Too Big to Fail

by Andrew Ross Sorkin

  Fuld tried to turn the call around, using it as an opportunity to ask Black if JP Morgan might be willing to offer Lehman some amount of cash, perhaps in the form of a loan that could be converted into Lehman stock. After all, Dimon had always told Fuld to call if he needed anything.

  “We’re getting ready to preannounce tomorrow,” Fuld told Black. “Maybe we need to hold that up for a day if you guys seriously think Jamie would consider doing a convert and taking a piece of us.”

  To the JP Morgan bankers, it was a ludicrous suggestion, like someone’s asking the repo man if he had any spare change.

  Black looked at Zubrow as if to say, Fuld has lost it, and replied carefully, “I don’t have any ideas, any brilliant ideas off the top of my head, but if you’re telling me you’re at that point where you would consider…that you’re at the point where it’s really getting difficult, then let us still talk and come back and see if there’s anything we can do.”

  Five minutes later, after a quick and sober discussion with his colleagues, Black was back on the phone with Fuld.

  “Dick, there’s nothing that anybody’s gonna…there’s nothing we can do, and frankly, there’s nothing anybody’s gonna do other than what might be in their own self-interest,” Black explained. “I’m sorry to say this, but my suggestion is to call the Fed and see if they might try and put together a Long-Term Capital–type proposal, and herd all the cats into one room.”

  There was a pause at the other end of the line, and then Fuld said icily, “That would be terrible for our shareholders.”

  Black could hardly keep from laughing. “No one is going to give a shit about your shareholders,” he replied.

  Stilling his frustration, Fuld tried to reengage Black. “I just talked to Vikram,” he announced. “Citi is sending a bunch of guys over to meet with our capital markets guys, and some of our management team, to see if there is some type of a capital market solution that we could announce at the same time that we’re pronouncing earnings.”

  Citi? Was Fuld joking? “OK,” Black said guardedly. “We can send over some of our guys.”

  Black immediately called Doug Braunstein, head of JP Morgan’s investment banking practice: “I’d like you to go and John [Hogan] to go,” he told him after explaining the situation. “I have no idea what they want. The fact that Citi has an idea probably means it doesn’t work,” he said with a chuckle. “But see what is up and see what they’re talking about.”

  Hank Paulson had his eyes fixed on his Bloomberg terminal as he watched Lehman’s share price carefully. It was 2:05 p.m., and the stock was down 36 percent, to $9, its lowest level since 1998.

  He had just gotten off the phone with Fuld, who had called with an update on his approach to Bank of America. Paulson was pleased to hear Fuld was now taking this seriously but afraid it was all too late.

  On Paulson’s television that moment, tuned to CNBC, the speculation among the network’s commentators was illuminating.

  “The stock is coming down at the rate it’s coming down because a number of people believe strongly that the company is headed for bankruptcy,” explained Dick Bove, a veteran banking analyst at Ladenburg Thalman. “I think that that belief is what is driving the short selling.”

  Erin Burnett, the anchor of Street Signs, countered: “But if people are still using the company as a counterparty, trusting the company, isn’t that a significant statement?”

  “The key thing you have to understand is it’s not in anyone’s interest for Lehman to fail,” replied Bove, who, oddly enough, had a buy on the stock and a $20 price target. “It’s not in the interest of its competitors—Goldman Sachs, Morgan, Citigroup, JP Morgan—because if Lehman were to fail, then the pressure moves to Merrill Lynch and then it moves to who knows who else?

  “It’s also, you know, not in the interest of the U.S. government for Lehman to fail,” Bove stressed again. “You have to believe, although I can’t tell you this is true, that Lehman has been talking to the Federal Reserve of New York, to Ben Bernanke, probably to Hank Paulson, because they don’t want this company to fail.”

  How true. Paulson picked up the phone to call Geithner to discuss what other options they might pursue.

