dropped a bombshell on them, telling them to prepare for the bankruptcies of Lehman Brothers, Merrill Lynch, AIG, Morgan Stanley, and even Goldman Sachs. He knew he might have been overstating the case, but he figured they needed to be prepared. Dimon was anxious—fearful, really. He was the Man Who Knew Too Much. As the “clearing bank” for both Lehman and Merrill—all trades for those firms passed through JP Morgan—he could see how quickly their businesses were crumbling. And as the adviser to AIG, well, that had been a nightmare for weeks. He probably knew more than Paulson.

He just hoped he was wrong.

Pacing in his kitchen, Fleming decided to try one last time to impress upon Thain that talking to Bank of America wasn’t just a good plan, it was perhaps the only way to save Merrill Lynch. If Bank of America bought Lehman instead, Merrill faced an onslaught of unimaginable proportions. The math was clear: If Lehman was swallowed up, there would be a run on the next biggest broker-dealer—and that was his firm. Merrill Lynch, perhaps the most iconic investment bank in the nation, was on the brink of ruin.

Thain picked up Fleming’s call just as his SUV was winding down Maiden Lane and about to enter the underground parking lot at the Fed Building. A half dozen photographers had already camped out and were snapping away.

“This is our time to move,” Fleming insisted. “We don’t even necessarily have to do the deal, but we should at least examine it now, and we should see if we can put it together.

“We should use the weekend to do that,” Fleming pressed on, before Thain could interrupt him. “We shouldn’t try to do this potentially under duress next week.”

As a longtime deal maker, Fleming certainly knew how valuable even a weekend could be. The biggest deals on Wall Street had always been finalized when the markets were closed on Saturday and Sunday, so that the details could be refined without worrying that a leak could quickly affect stock prices and potentially scuttle an agreement.

Thain still counseled patience. “If Lehman doesn’t make it, if they file for Chapter 11, Bank of America will still be there,” he told Fleming. But he assured him: “I hear you loud and clear. I’m keeping an open mind, and if we need to make the call, we’ll make the call.”

That was all Fleming needed to hear. He was making progress.

By 8:00 a.m., the grand lobby of the New York Federal Reserve was teeming with bankers and lawyers. They had gathered not far from a giant bronze statue of young Sophocles, his outstretched arm holding a tortoiseshell-and-horn lyre. The statue was a symbol of victory after the Battle of Salamis, a clash that saved Greece and perhaps Western civilization from the East. On this day the bankers assembled at the Fed had their own historic battle to wage, with stakes that were in some ways just as high: They were trying to save themselves from their own worst excesses, and, in the process, save Western capitalism from financial catastrophe.

An hour later the group shuffled into the same boardroom at the end of the corridor where they had sat, mostly shell-shocked, the night before.

By morning they had settled on the working groups: Citi, Merrill, and Morgan Stanley were put in charge of analyzing Lehman’s balance sheet and liquidity issues; Goldman Sachs, Credit Suisse, and Deutsche Bank were assigned to study Lehman’s real estate assets and determine the size of the hole. Goldman had had a jump start as a result of its mini-diligence session earlier in the week, and both Vikram Pandit and Gary Shedlin of Citigroup were so nervous that Goldman would try to buy the assets themselves on the cheap that they attached themselves to their group.

“As you know, the government’s not doing this, you’re on your own, figure it out, make it happen,” Geithner said. “I’m going to come back in two hours; you guys better figure out a solution and get this thing done.”

His tone struck many in the room as patronizing if not ridiculous. “This is fucking nuts,” Pandit said to John Mack; it was as if they had all been handed a test without the customary number 2 pencils.

Lloyd Blankfein raised a question: “Tim, I understand what you want to do, but how do I get in the other room?” In other words, he wanted to know how he could become a buyer subsidized by his competitors. Blankfein wasn’t serious—he had no interest in buying Lehman, but he was clearly trying to make a point. Why are we helping our competition?

Geithner deflected the question and left the room, followed by the bankers, who were simultaneously daunted and deflated.

Thain, Peter Kraus, and Peter Kelly of Merrill found a corner to talk in.

“So, what do you think?” Kelly asked.

“Lehman’s not going to make it,” Thain said.

“Then we’re not going to make it either,” Kelly replied calmly.

“We have to start thinking about options,” Kraus said.

Thain nodded in agreement. Maybe Fleming was right after all.

Thain dialed Fleming and, after telling him about the conversation, said: “Set up the meeting with Lewis.”

Upstairs, on the seventh floor of the Fed, Lehman’s Bart McDade and Alex Kirk felt a little bit like mail-order brides as they waited to meet the bankers from the firms that they hoped would save them. This, they knew, would be the ultimate “road show.”

They had brought binders of materials, including what were perhaps the two most important documents, known as decks. One described the spin-off that Lehman referred to as REI Global; the other was labeled “Commercial Real Estate Business Overview”—in other words, the worst of the worst holdings, the toxic assets that no one knew precisely how to value and that everyone was nonetheless certain that Lehman was overvaluing.

Even now Lehman seemed to be in denial: The decks revealed that it had marked down the value of its commercial real estate assets by an average of only 15 percent. Most Wall Street bankers had already assumed the reduction would be far greater.

“Okay, let’s just make sure you and I agree exactly on all of these issues and how they’re financed,” McDade said to Kirk. They reviewed each line in order: how the balance sheet was broken down by liabilities, their derivatives, receivables, payables, repo lines, and long-term debt.

If they were confused about any given detail, McDade phoned Ian Lowitt, who was a veritable financial encyclopedia. “He should be the one down here,” McDade blurted during one of his explanations of an especially obtuse passage.

As they completed their preparations, Steve Shafran, Hank Paulson’s top lieutenant, phoned and instructed the two men to go and meet their possible saviors. A security guard escorted them downstairs to the main dining room, where several dozen bankers waited. Wall Street’s most elite firms were effectively about to go shopping in the equivalent of a government-sponsored Turkish bazaar.

The Lehman executives were seated at a table in the farthest corner of the huge room, where everyone stopped to look—to gawk, in fact. “Do you know what this is like?” Kirk asked McDade when they were finally settled. “We’re the kid with the dunce cap in the corner!”

McDade let out a big laugh just as a group of bankers they did not know from Credit Suisse wandered over, flashing wide grins, and started eyeing them. “What’s going on?” one of them asked. Kirk rolled his eyes in a way that clearly indicated, Please, do not mess with us. “What the fuck do you think is going on?” he replied. Before things could get too ugly, the cream of Wall Street suddenly appeared: Vikram Pandit, John Mack, John Thain, and Peter Kraus came over to the table and got down to business. Mack, who had met McDade at his home over the summer when they had considered merging, struck a sympathetic note: “Oh, God, I feel awful for you guys. This is just terrible.” Thain sat quietly, sipping a coffee, with every reason to think, This could be me. McDade pulled out his documents and began walking them through the numbers. As Kraus began to question some of the assumptions, Pandit stopped him. “Okay, okay,” he said, impatiently waving his hand in the air. “You have a homework assignment,” he told the Lehman bankers. “Give me a full business plan on how you would run this thing, so we can consider whether we’re going to finance it. You have two hours to complete it.”

