Too Big to Fail

by Andrew Ross Sorkin

  Within minutes of Einhorn’s leaving the stage, news of his speech had been broadcast throughout financial circles. Lehman was in for some serious pain when the market opened the following day; the shares would fall as much as 5 percent.

  As Einhorn headed up Broadway to attend a book party being thrown for him at the restaurant Shun Lee West, he leafed through the program of the conference he had just left and saw something that made him smile ruefully.

  Lehman Brothers had been one of the Patron Sponsors of the conference, having paid $25,000 so that the world could hear him publicly undermine the firm’s credibility.

  CHAPTER SIX

  “Who talked?” Dick Fuld demanded, scarcely able to control his fury, and looking as if he might leap across the table and strangle someone.

  Lehman’s executive committee—the firm’s top managers—were arrayed around a conference room table on Wednesday, June 4, awkwardly sitting in absolute silence.

  Fuld held a copy of that day’s Wall Street Journal in his hand. There, on page C1, was what he described to them as “the greatest betrayal of my career.” He had practically choked that morning when he read the headline—“Lehman Is Seeking Overseas Capital”—with its subhead adding the damning detail: “As Its Stock Declines, Wall Street Firm Expands Search for Cash, May Tap Korea.”

  There it was, the morning’s news, the secret plan he had been working on for the past month to counter the critics and demonstrate strength, exposed for the entire world to read. He had been working frantically to shore up the firm, and now, he thought, the leak put all that effort in jeopardy.

  Fuld had spoken to the reporter Susanne Craig on and off the record many times over the last few months. But he’d certainly never breathed a word of this. Craig’s article was brief and to the point. She knew that Lehman had been in discussions with the Korea Development Bank, a state-owned policy bank in South Korea; she knew that it would be a huge international deal, and that it was being orchestrated by Kunho Cho, Lehman’s top executive in Seoul. The only way she could have learned those essential details was if someone in the know—someone at the table in the conference room that morning, in fact—had leaked the story.

  Coming on the heels of David Einhorn’s campaign against the firm—Lehman’s stock had fallen 22.6 percent since his speech in May—it was yet another public relations disaster. Fuld knew perfectly well that bankers were occasionally prone to being loose-lipped about their clients, but this concerned the firm he had given his entire life to, and was about its very survival. The breach of loyalty stung him deeply.

  Just a day earlier rumors had circulated that Lehman was so desperate for liquidity that it had tapped the Federal Reserve’s discount window. That was untrue, but Lehman’s stock was pummeled anyway, falling 15 percent.

  For the past two weeks Fuld had been forced to respond to such rumors on an almost daily basis, as Einhorn’s comments had taken on enough credibility to sow seeds of doubt about Lehman’s own. To Fuld’s thinking, that was precisely Einhorn’s objective. Fuld’s co-chief administrative officer, Scott Freidheim, had been in touch with nearly half the public relations flacks in the city, desperately attempting to formulate a counterattack against Einhorn and the shorts. “How does this guy have any credibility coming after us?” Freidheim asked Joele Frank and Steve Frankel, two crisis specialists. “We can’t go tit for tat with everyone who makes a claim,” he’d said to another PR executive, Steven Lipin. In the meantime, the firm had established a clear script for all discussions with the media: There would be no more winging it; they couldn’t afford any mistakes.

  Fuld thought Craig’s coverage had crossed the line, even if it was a legitimate scoop; To him, in his fit of rage, it was as if she had knowingly set out to undermine the firm, just like Einhorn. The article made Lehman seem like a collection of petty high school cliques, a gossip mill. He had always considered her one of only a handful of trustworthy reporters. The week before she’d even asked to sit in on one of Lehman’s management meetings, a request he thought was ludicrous, but he’d declined the request politely. “I’d like to be helpful,” he explained. “But I can’t allow that.”

  When Craig phoned Fuld that afternoon to follow up on her story, he lit into her mercilessly. “You pose as a responsible journalist but you’re just like the rest of them!” he said. “Your seat at the table has been removed,” he shouted, then slammed down the receiver. There would be a new rule in effect at Lehman, he subsequently decreed: Nobody, not even the PR department, was allowed to speak to the Wall Street Journal ever again.

