As the questions poured in, Paulson grew more and more agitated. “Why is the Federal Reserve giving AIG a bridge loan?” one journalist asked.
“Let me say what is going on right now in New York has nothing to do with any bridge loan from the government. What’s going on in New York is a private-sector effort again focused on dealing with an important issue that I think is important that the financial system work on right now and there’s not more I can say on that.”
He was about to step down when he announced, “I’ve got time for one more question … the woman in the middle there,” he said, pointing to another reporter.
The journalist asked him how he handicapped the health of the banking system today.
“There are going to be some real rough spots along the road, but I believe we’re making progress. And when I look at the way the markets are performing today, I think it’s a testament to the way the financial industry has come together, because they’re dealing with an extraordinary set of circumstances and they’re dealing in a way we should all be proud of.
“Thank you very much.”
By midafternoon, chaos reigned in the conference room on the sixteenth floor of AIG, where more than a hundred bankers and lawyers, led by Goldman Sachs and JP Morgan, had assembled to begin conducting diligence on the company. The only problem was, no one there seemed to have any of the company’s actual numbers.
“Is there anyone who works for AIG in this room?” a voice shouted out. When no one raised a hand a wave of nervous laughter swept the room.
Finally, Brian Schreiber of AIG was summoned. Working on three hours of sleep, he looked as if he might have a breakdown right there. He took a moment to collect himself before beginning a presentation of the latest numbers. After he finished a less than inspiring performance, the core group from that morning at the Fed huddled in AIG’s boardroom.
For a while it seemed as if progress was being made. Lee and Winkelried felt confident that AIG’s assets were strong, at least strong enough for them to lend against. What they believed the company was experiencing was merely a liquidity crisis: If they could provide AIG with a bridge loan, they’d be home free.
The group started discussing drafting a preliminary term sheet. They’d try to raise $50 billion, in exchange for warrants for 79.9 percent of AIG. It was almost a punitive price, but given the insurer’s status, it might be their only alternative to bankruptcy. Winkelried and Lee also discussed the fees they would collect, which would be split between the firms. If they sought to raise $50 billion, that would leave each firm with a $1.25 billion fee for organizing the loan.
As the group dispersed to return to the Fed to present their progress report to Geithner, Ruth Porat of Morgan Stanley, who was representing the Fed, pulled aside John Studzinski of Blackstone, who was representing AIG. They were old friends; Studzinski used to run Morgan Stanley’s mergers and acquisitions practice in London.
“So, what do you think?” Porat asked.
“What do you mean?” Studzinski replied. “I can’t tell from this meeting whether there’s going to be a term sheet or not.”
“That’s not what I meant,” Porat replied. “We’re worried that these guys are going to try to steal the business.”
“He was as useless as tits on a bull.”
Bob Willumstad, normally a calm man, was in an uncharacteristic rage as he railed about Dan Jester of Treasury, while telling Jamie Gamble and Michael Wiseman about his and Jester’s call to Moody’s to try to persuade them to hold off on downgrading AIG.
Willumstad had hoped that Jester, using the authority of the government and his powers of persuasion as a former banker, would have been able to finesse the task easily.
Willumstad explained the original plan “was that the Fed was going to try to intimidate these guys to buy us some time.” Instead, when Jester finally got on the phone, “he didn’t want to tell them.” Clearly uncomfortable with playing the heavy, Willumstad told them that Jester could only bring himself to say, “We’re all here, and you know, we got a big team of people working and we need an extra day or two.”
The core group of bankers who had been over at AIG now returned to the Fed, Jester having unsuccessfully tried to persuade Geithner to come to them at AIG—given that they were a group of some thirty and he was just one. Being the president of the Federal Reserve of New York had its privileges, however: They would come to him.
The hole that they needed to fill, Winkelried now reported in their summary to Geithner, was some $60 billion and “possibly more.” No one knew how any solution could work without financial help from the Fed.
“There’s no government money for this,” Geithner told them, repeating what Paulson had said earlier that day in Washington and echoing the same sentiment he had been conveying all weekend with regard to Lehman. If they needed proof that he was serious, Lehman’s bankruptcy was Exhibit A.
Geithner authorized Lee to begin making phone calls to Asia that night to see if he could begin raising some money there. JP Morgan and Goldman made it clear they still had a good deal more work ahead of them.
Late that evening, Jamie Gamble, AIG’s lawyer; John Studzinski; and Brian Schreiber gathered in a conference room for a morose meal of take-out Chinese. The situation seemed hopeless. Dinallo and Governor Paterson may have bought them a day by announcing their plan to release $20 billion of collateral, but it was too little, too late. Hours earlier they had called in the bankruptcy experts, and when the markets opened on Tuesday, they planned to draw down their credit lines, a clear sign to the markets that they were in trouble. When they had suggested the move, Willumstad had told them it was akin to “lowering the lifeboats into the water because you’re about to abandon ship. That’s the last thing you do. Shutting the lights off on the Titanic before it goes down.”
Schreiber still couldn’t believe they were in this position and remained convinced that the Fed would ultimately come to the rescue. “At this point, it’s a game of chicken,” he said, with a slight air of cockiness.
“Do you think the Fed gets what’s at stake?” Gamble asked.
“Are you crazy?” Studzinski replied. “Of course not. They just let Lehman fail. It’s like a bad Woody Allen movie.”
By 1:00 a.m., Scully and Porat of Morgan Stanley, who were still representing the Fed, decided they needed to talk privately. They hid in one of AIG’s small kitchens and closed the door, so they’d be out of earshot of the Goldman and JP Morgan bankers.
“This isn’t going to work,” Porat said. “They aren’t going to get there.”
“Agreed,” Scully replied. “We need a fallback plan.”
They gave their assignment a code name and decided they’d head back to the Fed to alert Dan Jester.
When they opened the kitchen door, they noticed that everyone else had already left, which only seemed to confirm their worst fears: Any chance of a deal had officially ended.
When they reached the Fed, it, too, was deserted, apart from Jeremiah Norton passed out on a couch. He had originally tried to commandeer Geithner’s couch but was told he had to find a napping place elsewhere.
Scully and Porat woke him, and the three of them went to deliver the bad news to Jester.
A conference call was set up for 3:00 a.m. with the Fed team and Treasury, leaving Hilda Williams, Geithner’s assistant, the unenviable task of calling everyone at that ungodly hour to coordinate it.