Too Big to Fail

by Andrew Ross Sorkin

  “If you guys believe that, share it,” Paulson said before they got up to leave. “I could use the help. No one around here wants to listen to my analysis.”

  After that singular plea for help from the Treasury secretary, JP Morgan’s top executives splintered into smaller groups to make several obligatory courtesy drop-bys on the Hill to their federal overseers. Charlie Scharf, head of the firm’s consumer business, and Michael Cavanaugh, its new CFO, went to see Sheila Bair, head of the FDIC; Steve Black paid a visit to James Lockhart; and later in the day, there was a meeting scheduled with Barney Frank for several members of the team.

  But the most important of the visits was Dimon’s, with the Federal Reserve’s Ben Bernanke. Dimon brought Barry Zubrow, the firm’s chief risk officer, along with him. Zubrow, a relative newcomer to JP Morgan, was quickly becoming one of its key executives. A former banker at Goldman Sachs, where he had worked for more than twenty-five years, he was a close friend of Jon Corzine, the deposed Goldman boss who had gone on to become governor of New Jersey. If anyone at JP Morgan understood the risks in the market as well as Dimon, it was Zubrow.

  As Dimon and Zubrow entered the Federal Reserve’s Eccles Building on Constitution Avenue, Zubrow sneaked a quick look at his BlackBerry before passing through the security X-ray machine. He was alarmed at what he saw: Lehman’s stock had plunged 38 percent, dipping to about $8.50 a share.

  In Lower Manhattan’s financial district, Robert Willumstad, AIG’s CEO, sat on the thirteenth floor of the Federal Reserve Bank of New York waiting to meeting with Tim Geithner. With the markets in turmoil, he had returned to see Geithner to press him again to consider making the discount window available to his company. While Geithner may have spurned his abstract request last month, this time Willumstad had come with a more detailed proposal to turn AIG into the equivalent of a primary dealer like Goldman Sachs or Morgan Stanley—or Lehman Brothers. “It’s going to be a few minutes. He’s on the phone,” Geithner’s assistant told him.

  “No problem, I have time,” Willumstad replied.

  Five minutes passed, then ten. Willumstad looked at his watch, trying to keep from getting annoyed. The meeting had been scheduled to start at 11:15.

  After about fifteen minutes, one of Geithner’s staffers, clearly embarrassed, came to speak with him. “I don’t want to hide the ball on you,” he said. “He’s on the phone with Mr. Fuld,” he revealed with a knowing smile, as if to indicate that Willumstad might be waiting a while longer. “He’s up to his eyeballs in Lehman.”

  Finally, a half hour later, Geithner appeared and greeted Willumstad. Geithner was clearly overwhelmed, his eyes darting around his office as he nervously twisted a pen between his fingers. He had also just flown back from an international banking conference in Basel, Switzerland.

  After some pleasantries, Willumstad explained the purpose of his request for this meeting: He wanted to change—no, very much needed to have—AIG’s role in the finance sector codified. He said that he wanted AIG to be anointed a primary dealer, which would give it access to the emergency provision enacted after Bear Stearns’ sale, and thus enable it to tap the same extremely low rates for loans available only to the government and other primary dealers.

  Geithner stared poker-faced at Willumstad and asked why AIG FP deserved access to the Fed window, which, as Willumstad was well aware, was reserved for only the neediest of financial institutions, of which there were now far more than usual.

  Willumstad made his case again, this time with a litany of figures to back up his argument: AIG was as important to the financial system as any other primary dealer—with $89 billion in assets, it was actually larger than some of those dealers—and should therefore be granted the same kind of license. And he mentioned that AIG FP owned $188 billion worth of government bonds. But most of all, he told Geithner, AIG had sold what was known as CDS protection—essentially unregulated insurance for investors—to all of the major Wall Street firms.

  “Since I’ve been here, we’ve never issued any new primary dealer licenses, and I’m not even sure what the process is,” Geithner said. “Let me talk to my guys and find out.” Before Willumstad turned to leave, however, Geithner posed the question that really concerned him, the one that had been occupying his thoughts all morning: “Is this a critical or emergency situation?”

