Too Big to Fail

by Andrew Ross Sorkin

  retired from Goldman’s powerful executive committee: At the end of October, Goldman announced that Zuckerberg would retire at the end of its fiscal year (November). Anita Raghavan, “Zuckerberg, Goldman’s Vice Chairman, to Retire as the Guard Changes at Firm,” Wall Street Journal, October 23, 1998.

  Corzine had tears in his eyes: Ellis, The Partnership, 609–13.

  trading debut in a $3.66 billion offering: On May 4, 1999, after a seven-month delay, Goldman went public—selling an oversubscribed 69 million shares for $53 each—and officially ending its 130 years as a private partnership. “Goldman Sachs Shares Soar In Long-Awaited Trading Debut,” Dow Jones, May 4, 1999.

  a $4.3 million home: Marc Gunther, “Paulson to the Rescue,” Fortune, September 29, 2008.

  oversaw a department of 112,000: Ibid.

  refurbishment of the building’s basement gym: Gunther, “Paulson to the Rescue,” For tune.

  “When there is a lot of dry tinder”: Paulson used similar language in an interview he later did with 60 Minutes correspondent Scott Pelley: “You know, we are about due for some kind of market turbulence,” he told the news program. “I didn’t expect quite this. But I said to the team, as we worked, ‘You never know, when there’s a lot of dry tinder out there, you never know what spark is gonna light the tinder.’” 60 Minutes, CBS News transcripts, September 28, 2008.

  “We have these periods every six eight, ten years”: Daniel Gross, “The Captain of the Street,” Newsweek, September 29, 2008.

  “wind-down authorities”: At a September hearing on U.S. credit markets, Paulson said, “We were not left with the authorities we needed fully to protect the system and the taxpayer, because we have wind down authorities, where the insurance or, you know, savings depositors, FDIC insurance—in 75 years, you know, we haven’t had a saver with FDIC insurance lose a penny.” See “Senate Committee on Banking, Housing and Urban Affairs Holds Hearing on U.S. Credit Markets,” Congressional Quarterly transcripts wire, September 23, 2008.

  “Good Housekeeping Seal of Approval”: John Helyar and Yalman Onaran, “Fuld Sought Buffett Offer He Refused as Lehman Sank,” Bloomberg News, November 10, 2008.

  CHAPTER THREE

  an agitated Timothy F. Geithner took the escalator: Geithner’s plane left LaGuardia Airport at 7:00 p.m., arriving in D.C. at approximately 8:20 p.m. on Wednesday April 2, 2008. Geithner’s daily schedules at the New York Fed can be viewed online at the New York Times Web site. See http://documents.nytimes.com/geithner-schedule-new-york-fed#p=1.

  “The most important risk is systemic”: “Testimony Before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Washington, D.C,” April 3, 2008. See http://www.newyorkfed.org/newsevents/speeches/2008/gei080403.html.

  the $29 billion government backstop: A week after the deal, J.P. Morgan agreed to cover $1 billion of Bear Stearns’s losses, lowering the Fed’s backstop to $29 billion. Robin Sidel and Kate Kelly, “J.P. Morgan Quintuples Bid to Seal Bear Deal,” Wall Street Journal, March 25, 2008.

  comparing the Bear rescue unfavorably: “I have reached a certain age where I can remember quite a few things, and there are some resemblances between the present situation, I’m afraid, and the early 1970s,” said Paul Volcker, in a speech to the Economic Club of New York on April 8, 2008. See http://econclubny.org/files/Transcript_Volcker_April_2008.pdf.

  “Ford to City: Drop Dead”: On October 30, 1975, this New York Daily News headline appeared on the front page, a day after President Gerald Ford said publicly that there would no federal bailouts for a near bankrupt New York. Ford later lamented that he had never actually used the words “drop dead” in his speech. Sam Roberts, “Infamous ‘Drop Dead’ Was Never Said by Ford,” New York Times, December 28, 2006.

  after announcing a record loss: On Sunday, November 4, 2007, Citigroup held an emergency board meeting, which revealed that there could be up to $11 billion in additional subprime write-downs. Later that day Citi installed Robert Rubin as chairman and released this statement from Prince: “It is my judgment that given the size of the recent losses in our mortgage-backed securities business, the only honorable course for me to take as chief executive officer is to step down. This is what I advised the board.” Jonathan Stempel and Dan Wilchins, “Citigroup CEO Prince Expected to Resign,” Reuters, November 4, 2007; Tomoeh Murakami Tse, “Citigroup CEO Resigns,” Washington Post, November 5, 2007.