Five minutes later a security guard came over to McDade and Kirk and told them, “We’re going to take you up to another floor so you can work.” The Fed had hoped to provide them with an actual conference room, but because there wasn’t any space available, they were escorted to the Fed’s medical center, where a makeshift office had been prepared. It was, if nothing else, all too apt a metaphor, as the Lehman executives immediately realized. Kirk looked at the defibrillator on the wall and deadpanned, “Well, this is appropriate. We’re clearly the heart attack victim.”

Greg Curl and Joe Price of Bank of America were on their way downtown with their lawyer, Ed Herlihy, for a 10:00 a.m. meeting with Paulson and Geithner. They had by now resolved not to pursue a deal with Lehman; Curl had already sent some of his people back to Charlotte.

Before they arrived, Herlihy’s cell rang; he could see from the caller ID that it was Fleming. For a moment, he hesitated answering.

Before they had left, the group had discussed what to do if Fleming called again. Chris Flowers had advised Curl, “Let’s not waste another fucking minute on this until John Thain himself calls Ken Lewis and says the words out of his own mouth: ‘I want to do this deal.’ Otherwise, it’s just a bunch of bullshit.”

Exasperated, Herlihy finally answered the phone.

“We’re going to make this happen,” Fleming said excitedly. “John says we should set it up.”

Herlihy had heard this before and had grown tired of the routine.

“Greg, I’ve said it once and I’ll say it again: We’re not doing this without being invited in. I’m actually in the car with Greg Curl now. I’ll put him on. He’ll tell you we’re serious about that.”

“Listen, we’re interested,” Curl said after being handed the phone. “But we do need to hear from Thain directly on this.”

“Okay, okay,” Fleming told him. “I’ll call you back.”

For all their interest in acquiring Merrill Lynch, Curl, Price, and Herlihy had reason to be wary of Fleming’s overtures. The three men knew something that no one else knew, a bizarre turn of events that had never leaked out—and thank god for that, they thought to themselves, for it would have left them the laughingstocks of Wall Street.

Ken Lewis had, in fact, already been through this dance with Merrill Lynch a year ago almost to the week with Stan O’Neal. No one outside of O’Neal and a handful of BofA executives even knew the talks had taken place, and not even Merrill’s or Bank of America’s board had been informed of them.

On the last Sunday of September, O’Neal had driven down to Manhattan from his weekend home in Westchester to meet with Lewis at his plush corporate apartment in the new Time Warner Center. The meeting had been set up by Herlihy, who had acted as an intermediary. O’Neal showed up alone, though—Lewis had brought Curl with him.

As a precondition of the meeting, O’Neal had indicated that he wanted $90 a share for Merrill Lynch, a substantial premium over its then stock price of slightly more than $70 a share. Lewis and Curl got right down to business, handing O’Neal a bound presentation of what a combination of Bank of America and Merrill would look like from a numbers and operational standpoint. As Lewis went through the proposal and was ready to start a discussion, O’Neal jumped out of his chair, excusing himself to go to the bathroom. After what felt like twenty minutes, as Lewis and Curl waited anxiously for him to return, they wavered between concern for O’Neal’s health and frustration that he seemed to have vanished.

Finally, O’Neal returned, as if nothing unusual had occurred. Lewis shrugged it off and continued going through the presentation. As he continued, O’Neal stopped him.

“Look, if we’re going to do a deal, it’s going to have to be at a reasonable premium,” O’Neal said, raising the price he wanted for the firm to $100 a share. “I’ve done some subsequent analysis and thought about it more,” he said, explaining how he justified the higher price by a sum-of-the-parts analysis of Merrill’s asset management, retail, and investment banking businesses.

The number took Lewis aback. At first he almost ended the conversation. But then he allowed that he would continue the talks, but suggested if O’Neal wanted more money, “it would require more cuts.”

“How much cost reduction do you have baked into the numbers that you have?” O’Neal asked.

Lewis’s presentation projected $6 billion in cuts over two years.

To O’Neal that was a huge number, even for someone who had been famous for his own cost cutting. And if he wanted $100 a share, it would be even more.

O’Neal asked, “So, how would you see me fitting into this?”

“Well, you’d be part of the management team, but I haven’t really thought about a structure,” Lewis told him.

That answer clearly was unsatisfactory. If they were going to have to reduce costs by as much as Lewis was saying, O’Neal said, he’d want to be the president of the firm so that at least somebody would be looking out for the Merrill employees. Lewis now became angry. “So, what you’re sayin’ is, you want me to sell out my management team to get this deal done for your benefit?”

For a moment O’Neal only stared down at his feet, until finally saying, “I appreciate you spending the time. I appreciate the presentation and the thought that went into it. I’ve always thought that, on paper, that if Merrill were to do a strategic merger you are the most compelling partner.” As he turned to the door, O’Neal said, “I’ll think about everything you said.”

Lewis never heard from him again.

What he didn’t know was that the next day O’Neal confided in Alberto Cribiore, a Merrill board member, that he had gone to see Lewis, and told him about the meeting. Cribiore, always a good proxy for the rest of the board, was clearly not receptive to the merger idea, quickly brushing it aside.

In his heavy Italian accent, Cribiore said, “But Stan, Ken Lewis is an asshole!”

The sixteenth floor of AIG was already a beehive of activity, with hundreds of bankers and lawyers roaming the floors, darting into the various rooms that had been set up to perform due diligence on different AIG assets up for sale.

Before the high-end tire kickers arrived, Douglas Braunstein of JP Morgan, fresh off a conference call with Dimon, pulled Bob Willumstad aside to confide, “You need to think about more than the $20 or $30 billion we were talking about before, because Lehman could go bankrupt this weekend.

“The market’s going to be bad,” Braunstein warned. “We should probably be thinking about $40 billion.”

Willumstad was flabbergasted; the challenge he faced had almost immediately doubled in size.

A minute later, Sir Deryck Maughan, the former head of Salomon Brothers, emerged from an elevator. Maughan—who was working for KKR, one of the bidders in the AIG fire sale—and Willumstad had known each other well but hadn’t been in touch for years. The last time they had seen each other was in 2004, when Maughan was being fired by Charles Prince, literally in Willumstad’s presence. It was Maughan, too, who had snubbed Steve Black’s wife on the dance floor more than a decade ago, resulting in a confrontation with Dimon, and his eventual ousting by Sandy Weill.

And now, on a weekend when the entire financial system hung in the balance, Willumstad, Dimon, and Black were all looking to Maughan for help. Ah, Willumstad thought as he greeted Maughan with a wide smile, life is rich with irony.

A few minutes earlier David Bonderman of Texas Pacific Group, one of the wealthiest private-equity moguls in the nation, had arrived with his own team. Bonderman, who was known for turnarounds, thanks to successful projects like fixing Continental Airlines, had also become increasingly leery of financial companies. He had acquired a $1.35 billion stake in Washington Mutual in April 2008 and watched his investment lose virtually all of its value in less than half a year.

