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group disbanded, he chatted with Fuld at the door. Min politely stuck to his position and

Fuld seemed to calm down.

The Lehman team decided to exclude Fuld from further talks. From that point on,

Lehman became far more cooperative--perhaps out of desperation. With the Perella team,

they modeled spin-off structures, and sent newly furnished financial information to KDB

to encourage a definitive proposal.

In late August, KDB drew up a term sheet offering to invest approximately $6 billion into

a CleanCo Lehman. Lehman would be paid 1.25 times book value but at a significantly

written -down book value. The offer worked out to $6.40 per share. At the time, Lehman

stock was trading around $13. The Koreans demanded two board seats and control if

Lehman didn't meet performance targets in terms of stock price and return on equity.

Lehman would also have to keep its single-A credit rating.

In Lehman's eyes, the offer was untenable. According to its valuations of the real estate,

the stock should be priced at $17 or $18 a share. The South Koreans countered that they

might be prepared to pay more if after 18 months it looked like they had undervalued the

company. But Lehman wasn't interested. In fact, no one seems to know if Fuld even

showed the term sheet to the Lehman board. Tom Russo, under whose purview such

matters fell, said he "could not recall" if Fuld ever produced the document.

Given Lehman's ultimate fate, such an omission would have been a grave deviation from

standard operating procedure.

On September 1, Barancik asked McGee what Lehman's reaction to the term sheet was.

McGee said it had been rejected, but that Min was welcome to come to New York and

talk further. In the meantime, Kunho Cho, a member of the Lehman team requested that

KDB not reveal that there had ever been any talks. A leak like that would negatively

impact Lehman's already depressed stock price.

Five days later, on September 6, Freddie Mac and Fannie Mae imploded. The U.S.

government had to seize the two mortgage giants and pledge as much as $200 billion of

taxpayer money to save them. On Monday, September 8, there were press leaks that the

deal between Lehman and the South Koreans had fallen apart. It was widely assumed

within Lehman that the South Koreans were the ones responsible for the leaks, terrified

that their involvement in talks would be made public. In any case, the leaks spelled

disaster. They further undermined the credibility of the firm, and reinforced the idea that-for all the rumblings--Lehman was just blowing smoke about having a buyer.

By Tuesday, Lehman stock had dropped 45 percent, to $7.79.

Barancik called McGee and asked if Lehman would be willing to reconsider KDB's offer.

McGee, staring into the abyss, said Lehman would consider it.

But he was too late.

On September 10 a South Korean government official told Reuters they were walking

away from the deal. The stock fell 9 percent to $7.25. Hours later, a KDB official told the

news agency the two were still in talks and that the bank had made an offer--only to

concede a few hours later that prospects looked grim. Lehman stock fell another 60

percent the next day to $4.22.

Bob Steel summed up those failed negotiations this way: "It takes nine months to make a

baby, and they didn't have nine."

Chapter 19

The Wart on the End of Lehman's Nose

The trouble was that by the end they believed their own press.

They were in la-la land. They really did believe they were

omnipotent. It just never occurred to them they couldn't get

away with that balance sheet.

--Former senior Lehman executive

Fannie Mae and Freddie Mac, the two teetering giants that kept the multitrillion -dollar

housing market churning with cheap loans, officially collapsed on September 7, 2008.

Although the two companies were technically publicly traded capitalist entities, they had

been founded by the government during the Depression and were still called governmentsponsored enterprises. They