  “I’m not the right choice”: Jo Becker and Gretchen Morgenson, “Member and Overseer of Finance Club,” New York Times, April 27, 2009.

  making $398,200 a year: Geithner’s salary in 2008 has been reported as being $411,200, but this figure also includes the first two weeks of 2009. Scott Lanman, “Geithner Nomination Takes Top Fed Wall Street Liaison,” Bloomberg News, November 24, 2008; Robert Schmidt, “Geithner Takes Salary Cut to Run Treasury, Bloomberg News, Gets Fed Severance,” January 27, 2008.

  his monthly $80 haircut: Joseph Berger, “Suddenly, There’s a Celebrity Next Door,” New York Times, January 2, 2009.

  punctuating sentences with “fuck”: “A reassuring figure for Treasury,” The Economist, November 22, 2008.

  “He’s twelve years old!”: Robert Rubin recalled Pete Peterson telling him this after meeting Timothy Geithner. Peterson, when later asked about the comment, only remembered saying that Geithner looked young. Greg Ip, “Geithner’s Balancing Act—The Fed’s Go-to Man for Financial Crises Takes on Hedge Funds,” Wall Street Journal, February 20, 2007.

  summoning the chief executives: Lowenstein, When Genius Failed, 216; Victoria Thieberger, “Fed’s McDonough a Cool Head in Financial Storms,” Reuters, January 16, 2003.

  Geithner’s beginnings: Gary Weiss, “The Man Who Saved (or Got Suckered by) Wall Street,” Condé Nast Portfolio, June 2008; Yalman Onaran and Michael McKee, “In Geithner We Trust Eludes Treasury as Market Fails to Recover,” Bloomberg News, February 25, 2009; Daniel Gross, “The Un-Paulson,” Slate, November 21, 2008.

  published a number of incendiary stories: Peter S. Canellos, “Conservatives’ Sour on ‘Rebel Media,’” Boston Globe, April 19, 2007.

  Geithner played conciliator: Onaran and McKee, “In Geithner We Trust,” Bloomberg News.

  recommendation from the dean at John Hopkins: George Packard, then dean of John Hopkins, recommended Geithner to Brent Scowcroft, then vice chairman of Kissinger Associates, which led to his research job. Deepak Gopinath, “New York Fed’s Geithner Hones Skills for Wall Street,” Bloomberg Markets, April 22, 2004.

  a very favorable impression on the former secretary of state: “He doesn’t try to walk into a room and take it over,” Kissinger once said about Geithner. “He prevails with the power of his argument.” Candace Taylor, “Quiet NY Fed Chief Makes Loud Moves,” New York Sun, March 31, 2008.

  “The Committee to Save the World”: Time’s headline for its February 15, 1999, cover, which featured the faces of Treasury secretary Robert Rubin, Fed chairman Alan Greenspan, and Treasury deputy Larry Summers.

  On Thanksgiving Day, Geithner called Summers: Jon Hilsenrath and Deborah Solomon, “Longtime Crisis Manager Pleases Wall Street, Mystifies Some Democrats,” Wall Street Journal, November 22, 2008.

  “Tim’s controlled, consistent, with very good ground strokes”: Onaran and McKee, “In Geithner We Trust,” Bloomberg News.

  New York Fed is the only one whose president is a permanent member: “The Federal Open Market Committee includes seven members of the Board of Governors and five Reserve Bank presidents. While the president of the Federal Reserve Bank of New York serves on a continuous basis, the other 11 Reserve presidents serve rotating one-year terms beginning January 1 of each year.” http://www.federalreserve.gov/FOMC/.

  the annual salary of the New York Fed president: The Fed chairman’s salary in 2008 was $191,300. http://www.federalreserve.gov/generalinfo/faq/faqbog.htm.

  “These changes appear to have made the financial system”: Geithner, from his “Remarks at the Global Association of Risk
Professionals 7th Annual Risk Management Convention & Exhibition in New York City, February 28, 2006. http://www.ny.frb.org/newsevents/speeches/2006/gei060228.html

  his deputy, Steel, would be there in his place: “I very much appreciate the opportunity to appear before you today to represent Secretary Paulson and the U.S. Treasury Department,” Steel said on April 3, 2008. “As you know, Secretary Paulson is on a long-scheduled trip to China.” Steel’s full speech available at: http://www.ustreas.gov/press/releases/hp904.htm.

  underwriting more than 40 percent of all mortgages: Bethany Mc Lean, “Fannie Mae’s Last Stand,” Vanity Fair, February 2009; Carol D. Leonnig, “How HUD Mortgage Policy Fed the Crisis,” Washington Post, June 10, 2008.