  By the time the closing bell rang at the New York Stock Exchange, Lehman’s shares had taken a brutal beating, ending the day at $7.79, having fallen 45 percent. McDade’s secretary could hardly keep up with the calls. McDade himself had to help his new CFO, Ian Lowitt, prepare the numbers for the following day’s earnings call. They’d officially decided they had to preannounce something—anything, really—as investors needed to hear from them.

  McDade also had to brief Larry Wieseneck and Brad Whitman, whom he had designated to meet with JP Morgan and Citigroup executives at Simpson Thacher’s Midtown offices later that day. They would ask for one or both banks to extend a credit line or perhaps to consider helping them raise capital. Finally, perhaps the trickiest task of all, he had to figure out how the firm would position its good bank–bad bank plan to investors. The reason that was such a challenging proposition was that nobody could or would put a price on the firm’s abundance of toxic assets.

  If all that weren’t enough to deal with, McDade had just had a baffling conversation with Fuld, who informed him that Paulson had called him directly to suggest that the firm open up its books to Goldman Sachs. The way Fuld described it, Goldman was effectively advising Treasury. Paulson was also demanding a thorough review of Lehman’s confidential numbers, courtesy of Goldman Sachs.

  McDade, though never much of a Goldman conspiracy theorist, found Fuld’s report discomfiting, but moments later was on the phone with Harvey Schwartz, Goldman’s head of capital markets. “I’m following up on Hank’s request,” he began.

  After another perplexing conversation, McDade walked down the hall and told Alex Kirk to immediately call Schwartz at Goldman, instructing him to set up a meeting and get them to sign a confidentiality agreement.

  “This is coming directly from Paulson,” he explained.

  At 4:30 p.m. Paulson asked Christal West, his assistant, to get Ken Lewis on the phone. Ken Wilson had just briefed Paulson on his most recent call with Fuld—his seventh of the day—about Bank of America again. Now, Wilson told Paulson that all he needed to do was to make the case directly to its CEO. Paulson and Lewis did not know each other well, and the only real time they had spent together was a lunch in Charlotte several years back, when Paulson was still at Goldman. Ken Wilson had brought Paulson down to meet Lewis then to demonstrate Goldman’s loyalty to their acquisitive client.

  “I’ve got Lewis on the line,” West finally called out to Paulson, who picked up the receiver.

  “Ken,” he began gravely, “I’m calling about Lehman Brothers,” and after pausing said, “I’d like you to take another look at it.”

  The receiver was silent for a few seconds. Lewis agreed to consider it, but added: “I don’t know how much it will do for us strategically.” He made it clear, however, that the price would have to be right. “If there’s a good financial deal there, I could see doing it.”

  Lewis’s biggest concern about a potential deal, as he told Paulson, was Fuld, who Lewis worried would be unrealistic about his asking price. He recounted to Paulson how badly their meeting had gone back in July.

  “This is out of Dick’s hands,” Paulson assured him. It was a powerful statement that could be interpreted only one way: You can negotiate directly with me.

  By 7:30 p.m., the conference room on the thirtieth floor of Simpson Thacher was packed with executives from JP Morgan and Citigroup, who were milling about impatiently. “This is going be a waste of two hours of our time,” John Hogan of JP Morgan whispered to his colleague, Doug Braunstein, who just smiled wryly.

  Larry Wieseneck greeted Gary Shedlin—co-head of global financial institutions M&A of Citigroup and one of his closest friends and regular golf partners at Crestmont, their club in New Jersey—then assessed the crowd. Realizing that he
wasn’t even certain who everyone was, he passed around a piece of paper asking them all to sign in. If he was going to share confidential information with them, he wanted to know precisely with whom he’d be dealing.

  Wieseneck was particularly worried about the imbalance of people from JP Morgan’s risk department, compared to the deal-making bankers he had expected would be coming to help them think through their options. “These are all risk guys,” he told his colleague Brad Whitman, as the two chatted in the corner, plotting strategy. This was supposed to be a meeting on how to save Lehman, he thought, not a due diligence session for JP Morgan to figure out the extent of its exposure if Lehman failed.