  Willumstad, fortunately, had been prepared to address this very topic. In meetings with AIG’s lawyers and advisers, including Rodgin Cohen at Sullivan & Cromwell and Anthony M. Santomero, the former president of the Federal Reserve Bank of Philadelphia, he had been guided on how to field the question with the advice, “Tread carefully.” If he acknowledged that AIG had a true liquidity crisis, Geithner would almost certainly reject its petition to become a primary dealer, denying the company access to the low-priced funds it so badly needed.

  “Well, you know, let me just say that it would be very beneficial to AIG,” Willumstad carefully replied.

  He left Geithner with two documents. One was a fact sheet that listed all the attributes of AIG FP and argued why it should be given the status of a primary dealer. The other—a bombshell that Willumstad was confident would draw Geithner’s attention—was a report on AIG’s counterparty exposure around the world, which included “$2.7 trillion of notional derivative exposures, with 12,000 individual contracts.” About halfway down the page, in bold, was the detail that Willumstad hoped would strike Geithner as startling: “$1 trillion of exposures concentrated with 12 major financial institutions.” You didn’t have to be a Harvard MBA to instantly comprehend the significance of that figure: If AIG went under, it could take the entire financial system along with it.

  Geithner, his mind still consumed with Lehman, glanced at the document cursorily and then put it away.

  At Treasury, Dan Jester, Paulson’s special assistant, had just returned to his office when his assistant announced something surprising: David Viniar, Goldman Sachs’ chief financial officer, was on the telephone.

  Any call from Goldman would mean an awkward conversation for Jester, given that he used to work there. Unlike Paulson, Jester hadn’t been required to sell all his Goldman Sachs stock when he took the job in Washington. And, unlike Paulson, who had to run the congressional gauntlet before joining Treasury, Jester, as a special assistant to the secretary, didn’t require that official confirmation. Although Viniar had been a longtime friend and colleague from their days together at Goldman, he surely wanted to talk business. With the markets going wild, it was no time for social calls. After a short pause, Jester picked up the phone, and Viniar, after quickly greeting him, got right to the point.

  “Could we be helpful on Lehman?”

  While the question itself was carefully phrased, Viniar’s timing was curious: Jester had just learned from Geithner that Lehman was likely to preannounce a $3.9 billion loss on Wednesday. Fuld had given the government a private heads-up—and less than an hour later, here was Goldman, sniffing around.

  Anxious about running afoul of the rules, Jester stepped gingerly around the issue. But he did learn just enough to determine that Viniar was serious about its offer of assistance. Viniar told him that Goldman would be interested in buying some of Lehman’s most toxic assets; of course, it was clear that Goldman would only do so if it could buy the assets on the cheap. Viniar asked if Treasury could be helpful in arranging an entrée.

  As soon as they hung up the phone, Jester reported the call to Robert Hoyt, Treasury’s general counsel. With all the conspiracy theories circulating about Goldman and the government, any leaks about the call could be explosive; he needed to cover his ass.

  Now it was time to tell Paulson.

  At the Lehman tower, Alex Kirk sprinted down the hall to McDade’s office. “Something strange is going on,” he said, catching his breath. “I just got off the phone with Pete Briger.”

  Briger, the president of Fortress Partners, a giant hedge fund and private-equity firm, was well wired into the rumor mill, a carryov
er from his days as a Goldman Sachs partner. He was calling, Kirk recounted, with what sounded like an ominous proposal.

  “I know you’re really loyal to Bart and to Lehman Brothers, and I would never make this call in any other circumstance,” Briger had told Kirk. “But if you happen to be taken over this weekend by another financial institution, and you’re not sure whether you want to go work at that financial institution as opposed to Lehman Brothers, I really want you to come talk to me.”

  Kirk, taken aback, managed to reply, “I’m flattered,” his mind racing all the while. “I hope that actually doesn’t happen,” he continued. “I didn’t even think you liked me.”

  “I was talking to Wes about you the other day,” Briger said, referring to Wesley R. Edens, Fortress’s CEO, “and I said—you know, not that I don’t like you, but I was saying to Wes—‘I would much rather have partners that are really, really smart motherfuckers than guys that I like.’”

