Too Big to Fail [189]
“He hasn’t called me back,” McCarthy grumbled. “You can’t get hold of any of these people.”
They had no idea what Barclays’ Diamond had—or had not—communicated to the U.S. government about what conditions had to be met to receive their blessing back in Britain. Indeed, McCarthy was nervous that Diamond, an American who had never become part of Britain’s gentlemen’s club, may have been a bit reckless in the negotiations, like any aggressive Wall Streeter. Both men were especially concerned that Diamond, in his zeal to sign a deal, might not have fully explained the requirements that the British regulators would ask for before approving it. To them, buying Lehman could put the bank and the British financial system as a whole in jeopardy. Varley, who was supportive of pursuing Lehman but clearly less enthusiastic than Diamond, had assured Sants during a call on Friday that Barclays’ board would only pursue the deal if it could receive adequate help from the U.S. government or another source. “I would not recommend a transaction to my board unless I’m satisfied both in terms of the quality of the assets we’re purchasing and in respect to the funding positions,” Varley had said.
McCarthy and Sants also faced another looming problem, one that, in the grand scheme of things, may have seemed minor but was nonetheless important at that very moment: The London Clearing House, which clears many of the derivative counterparty trades across Europe, was scheduled to do a software upgrade that weekend that would switch all its transactions to a newer system. They had instructed the London Clearing House on Saturday to hold off on proceeding with the upgrade until they knew more about the fate of Lehman and Barclays, but were now being badgered for a final answer, as dozens of technicians had been engaged to handle the switch-over.
“We shouldn’t allow this to drag on,” Sants said to McCarthy, hoping they could get an answer back to the London Clearing House. “We ought to try to contact Geithner and just make our position very clear.”
They scripted out what McCarthy would say: “We feel as the regulator [sic], in the best interest of the global financial system, that it’s important you understand—we hope Barclays has already made this clear to you, but in the event Barclays has not made this clear to you—that we need the appropriate funding assurances both on the trading side and with regards to the asset issues if we’re going to allow this to go forward.”
McCarthy said he would try Geithner one last time.
On the thirteenth floor of the NY Fed, Hilda Williams, Geithner’s assistant, told him that Callum McCarthy was on the phone. Geithner finally took the call, explaining, brusque as ever, that he had been in back-to-back meetings trying to get a deal together for Lehman and apologizing for not returning his call sooner.
McCarthy stopped him, saying that he was very concerned that he didn’t know anything about the deal being contemplated. He had a list of questions that he needed answered.
“The capital requirements and, in particular, the transaction risk between the time of taking on the risk and the completion of the transaction leaves a very big open-ended exposure,” McCarthy said, keying in on his biggest problems with the deal. He explained that the FSA still needed to determine whether Barclays was properly capitalized enough to take on the risk of buying Lehman. And, he said, even if it was—which he suggested was a possibility—Barclays still would need to find a way to guarantee Lehman’s trades until the deal was completed. “I’m very doubtful Barclays can ever get to a position to fulfill the requirements, and it is far from clear that they will able to do so,” he said.
Geithner had no idea that the FSA would take such an aggressive position and asked McCarthy directly whether the authority was formally saying it wouldn’t approve the deal.
“It is completely impossible for us to take a view on whether these risks are risks that we would accept,” McCarthy