John Varley, chief executive of Barclays Bank, said pursuing the acquisition of Lehman Brothers at the height of the financial panic in 2008 led to "the riskiest week" of his life.
Recalling negotiations in the days before and after the bankruptcy of the Wall Street investment bank, Varley said it had been impossible to tell for certain what Lehman's assets or liabilities might be worth, which was why Barclays insisted on numerous conditions before agreeing to purchase the company's US operations at a knock-down price.
The British banking boss appeared last week in a Manhattan bankruptcy court to answer allegations that Barclays kept important information about the acquisition secret from the judge who approved the deal, less than five days after Lehman Brothers filed for Chapter 11 bankruptcy protection in September 2008.
The claims are being made by the trustee and estate of Lehman Brothers, the rump of the business that Barclays did not buy and which is being wound down to recoup some money for creditors. They want Barclays to pay more than $11bn extra for the business, which quickly proved profitable.
The hearing provided new insights into the chaotic, high-stakes decision-making at major banks during the credit crisis, and into the boardroom discussions at Barclays, which codenamed the acquisition of Lehman Brothers 'Project Long Island' after the New York region. Barclays itself was codenamed 'Baltimore' in internal documents.
Varley said Barclays made every effort during the talks to ensure the deal would be positive for shareholders, but "the numbers were frustratingly imprecise during the week". He added: "The only circumstances in which I would be able to look our regulators in the eye – and for that matter, to look shareholders in the eye – were if we were to protect our capital ratios in a transaction like this."
Among the allegations is that Barclays unfairly negotiated a lower price for Lehman's trading assets. Varley was asked if they were marked down from the price at which they were carried on Lehman's books on the Friday before its bankruptcy.
"Of course they were," he said. "The markets were collapsing. The marks were made on Friday night. By Monday morning they were irrelevant. We were seeking to establish the contemporary value of the assets we were seeking to acquire."
Barclays reported a $4.2bn gain on the Lehman acquisition in its annual accounts just five months later, but Varley said the gain was not "forecastable or bankable" at the time. Asked why he told analysts at the time of the acquisition in September that the deal had been "derisked", he said it had been made less risky. "Was it still a risky transaction? This was the riskiest week of my life," he added.
Earlier, Bob Diamond, the head of Barclays' investment banking division, Barclays Capital, said the company's board members had been haunted by the fear they were missing important risks in the deal. Barclays was the only bidder for Lehman after Bank of America pulled out of talks that weekend, he said.
"We had to step back when BofA walked away from doing a deal for Lehman at a small amount of cash, perhaps less than $1bn, and instead did a deal for Merrill Lynch at $50bn," he told the court. "What had they seen in due diligence, in the incredible lack of information and the misinformation?"
Diamond gave a vigorous performance on the stand – almost six hours over two days – and during Monday's hearing more than once was reprimanded by Judge James Peck for giving "evasive" answers. "I think this is a witness that needs to have the leash held tightly," the judge said.