Willumstad was becoming increasingly anxious that all these bidders were there to suck AIG dry.

Perhaps sensing Willumstad’s anxiety, Dr. Paul Achleitner, a board member of the insurance giant Allianz who had cut short his vacation in Majorca, Spain, to fly in for the diligence session, approached him.

“Can I see you privately?” he asked.

“Sure,” Willumstad replied.

Achleitner had been invited to the diligence session by Chris Flowers, who had chartered a plane to fetch Achleitner and bring him across the Atlantic.

Willumstad and Achleitner found a quiet corner.

“I want you to know that I’m not here with all these vultures,” Achleitner said, pointing at the scrum of private-equity investors swirling about. “I’m here as Allianz. If we’re going to invest, we might invest alongside them, but we’re going to make our own decision.”

“Thank you, I appreciate that,” Willumstad said, before returning to the vultures.

Willumstad and the AIG team were quickly having a difficult time keeping track of everyone in the growing crowd and, as the weekend wore on, whom they actually represented.

When Christopher A. Cole from Goldman Sachs appeared with a small army of bankers, John Studzinski, AIG’s banker from Blackstone, became alarmed. Goldman? Who invited them?

“Who are you working for?” Studzinski asked Cole. At first Cole seemed oddly reticent to say. “Well,” he said, “we have several clients here.” Studzinski just stared at him, hoping to hear more. As they spoke, Richard Friedman, who ran Goldman Sachs’ private investment business, walked by, which did not go unnoticed by everyone else in the room. Was Goldman actually there for itself? “We’re here,” Cole started speaking again, “working with Allianz, Axa, and Goldman Sachs Capital Partners.” It was all so confusing and conflicted.

Skeptical about the answers he was getting, and perhaps a bit paranoid, Studzinski raced up to the senior security guard on the eighteenth floor, Nathan T. Harrison. “Listen,” he told him, “I want you to watch all these people like a hawk. If you see anything untoward, anything at all—people walking around the wrong floors, whatever—come find me immediately.”

Without a minute to spare the Bank of America team, which included Greg Curl, Joe Price, and Ed Herlihy, marched into the Fed building for their 10:30 a.m. meeting with Paulson and Geithner. Christopher Flowers had raced over on foot from AIG, two blocks away.

As they waited in a conference room outside Geithner’s office, Curl recounted to the group how Fuld had been phoning Lewis’s home all night.

“Dick … what an asshole!” Flowers said dismissively.

As Paulson, Geithner, and Dan Jester entered the room, the mood quickly turned chilly. Paulson hated Flowers, and the antipathy was mutual. They had been feuding for years, ever since Paulson passed over Flowers for the top job of running Goldman’s investment banking division back when the firm was planning to go public. Flowers—who was given to telling his peers that Paulson was an “idiot”—quickly left the firm. Paulson told him that his decision to quit, coming as it did at the critical time of the IPO, was a “disgrace.” Flowers was bought out of the partnership ahead of the offering, but when the IPO was canceled, he made overtures about trying to return to the firm. That conversation had ended in a near-shouting match.

Trying to break the tension, Geithner now asked, “So what’s the latest?”

Curl indicated in no uncertain terms that BofA was no longer interested in buying Lehman Brothers unless the government was prepared to help even more than they had asked for the day before. He said that they had identified at least $70 billion in problem assets that Bank of America would need guaranteed—the figure had grown from the $40 billion of a day earlier—and that it might be even larger. Given that, they were going to put their pencils down unless Paulson was willing to “step up.”

Curl also said that he was concerned that Fuld was still seeking a premium for the stock. “We think that’s bullshit,” Flowers remarked.

“You know, no one cares what they think. Don’t worry about what they think,” Paulson told them. “At this point, it doesn’t matter what Dick Fuld thinks.”

In the middle of the meeting, Herlihy’s cell phone began ringing, and he saw that it was Fleming. After ignoring his first two calls, Herlihy whispered to Curl that it was Fleming and excused himself from the meeting.

“What’s up?” Herlihy asked impatiently.

“Okay. He’ll do the meeting at two thirty p.m.!” Fleming exclaimed.

“Well, can you get Thain to call Lewis?” Herlihy asked.

“Not now,” Fleming said. “Thain can’t speak to him because he’s in a meeting with Paulson.”

Herlihy rolled his eyes. “No, he’s not, Greg. I’m in a meeting at the Fed with Paulson. I just stepped out of the room and can see him. He’s down the hall from me.”

Herlihy was growing increasingly concerned that Fleming didn’t have Thain’s blessing, and repeated, “Listen, this isn’t going to work. He’s got to call. If I can step out to take your call, he can step out and call Lewis.”

“He’s going to be there, I promise. I’m not risking my reputation by having Lewis fly up here and go to an empty meeting,” Fleming insisted.

“He’s got to make the call,” Herlihy insisted again.

By the time Herlihy stepped back into the room, it was clear that the meeting was winding down, and while the government was still refusing to become involved, Paulson was trying to keep Bank of America from dropping out altogether.

As everyone stood up to leave, Chris Flowers pulled Paulson aside and said, “I’ve got to talk to you about AIG.” He paused to make certain they weren’t being overheard and continued, “I’ve been over there working with them, and it’s just remarkable what we found.” He took out the same piece of paper that had been handed out the day before, showing the firm’s cash outflows and how by Wednesday it would be out of money.

“Here’s how big the hole is,” Flowers said, pointing to the negative $5 billion cash balance coming due that next week. “AIG is just totally out of control. They’re incompetent!” Flowers offered to come back to the Fed with Willumstad to go over the numbers in more detail, and while Paulson was shocked at the numbers, he tried not to give Flowers the satisfaction of knowing how unnerved he was.

When Flowers walked out of the meeting and rejoined the Bank of America team in the hallway, he smugly told them, “They’re not on top of it.”

As Paulson, Geithner, and Jester reassembled in Geithner’s office, Jester stressed that they had to somehow keep Bank of America “warm” so that it remained in the auction. And if Bank of America had dropped out, it had to be kept quiet—especially from Barclays.

Paulson, however, was focused on the AIG document that he had just seen, doing the math in his head. “It’s much worse than I thought,” he finally said. “These guys are in deep doo-doo.”

Geithner reached Willumstad on speakerphone and told him that they had just met with Chris Flowers, who had walked them through the numbers.

“He’s looking at buying some assets, putting together a deal,” Willumstad responded, and for a moment the confused government officials all looked at one another: Wasn’t Flowers advising AIG? But then Jester smiled knowingly at Paulson. This was classic Flowers, playing both sides. It quickly became evident to everyone that Flowers was likely trying to tee up a deal for his buyout shop with government assistance. “He’s frankly a troublemaker,” Paulson exclaimed. “He doesn’t want to save this country!”

The discussion returned to the numbers, and Willumstad explained that they had teams of bidders at his office and were hoping to sell enough assets over the weekend to cover the pending shortfall.

Geithner suggested Willumstad come over later that day to review the firm’s books so that they could get a better handle on what its plans were.

“Okay,” Willumstad said. With a laugh, he added, “I won’t be bringing Flowers.”