  Kirk laughed as he related the conversation to McDade, repeating the punchline twice.

  But it wasn’t Briger’s backhanded compliment that was the odd part; it was his timing, which could hardly have been coincidental; Kirk was convinced that it was the result of a leak. “Why the hell is he calling me now?” Kirk asked McDade, throwing his hands in the air. Lehman wasn’t in merger talks with anyone, at least not yet.

  Then, after McDade stared at him without answering, Kirk answered his own question: “I guarantee they know something that we don’t.”

  Jamie Dimon and Barry Zubrow sat in the Anteroom of the Federal Reserve waiting for Chairman Bernanke and his colleagues to appear. Their meeting was scheduled to run from 11:15 a.m. to 11:45 a.m.—which meant that the two JP Morgan officers would have to speak quickly in order to tell the Keeper of the Secrets of the Temple everything they had planned to in the half hour they had been allotted.

  Overlooking Constitution Avenue, the Anteroom, despite its name, is a capacious space with thirty-foot-high ceilings standing just off the Board Room, where the nation’s main fiscal policies are hammered out, and steps from Bernanke’s office.

  Looking around as he sat waiting, Dimon studied the portraits of all the former Fed chairmen, including Marriner S. Eccles, who was appointed the first chairman of the Board of Governors of the Federal Reserve System in 1934, when he noticed the conspicuous omission of Alan Greenspan among them. “Maybe that’s appropriate,” he joked, given what had been transpiring in the economy. (Greenspan’s portrait had, in fact, not yet been completed.)

  Bernanke finally arrived and took his seat. He, too, had just been privately briefed that Lehman might preannounce a staggering loss the following day but had decided that he would keep that news to himself during his meeting with the JP Morgan executives.

  Dimon informed Bernanke that they had just come from a visit with Paulson at Treasury, and the conversation turned to the blowback he had been facing for orchestrating the Fannie Mae and Freddie Mac takeover. “The negative publicity is really getting to him,” Bernanke acknowledged of Paulson, who had spoken to him yesterday morning and gotten an earful about the press coverage.

  Dimon then launched into his semiprepared remarks, glancing down occasionally at a paper on which he had scribbled some notes during the car ride over.

  “There’s a broad lack of confidence out there,” he said. “We’re hearing it from our clients, our customers; we’re seeing it in our prime brokerage.” He pointed out that despite the fact that the turmoil was, temporarily and perversely, helping JP Morgan’s business—since customers trusted it as one of the most solid banks—it was bad for everyone else and ultimately would be bad for his firm, too.

  This, of course, was hardly news to Bernanke, who sat politely nodding in his best professorial manner.

  Dimon then told the chairman—who had been joined by late-arriving Kevin Warsh, one of the Fed governors—that he was particularly worried about Lehman Brothers. He praised the decision to nationalize Fannie and Freddie, but noted the move had not helped calm the markets. “There’s confusion about the role government will play going forward,” he said, looking for the answer to the question on everyone’s mind: Would the Fed back additional bailouts?

  Bernanke, however, wasn’t prepared to show his hand, and as the meeting came to an end would say only, “We’re working on a number of initiatives. We’re just trying to stay ahead of this thing.”

  At Lehman, the air on the thirty-first floor seemed to only grow thicker as the day advanced. To some of his colleagues, Fuld looked as if he were having trouble breathing. He had been debating all weekend about whether to call Bank of America, and Treasury’s Ken Wilson had phoned him at least three times that morning, to press that case. “You gotta make the call,” Wilson instructed him. Wilson knew Bank of America well; during his stint at Goldman, he had been its banker for more than a decade. “It’s a good strategic fit,” Wilson urged. What Wilson hadn’t told Fuld was that he had already worked over Greg Curl of Bank of America to tee up the phone call. During an earlier conversation, Wilson had informed Fuld that the only way a deal was going to take place was if he was willing to take price off the table as a bargaining point. That was an indirect way of warning Fuld that he didn’t have much negotiating power—or time.

