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SEPTEMBER : THE BANKRUPTCY OF LEHMAN
dealer to live on and would not want the Fed in its position as lender to grab tri-party
collateral. Parkinson told the FCIC staff that Zubrow informed him over the week-
end that JP Morgan would not unwind Lehman’s repos on Monday if the Fed did not
expand the types of collateral that could be financed through the PDCF lending facil-
ity. Earlier in the year, Parkinson had said that JP Morgan’s refusal to unwind would
be unforgiveable. Now he told Geithner to “tell those sons of bitches . . . to unwind.”
Merrill CEO John Thain told the FCIC that by Saturday morning, the group of ex-
ecutives reviewing Lehman’s assets had estimated that they were overvalued by any-
where from to billion. Thain thought that was more than the assembled
executives would be willing to finance and, therefore, Thain believed Lehman would
fail. If Lehman failed, Thain believed, Merrill would be next. So he had called Ken
Lewis, the CEO of Bank of America, and they met later that day at Bank of America’s
New York corporate apartment. By Sunday, the two agreed that Bank of America
would acquire Merrill for per share, payable in Bank of America stock.
On Saturday afternoon, Lehman’s counsel provided the Fed with a document de-
scribing how Lehman’s default on its obligations would “trigger a cascade of defaults
through to the [subsidiaries] which have large OTC [derivatives] books.” Bernanke,
Fed Governor Kohn, Geithner, and other senior Fed officials subsequently partici-
pated in a conference call to discuss the possibility of going “to Congress to ask for
other authorities,” something Geithner planned to “pitch.” However, Fed General
Counsel Scott Alvarez cautioned others not to mention the plan to JP Morgan, be-
cause he did not want to “suggest Fed willingness to give JPMC cover to screw
[Lehman] or anyone else.”
By Saturday night, however, it appeared that the parade of horrors that would re-
sult from a Lehman bankruptcy had been avoided. An agreement apparently had
been reached. Barclays would purchase Lehman, excluding to billion of as-
sets financed by the private consortium (even though the bankers in the consortium
had estimated those assets to be significantly overvalued). Michael Klein, an adviser
to Barclays, had told Lehman President Bart McDade that Barclays was willing to
purchase Lehman, given the private consortium agreement to assist the deal. It
seemed a deal would be completed.
“THIS DOESN’T SEEM LIKE IT IS GOING TO END PRETTY”
But on Sunday, things went terribly wrong. At : A.M., Barclays CEO John Varley
and President Robert Diamond told Paulson, Geithner, and Cox that the Financial
Services Authority (FSA) had declined to approve the deal. The issue boiled down
to a guarantee—the New York Fed required Barclays to guarantee Lehman’s obliga-
tions from the sale until the transaction closed, much as JP Morgan had done for
Bear Stearns in March. Under U.K. law, the guarantee required a Barclays share-
holder vote, which could take to days. Though it could waive that requirement,
the FSA asserted that such a waiver would be unprecedented, that it had not heard
about this guarantee until Saturday night, and that Barclays did not really want to
take on that obligation anyway.