Downstairs the CEOs were now summoned from the dining room to the conference room to deliver a progress report to Paulson and Geithner.

Each of the groups offered up what they had accomplished, which amounted to very little. Part of the problem was that there was still huge disagreement over what Lehman’s assets were actually worth, especially its notorious commercial real estate assets. While Lehman had been valuing that portfolio at $41 billion, consisting of $32.6 billion in loans and $8.4 billion in investments, everyone knew it was worth far less. But how much less?

One set of estimates making the rounds was a spreadsheet called “Blue Writedowns” that cut the estimated value of Lehman’s commercial real estate loans by about one quarter, to less than $24 billion. Others thought the situation was much worse. A handwritten sheet with more estimations making the rounds had the numbers “17-20”—less than half the estimated value.

The story was much the same with residential mortgages, which Lehman had estimated at $17.2 billion. While the Blue spreadsheet placed the value at about $14 billion, others in the room put the real value at closer to $9.2 billion, or roughly half.

But Pandit had another issue to raise: He wanted to talk again about AIG. And then he added: “What about Merrill?”

It made for an awkward moment, as John Thain was only seats away.

“You guys get this done for me, and I’ll make sure I can take care of AIG and Merrill,” Paulson replied. “I’m a little uncomfortable talking about Merrill Lynch with John in the room.”

Harvey Miller, Lehman’s bankruptcy lawyer, had just had a terrible meeting with representatives of the New York Fed. He couldn’t answer any of their questions, and frankly, he was embarrassed at having continually to resort to the same answer: “We don’t have access to information. Everybody at Lehman is either working on Bank of America or Barclays.” After they left, Miller complained to his colleague, Lori Fife, “That was bullshit.”

Miller had dealt with tough clients before—bankruptcy was always a parlous transaction—but he had never been shut out like this. When he called Steve Berkenfeld, Lehman’s general counsel, to complain, Berkenfeld tried to explain why the information had not been as forthcoming as he had hoped. “The problem is that many of our financial team have gone downtown to give an update to the Fed.”

“I see,” replied Miller frostily. “And what is the latest with Barclays?”

“We’re still hopeful, but there’s not much new to report at this moment.”

“And with BofA?”

Berkenfeld paused before answering. “They’ve gone radio silent.”

That didn’t sound very encouraging to Miller, who had developed a keen ear for detecting a tone that indicated the end was near. His team of lawyers had been operating on the assumption that the bankruptcy work was a contingency; no one was expecting Lehman to have to make a filing immediately. But as the clouds over the firm grew darker, Miller decided to move forward. He told Fife that if Lehman were to need to file for bankruptcy, it would take them at least two weeks to get the paperwork in order. They might as well begin now.

Just after noon he sent out an e-mail to a handful of colleagues with an apocalyptic subject line: “Urgent. Code name: Equinox. Have desperate need for help on an emergency situation.”

Thain was in the middle of a conversation strategizing with Peter Kraus when Fleming called.

“I’ve set it up,” Fleming told him excitedly. “You’ll meet with Lewis this afternoon.”

Thain knew that the meeting was a good idea, but there was one complication: “Paulson’s not going to like this,” he warned Fleming. A merger, he thought, would be a death sentence for Lehman, as he’d have stolen Lehman’s sole potential savior. He didn’t know that Bank of America had dropped its bid for Lehman.

“Paulson’s constituency is the taxpayer,” Fleming responded. “Ours is Merrill Lynch shareholders. Paulson has the ability to step in. We’re going to have to listen to him, but we don’t have to anticipate that. He may not like it, but unless he tells us we can’t do it, if we think this is in the best interest of Merrill Lynch shareholders, we need to do it.”

Thain still hesitated, wanting to make certain that he wasn’t putting the company into play.

“I’ve set the meeting for two thirty p.m.,” Fleming pressed, and then carefully added, “But you have to call Ken first.”

“Why?” Thain asked, perplexed at the request.

“Because he wants to hear your voice,” Fleming answered.

“What do you mean?”

“I don’t know, just tell him the weather is nice in New York and you’re looking forward to seeing him.”

“I don’t understand why I need to make the call,” Thain persisted.

“John, you just have to call him.”

“You’re getting on my nerves,” Thain said, annoyance straining his voice.

“You know what? That’s probably going to happen again this weekend,” Fleming said, raising his own voice to his boss for the first time. “But call the guy. He’s not going to fly until you call him.”

“Okay,” Thain agreed. They decided that they’d meet at Merrill’s Midtown office in thirty minutes to plan for the meeting.

Soon after Thain hung up with Fleming, John Mack walked over to him.

“We should talk,” Mack said quietly. He didn’t have to elaborate—the phrase was accepted code for We should talk about doing a deal together.

“You’re right,” Thain said, and they agreed to organize a meeting later that day. It was becoming a busy day.

On the fourth floor of the Fed, Bob Diamond of Barclays was tapping his foot impatiently.

For most of the morning, it seemed to him that Lehman and the government were exclusively focused on Bank of America. He had come to suspect that he was being used, that he was the government’s stalking horse so that they could coax out a higher bid for Lehman from Bank of America.

But then, just past 2:00 p.m., Diamond had an indication that his bid might be taken seriously when someone at the Fed taped a piece of paper on Barclays’ conference room door that said “Bidder.” The Fed’s kitchen staff had also finally shown up with food. All small gestures, but encouraging signals, nonetheless.

Still, Diamond knew he had a big problem to deal with before a Lehman deal could take place—a problem that he had yet to share with Paulson or anyone in the U.S. government. His general counsel in London, Mark Harding, had informed him on an internal conference call that morning that if Barclays were to announce plans to acquire Lehman, the deal would require a shareholder vote—a vote that might take as long as thirty to sixty days to complete. That meant that it would be critical that Barclays find a way to guarantee Lehman’s trading from the time they signed the deal until it was approved by its shareholders—or the acquisition would be worthless. Without the guarantee, Lehman’s trading partners would stop doing business with it, swiftly draining its resources and destroying any value for Barclays. This was about confidence: Counterparties needed to know that there was someone standing behind Lehman in the same way that JP Morgan had stepped up to the plate for Bear Stearns and guaranteed all of its trades even before the deal closed. The problem was that legally Barclays could not guarantee any more than about $3.5 billion of Lehman’s trades without seeking permission from shareholders first, a process that could take as long as completing the deal.

Paulson and Geithner had repeatedly told Diamond in no uncertain terms that the U.S. government was not going to help, but he hadn’t been able to determine if that was just a negotiating stance. As for the British government, there was no mystery there to him: It was perfectly clear that it wouldn’t get involved.

What Barclays needed was a partner—a big, rich one—and it was a matter that Diamond knew he had to discuss with his brain trust, which was led by Archibald Cox Jr., Barclays Capital’s chairman (and the son of the Watergate prosecutor), Rich Ricci, the firm’s COO, and Jerry del Missier, Barclays Capital’s co-president. Diamond had also hired his own outside adviser, Michael Klein, a smart former senior banker at Citigroup. Klein had resigned from Citigroup months earlier rather than be marginalized by Pandit’s new team, but he was still a hot commodity. To keep him from going to work for a competitor, Citigroup had agreed to pay him out $28 million in deferred compensation that he would have lost by leaving. In exchange, he had to stay “on the beach” for an entire year. Diamond, convinced he needed Kein on his side, had called Pandit earlier in the week to get his on the beach status temporarily suspended so that he could work for Barclays on an emergency basis.