  Rodgin Cohen, who has a bad back, was standing at the computer in his corner office on the thirtieth floor of Sullivan & Cromwell’s offices overlooking the New York Harbor when the phone rang. It was Dick Fuld, giving him the instructions to call Bank of America’s Curl. Cohen scribbled out a script for himself as Fuld was speaking; the stakes on this one were too high to do a presentation off the top of his head.

  “Got it. I’ll call you back after I’ve talked to him.”

  Cohen studied his script one final time and got Curl on the line. “Look,” he said amiably, “the world has moved a lot. We’d like to reengage.”

  “O…kay,” Curl said slowly, making it clear that, while he agreed to listen to Cohen’s pitch on behalf of his client, he remained wary.

  “We have two priorities. Preserving Lehman’s brand and reputation and doing well by the Lehman people,” Cohen said.

  Then, checking the next sentence in the script, he paused for effect.

  “You will notice price is not a priority,” he said, “but there is, of course, a price at which we could not do a transaction.”

  “We could be interested,” Curl replied cautiously. “Let me talk to the boss and call you back.”

  “Greg, we’d be looking to do something quickly,” Cohen told him.

  “Got it.”

  Dimon and Zubrow hopped out of their black Town Car in front of 601 Pennsylvania Avenue, a six-story modern limestone building northwest of the White House that serves as JP Morgan’s Washington headquarters. It was here that all of the government-relations people worked, so a constant stream of Gucci-clad lobbyists was a familiar sight.

  By the time Dimon and Zubrow arrived most members of the operating committee had already finished their morning meetings and were eating lunch in a conference room on the second floor. Sandwiches and sodas were being passed around as Cavanagh was recounting how his conversation with Sheila Bair had gone and Black was regaling the group with anecdotes from his encounter with James Lockhart.

  As the conversation inevitably turned to Lehman and its falling stock price, Dimon told the group about their discussion with Bernanke. “I think he gets it,” Dimon said, but when a banker asked if the Fed was likely to bail out Lehman, Dimon’s reply was unequivocal: “Not going to happen.”

  Black had long been bearish on Lehman. At an internal leadership forum at JP Morgan in January 2007, he had predicted: “Dick Fuld will end up selling that company when he has to sell instead of when he should have sold it.” Reminding the group of his earlier prognostication, he announced: “I told you they would be fucked!”

  The mood grew more somber, however, as they all realized what an upheaval of that order would mean to them. If Lehman went d
own—and the government elected not to intervene—JP Morgan itself could suffer colossal losses. Zubrow informed the group that John Hogan, chief risk officer for JP Morgan’s investment bank, had sought more than $5 billion in collateral from Lehman the week before, and again during the weekend, but had received nothing as of yet. Zubrow had also been to see Lehman’s CFO, Ian Lowitt, and put him on notice that JP Morgan was worried about them.

  Black suggested that they call Fuld and demand that he send the collateral immediately. Just as important, the group decided that they should probably broaden the collateral agreement so that they’d be able to ask for even more money if other parts of Lehman’s business were to falter.

  Everyone agreed that this was the best course of action, so Black and Zubrow slowly rose from their seats and left the conference room. Their faces told the story: It was not going to be a pleasant conversation.

  Black dialed Fuld on the speakerphone and when the connection was made immediately explained their plight: “We got, you know, $6 to $10 billion worth of intraday exposure to you, and we don’t have enough collateral,” Black said. He reminded him that JP Morgan had asked for $5 billion the week before.

  “We understand that that’s a tough ask for you guys,” he continued, “so let’s spend some time on how we might solve our issue without creating a major issue for you.” In the back of Black’s mind he knew he was being far too generous; he could easily have said, If you don’t, we’ll shut you down tomorrow morning, which we have every right to do.

  Initially, it seemed as if Fuld had understood the veiled threat. “Let me get my guys, and we’ll take a look at it,” he said resignedly. Fuld proceeded to conference Lowitt into the call and calmly explained the situation to him. The four men discussed a handful of options that would enable Lehman to provide the collateral. Perhaps Lehman could move all its cash over to JP Morgan and just leave it on deposit, so it wouldn’t count against the firm’s capital?