Too Big to Fail

by Andrew Ross Sorkin

  “Warren!” Flowers said enthusiastically, after reaching Buffett, as if they were best friends. He reminded him of their past dealing and then immediately explained the purpose of his call. He was staring at a piece of paper, he said, that showed that AIG would soon run out of money. He told Buffett that the spreadsheet was so basic, and so poorly done, that “I might have used it to track my grocery bill.”

  Hearing that Buffett was amused by the comment, Flowers continued, “They’re a bunch of morons!” and paused meaningfully before saying, “but there’s a lot of value here.” He explained that he was looking for Buffett to invest $10 billion of capital in AIG; he hoped, in fact, that they could make an investment together.

  Buffett, however, wasn’t especially interested in getting mixed up in such a mess. “You know, I don’t have as much money as I used to,” he said with a laugh. “I’m kind of low on cash.” He also wasn’t exactly sure he wanted to step into a battle between Hank Greenberg and Eli Broad, who were both waging war against the company. The only thing he might be willing to take a look at, he told Flowers, was AIG’s property and casualty business.

  “Listen, there might be a real opportunity here,” Flowers agreed. “Let me get Willumstad to at least call you.”

  Flowers returned to the room and told them Buffett was an unlikely candidate but urged Willumstad to contact him.

  Willumstad, who had never met Buffett, called and began his pitch, but before he could get very far into it, Buffett stopped him.

  “I’ve looked over the 10-K,” he said. “The company is too complicated. I don’t have enough confidence to do that. Look, nothing is going work with us, so don’t waste your time. You’ve got plenty to do.”

  But then he held out one glimmer of hope. “If you wanted to sell some assets that I might have some interest in…but I don’t know.”

  Willumstad thanked him for his time and consideration and slammed the phone down in frustration.

  By midday, rumors were now rampant at Lehman Brothers that the board might be about to fire Fuld. With the stock trading down another 9.7 percent to $3.71 a share, the possibility was being discussed openly not only throughout the office but in the media as well.

  By now the anger was also becoming increasingly palpable on the trading floor among the firm’s staff. Lehman’s employees were unique on Wall Street in that they owned a quarter of the company’s shares. For all the complaints about Wall Street being short-term oriented, most Lehman employees had a five-year vesting period, which meant huge sums of their own wealth were tied up in the firm without the ability to sell their shares. And as of Friday, those shares had lost 93 percent of their value since January 31; $10 billion had disappeared. (Fuld, who owned 1.4 percent of the company—some 10.9 million shares—had lost $649.2 million.) To make matters worse, in a cruel irony, Lehman employees were sent a memorandum that morning saying that the unrestricted shares that they did own outright, they could not sell; it was the standard blackout notice they received around earnings every quarter preventing them from selling shares for several weeks.

  Reports of Fuld’s possible ouster reached new heights when word spread that morning that John D. Macomber, one of Lehman’s board members and the former CEO of the chemical giant Celanese Corporation, had arrived at the building and was headed for the thirty-first floor. Almost a dozen people were milling about Fuld’s corner office when they saw Macomber, who was eighty years old, hobbling down the hallway toward them. Several began to leave as Macomber got to the door, expecting they would soon be asked to excuse themselves.

  “Stay,” Macomber ordered them.

  Fuld, looking haggard, greeted Macomber with a handshake. He didn’t think he was getting fired, but he could sense the nervousness in the room.

  “I want to talk to you,” Macomber said, and though for a moment some of the bankers thought he indeed intended to tell Fuld that his services were no longer required, he instead launched, to everyone’s surprise, into a rousing speech to rally the troops.

  “I want everyone in the room to know that I know that you guys have done a good job,” he said. “This was just bad luck. We’re one hundred percent behind all of you.”

  Fuld’s board, it seemed, was still loyally Fuld’s board.

  Rodgin Cohen was still over at Sullivan & Cromwell’s Midtown offices trying to coax Bank of America into buying Lehman. But he could tell something had gone wrong; Greg Curl’s body language had changed, and the BofA team seemed as if it had slowed down, as if it had already decided against bidding.