As they began brainstorming about the trading-guarantee problem, Klein asked aloud, “Who could possibly do this?”

“This is the kind of thing that, a year ago, you’d go to AIG, and they would have wrapped this for you, right?” del Missier asked.

That clearly was no longer possible, and Klein offered, “What about Buffett?” “Yeah, but Buffett only does deals if it’s a fantastic deal for Buffett,” del Missier pointed out.

Klein had done some deals with the Omaha Oracle when he was at Citigroup and had all his phone numbers. He called and found Buffett at the Fairmont Hotel Macdonald in Edmonton, Alberta, as he and his second wife, Astrid Menks, were about to leave for a gala, unbeknownst to them, as the surprise guests.

Klein put him on speakerphone with Diamond and his team. Del Missier began to explain to Buffett why the guarantee was so important. “If Lehman trades dollars for yen with somebody, that bank needs to know that Lehman is going to deliver the dollars before they deliver the yen,” he told Buffett. “If there are worries that they’re going to be able to settle that trade, the whole thing is going to unravel.”

Buffett understood what was at stake but couldn’t fathom guaranteeing Lehman’s books for up to two months. But wanting to be polite, he suggested, “If you fax me something written out about it, when I get back, I’ll be glad to read it.”

As he shut his cell phone and strolled to his car on the way to the gala, Buffett remembered the last time he had received a call like this. What a mess that turned out to be. In 1998, the week before the rescue of Long-Term Capital, Jon Corzine of Goldman Sachs called asking if he’d consider joining a group interested in buying the giant, troubled hedge fund. Buffett was about to leave on a trip to Alaska with Bill and Melinda Gates, so he asked Corzine to send him some information on that deal. Then he ended up spending a day trying in vain to get his satellite phone to connect while he viewed grizzly bears in Pack Creek. He tried to orchestrate a deal between himself, Goldman, and AIG, but failed. It was a big waste of time and energy. Maybe he had to stop being so polite to these Wall Street boys.

Downstairs at the New York Fed, the CEOs and their underlings had all begun milling around the lunch buffet tables. Despite the grave assignment they’d been given, there was little they could actually accomplish on the spot. Not only did they not have computers with them, but the people with any real expertise in analyzing balance sheets and assets were either with the Lehman team upstairs or back at their offices, poring over volumes of spreadsheets.

In one corner a number of executives, trying to pass the time, were doing vicious imitations of Paulson, Geithner, and Cox. “Ahhhh, ummm, ahhhh, ummm,” one banker muttered, adopting Paulson’s stammer. “Work harder, get smarter!” another shouted, mocking Geithner’s Boy Scoutish exhortations. A third did his best impression of Christopher Cox, whom they were all convinced had little understanding of high finance: “Two plus two? Um—could I have a calculator?” In another corner, Colm Kelleher, Morgan’s CFO, had begun playing BrickBreaker on his BlackBerry, and soon an unofficial tournament was under way, with everyone competitively comparing scores.

After lunch, they were all summoned back into the main conference room, where John Thain’s absence did not go unnoticed.

If there was one topic besides Lehman’s future on the minds of the CEOs, it was the fate of their own firms. What would Lehman’s bankruptcy mean for them? Was Merrill really next? What about Morgan Stanley or Goldman Sachs? And what about JP Morgan or Citigroup? While commercial banks like JP Morgan had large, stable deposit bases, they still funded part of their business the same way the broker-dealers did: by regularly rolling over short-term commercial paper contracts that had become subject to the same erosion of confidence that had brought down Bear Stearns—and now Lehman Brothers. To them the waning trust only suggested the nefarious handiwork of short-sellers.

At one point, John Mack questioned the whole idea of bailouts and ruminated aloud about whether they should just let Merrill fail, too, even though seated just a few places away from him was Peter Kraus, who was standing in for John Thain. The question quickly quieted the room. Some thought he was gaming all of them—maybe he wanted to buy Merrill on the cheap? What they didn’t know was that he had approached Thain just hours earlier and had set a meeting for that evening.

Dimon looked at Mack dumbfounded. “If we do that,” he said caustically, “how many hours do you think it would be before Fidelity would call you up and tell you it was no longer willing to roll your paper?”

When Thain finally did call Ken Lewis, the conversation was brief and to the point—merely a discussion of the logistics of their meeting. Thain was concerned enough to get the details correct that he called Lewis back a second time to confirm which entrance of the Time Warner Center he ought to use.

Before driving over to Lewis’s apartment, Thain met with Fleming at the firm’s Midtown offices to strategize. He made it clear to Fleming that the discussions were purely exploratory—and that he wanted to sell only a small stake in the firm, maybe up to 20 percent.

“He’s not going to go for that,” Fleming warned. “Lewis is going to say that he wants to buy the whole company.”

Thain opened the car door himself, making a beeline to the entrance. Ducking under the extended steel-and-glass awning, with its One Central Park address, he rushed solo up the South Tower to Lewis’s apartment.

Lewis greeted Thain warmly in a room with striking views but one that revealed its status as a corporate apartment by the virtual absence of artwork or furniture.

“Given all the events that were going on,” Thain said, once they settled themselves, “I am concerned about the impact on the market and on Merrill if Lehman were to go bankrupt.” He paused for a few seconds and then said bluntly: “I’d like to explore whether you’d have an interest in buying a 9.9 percent stake in the company and providing a large liquidity facility.”

“Well, I’m not really very interested in buying 9.9 percent of the company,” Lewis shot right back just as directly. “But I am interested in buying all the company.”

“I didn’t come here to sell the entire company,” Thain replied with a slight grin on his face, having not expected Lewis to be so aggressive.

“That’s what I’m interested in,” Lewis repeated firmly.

Thain nervously tried to forge a compromise. “Are you willing to go down two tracks, explore a 9.9 percent sale and explore a 100 percent sale?”

“Yes,” Lewis agreed, “but remember that I said to you, I’m not really interested in 9.9 percent, I’m really interested in a full merger.”

Lewis and Thain spent the next half hour reviewing the various mixes of businesses, the strategic rationale for a merger, and assembling some due diligence teams. Lewis suggested they reconvene with “the two Gregs”—Greg Curl and Greg Fleming—at 5:00 p.m.

“I can’t do it then,” Thain told Lewis.

Strange, Lewis thought. Thain showed up wanting to do a deal and now he couldn’t meet in two hours? Did he have somewhere better to be? Was he in talks with someone else?

As he was about to leave, Thain stopped and raised a final point: “I have to tell Hank about these conversations,” he explained, “because I’m worried that if Hank finds out about them, he’s going to think that I screwed up the Lehman deal.”