  Apologizing for the delay, Wieseneck announced to the room that they were waiting for Skip McGee, Lehman’s head of investment banking, to arrive.

  “We’ve got a lot of people here,” Braunstein, who had brought his whole team along, complained. “We can’t wait here all night.”

  As tension in the room continued to rise, Whitman finally received an e-mail from McGee, who told him to go ahead and begin, as it was unlikely that he would be able to make it at all.

  After calling the group to order, Wieseneck walked it through Lehman’s plan to spin off its real estate assets as a “bad bank.” Everyone agreed the plan was a good one, but there was general concern that it might have come too late, given that it would take months to put into effect. And Lehman would need to infuse the entity with at least a modicum of capital to prevent it from toppling immediately.

  Wieseneck then opened up the meeting to questions, and almost immediately became annoyed by the sheer volume of them posed by the JP Morgan bankers—most of which had nothing to do with helping Lehman raise capital. “How big is the book? What assumptions are you using around the models?” Hogan asked. “It sounds like you probably need some capital to make this whole thing work.” The Lehman representatives didn’t have any answers, suggesting that he get in touch with their CFO.

  To Wieseneck it was obvious that what the queries were really about was determining Lehman’s liquidity position: whether counterparties were trading with it and the status of its cash position. These were all legitimate concerns that any prudent investor might have, but in this case, Wieseneck and Whitman suspected that they were intended more as a means to protect JP Morgan. Shedlin’s questions, in contrast, were directed at various possible structures of deals that could help Lehman, but he was getting drowned out by the other bankers around the table.

  The one point on which bankers from both sides agreed was that Lehman should not announce its SpinCo plan unless it could identify the exact “hole” that it needed to fill—that is, how big a capital infusion was necessary. “You don’t know how much money you’re going to need,” Hogan told them. “By going out and announcing this, you’d only add uncertainty to the market,” he warned. “You’d get crushed.”

  Shedlin was even blunter. “Look, we think it’s very dangerous for you guys to lay out a strategy with a SpinCo where people basically will conclude that you guys still have a very significant capital hole,” he said. “Going out with a story that suggests you have a big capital hole and no solution to raising it is only gonna put you at the mercy of the market even more.”

  As the meeting broke up, two messages were clear as day to Wieseneck and Whitman. The first: Forget about announcing the plan, but if you feel you must do so, be very careful about talking about raising new capital and don’t get pinned down to a specific number.

  It was the other, however, that made them appreciate the true depth of their predicament: You’re on your own. None of the banks volunteered to offer any new credit lines.

  As soon as Braunstein and Hogan left the building and crossed Lexington Avenue, they called Jamie Dimon and Steve Black.

  “Here’s the story,” Hogan said, virtually shouting into his cell phone. “I think these guys are fucked.” They proceeded to walk Dimon and Black through all of the details of what Lehman was preparing to announce the following day.

  “We have to go back and tie everything up and line up all of our contingent risks,” Hogan insisted. “I don’t want to take a hickey on this.”

  From the Bank of America headquarters in Charlotte, North Carolina, Greg Curl dialed Treasury’s Ken Wilson, who was still in his office, frantically fielding calls. Wilson had been expecting to hear from Curl, notifying him that he was getting on a plane to New York to begin his due diligence on Lehman.

  Curl, however, was phoning with very different news. “We’re having an issue with the Richmond Fed,” he explained. Jeff Lacker, the president of the Federal Reserve of Richmond, Bank of America’s regulator, had been concerned about the bank’s health and had been putting pressure on it to raise new capital ever since it had closed its acquisition of Countrywide in July. As the official overseer of banks in Virginia, Maryland, North Carolina, South Carolina, the District of Columbia, and part of West Virginia, the Richmond Fed wielded considerable power through its regulation of capital reserves.