  Cohen, who was one of the few lawyers in the city who had direct access to Tim Geithner, dialed his office to report his suspicions that the government’s hard line against offering any help had scared Bank of America away.

  “I don’t think this deal can get done without government assistance,” Cohen stressed to Geithner. “They may be bluffing us, and they may be bluffing you. But we can’t afford to call that bluff.”

  Geithner, who had expressed similar worries to Paulson the day before but had been told to stand down, was succinct in his response: “You can’t count on government assistance.”

  At about 2:20 p.m., just as Lehman’s shares fell another 6 percent to $3.59, Hank Paulson, visibly frazzled, ran downstairs and out of the Treasury Building to head to the airport. Dan Jester, Jim Wilkinson, and Paulson’s assistant, Christal West, jumped in his Suburban with him. Christopher Cox was planning to meet them at the airplane.

  On a call just hours earlier, he and Geithner had officially determined that something needed to be done about Lehman.

  If they really were going to convene all the CEOs on Wall Street and try to urge them to come up with a private-market solution, now was the time to do it. Otherwise, by Monday, Lehman would be unsalvageable. “We have the weekend,” he reminded them.

  They settled on setting up a meeting at 6:00 p.m. at the New York Fed. Geithner’s office wouldn’t start calling all the CEOs until just past 4:00 p.m., after the market had closed. The last thing they could afford was for news of the meeting to leak.

  Paulson, who usually made the trip to New York on US Airways, which offered a government discount—Wendy had always given him grief about flying in a private jet—arranged to charter a plane to New York, using his NetJets accounts. He couldn’t afford to be delayed; the matter at hand was too important, and the weather was atrocious. If anything, he was worried the plane wouldn’t even be able to take off.

  As they sped toward Dulles to catch the flight, Paulson, almost inaudibly, said, “God help us.”

  CHAPTER FOURTEEN

  Lloyd Blankfein was milling about the greenroom at the Hilton Hotel on Fifty-third Street at Sixth Avenue, waiting to make a speech at the Service Nation Summit, an annual conference coordinated by a coalition of nonprofits that promotes volunteerism in America. Dressed in his customary blue suit and pressed white shirt and blue tie, he had come to give one of the keynote addresses—following Governor Arnold Schwarzenegger and preceding Hillary Clinton—to discuss Goldman’s 10,000 Women nonprofit program, which fostered business and management education for women in developing and emerging economies.

  Clinton, who had been at the other side of the greenroom returning phone calls, now strolled over to him and politely asked if she might speak before him; she had to get to a dinner, she explained. Blankfein was a big fan; he had given her some $4,600 in donations and had endorsed her in the Democratic primaries over Barack Obama. Since he had no pressing business himself, Blankfein gladly agreed to the switch.

  Two minutes later, however, Blankfein’s cell phone rang. “We got a call from the Fed. There’s a meeting at six p.m. for all the bank CEOs,” his assistant told him, sounding simultaneously excited and nervous. “Paulson, Geithner, and Cox are supposed to be there.”

  This was it, Blankfein thought. The big one. Paulson was going to have “the families” meet to try to save Lehman.

  Blankfein looked at his watch. It was already getting cl
ose to 5:00 p.m., Schwarzenegger was still chattering away, and he had just given his spot away to Clinton.

  He tried to reach Gary Cohn, Goldman’s co-president, to find out what was going on but didn’t get an answer—Cohn was likely still on the shuttle back from D.C. after testifying at a hearing for the Committee on Energy and Natural Resources.

  Blankfein sheepishly walked over to Clinton. “Remember I told you that you could go ahead of me?” he asked. “Well, I have an emergency. I just got a call that I have to go to the Fed.”

  Clinton looked at him as if she didn’t understand what he was saying.

  Embarrassed, he tried to explain: “They usually don’t call me up when it’s something really pleasant, since they’ve done this a total of never.”

  She half-smiled sympathetically and let him speak first.

