Too Big to Fail [185]
“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 each other, 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,