  “They’ve been screwing around,” Curl complained to Wilson, who was hearing of this for the first time. Curl told him that at the time that Bank of America was considering acquiring Countrywide back in January—a purchase that the government had quietly encouraged to help keep that firm from imploding—the Fed had quietly promised to relax its capital requirements if it proceeded with the deal. Or at least that’s what Ken Lewis thought.

  Now, two months after the Countrywide acquisition had been completed, Lacker was threatening to force the bank to slash its dividend. Bank of America had not disclosed the conversations, hoping they’d be able to resolve the matter before the news ever leaked. The bank had been working the phones that afternoon with the Richmond Fed to try to figure out where the bank now stood with Lacker, but it was having little luck. “We’re going to need your help,” he told Wilson. “Otherwise, we can’t move forward.”

  Wilson recognized the gambit all too clearly: Bank of America was using the Lehman situation as a bargaining chip. The bank would help Lehman, but only if the government would do it a favor in return. Lewis, through Curl, was playing hardball.

  Wilson promised to look into the matter and then immediately called Paulson. “You’re not going to believe this…”

  At 10:00 p.m., a frustrated Bart McDade was still holding court in the boardroom on the thirty-first floor at Lehman Brothers. He had just learned that Bank of America wasn’t coming up to New York in the morning, though he didn’t yet understand exactly why. “We’re playing against the clock,” he railed.

  Hours earlier, McDade had implored Fuld to go home and get some sleep before tomorrow’s earnings call, for which he needed to be on his best form. Since Fuld left, he had been reviewing various drafts of the press release. What should they say? What could they say? How should they say it?

  McDade had just finished coaching Lowitt, his CFO, through his part of the presentation when Wieseneck and Whitman returned from their meeting with JP Morgan and Citigroup.

  Before joining everyone in the boardroom, they huddled with Jerry Donini and Matt Johnson, along with a half-dozen other bankers. Whitman described the entire meeting to them. “It was unbelievable,” he concluded his account, shaking his head. “It was like a JP Morgan risk convention!”

  The group then joined McDade in the conference room, where, after Wieseneck and Donini walked the group through the SpinCo plan, Wieseneck shared the advice that JP Morgan and Citigroup had given them earlier. “We’ve got to be careful how we message if we intend to raise capital or not,” Donini warned.

  It was about 1:30 a.m. before everyone finally packed it in. A small fleet of black Town Cars lined Seventh Avenue in front of the building to whisk the bankers home. They’d need to be back at the office only five hours later, giving them time for perhaps a brief nap and a shower, before a day that they suspected would determine the course of their futures.

  CHAPTER THIRTEEN

  The day’s papers for Wed
nesday, September 10, 2008, were strewn everywhere in Dick Fuld’s office, where a sleep-deprived Bart McDade and Alex Kirk had arrived at 6:30 a.m. for last-minute preparations for the looming conference call, scheduled to begin in only three and a half hours. The news was not good.

  The lead of the New York Times read: “Only days after the Bush administration assumed control of the nation’s two largest mortgage finance companies, Wall Street was gripped by fears that another big financial institution, the investment bank Lehman Brothers, might founder—and that this time, the government might not come to the rescue.”

  Several paragraphs down came the quote that succinctly stated the threat that now faced them: “Some may worry that Treasury has taken on so much taxpayer burden they don’t have any remaining capacity to take on the burdens of Lehman,” said David Trone, an analyst at Fox-Pitt Kelton.

  The Wall Street Journal noted the differences between what had taken place during the final days of Bear Stearns and what was now occurring at Lehman. For one thing, Lehman could borrow from the Federal Reserve.

  It wasn’t just the stock investors who were nervous; Fuld and McDade had already begun receiving reports from the trading floor that morning indicating that more hedge funds were pulling their money out of Lehman. A sign of just how desperate the situation had become was that GLG Partners of London—whose largest shareholder, with a 13.7 percent stake, was Lehman—reduced the amount of business it conducted with the firm.