Too Big to Fail [177]
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