  Jamie Dimon could hardly believe his bad luck. He was supposed to be home by 7:00 p.m. to have dinner with his daughter Julia’s boyfriend’s parents, whom he and his wife were meeting for the first time. Julia, his eldest daughter, had been begging her father all week to be on his best behavior and to make a good impression. And now the Fed was calling an all-hands-on-deck meeting of Wall Street’s top brass.

  Dimon called his wife, Judy, who was well accustomed to receiving calls like this from her husband. “Geithner’s called us down to the Fed,” Dimon told her. “I don’t know how long it’ll go. I’ll try to get there as soon as I can.”

  Dimon hung up the phone and hurried down the hallway to tell Steve Black the news. Black had just confirmed his plans to play in a tournament at the Golf Club of Purchase in Westchester, teeing off the next morning at 7:00.

  “We’re going down to the Fed,” Dimon told him.

  “You’ve got to be fucking kidding me,” he replied.

  Black immediately called the Purchase club back. “Sorry,” he said with a weary sigh, “I was only kidding. Take me out.”

  Brian Moynihan, Bank of America’s president of global corporate and investment banking, was reviewing some of Lehman’s assets valuations at Sullivan & Cromwell’s Midtown offices when Ken Lewis phoned from Charlotte.

  “We got a call from Geithner’s office,” Lewis told him. “You have to go down to the Fed. They’re going to do a meeting to figure out what to do about this whole situation.”

  Moynihan rushed downstairs, bolted without an umbrella through the revolving doors and into the pouring rain, and commandeered one of Sullivan & Cromwell’s Town Cars to take him down to the New York Federal Reserve.

  Just as the car was making its way into Park Avenue traffic and he dried himself off, Moynihan’s cell phone rang again.

  “There’s been some crossed wires, Mr. Moynihan,” one of Tim Geithner’s assistants told him. “I know we had invited your firm to this meeting—”

  “Yes, I’m on my way down right now,” he assured her.

  After a brief pause she said, “Given your bank’s role in the merger discussions, we believe it would be inappropriate for you to attend the meeting.”

  Moynihan had gotten no farther than eight blocks before turning around and calling Lewis to tell him the news.

  John Mack and Colm Kelleher, Morgan Stanley’s chief financial officer, were sitting in the backseat of Mack’s Audi, having hurried to the car just ten minutes earlier after Mack’s secretary had instructed them to get down to the Fed as soon as possible. “This must be Lehman,” Kelleher had said as they rushed out.

  Not only was the rain pelting the roof furiously, but they were now sitting in bumper-to-bumper traffic on the West Side Highway, still miles away from their destination.

  “We’re not fucking moving,” Mack said, repeatedly checking his watch.

  “We’re never going to get there,” Kelleher agreed.

  Mack’s driver, John, a former police officer, noticed the bicycle lane running alongside the highway—a project of the Bloomberg administration to encourage walking and cycling.

  “Boss, that bike lane on the right, where does it go?” John asked, craning his neck back at them.

  Mack’s face lit up. “It goes all the way down to the Battery.”

  “Fuck it!” the driver said as he found a break in the street divider and inched the car onto the bike lane, speeding down it.

  Hank Paulson’s Cessna Citation X touched down on runway 1-19 at New Jersey’s Teterboro Airport at 4:40 p.m. The pilot, navigating through a torrential downpour and fifty-mile-an-hour winds, threw the switch on the flaps and taxied to the main gate, where the Secret Service was waiting in two black Chevrolet Suburbans.

  Now, as they inched their way through the Holland Tunnel toward Manhattan in rush-hour traffic, Paulson took a call from Greg Curl of Bank of America and Chris Flowers, the firm’s banker, who had completed their assessment of the Lehman numbers.

  “We’re going to need the government to help to make this work,” Curl told Paulson bluntly and then launched into a series of proposed deal terms, conditions that would have to be met in order for this transaction to take place.

  Paulson listened patiently, even if he had a hard time understanding why Curl felt he had the upper hand to the point that he could dictate the conditions. But, as Paulson himself liked to say, “You only need two girls at the dance to call it an auction,” and under the circumstances, he needed BofA to be one of them. If he could just keep Bank of America around long enough to close a deal with Barclays, he’d have succeeded. Paulson handed his cell phone over to Dan Jester (who had, ironically, worked for Flowers at Goldman in the financial services group in the 1990s), who took notes.