  “Their securities move like water”: Justin Fox, “Hank Paulson,” Time, August 11, 2008.

  The two men had known each other since 1976: Brendan Murray and John Brinsley, “Paulson’s Surrogate Steel Sees ‘Initial’ Progress in Markets,” Bloomberg News, March 19, 2008.

  Steel came from a modest background: Rick Rothacker, Stella M. Hopkins, and Christina Rexrode, “Wachovia’s New CEO Is Pro in Crisis Control,” Charlotte Observer, July 13, 2008.

  “Was this a justified rescue”: Dodd’s question, as well as succeeding statements from Bernanke, Steel. and Geithner are taken directly from official Fed transcripts from the first half of the hearing. See “Panel I of a Hearing of the Senate Banking, Housing and Urban Affairs Committee,” Federal News Service, April 3, 2008.

  “Buying a house is not the same as buying a house on fire”: When asked about the logic behind Bear’s $2-a-share price, Dimon said: “I tell people that buying a house is not the same as buying a house on fire.” “Panel II of a Hearing of the Senate Banking, Housing and Urban Affairs Committee,” Federal News Service, April 3, 2008.

  cancel the office’s newspaper subscriptions to cut costs: Dimon “obsesses over spending at the granular level,” so much so that he once told a vice president, who was listing the company’s print subscriptions, “You’re a businessman; pay for your own Wall Street Journal.” See Ken Kurson, “Jamie Dimon Wants Respect,” Money, February 2002.

  “has suddenly become the most talked about”: Eric Dash, “Rallying the House of Morgan,” New York Times, March 18, 2008.

  “quickly becoming Wall Street’s banker of last resort”: Robin Sidel, “In a Crisis, It’s Dimon Once Again,” Wall Street Journal, March 17, 2008.

  “All hail Jamie Dimon!” Andrew Bary, “The Deal—Rhymes With Steal—of a Lifetime,” Barron’s, March 24, 2008.

  “I want to be rich”: Leah Nathans Spiro, “Ticker Tape in the Genes,” BusinessWeek, October 21, 1996.

  “I think you’re wrong!” Shawn Tully, “In This Corner! The Contender,” Fortune, March 29, 2006.

  which his mother showed to Weill: Leah Nathans Spiro, “Smith Barney’s Whiz Kid,” BusinessWeek, October 21, 1996.

  “Can I show it to people here?” As Monica Langley reported: “Sandy liked the paper enough that he sent Jamie a note: ‘Terrific paper. Can I show it to people here?’” Langley, Tearing Down the Walls, 50.

  “I won’t pay you as much”: Ibid., 74.

  “Jews are going to take over American Express!”: Ibid., 71.

  watching Weill sleep off his martini lunches: Ibid., 103.

  the $1.65 billion acquisition of Primerica: Robert J. Cole, “2 Leading Financiers Will Merge Companies in $1.65 Billion Deal,” New York Times, August 30, 1988

  A $1.2 billion purchase of Shearson: Dana Wechsler Linden, “Deputy Dog Becomes Top Dog,” Forbes, October 25, 1993.

  “You’re a fucking asshole!”: Langley, Tearing Down the Walls, 201.

  $4.2 billion deal for Travelers: Greg Steinmetz, “Primerica, Travelers Seal Merger Pact; Takeover May Speed Insurer’s Recovery, Wall Street Journal, September 24, 1993.

  “Promote her”: Langley, Tearing Down the Walls, 241.

  “Now we can be father and daughter again”: Ibid., 254.

  the $83 billion merger with Citicorp: Announced as a $70-billion merger Monday morning, by the day’s end Travelers had soared 18 percent and Citicorp, 27 percent, bringing the merger’s value up to $83 billion. Langley, Tearing Down the Walls, 289–93. Michael Siconolfi, “Citicorp, Travelers Group to Combine in Biggest-Ever Merger,” Wall Street Journal, April 7, 1998.

  “It’s bad enough how you treat me”: Langley, Tearing Down the Walls, 314.

