On this late summer evening, the courtroom was on the warm side—the windows were closed and, for lack of enough chairs, people had taken to sitting on the air vents. Lawyers from the firm representing Lehman, Weil Gotshal, carried in ice water.
Signaling to Harvey Miller of Weil Gotshal, Judge Peck said: “You may approach, if that’s what you’re doing. I can’t really tell. Frankly, with so many people in the courtroom, whenever I see the movement this way, I get a little concerned. Mr. Miller?”
Miller, even under these circumstances dapper in a gray suit, red tie, and blue shirt, outlined the deaclass="underline" Barclays would pay $1.75 billion for Lehman’s North American operations. “This is a tragedy, Your Honor,” Miller said of what had happened to Lehman Brothers. “And maybe we missed the RTC by a week,” he added, referencing the development of the new TARP program. “That’s the real tragedy, Your Honor.”
“That occurred to me as well,” Judge Peck said sympathetically.
Many of the lawyers for Lehman’s creditors, however, were less charitable. They were furious about Lehman’s deal with Barclays, suggesting it was paying far too little and complaining about ambiguities in the purchase agreement. Daniel H. Golden of Akin Gump Strauss Hauer & Feld, representing an ad hoc group of investors holding more than $9 billion of Lehman bonds, pleaded with the court for a brief delay.
“There has simply been no credible evidence adduced at this hearing that the price that Barclays is paying for these assets represents fair value,” he said. “There’s no other testimony or evidence that suggests the other assets being purchased by Barclays represent fair value or an attempt to maximize value for creditors.”
Miller, taking umbrage at the mere suggestion that the deal wasn’t fair, shot back that the transaction had to be approved by the court immediately.
“I don’t want to use the melting ice cube” analogy, he said, the emotion showing on his face. But “it’s already half melted, Your Honor… . The things that have happened since Wednesday, make it imperative that this sale be approved. In the interest of all of the stakeholders, including Mr. Golden’s clients, they will benefit by this, Your Honor, because if the alternative happens, there will be very little to distribute to creditors, if anything.”
Nearly eight hours and three recesses into the hearing, after arguments by dozens of lawyers, several interruptions because of static from the speakers, and one brief aside about Judge Wapner’s The People’s Court, Judge Peck, moved by the enormity of trying to save what was left of a more than century-old firm, agreed to sign off on the Barclays deal.
“This is not simply approving the transaction because Mr. Miller is putting pressure on me to do so,” the judge explained. “This is not approving the transaction because I know it’s the best available transaction. I have to approve this transaction because it’s the only available transaction.”
With a heavy heart, he went on to offer a eulogy: “Lehman Brothers became a victim. In effect, the only true icon to fall in the tsunami that has befallen the credit markets. And it saddens me. I feel that I have a responsibility to all the creditors, to all of the employees, to all of the customers and to all of you.”
It was 12:41 a.m. when Judge Peck ended the hearing. As he stepped down from the bench, the courtroom, with at least several people moved to tears, erupted in a wave of applause.
Tim Geithner hadn’t slept well on Friday night, having decided to stay in one of the grim rooms on the twelfth floor of the Federal Reserve. By 6:00 a.m., he had returned back upstairs to his office dressed in an oxford dress shirt and sweatpants and begun puttering around the hallways in his stocking feet.
In his mind, he was already making battle plans. He had made it safely to the weekend, but he already was worried about what would happen on Monday if he didn’t find a way to save Morgan Stanley and Goldman Sachs.
“John’s holding on to a slim reed,” Paulson had told Geithner about John Mack’s perilous position on a phone call the night before. They had heard that Morgan Stanley had only about $30 to $40 billion left, but Paulson was also still anxious about Goldman Sachs, his former employer. “We’ve got to find a lifeline for these guys,” said Paulson, and they reviewed the possible options.
On a pad that morning, Geithner started writing out various merger permutations: Morgan Stanley and Citigroup. Morgan Stanley and JP Morgan Chase. Morgan Stanley and Mitsubishi. Morgan Stanley and CIC. Morgan Stanley and Outside Investor. Goldman Sachs and Citigroup. Goldman Sachs and Wachovia. Goldman Sachs and Outside Investor. Fortress Goldman. Fortress Morgan Stanley.
It was the ultimate Wall Street chessboard.
Lloyd Blankfein arrived at his office at just past 7:00 on Saturday morning. Even though he was still pushing his “Fortress Goldman” bank holding plan, he and Gary Cohn had assigned more than a half dozen teams to start investigating different deals: HSBC, UBS, Wells Fargo, Wachovia, Citigroup, Sumitomo, and Industrial and Commercial Bank of China.
Cohn had had another conversation on Friday with Kevin Warsh of the Federal Reserve who encouraged him to keep looking at merger options, especially at Citigroup. While it had never been made public, Goldman had explored the idea of merging with Citigroup several times over the past eighteen months but had never engaged in formal talks. Cohn and Warsh had discussed the possibility at least twice before, and even though Cohn always resisted the idea, he was intrigued.
Initially Cohn’s notion was that Citi should buy Goldman; he had even established an asking price. But Warsh suggested that Cohn approach it the other way around: Goldman should be the buyer. To Cohn that made no sense given that Citi was so much bigger. But what Warsh knew—and hadn’t yet shared with Cohn—was that Citigroup’s balance sheet had so many holes that its value was likely a lot lower than its current stock price.
As a result, the Fed was considering three possible outcomes for Citi, code-named “NewCo,” “Goldman Survivors,” and “Citi Survivors.”
Blankfein was reading an e-mail when John Rogers, the firm’s chief of staff, arrived. Blankfein pressed a secret button under his desk to open remotely the glass door to his office. (Paulson had installed the Inspector Gadget-like device when he was Goldman’s CEO.)
As he and Rogers were reviewing their own battle plans, Geithner called. In his usual impatient tone, he insisted that Blankfein immediately call Vikram Pandit, Citigroup’s CEO, and begin merger discussions. Blankfein, slightly shocked at the directness of the request, agreed to place the call.
“Well, I guess you know why I’m calling,” Blankfein said when he reached Pandit a few minutes later.
“No, I don’t,” Pandit replied, with genuine puzzlement.
There was an awkward pause on the phone. Blankfein had assumed that the Fed had prearranged the call. “Well, I’m calling you because at least some people in the world might be thinking that combining our firms would be a good idea,” he said.
After another few moments of uncomfortable silence Pandit finally replied, “I want you to know I’m flattered by this call.”
Blankfein now began to wonder if Pandit was putting him on. “Well, Vikram,” he said briskly, “I’m not calling with any flattery towards you in mind.”
Pandit hurriedly ended the calclass="underline" “I’ll have to talk to my board. I’ll call you back.”