  When he learned of Fuld’s diktat, Andrew Gowers, Lehman’s head of communications, was beside himself. “I don’t understand how on earth this policy is supposed to help us communicate in the middle of all this if we’re going to shut out the biggest financial paper in the country,” he complained to Freidheim.

  “I don’t know,” Freidheim replied with a shrug. “It’s between Dick and the paper.”

  Scott Freidheim knew who the leaker was, or so he believed.

  At forty-two years old, Freidheim was the youngest member of Fuld’s inner circle. The son of the former CEO of Chiquita, he was the ideal Fuld operative: a get-it-done loyalist with a killer instinct. As the firm’s co-chief administrative officer, he wasn’t so much a banker as he was a highly paid strategist. To Fuld’s detractors, he was one of the chairman’s pets, a know-nothing protector of the throne who shielded Fuld from any number of ugly truths. Freidheim was an executive in the Joe Gregory mold: He owned an enormous home in Greenwich and a constantly rotating fleet of cars; he had recently bought the “mobile office” once owned by one of his friends, hedge fund mogul Eddie Lampert—a black GMC Denali outfitted with Internet access that he had chauffeur him to Manhattan each day. “Isn’t this awesome!” he once announced excitedly when he showed off the vehicle to colleagues as it blasted the theme song to Mission: Impossible.

  After the tense meeting with Fuld about the Journal story, Freidheim was determined to find the leaker for his boss. He had in fact sensed that something was amiss the night before, after he’d had a flurry of confusing phone calls with Craig and with Lehman’s spokesperson, Kerrie Cohen. He had been frustrated because he couldn’t get a straight answer about the coming story.

  Early the next morning, Erin Callan had dropped by his office, which she rarely did, and innocently asked about the story, “Do you think it will make the stock go up?”

  With that it became clear to Freidheim that the leak had been her idea. Like a growing group of executives up and down the organization, Freidheim had come to the conclusion that Callan was in the wrong job, and he had grown tired of her perky self-assurance. She performed for the media as though she were on some kind of reality show. She might have pulled off the earnings call back in March, but now he questioned Gregory’s decision to put her in the job, referring to her as a “diversity hire.” He couldn’t believe she had gone off and talked to Einhorn before his speech without first consulting anyone—he’d been trying to put that fire out for a week now. And he had been furious back in April when Craig, in another Journal story, had crowned her “Lehman’s straight shooter,” as if the rest of them were a pack of untrustworthy liars. Callan just didn’t know where the line was drawn. She kept a model of a private jet on her desk and revealed details about her personal shopper to the press, blithely unaware of the resentment it inspired. The worst was when she framed a photograph of herself getting out of a limousine, from a gushy profile in the Condé Nast Portfolio magazine that pronounced her “The Most Powerful Woman on Wall Street,” and hung it on her office wall; Gregory had had to tell her to take it down.

  Freidheim, now on the warpath, called security and ordered the company’s phone records searched. He soon discovered what he regarded as all the proof he needed: Callan had indeed spoken to Craig the day before. Whether that meant she had actually informed the reporter about the Korea trip was yet to be determined, but the phone record gave him an e
xcuse to talk to Fuld about her.

  When Freidheim arrived at Fuld’s office, he found Gregory there and proceeded to present his findings to both men. He concluded by saying that he wanted to approach Callan about the call himself, and added, “We can’t rule out firing her.”

  Gregory, her mentor, was aghast at the accusation. Nobody was getting fired, and as far as he was concerned, nobody was even going to mention the matter to Callan. “She has too much on her plate,” Gregory insisted, and Fuld nodded his agreement. He simply could not afford to lose his CFO, not in the current climate, and not even if she had done the unthinkable and leaked the information.

  In his heart, Fuld knew that his Korean gambit was a Hail Mary pass. Lehman’s own banking operation in Seoul was effectively a mirage; it had never produced any business significant enough even to warrant Fuld’s attention. He had also been warned repeatedly by just about everyone in the office that there were some serious doubts about the players involved. The whole success of the effort hinged on two individuals: Kunho, a well-connected banker with impeccable manners who, as far as anybody could tell, was simply unable to close any deal; and Min Euoo Sung, a former Lehman Brothers banker based in South Korea who had left the firm and had managed to snag a prestigious new appointment as the head of the Korea Development Bank. While Fuld had always liked Min—years earlier, when Min was working for Woori Financial Group, he had brought Lehman in on a joint $8.4 billion purchase of a troubled loan portfolio—some of Min’s other colleagues at Lehman were stunned by the appointment, as were a number of KDB’s staff, who, having judged his credentials as inadequate, had tried unsuccessfully to stop it.

