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Thain gets busy


By William Cohan
Last Updated: December 15, 2008: 7:00 AM ET

While most of Wall Street was hunkered down at the New York Federal Reserve to review Lehman's books, Greg Fleming, the president of Merrill Lynch and a former financial institutions banker, had been urging his boss, John Thain, Merrill's CEO, to call Ken Lewis to talk about a deal between the two firms. Fleming had grown concerned during the week as Merrill's stock fell to $17.05 per share, from $28.50 per share. Fleming also knew that Lewis had long coveted Merrill Lynch and that Fleming's previous boss, Stan O'Neal, had no interest in such a deal.

"It's an iconic name," Lewis told Fortune about Merrill Lynch and the "one company" he wanted "to round out" his strategic vision for Bank of America. He said owning Merrill Lynch "would give us a major presence in investment banking as well as wealth management."

Thain, who had been at the Fed on Friday night, knew by Saturday morning that Bank of America was out of the hunt for Lehman, and he had also decided that Lehman was not going to be saved. If Lehman declared bankruptcy, he figured Merrill would be the next domino to fall. He had watched the group of bankers "pummel" Bart McDade, Lehman's president, with questions about Lehman's assets "and decided he did not want to be next," according to a banker there. "It became clear to me that it would make sense to explore options for us," Thain said in the press conference after announcing the deal.

Thain got Lewis' cell phone number from Fleming, stepped out of the meeting and called the Bank of America CEO. "We began to talk about the opportunity over the phone," Lewis said. "Then a few hours later, we were talking about it in person." Rumors began circulating at the New York Fed that Thain and Lewis were talking about a deal. In the interim, Lewis flew up by private jet from Charlotte to New York. They agreed to meet secretly in Bank of America corporate-owned apartment at the TimeWarner Center, at Columbus Circle. "It didn't take but about two seconds to see the strategic implications or [the] positive implications" of the deal, Lewis said. "It was obviously a fairly short period of time, very intense and we saw a lot of each other." Following his call to Lewis, Thain said the two men "quickly" realized "the strategic combination made a huge amount of sense, and the opportunity to put this transaction together really was [so] unique that we both decided we wanted to take the opportunity." The code name for the deal was "Project Alpha."

At his side as an advisor Lewis had J. Christopher Flowers, the head of his own private-equity firm that specialized in financial services. Flowers, an ex-Goldman partner, seemed to have examined the books of nearly every Wall Street firm by September 2008, including Bear Stearns and Merrill Lynch. "[Flowers] had done quite an amount of due diligence on Merrill Lynch fairly recently," Lewis said. "It was very, very extensive. They had looked at the marks very comprehensively. This allowed us to have him and his team as an advisor, and just update the information they already had. That was one of the key ingredients to being able to do this as quickly as we did." Flowers was very complimentary of what Thain and his team had done in terms of shedding assets including Merrill's 25% stake in Bloomberg and a $30.6 billion portfolio of troubled, mortgage-backed securities for 22 cents on the dollar.

Lewis determined he had to move quickly to win Merrill. Not only had he wanted to own the firm for years, he also was aware that Goldman Sachs and Morgan Stanley were in the mix. Merrill had reached out to Morgan Stanley about a deal. Morgan Stanley passed quickly - reportedly because the firm decided there simply was not enough time.

Separately, on Saturday morning at the Fed, representatives of Goldman Sachs reached out to former Goldman partner Peter Krause, Merrill's newly recruited head of strategy, to see whether Merrill would consider allowing Goldman to make a 9.9% minority investment in Merrill. This set off a heated debate - according to someone who witnessed it - between Krause and Fleming about whether Merrill should pursue the Goldman deal or the Bank of America deal.

For Goldman, the idea was to save a rival and to keep the fury of the looming storm at bay. "I think about it in terms of the Great Barrier Reef," one Goldman executive said. "If you think of Bear as being an outlying piece of coral at the far eastern extremity of the reef. Then Lehman is a bit closer in and then Merrill is a bit closer. Then Morgan Stanley and Goldman Sachs are on the beach but still pretty close to the water. When you have a tsunami coming in, it's getting to be pretty uncomfortable."

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