September 15, 2008
In Frantic Day, Wall Street Banks Teeter
By ANDREW ROSS SORKIN
This article was reported by Jenny Anderson, Eric Dash, Ben White and Andrew Ross Sorkin and was written
by Mr. Sorkin.
In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself on Sunday to
Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent
securities firm, Lehman Brothers, announced it will file for Chapter 11 bankruptcy.
The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a
tumultuous year in which once-proud financial institutions have been brought to their knees as a result of
hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments.
But even as the fates of Lehman and Merrill hung in the balance, another crisis loomed as the insurance
giant American International Group appeared to teeter. Staggered by losses stemming from the credit crisis,
A.I.G. sought a $40 billion lifeline from the Federal Reserve, without which the company may have only days
The stunning series of events culminated a weekend of frantic around-the-clock negotiations, as Wall Street
bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral
in the markets stemming from a crisis of confidence.
“My goodness. I’ve been in the business 35 years, and these are the most extraordinary events I’ve ever seen,”
said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman
in the 1970s and a secretary of commerce in the Nixon administration.
It remains to be seen whether the sale of Merrill, which was worth more than $100 billion during the last
year, and the controlled demise of Lehman will be enough to finally turn the tide in the yearlong financial
crisis that has crippled Wall Street and threatened the broader economy.
Questions remain about how the market will react Monday, particularly to Lehman’s plan to wind down its
trading operations, and whether other companies, like A.I.G. and Washington Mutual, the nation’s largest
savings and loan, might falter.
Indeed, in a move that echoed Wall Street’s rescue of a big hedge fund a decade ago this week, 10 major
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banks agreed to create an emergency fund of $70 billion to $100 billion that financial institutions can use to
protect themselves from the fallout of Lehman’s failure.
The Fed, meantime, broadened the terms of its emergency loan program for Wall Street banks, a move that
could ultimately put taxpayers’ money at risk.
Though the government took control of the troubled mortgage finance companies Fannie Mae and Freddie
Mac only a week ago, investors have become increasingly nervous about whether major financial institutions
can recover from their losses.
How things play out could affect the broader economy, which has been weakening steadily as the financial
crisis has deepened over the last year, with unemployment increasing as the nation’s growth rate has slowed.
What will happen to Merrill’s 60,000 employees or Lehman’s 25,000 employees remains unclear. Worried
about the unfolding crisis and its potential impact on New York City’s economy, Mayor Michael R.
Bloomberg canceled a trip to California to meet with Gov. Arnold Schwarzenegger. Instead, aides said, Mr.
Bloomberg spent much of the weekend working the phones, talking to federal officials and bank executives in
an effort to gauge the severity of the crisis.
The weekend that humbled Lehman and Merrill Lynch and rewarded Bank of America, based in Charlotte,
N.C., began at 6 p.m. Friday in the first of a series of emergency meetings at the Federal Reserve building in
The meeting was called by Fed officials, with Treasury Secretary Henry M. Paulson Jr. in attendance, and it
included top bankers. The Treasury and Federal Reserve had already stepped in on several occasions to
rescue the financial system, forcing a shotgun marriage between Bear Stearns and JPMorgan Chase this year
and backstopping $29 billion worth of troubled assets — and then agreeing to bail out Fannie Mae and
The bankers were told that the government would not bail out Lehman and that it was up to Wall Street to
solve its problems. Lehman’s stock tumbled sharply last week as concerns about its financial condition grew
and other firms started to pull back from doing business with it, threatening its viability.
Without government backing, Lehman began trying to find a buyer, focusing on Barclays, the big British
bank, and Bank of America. At the same time, other Wall Street executives grew more concerned about their
own precarious situation.
The fates of Merrill Lynch and Lehman Brothers would not seem to be linked; Merrill has the nation’s largest
brokerage force and its name is known in towns across America, while Lehman’s main customers are big
institutions. But during the credit boom both firms piled into risky real estate and ended up severely
weakened, with inadequate capital and toxic assets.
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Knowing that investors were worried about Merrill, John A. Thain, its chief executive and an alumnus of
Goldman Sachs and the New York Stock Exchange, and Kenneth D. Lewis, Bank of America’s chief executive,
began negotiations. One person briefed on the negotiations said Bank of America had approached Merrill
earlier in the summer but Mr. Thain had rebuffed the offer. Now, prompted by the reality that a Lehman
bankruptcy would ripple through Wall Street and further cripple Merrill Lynch, the two parties proceeded
On Sunday morning, Mr. Thain and Mr. Lewis cemented the deal. It could not be determined if Mr. Thain
would play a role in the new company, but two people briefed on the negotiations said they did not expect
him to stay. Merrill’s “thundering herd” of 17,000 brokers will be combined with Bank of America’s smaller
group of wealth advisers and called Merrill Lynch Wealth Management.
