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The gloves come off


By William Cohan
Last Updated: December 15, 2008: 12:09 AM ET

Friday Evening September 12: Paulson pulls the fire alarm
Late Friday Night: Bank of America bows out
Saturday Morning: Lehman's books get scrubbed
Saturday Afternoon: Thain gets busy
Saturday Night: The gloves come off
Sunday Morning: A flag on the play
Monday Morning: Lehman throws in the keys
The aftermath

Merrill and Bank of America executives were closing in on an all-stock deal, in which Merrill shareholders would receive $29 per share in Bank of America stock, which valued Merrill at $50 billion, a 70% premium to where Merrill's stock had closed the previous Friday.

Should the government have saved Lehman? Tell us what you think.

Meanwhile, back at the Fed, tempers started to flare. The assembled bankers were still wrestling with how to value the Lehman real-estate assets that Barclays wanted to leave behind. "It was a question of how much equity we needed to put up," one banker said, "to make the Barclays deal fly." This led to increasing tensions on all sides. At one point, late Saturday night, Gary Shedlin, a M&A banker at Citigroup, faced off against his old boss, Michael Klein, who was there representing Barclays and his client, Archibald Cox Jr., who was appointed chairman of Barclays Americas in April 2008.

"How much equity do you need to raise to do the deal?" Shedlin asked Klein.

"Why is that important?" Klein shot back. "Why do you need to know that?"

"You're making an offer for this company and we've got to know how you're going to finance it," Shedlin countered.

"We will not have to raise any incremental capital as part of this transaction," Klein said definitively. The two men glowered at each other before turning to less confrontational matters. (Shedlin confirmed the exchange to Fortune; Klein did not respond to requests to be interviewed.)

Bankers worked most of the night to put together a term sheet for how they would all agree to support Barclays' acquisition of most of Lehman Brothers. Some banks - such as BNP-Paribas and Bank of New York - were not so sure they wanted to participate, causing Jamie Dimon, the CEO of JPMorgan Chase to admonish them. "You're either in the club or you're not," he said, according to one banker. "And if you're not you'd better be prepared to tell the secretary why not." Still, a deal seemed close.

NEXT: SUNDAY MORNING A flag on the play To top of page

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