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At 8 a.m. on Sunday, September 14, 2008, Barclays told Hank Paulson, Tim Geithner, and SEC chairman Christopher Cox that the UK Financial Services Authority would not approve the guarantee needed to keep Lehman Brothers alive until a sale could close.
Bank of America was already moving somewhere else.
By that Sunday, according to the Financial Crisis Inquiry Commission, Merrill Lynch CEO John Thain and Bank of America CEO Ken Lewis had agreed that Bank of America would acquire Merrill for $29 a share, payable in Bank of America stock. Lehman was still looking for a buyer. Merrill had found one.
Friday night: the call goes out
On Friday evening, September 12, Paulson summoned the heads of the major Wall Street firms to the Federal Reserve Bank of New York at 33 Liberty Street. The group included Lloyd Blankfein from Goldman Sachs, Jamie Dimon from JPMorgan Chase, John Mack from Morgan Stanley, John Thain from Merrill Lynch, and Vikram Pandit from Citigroup.
The message was blunt. A private-sector solution was the only option, and the government would not provide the kind of extraordinary support it had used in March for Bear Stearns. Ben Bernanke later told Congress that the Fed, Treasury, and SEC brought the firms together to try to craft a private solution for Lehman, but no acquisition could be arranged.
Lehman’s stock had closed that Friday at $3.65. It had traded above $60 earlier in the year. Inside the firm, Richard Fuld and his lieutenants were still trying to find capital, a buyer, or enough time to make Monday morning survivable.
The immediate problem was not only confidence. It was funding. Lehman depended on short-term financing and clearing relationships that were tightening by the hour, including collateral demands from JPMorgan, its clearing bank.
Saturday: two possible buyers shrink to one
On Saturday, Bank of America and Barclays were the two plausible buyers left in the building. Bank of America’s team reviewed Lehman’s books. Barclays worked through a separate transaction path. Both were staring at the same problem, Lehman’s real estate and mortgage-linked assets were worth less to a buyer than Lehman had been carrying them for.
Lewis had already told Paulson that Bank of America would not buy Lehman without government assistance. The FCIC report says Lewis believed Lehman’s real estate and other assets were overvalued by $60 billion to $70 billion, a message he delivered to Paulson before the bankruptcy.
John Thain drew his own conclusion on Saturday morning. If Lehman failed, Merrill Lynch could be next. He called Ken Lewis, and the two men met later that day at Bank of America’s New York corporate apartment.
By Saturday night, there was still a path for Lehman. Barclays was prepared to buy the firm if a private consortium absorbed tens of billions of dollars in troubled assets. For a few hours, it looked as if the weekend might produce a rescue.
Sunday morning: the Barclays guarantee breaks
The rescue depended on one bridge: Barclays had to guarantee Lehman’s trading obligations from the announcement of a deal until the transaction closed. Without that guarantee, counterparties would not keep trading with Lehman on Monday morning.
The UK problem was that the guarantee required a Barclays shareholder vote, a process that could take weeks. The FSA could have waived the requirement, but it declined to do so. The regulator said the waiver would be unprecedented and that the obligation could leave Barclays exposed to open-ended liabilities.
Paulson and Geithner could not offer a federal guarantee in its place. The Fed had insisted that there would be no public backstop for Lehman, and by Sunday morning the government was still holding that line.
Alistair Darling, the UK chancellor, later said he would not let British taxpayers underwrite the liabilities of a large American bank. The FCIC records the line as a warning that the “U.S. cancer” should not spread to the UK. The Barclays transaction was effectively dead.
The filing before Asia opened
After the Barclays path collapsed, Lehman’s team returned to its headquarters at 745 Seventh Avenue. Harvey Miller of Weil Gotshal and Lehman’s lawyers prepared the bankruptcy filing while executives tried to understand whether any alternative was still available.
Lehman Brothers Holdings Inc. filed for Chapter 11 protection in the Southern District of New York on Monday, September 15, 2008. Its 8-K filing reported about $639 billion in assets and $613 billion in liabilities, making it the largest bankruptcy in U.S. history.
Bank of America’s Merrill Lynch deal landed almost simultaneously. In a September 15, 2008 announcement, Bank of America said it had agreed to acquire Merrill Lynch in a $50 billion all-stock transaction.
Within forty-eight hours, the next crisis had overtaken the last one. On September 16, the Federal Reserve authorized the New York Fed to provide AIG with an $85 billion secured credit facility. The institution that had not been rescued was now the warning case for the one that was.
What Barclays bought after the bankruptcy
Lehman’s employees came to work on Monday into a firm that no longer existed in the same legal sense. Some still had desks, screens, and phones. Many did not yet know whether they had jobs.
Barclays returned almost immediately. On September 17, the SEC issued a statement on the proposed Barclays acquisition of Lehman Brothers Inc., and Barclays announced a deal to buy Lehman’s North American investment banking and capital markets operations.
The transaction was not the same as the rescue discussed on Sunday. Bankruptcy had stripped away the parent-company liabilities Barclays had refused to guarantee. The business Barclays wanted was still there, but the obligation to keep the whole firm alive was not.
The Sunday detail that matters
The precise 9 a.m. scene in which Ken Lewis personally tells Paulson he is buying Merrill instead of Lehman is not supported cleanly by the public record. The stronger documented sequence is this: Bank of America had already told Paulson it would not buy Lehman without support, Thain and Lewis agreed by Sunday on the Merrill deal, and Barclays’ 8 a.m. regulatory problem removed the last remaining buyer for Lehman.
That sequence is more than enough. The Lehman weekend turned because the only remaining Lehman buyer could not bridge a guarantee, while the other American buyer had already moved to the firm next in line.
The building at 33 Liberty Street still looks almost exactly as it did then, stone-faced and heavy, with conference rooms above the street and the old central-bank stillness around it. The order of the weekend is what changed: one bank without a buyer, one rival with a rescue, and a Sunday morning call from London that left Lehman with only the hours before Asia opened.