For Bank of America, which this year bought Countrywide Financial, the troubled mortgage lender, the
purchase of Merrill puts it at the pinnacle of American finance, making it the biggest brokerage house and
consumer banking franchise.
Bank of America eventually pulled out of its talks with Lehman after the government refused to take
responsibility for losses on some of Lehman’s most troubled real-estate assets, something it agreed to do
when JP Morgan Chase bought Bear Stearns to save it from a bankruptcy filing in March.
A leading proposal to rescue Lehman would have divided the bank into two entities, a “good bank” and a
“bad bank.” Under that scenario, Barclays would have bought the parts of Lehman that have been
performing well, while a group of 10 to 15 Wall Street companies would have agreed to absorb losses from
the bank’s troubled assets, to two people briefed on the proposal said. Taxpayer money would not have been
included in such a deal, they said.
Other Wall Street banks also balked at the deal, unhappy at facing potential losses while Bank of America or
Barclays walked away with the potentially profitable part of Lehman at a cheap price.
For Lehman, the end essentially came Sunday morning when its last potential suitor, Barclays, pulled out
from a deal, saying it could not obtain a shareholder vote to approve a transaction before Monday morning,
something required under London Stock Exchange listing rules, one person close to the matter said. Other
people involved in the talks said the Financial Services Authority, the British securities regulator, had
discouraged Barclays from pursuing a deal. Peter Truell, a spokesman for Barclays, declined to comment.
Lehman will seek bankruptcy protection for its holding company in the largest failure of an investment bank
since the collapse of Drexel Burnham Lambert 18 years ago.
Lehman’s subsidiaries were expected to remain solvent while the firm liquidates its holdings, people close to
the matters said. Herbert H. McDade III, Lehman’s president, was at the Federal Reserve Bank in New York
late Sunday, discussing terms of Lehman’s fate with government officials.
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Lehman’s filing is unlikely to resemble those of other companies that seek bankruptcy protection. Because of
the harsher treatment that federal bankruptcy law applies to financial-services firms, Lehman cannot hope to
reorganize and survive. It was not clear whether the government would appoint a trustee to supervise
Lehman’s liquidation or how big the financial backstop would be.
Lehman has retained the law firm Weil, Gotshal & Manges as its bankruptcy counsel.
The collapse of Lehman is a devastating end for Richard S. Fuld Jr., the chief executive, who has led the bank
since it emerged from American Express as a public company in 1994. Mr. Fuld, who steered Lehman
through near-death experiences in the past, spent the last several days in his 31st floor office in Lehman’s
midtown headquarters on the phone from 6 a.m. until well past midnight trying to find save the firm, a
person close to the matter said.
A.I.G. will be the next test. Ratings agencies threatened to downgrade A.I.G.’s credit rating if it does not raise
$40 billion by Monday morning, a step that would crippled the company. A.I.G. had hoped to shore itself up,
in party by selling certain businesses, but potential bidders, including the private investment firms Kohlberg
Kravis Roberts and TPG, withdrew at the last minute because the government refused to provide a financial
guarantee for the purchase. A.I.G. rejected an offer by another investor, J. C. Flowers & Company.
The weekend’s events indicate that top officials at the Federal Reserve and the Treasury are taking a harder
line on providing government support of troubled financial institutions.
While offering to help Wall Street organize a shotgun marriage for Lehman, both the Fed chairman, Ben S.
Bernanke, and Mr. Paulson had warned that they would not put taxpayer money at risk simply to prevent a
The message marked a major change in strategy but it remained unclear until at least Friday what would
happen. “They were faced after Bear Stearns with the problem of where to draw the line,” said Laurence H.
Meyer, a former Fed governor who is now vice chairman of Macroeconomic Advisors, a forecasting firm. “It
became clear that this piecemeal, patchwork, case-by-case approach might not get the job done.”
Both Mr. Paulson and Mr. Bernanke worried that they had already gone much further than they had ever
wanted, first by underwriting the takeover of Bear Stearns in March and by the far bigger bailout of Fannie
Mae and Freddie Mac.
Officials noted that Lehman’s downfall posed a lower systemic threat because it had been a very visible and
growing risk for months, which meant that its customers and trading partners had had months to prepare
Outside the public eye, Fed officials had acquired much more information since March about the
interconnections and cross-exposure to risk among Wall Street investment banks, hedge funds and traders in
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the vast market for credit-default swaps and other derivatives. In the end, both Wall Street and the Fed
Reporting was contributed by Edmund L. Andrews, Eric Dash, Michael Barbaro, Michael J. de la Merced
and Louise Story.
Copyright 2008 The New York Times Company
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