“Well, look, you know,” Lewis answered, “I would prefer the Merrill deal. You can tell Hank that we’re having these discussions, because we’re not going to pursue Lehman without government assistance.”

In the end, the men would separately brief Paulson, who, as it happened, was thrilled to hear the news. As far as he was concerned, Barclays was about to buy Lehman, and now Bank of America was talking about acquiring Merrill. It was all coming together.

“I got voice mail again,” a frustrated Fuld told Tom Russo. “Nobody’s picking up his goddamn phone!”

He could not locate anyone he needed—Paulson, Geithner, Cox, Lewis. Even Bart McDade, his own employee, was unreachable. They were all down at the NY Fed, but no one was taking his call or calling him back.

Fuld wanted an update. He had been in his office all of Saturday, dressed in a blue suit and starched white shirt as if it were a typical work day, but hadn’t heard a word about Bank of America or Barclays.

When the phone did ring, it was Rodgin Cohen, who, calling from the NY Fed, said, “Yeah, we’ve got a problem. I think Merrill and BofA are talking.”

“What do you mean?” Fuld barked.

Cohen explained that he had just left a meeting with Geithner at which he tried to persuade him again that government assistance was necessary to avoid the collapse of the entire banking system. As Cohen recounted it, he had told Geithner: “If you don’t help, Merrill will be gone by Monday.”

Geithner’s response—“We’re working on a solution for Merrill”—had been purposefully vague, but both Cohen and Fuld knew exactly what it meant. It also explained Bank of America’s silence. They both hadn’t forgotten Greg Curl’s comment to them over the summer about how Lewis had always wanted to buy Merrill. And it explained the odd phone call Cohen had received from Merrill’s Fleming earlier in the week, casting about for information.

“I can’t even believe this,” Fuld said, sinking deeper into his chair.

During some downtime at the NY Fed, Gary Cohn and David Viniar of Goldman Sachs greeted their former colleague Peter Kraus, who was now a week into his new job at Merrill.

“Peter, come for a walk,” Cohn suggested, and all three men stepped out the front door onto Liberty Street.

“So, what’s going on?” Cohn asked after they had gone a short way, hinting that he knew that Merrill was under enormous pressure—perhaps more so than anyone in the room.

“We just have a liquidity problem,” Kraus said. “JP Morgan just upped our intraday margin lines by $10 billion.” He paused. “We’re fine, we’re totally fine.”

“Peter, should we be looking at you guys?” Cohn asked.

Kraus looked down before answering. “Yes.” Any deal with Goldman would not just shore up Merrill’s teetering financial position but also would be seen as a vote of confidence by the smartest guys in the room.

“Why didn’t you say something?” Cohn asked. “We’ve been friends forever. We’ve been sitting next to each other for a day and a half.”

As they strolled around the block, Kraus said that it would be worth having a meeting. He said that Merrill would be looking for a credit line to get over the hump of their liquidity crisis in exchange for selling a small stake in the company, probably under 10 percent. It was nearly the same arrangement that Thain had originally been seeking from Lewis.

They agreed to meet the following morning at Goldman Sachs’ offices.

The instructions were specific: Don’t use the main entrance of the New York Federal Reserve on Liberty Street; use instead the employee entrance on Maiden Lane and show your driver’s license to the security guards. Your name will be on a list; an escort will be waiting for you.

Bob Willumstad of AIG and his advisers, Doug Braunstein of JP Morgan, Jamie Gamble of Simpson Thacher, and Michael Wiseman of Sullivan & Cromwell walked over from AIG’s headquarters to meet with Paulson and Geithner, strolling past the photographers and reporters, who, to the bankers’ relief, didn’t recognize them.

“Where do you stand on the capital raise?” Geithner asked without preamble.

Willumstad said that he believed that they were making progress. A half dozen bidders were still at the building, including Flowers, KKR, and Allianz.

But, Willumstad said, the bigger news—the good news—was that he had persuaded Eric R. Dinallo, superintendent of the New York State Insurance Department, to release some $20 billion in collateral from AIG’s regulated insurance entities, which would help it meet its capital requirement. Dinallo had made the agreement contingent on AIG’s raising another $20 billion to fill the hole. Willumstad intimated that he thought he had another $5 billion loan commitment coming from Ajit Jain, who ran Berkshire Hathaway’s reinsurance business. That left him with a $15 billion gap, but he told the regulators that the company had assets up for sale that were worth more than $25 billion.

With that, Paulson and Geithner rose and abruptly left the meeting. They had heard all they needed to; progress was being made.

The doorman opened the cast-iron and glass doors to allow Thain, Kraus, and their colleague Tom Montag into the lobby of Walid Chammah ’s apartment building. It was the second secret merger meeting to take place there in one week. Thain was a little worried about being spotted: Among others, Larry Fink of Black Rock lived at the same address.

Mack, Chammah, and Gorman were waiting for them in Chammah’s living room.

Gorman, who had run Merrill Lynch’s private client business for five years before joining Morgan Stanley, was immediately struck by the fact that no one in the group representing Merrill had been with the company for more than ten months. The firm Gorman helped to build, and where his brother, Nick, still worked, was going to be sold out from under it by bankers with no sense of the firm’s heritage.

Thain opened the discussion by indicating that he was looking to do a deal. “With what’s going on with Lehman,” he said, “we recognize this is the right time to look at our options.”

Kraus began to go over the numbers, flipping through the pages of a book he had brought along with him. For someone who had only a few days on the job, Chammah and Gorman thought, he seemed to know his stuff. (Kraus had, in fact, stayed up till 3:00 a.m. earlier that week poring over the firm’s balance sheet.)

But the gaps in his knowledge soon became apparent. When Gorman started asking him about Merrill’s retail business—the part of the company in which Morgan Stanley was most interested—neither Thain, Kraus, nor Montag knew the numbers.

Still, Mack said he was interested and asked what the next step was. “We have a board meeting scheduled for Monday night,” he explained, “and Tuesday we could probably start diligence and take a look then. It’s obviously intriguing but this is complicated.”

Thain gave Kraus an anxious glance and then turned to Mack: “No, no. You don’t understand. We would need to have a decision before Asia opens.”

Gorman was confused: “What do you mean by ‘decision’?”

“We’re looking to have a signed deal by then,” Thain said calmly.

“We can keep talking,” Mack answered, shocked by the request, “but I don’t know that that’s physically possible.”

After they saw themselves out of the apartment, Thain looked at Kraus and said, “Well, it’s pretty clear that they don’t have the same sense of urgency that we do.”

Greg Curl of Bank of America was already at Wachtell, Lipton when Greg Fleming of Merrill Lynch arrived. While he waited, Curl had been on the telephone trying to undo his decision from four hours earlier: He had sent more than a hundred bankers back to Charlotte, assuming they were no longer needed, because as far as he had been concerned, the Lehman deal was dead. Now, with the possibility of a deal with Merrill, he needed them on the next plane back to New York. He recognized that the situation was almost comical and had assigned several people to coordinate looking into chartering flights, because the three remaining direct US Airways flights to New York that night were already full.