  Min, however, was undeterred; he had grandiose visions. At a dinner with his new colleagues, he sang a song called “Leopard in Mt. Kilimanjaro” as an expression of his desire to be a powerful force in the world of finance. The Lehman situation presented the first major opportunity to achieve that goal. Before he had even formally started his job, Min had approached his friend Kunho about doing a deal. Kunho had in turn brought Jesse Bhattal, the debonair head of Lehman’s Asian-Pacific operations, based in Tokyo, into the talks, and the idea started to gain momentum.

  What choice did Fuld have but to play this situation out? In less than a week, on June 9, the firm would be announcing its first quarterly loss—a staggering $2.8 billion—since American Express spun it off. The stock was already down 18 percent in three days. Fuld had to find capital, and at this point, he would try any avenue he could. He had been pressing his old friend Hank Greenberg, the former chairman of AIG, to put money into the company, as well as trying to get an investment from General Electric, but he couldn’t be certain that either would come through.

  Certainly, Fuld did have some reason to believe that a constructive agreement might be negotiated with the Koreans. The Monday before the Lehman team had left for Asia, David Goldfarb, Fuld’s chief strategy officer, had raised his boss’s expectations.

  “Korea situation sounds promising,” Goldfarb wrote in an e-mail that he also sent to Gregory. “They really are looking to restructure and open up financial services and seems to want anchor event to initiate the effort, which could be us. I still prefer a Hank [Greenberg] or GE solution, but if that is not there, we could make this strategically based as well.

  “Between Kunho and ES’s [Min’s] relationship it feels this could become real. If we did raise $5 billion, I like the idea of aggressively going into the market and spending 2 of the 5 in buying back lots of stock (and hurting Einhorn bad!!). Lots to do on this, been speaking to Jesse and Kunho. Sounds like the Koreans are serious on this and are looking to do something aggressive. Could be interesting timing for them, to get some attention away from faster growth Asian economies. Could be interesting, but as we know these thing often don’t go further then the rhetoric.”

  On June 1 a small team of Lehman bankers had headed to New Jersey’s Teterboro Airport and set off for Korea in the firm’s Gulfstream. The senior person aboard, Tom Russo, Lehman’s chief legal officer, had little deal-making experience, but as one of Fuld’s confidants, he could serve as a trusted pair of eyes and ears. Mark Shafir, the firm’s head of global mergers and acquisitions (and the brother of Robert Shafir, whom Gregory had unceremoniously forced to quit), was the lead deal banker, along with Brad Whitman, a talented acquisitions expert who had spent most of his career merging the nation’s far-flung telecommunications firms into a handful of powerful players. Completing the group were Larry Wieseneck, the firm’s head of global finance, and lawyer Jay Clayton of Sullivan & Cromwell. They would meet Kunho and Bhattal when they got there.

  With a stop for refueling in Anchorage, the jet made the trip in nineteen hours, and on arrival the exhausted Lehman contingent took a fleet of cars to their hotel on the outskirts of Seoul. The Shilla was a peculiar place with a lobby that looked like a spaceship, but at least it had a bar.

  The first meeting in Seoul involved only lower-level officials of KDB and Hana Financial, which was also considering an investment. Shafir and Whitman could tell immediately that this was not a deal that was likely to happen. Neither Korean firm had brought along lawyers or hired its own U.S. advisers. And Min, who had not yet officially started as chief executive of KDB, could not even take part in the talks.

  “This is bullshit,” Wieseneck exclaimed after the initial session ended, having served little purpose other than to make introductions. Even as the talks progressed, the Lehman team could hardly tell to whom they were speaking. At one point Russo engaged in what he thought was a productive exchange with an individual who turned out to be an outside accountant. “Relying on Kunho is like bottom of the ninth, two outs, in the World Series,” Shafir complained to his American colleagues the first night in the bar, “and you send up a guy to the plate who hasn’t gotten a hit all year.”