  Curl told Jester that Bank of America would agree to the deal only if the government was willing to take $40 billion of losses on Lehman’s assets. “We’ve been through the books, and they’re a mess,” Curl explained, referring to Lehman’s bountiful toxic assets. Bank of America, he said, would be willing to split the first $1 billion of losses with the government, but after that, the next $40 billion, the government would have to guarantee. In exchange, Curl told him, the bank would give the government warrants (the option to buy shares at a later date) for Bank of America, with a strike price of $45 a share. (BofA shares closed that day at $33.74.) Jester mouthed the figures to Paulson as Curl relayed them. Both men shook their heads, knowing full well that under these terms a deal was never going to happen.

  As the Suburban made its way through downtown Manhattan, Paulson called Geithner to strategize. It was already past 6:00 p.m., when the meeting was set to begin; they figured they would let the CEOs stir for a bit until Paulson arrived, just to let them know they meant business.

  Thirty-three Liberty Street, the New York Federal Reserve Building, is an imposing, fortresslike sanctuary of old-fashioned, traditional finance. In 1927 Margaret Law, a critic for Architecture magazine, wrote that the three-year-old building had “a quality which, for lack of a better word, I can best describe as epic.” Deep below the limestone and sandstone building, which was modeled after the Strozzi Palace of Florence, lies a three-level vault built into the bedrock of Manhattan, fifty feet under sea level. It holds more than $60 billion of gold. Real hard assets, with real value.

  If Lehman’s fate was going to be resolved—if Wall Street was going to be saved—the matter would be decided at 33 Liberty Street. While modern finance may have allowed investors to zip money across continents in milliseconds, the New York Federal Reserve stood as one of the last bastions of tangible values.

  As John Thain’s black GMC Yukon pulled up to the building, he couldn’t help but recall the last time he had come there, as a partner at Goldman, in response to another such cataclysmic event, the rescue of Long-Term Capital Management in 1998. For three straight days, he had worked around the clock to come up with a solution.

  And had they not saved Long-Term Capital, the next domino back in 1998 was clearly Lehman Brothers, which was suffering from a similar crisis of confidence.

  The irony of the situation was rich. Ten years earlier, on a Satur
day morning just past 7:30 a.m., Thain had run into Fuld in the Fed hallways and asked, “How’s it going?”

  “Not so well,” Fuld had said. “People are spreading nasty rumors.”

  “I can’t imagine that,” Thain had replied, trying to be polite, but knowing full well that the rumors were everywhere.

  “When I find out who it is,” Fuld had said furiously, “I’m going to reach down his throat and tear out his heart.”

  They were back to where they started.

  The meeting of “the families” did not begin until 6:45 p.m., when Paulson, Geithner, and Cox finally emerged, briskly walking down a long hall on the first floor, almost as if they were marching in a formation, toward a conference room in the south corner of the building overlooking Liberty and Williams Streets.

  The CEOs had all been milling about, tapping away on their BlackBerrys, and pouring themselves cups of ice water to cool themselves from the miasma of humidity that hung in the building. If there had been any question about the subject of this gathering, it was readily apparent before Paulson ever said a word: Conspicuous by his absence was the longest-running member of their tribe, Dick Fuld.

  “Thanks for coming down here on such short notice,” Paulson began.

  He explained that Lehman Brothers was in a “precarious position” and told the group, “We’re going to need to find a solution before the weekend is out.”

  And then, to make it perfectly clear what the parameters of that solution were going be, he stated flatly: “It’s not going to be government money; you’re going to have to figure this out.”

  “We’ve got two buyers that are each going to need help in my judgment,” he continued. He did not mention Bank of America or Barclays by name, but everyone knew who the players were—the names had crossed the tape twenty-four hours earlier. He revealed to the men arrayed around the table that each bidder had already indicated to him that it would not buy Lehman Brothers unless the government—or someone—consented to finance at least part of the deal.