Curl invited Fleming into one of the law firm’s conference rooms that he had commandeered, grabbing a handful of cookies from the catering cart that was parked there. He quickly asked him for his assessment of where he thought they were in terms of pursuing a deal.

“I’m thinking we announce Monday morning,” Fleming said.

“That’s very quick,” Curl replied, taken aback by the timetable.

“You know the company really well,” Fleming answered. He was one of the few people who were aware that Merrill’s former CEO Stanley O’Neal had talked to Lewis about a merger, though he didn’t know all the details. “I know all the work you’ve already done. I’ll open up everything. Just tell me what you need.”

For the next half hour they drew up a process that would enable Bank of America to examine Merrill’s books within literally twenty-four hours. Curl, who dusted off the work he had done a year ago for the talks with O’Neal, said he was going to bring Chris Flowers in to advise him, as Flowers had recently looked into buying some of Merrill’s toxic assets over the summer (assets that were ultimately sold to Lone Star National Bank), so he would have a head start. Bank of America already even had a code name for the deal: “Project Alpha.”

Before the meeting broke, the issue of price was raised. Fleming boldly declared that he was looking for “something with a three-handle,” by which he meant $30 a share or more, which represented a 76 percent premium over Merrill’s share price of $17.05 on Friday. It was a shockingly high number, especially in the context of the greatest financial crisis of the firm’s history, but Fleming felt he had no choice: Merrill had just sold $8.55 billion of convertible stock a month earlier to big investors like Singapore’s state-owned Temasek, at $22.50 a share. He needed to get them a reasonable premium.

For most bankers, a number that high would have stopped the talks in their tracks, but Curl understood the rationale behind the price that Fleming was seeking. Fleming argued that Merrill’s shares were temporarily depressed and that he needed a price that reflected a “normalized basis.” Just a year and a half ago, he reminded him, Merrill’s shares were trading at more than $80.

Curl had a strong view about takeovers: You never want to overpay, but if you believe in the business, you’re better off paying more to guarantee you own it than to lose it to a competitor.

“Okay,” Curl said, not committing to Fleming’s number, but clearly indicating that he wasn’t going to reject it altogether. “We’ve got a lot to do.”

The weather was beautiful for a late Saturday-night dinner on the patio of San Pietros, the southern Italian restaurant on East Fifty-fourth Street off Madison Avenue. During the week the restaurant plays host to Wall Street bigwigs over lunch: Joseph Perella of Perella Weinberg, the dean of the M&A banking business, has a table there; other regulars include Larry Fink, chief executive of BlackRock; Richard A. Grasso, the former chairman of the New York Stock Exchange; Ronald O. Perelman, the chairman of Revlon; and David H. Komansky, the former chief executive of Merrill Lynch; and even former president Bill Clinton and his pal Vernon Jordan.

Tonight Mack and Morgan Stanley’s management took a quiet table outside. For Chammah it was an opportunity to unwind and smoke a cigar. It had been a draining twenty-four hours.

Gerardo Bruno, a big personality from southern Italy who owns the restaurant with his three brothers, showed the group to their table. Mack took his blazer off and threw it over the back of his chair. Soon, Paul Taubman, Colm Kelleher, and Gary Lynch met them there. There was a lot to talk about.

After ordering a bottle of Barbaresco they launched into a postmortem of the grueling day, specifically the last crazy hour with Merrill Lynch, with Mack recounting the meeting with Thain for the benefit of those who hadn’t been in the room with him.

“And then he says, ‘Can you do it in twenty-four hours?’” Mack reported as the table erupted in laughter.

“No fucking way,” Colm Kelleher said.

Once the laughter died down, Mack raised the biggest question before them: Given the scope of the crisis now enveloping the industry, did they need to do a deal?

Chammah spoke up first. “Listen, there are not too many dancing partners out there that we want to dance with. If there’s ever going to be a time to talk, now’s probably the time.”

Gorman stepped in and explained that Merrill Lynch, given their conversation just an hour ago with Thain, was likely to merge with Bank of America, perhaps within the next twenty-four hours. That meant that Bank of America would be taken off the table as a merger partner. Gorman was still shaking his head over the audacity of Thain, Kraus, and Montag’s attempt to sell Merrill, a firm they had only recently joined and hardly knew.

“We could call Lewis,” Gorman suggested.

Mack had always thought that Bank of America could be a natural merger partner for Morgan Stanley; indeed, before the crisis, he had often half joked with friends that it was his “exit strategy.” When his stock price was higher, he had often thought a deal with Bank of America would be one triumphant way of demonstrating that he had restored Morgan Stanley, the firm he loved, to its former glory. Strategically, they were a perfect fit: Bank of America was an outstanding commercial and retail bank, but its investment side was weak. Morgan Stanley had the opposite configuration: It was a superior investment bank but had few stable deposits. Perhaps the best part of the merger would be that Mack, born near Charlotte, where Bank of America was based, could retire there with his family as the new, combined bank’s chairman.

But tonight, Mack understood, it wasn’t meant to be. “If Merrill goes to BofA, what do you think about Wachovia?” he asked as plates of Timballo di Baccala con Patate, Fave e Pomodoro arrived at the table.

For the next two hours, they debated the merits of reaching out to Wachovia, also based in Charlotte; JP Morgan Chase; or HSBC. They could call China Investment Corporation, the nation’s largest sovereign wealth fund, Kelleher suggested, while Paul Taubman mentioned Mitsubishi.

Whomever they might select, Mack was adamant on one point: “We shouldn’t be rushed into anything.” While it might be ugly out there, he reminded everyone of the obvious: They were Morgan Stanley, the global financial juggernaut. The firm’s market value was still more than $50 billion as of that Friday—a lot less than a month earlier but hardly a joke. And they had $180 billion in the bank.

Kelleher, the bank’s CFO, had been diligently building up liquidity for months, in the event of just such a situation in which they now found themselves. There was no way there could be a run on Morgan Stanley; they had too much credibility in the market. At the same time, he recognized that if Lehman was sold to Barclays, and Merrill was sold to Bank of America, his firm would be in the hot seat.

Chammah, taking a sip of wine, said soberly, “We could be up next.”

It was after 8:00 p.m., and Jamie Dimon, who was starving, made his way up to the executive dining room on the forty-ninth floor of JP Morgan’s headquarters. The operating committee had been working flat out for the entire day, calculating the firm’s exposure to Lehman, Merrill, Morgan Stanley, Goldman, and, of course, AIG, and the dining staff had been called in to work overtime to feed everyone. Tonight was tacos, and though the food may not have been as good as what the Fed offered downtown, it was better than Dimon had remembered. It was also the first time he’d eaten dinner in the recently renovated partners’ dining room.

In the middle of his meal, Dimon stood up and began pacing back and forth in front of the floor-to-ceiling windows, surveying the cityscape. From his vantage point he could see all of Manhattan in every direction. The sun had just crested below the Empire State Building a half hour earlier, and a fog hung over the city.

