In the end, the men would separately brief Paulson, who, as it happened, was thrilled to hear the news. As far as he was concerned, Barclays was about to buy Lehman, and now Bank of America was talking about acquiring Merrill. It was all coming together.
“I got voice mail again,” a frustrated Fuld told Tom Russo. “Nobody’s picking up his goddamn phone!”
He could not locate anyone he needed—Paulson, Geithner, Cox, Lewis. Even Bart McDade, his own employee, was unreachable. They were all down at the NY Fed, but no one was taking his call or calling him back.
Fuld wanted an update. He had been in his office all of Saturday, dressed in a blue suit and starched white shirt as if it were a typical work day, but hadn’t heard a word about Bank of America or Barclays.
When the phone did ring, it was Rodgin Cohen, who, calling from the NY Fed, said, “Yeah, we’ve got a problem. I think Merrill and BofA are talking.”
“What do you mean?” Fuld barked.
Cohen explained that he had just left a meeting with Geithner at which he tried to persuade him again that government assistance was necessary to avoid the collapse of the entire banking system. As Cohen recounted it, he had told Geithner: “If you don’t help, Merrill will be gone by Monday.”
Geithner’s response—“We’re working on a solution for Merrill”—had been purposefully vague, but both Cohen and Fuld knew exactly what it meant. It also explained Bank of America’s silence. They both hadn’t forgotten Greg Curl’s comment to them over the summer about how Lewis had always wanted to buy Merrill. And it explained the odd phone call Cohen had received from Merrill’s Fleming earlier in the week, casting about for information.
“I can’t even believe this,” Fuld said, sinking deeper into his chair.
During some downtime at the NY Fed, Gary Cohn and David Viniar of Goldman Sachs greeted their former colleague Peter Kraus, who was now a week into his new job at Merrill.
“Peter, come for a walk,” Cohn suggested, and all three men stepped out the front door onto Liberty Street.
“So, what’s going on?” Cohn asked after they had gone a short way, hinting that he knew that Merrill was under enormous pressure—perhaps more so than anyone in the room.
“We just have a liquidity problem,” Kraus said. “JP Morgan just upped our intraday margin lines by $10 billion.” He paused. “We’re fine, we’re totally fine.”
“Peter, should we be looking at you guys?” Cohn asked.
Kraus looked down before answering. “Yes.” Any deal with Goldman would not just shore up Merrill’s teetering financial position but also would be seen as a vote of confidence by the smartest guys in the room.
“Why didn’t you say something?” Cohn asked. “We’ve been friends forever. We’ve been sitting next to each other for a day and a half.”
As they strolled around the block, Kraus said that it would be worth having a meeting. He said that Merrill would be looking for a credit line to get over the hump of their liquidity crisis in exchange for selling a small stake in the company, probably under 10 percent. It was nearly the same arrangement that Thain had originally been seeking from Lewis.
They agreed to meet the following morning at Goldman Sachs’ offices.
The instructions were specific: Don’t use the main entrance of the New York Federal Reserve on Liberty Street; use instead the employee entrance on Maiden Lane and show your driver’s license to the security guards. Your name will be on a list; an escort will be waiting for you.
Bob Willumstad of AIG and his advisers, Doug Braunstein of JP Morgan, Jamie Gamble of Simpson Thacher, and Michael Wiseman of Sullivan & Cromwell walked over from AIG’s headquarters to meet with Paulson and Geithner, strolling past the photographers and reporters, who, to the bankers’ relief, didn’t recognize them.
“Where do you stand on the capital raise?” Geithner asked without preamble.
Willumstad said that he believed that they were making progress. A half dozen bidders were still at the building, including Flowers, KKR, and Allianz.
But, Willumstad said, the bigger news—the good news—was that he had persuaded Eric R. Dinallo, superintendent of the New York State Insurance Department, to release some $20 billion in collateral from AIG’s regulated insurance entities, which would help it meet its capital requirement. Dinallo had made the agreement contingent on AIG’s raising another $20 billion to fill the hole. Willumstad intimated that he thought he had another $5 billion loan commitment coming from Ajit Jain, who ran Berkshire Hathaway’s reinsurance business. That left him with a $15 billion gap, but he told the regulators that the company had assets up for sale that were worth more than $25 billion.
With that, Paulson and Geithner rose and abruptly left the meeting. They had heard all they needed to; progress was being made.
The doorman opened the cast-iron and glass doors to allow Thain, Kraus, and their colleague Tom Montag into the lobby of Walid Chammah ’s apartment building. It was the second secret merger meeting to take place there in one week. Thain was a little worried about being spotted: Among others, Larry Fink of Black Rock lived at the same address.
Mack, Chammah, and Gorman were waiting for them in Chammah’s living room.
Gorman, who had run Merrill Lynch’s private client business for five years before joining Morgan Stanley, was immediately struck by the fact that no one in the group representing Merrill had been with the company for more than ten months. The firm Gorman helped to build, and where his brother, Nick, still worked, was going to be sold out from under it by bankers with no sense of the firm’s heritage.
Thain opened the discussion by indicating that he was looking to do a deal. “With what’s going on with Lehman,” he said, “we recognize this is the right time to look at our options.”
Kraus began to go over the numbers, flipping through the pages of a book he had brought along with him. For someone who had only a few days on the job, Chammah and Gorman thought, he seemed to know his stuff. (Kraus had, in fact, stayed up till 3:00 a.m. earlier that week poring over the firm’s balance sheet.)
But the gaps in his knowledge soon became apparent. When Gorman started asking him about Merrill’s retail business—the part of the company in which Morgan Stanley was most interested—neither Thain, Kraus, nor Montag knew the numbers.
Still, Mack said he was interested and asked what the next step was. “We have a board meeting scheduled for Monday night,” he explained, “and Tuesday we could probably start diligence and take a look then. It’s obviously intriguing but this is complicated.”
Thain gave Kraus an anxious glance and then turned to Mack: “No, no. You don’t understand. We would need to have a decision before Asia opens.”
Gorman was confused: “What do you mean by ‘decision’?”
“We’re looking to have a signed deal by then,” Thain said calmly.
“We can keep talking,” Mack answered, shocked by the request, “but I don’t know that that’s physically possible.”
After they saw themselves out of the apartment, Thain looked at Kraus and said, “Well, it’s pretty clear that they don’t have the same sense of urgency that we do.”
Greg Curl of Bank of America was already at Wachtell, Lipton when Greg Fleming of Merrill Lynch arrived. While he waited, Curl had been on the telephone trying to undo his decision from four hours earlier: He had sent more than a hundred bankers back to Charlotte, assuming they were no longer needed, because as far as he had been concerned, the Lehman deal was dead. Now, with the possibility of a deal with Merrill, he needed them on the next plane back to New York. He recognized that the situation was almost comical and had assigned several people to coordinate looking into chartering flights, because the three remaining direct US Airways flights to New York that night were already full.