  Lehman had wanted to start discussions at $40 a share, but by the end of the first day the stock was at $30. Nobody—not even this group of deal-hungry Koreans—was going to pay a 33 percent premium. The whole affair became increasingly unreal.

  No food was served at the meetings, so the Lehman bankers were starving by the time they got back to their hotel, where the meals were generally dreadful. The only palatable item they could find on the menu was tuna, which most of them ate every day of their stay.

  But neither the subpar accommodations nor the Koreans’ erratic behavior could dent Russo’s enthusiasm: He was going to make this happen. “They’re going to do this deal,” he told his colleagues, supported by Kunho and Bhattal. “They’re going to put in $10 billion. They’re going to make their balance sheet available for loans.”

  No, they weren’t, thought Shafir. They weren’t going to do anything of the kind.

  Sitting on a hotel room bed crowded around the speakerphone, the group called Fuld back in New York, with Russo leading the conversation. “Dick, I’m feeling very good about it,” Russo enthused. “I think we have a 70 percent chance of getting something done with these guys.”

  Fuld’s delight at the news, however, was short-lived. The group returned to New York empty-handed on June 5; efforts to come up with even a rudimentary term sheet had completely failed. The Koreans had obviously been deterred by Lehman’s cratering stock, and simply may not have had the wherewithal to bring about such a major piece of business. Even Russo had lost confidence. “We’re not going to get a deal with these yoyos,” he told Fuld.

  Moments after hearing the news, Fuld, frustrated as ever, screamed down the hall at Steven Berkenfeld, a member of the firm’s executive committee.

  “Were you the one who said you can’t trust the Koreans?” he asked.

  “I don’t think I phrased it that way,” Berkenfeld said.

  “Yes, you did,” Fuld said. “And you were right.”

  The Korean deal wouldn’t go away quietly, though. A few days later, Min called Fuld and insisted he still wanted to get something done. Fuld figured the only way it was remotely possible was if the
Koreans hired a real adviser. So he called up Joseph Perella, the mergers and acquisitions guru who had recently started a new firm, Perella Weinberg Partners.

  “Listen,” I’ve got something for you,” Fuld told Perella. “You’re going to get a call from ES. Do you know him? He used to work for me.”

  Fuld was explicit about what he needed out of the deal. “We’re trading at about $25. Our book value is $32. We need a premium, so we’d take $35 to $40.”

  Perella, who assigned the project to his colleague Gary Barancik, didn’t think the odds were good. KDB was a national institution with what seemed to him to be a local charter. They had no business branching out with a risky international deal. “It’s like the Long Island energy utility trying to buy something in Russia,” he told Barancik.

  But they promised to do the best they could.

  Skip McGee, a forty-eight-year-old Texan, commuted to New York every week from Houston to run Lehman’s investment banking operations. He’d board a private plane using the firm’s NetJets account every Sunday evening around 7:30, land in New York around midnight, and take a car to his rental on the Upper West Side. Come Thursday night he’d be on a first-class flight back to Houston on Continental.

  McGee, a classic, old-school, back-slapping banker, was clearly ambitious. After graduating summa cum laude from Princeton and getting a law degree, he had spent nearly two decades at Lehman, first as a banker for wildcatters in the oil patch of his backyard and then moving up the ranks until he became the head of the entire investment banking division and joined Fuld’s vaunted executive committee.

  For some time, McGee and his team had been having deep misgivings about the way the firm was being managed. His unit, which advised corporate clients on mergers and stock offerings, had its best year ever in 2007, bringing in $3.9 billion in revenue, and yet the firm’s stock, which was used to pay a large portion of everyone’s bonuses, was being decimated by anxiety about what was happening on the other side of the house—namely, the firm’s investments in real estate assets. Even worse, the constant rumors and headlines about Lehman’s health were beginning to affect his team’s ability to sign up new clients, who were reasonably worried about hiring them. It had gotten so bad that some clients had asked to include a “key man” provision in their engagement letters that would guarantee that the banker assigned to them would continue working with them if Lehman was sold or went bankrupt.