Dimon was mulling over the day’s events, realizing how bad it was out there. “They want Wall Street to pay,” he told the room of bankers relaxing after their late dinners, hoping to get them to appreciate the political pressure Paulson was facing. “They think we’re overpaid assholes. There’s no politician, no president, who is going to sign off on a bailout.” Then, channeling the populist anger, he asked, “Why would you try to bail out people whose sole job it is to make money?

“We just hit the iceberg,” Dimon bellowed to his men, as if he were standing upon the deck of the Titanic. “The boat is filling with water, and the music is still playing. There aren’t enough lifeboats,” he said with a wry smile. “Someone is going to die.”

“So you might as well enjoy the champagne and caviar!”

With that, he returned to his table and took a final bite of taco.

At the Fed, Barclays, against all odds, appeared to be making progress. Earlier that day, Michael Klein, Diamond’s adviser, had come up with a structure for the deal with which they were all happy. Diamond wasn’t interested in Lehman’s real estate assets; what he wanted was the “good bank”—Lehman minus its troubled property holdings.

Klein’s plan was simple: Barclays would buy “good” Lehman, and the rival banks across the hall at the Fed would help finance the “bad bank’s” debt. That struck Diamond as a “clean” deal he could easily sell to his board back in London and to the British regulators, who he knew were still a bit skittish about the transaction. All in, it would cost $3.5 billion, which would be used to help support the “bad bank.”

Past midnight, the Barclays team decamped from their conference room, planning to leave. But as they marched downstairs, they were pulled aside into another conference room and asked to explain their plan to the rival bankers who were still at the Fed. This would be a tricky maneuver: They were, in effect, being asked to sell their bitterest rivals in the industry to subsidize their bid.

Despite the hour, a group of bankers from Goldman, Citi, Credit Suisse, and other firms were still lingering about. Klein proceeded to explain, in the most delicate way possible, Barclays’ plan, which everyone in the room instantly realized meant that an industry consortium would have to come up with some $33 billion to finance ShitCo, or as Klein kept describing it to people, “RemainderCo.” For the other banks, this would be less an investment in Lehman or Barclays than it would be in themselves, hoping to stave off the impact of a Lehman failure.

The way Klein explained it, the consortium would own the equivalent of an alternative investment management firm like Fortress Investment or Blackstone Group, owning Lehman’s real estate and private-equity assets.

The idea was not received with enthusiasm. Gary Shedlin of Citigroup, a former colleague of Klein’s, was the first to raise red flags, perhaps because an undercurrent of tension still existed between him and Klein stemming from clashes during their time together at Citi.

“How much equity do you need to raise to do the deal?” Shedlin asked.

“Why is that important?” Klein responded, seemingly confused about its relevance. “Why do you need to know that?”

“You’re making an offer for this company,” Shedlin snapped back, “and we’ve got to know how you’re going to finance it.”

Archie Cox of Barclays, frustrated by the questioning, replied icily, “We will not have to raise any incremental capital as part of this transaction.”

Klein, realizing that the bankers didn’t understand the structure of the deal, explained it again. Barclays wasn’t going to be investing in Lehman’s “bad bank” alongside the consortium; it was only buying Lehman’s “good bank.”

The bankers around the table looked at one another, as his explanation set in. They really were being asked to subsidize a competitor. Barclays would have no stake in Lehman’s worst assets, which they were being asked to take on.

After Shedlin calmed down, the group, while not happy about the proposal, agreed that it might be the best of many bad options. They set about hammering out a term sheet. As unbelievable as it seemed to all the bleary-eyed bankers in the room, they were inching toward a possible deal.

“We’ve got a big problem. I mean, fucking big,” Douglas Braunstein of JP Morgan announced to his team at AIG just past midnight.

The lights were still ablaze where a battalion of bankers, hunched over laptops and spreadsheets, had just discovered a new hole in AIG’s finances. Its securities lending business had lost $20 billion more than anyone had recorded.

“We’re not trying to solve for $40 billion anymore,” Braunstein shouted. “We need $60 billion!”

AIG was such a sprawling mess, and its computer systems so bizarrely antiquated, that no one conducting diligence had until that moment discovered that its securities lending business had been losing money at a rapid clip for the past two weeks. As the JP Morgan bankers dug deeper, they found that AIG had been engaged in a dubious practice: They had been issuing long-term mortgages and financing them with short-term paper. As a result, every time the underlying asset, the mortgages, lost value—which had happened every day of the previous week—they needed to pony up more promissory notes.

“This is unbelievable,” Mark Feldman, one of the JP Morgan bankers, said as he stormed out of the room in search of Brian Schreiber of AIG.

When he finally tracked Schreiber down, he told him, “We need you to sign the engagement letter. This is getting ridiculous. We’ve been here all weekend.”

Dimon and Steve Black had ordered Feldman to get the engagement letter signed or leave and take everyone with him. After all, as Black reminded him, JP Morgan had no indemnification if they didn’t have a signed engagement letter, leaving them with exposure to lawsuits; and perhaps more important, they wanted to make sure they got paid for their time and efforts. Black told him to blame his boss in the event of any complaints.

Schreiber, who’d been given signing authority by Willumstad, was nevertheless annoyed. His unit at AIG had taken to calling the junior JP Morgan team “The Hitler Youth,” but how could Feldman actually pressure him to sign such a document at a time like this? The entire firm was teetering, and his banker was asking for his fee?

At first, Schreiber tried to suggest that the firm’s counsel might have to be responsible for any signature, but Feldman was having none of it.

Schreiber finally erupted. “I can’t sign this! My board won’t sign this letter. This is disgusting. It’s offensive. It’s vulgar. I just can’t justify signing this!” he shouted.

Feldman, who had called Schreiber “a fucking imbecile” to his face at least once, had now also reached his limit. “If you don’t sign this letter this minute, I’m going to have every fucking JP Morgan banker pack up and leave right this second!”

At that Schreiber relented and, irately pulling out his pen, signed it.

At 3:00 on Sunday morning, more than two hundred bankers and lawyers from Bank of America and Merrill Lynch were on their second round of pizza delivery at Wachtell, Lipton, and they were still sprinting to complete their diligence.

Greg Fleming, who had been awake for almost twenty-four hours, had booked a room at the Mandarin Oriental, so that he wouldn’t have to drive back to Rye.

He was gathering his belongings and about to call it a night when Peter Kelly, Merrill’s deal lawyer, entered the conference room.

“I’ve got news,” Fleming told him. He enthusiastically explained that he had already broached the issue of price with Curl and had reason to believe that Bank of America might be willing to pay as much as $30 a share.

For a moment Kelly thought Fleming had to be joking.

“I can’t believe they’re going pay us $30,” Kelly told him. “Greg, this trade is never going to happen. It doesn’t make any sense. We’re on our knees here.”

“I’m telling you,” Fleming insisted. “I think they’re going to get there.”

“You’re getting gamed right now and you don’t know it!” Kelly snapped, trying to talk some sense into his friend at this late hour. “You need to wake up and figure out how you’re getting gamed, because there’s no way they’re doing a $30 trade! They’re going to lead us to the altar and they’re going to renegotiate it at $3, or they’re just going to let us go.”

“Don’t doubt me, Pete,” Fleming insisted. “The trade is going to happen.”