  “Don’t you ever turn your back on me while I’m talking!”: Roger Lowenstein, “Alone at the Top,” New York Times Magazine, August 27, 2000.

  summoned Dimon to the corporate compound in Armonk: Timothy L. O’Brien and Peter Truell, “Downfall of a Peacemaker,” New York Times, November 3, 1998.

  the Internet retailer Amazon: Duff McDonald, “The Heist,” New York, March 24, 2008.

  Dimon brought in his own team of expense cutters: Shawn Tully, “In This Corner! The Contender,” Fortune, March 29, 2006.

  “fortress balance sheet”: Jamie Dimon representing JPMorgan Chase at the Credit Suisse Group Financial Services Forum, February 7, 2008.

  celebrating his fifty-second birthday over dinner: Alistair Barr, “Dimon Steers J.P. Morgan Through Financial Storm,” MarketWatch.com, December 4, 2008.

  “This wasn’t a negotiating posture”: “Panel II of a Hearing of the Senate Banking, Housing and Urban Affairs Committee,” Federal News Service, April 3, 2008.

  “I am very troubled by the failure of Bear Stearns”: Panel I of a Hearing of the Senate Banking, Housing and Urban Affairs Committee,” Federal News Service, April 3, 2008.

  CHAPTER FOUR

  private dinner to mark the end of a G7 summit: Treasury provided a list of dinner attendees to the press that Friday. Lehman’s Fuld was listed alphabetically between Larry Fink of BlackRock and John Mack of Morgan Stanley. “Attendees for G7 Outreach Dinner with Banks,” Reuters, April 11, 2008.

  it would raise $4 billion: Jenny Anderson, “Trying to Quell Rumors of Trouble, Lehman Raises $4 Billion,” New York Times, April 2, 2008.

  “We’re closer to the end than the beginning”: Joseph A. Giannone, “Goldman CEO Says Credit Crisis in Later Stages,” Reuters, April 10, 2008.

  a new IMF Report: International Monetary Fund, “Global Financial Stability Report,” April 2008, 50.

  staggering amount of leverage—the amount of debt to equity: “At the end of the first quarter in 2008, the leverage ratios at Morgan Stanley, Lehman Brothers, Merrill Lynch, and Goldman Sachs were 31.8, 30.7, 27.5, and 26.9, respectively, compared with an average of 8.8 for all U.S. commercial banks and savings institutions.” Senate Joint Economic Committee, “Financial Meltdown and Policy Response,” September 2008.

  “Just finished the Paulson dinner”: “Hearing on Causes and Effects of the Lehman Brothers Bankruptcy,” House of Representatives Committee on Oversight and Government, October 6, 2008. See http://oversight.house.gov/story.asp?ID=2208.

  “Break the Glass: Bank Recapitalization Plan”: Author obtained a copy of the proposal from a confidential source.

  Kashkari background: Deborah Solomon, “U.S. News: Paulson to Tap Adviser to Run Rescue Program,” Wall Street Journal, October 6, 2008.

  chairman of the Federal Reserve on February 1, 2006: Bernanke’s first day fell on the first of the month; his swearing-in ceremony took place the following Monday. “Our mission as set forth by the Congress is a critical one,” Bernanke said at his Fed ceremony. Jeannine Aversa, “At Ceremonial Swearing-in, New Fed Chief Bernanke Vows to Work with Congress,” Associated Press, February 6, 2006.

  Bernanke’s beginnings: John Cassidy, “Anatomy of a Meltdown,” New Yorker, December 1, 2008; Roger Lowenstein, “The Education of Ben Bernanke,” New York Times Magazine, January 20, 2008; Larry Elliott, “Ben Bernanke,” Guardian, June 16, 2006; Mark Trumbull, “Back-story: Banking on Bernanke,” Christian Science Monitor, February 1, 2006; Ben White, “Bernanke Unwrapped,” Washington Post, November 15, 2005.

  Anna Fr
iedmann, a Wellesley College student whom he married: John Cassidy, New Yorker, December 1, 2008.

  “Econometrics” research: Lowenstein, “The Education of Ben Bernanke,” New York Times Magazine, January 20, 2008.

  planned to take a vacation: Ibid.

  Interest rate left unchanged at 5.25 percent: “Fed Keeps Rates Steady,” Dow Jones, August 7, 2007.

  “The committee’s predominant policy concern”: “Text of Federal Reserve’s Interest Rate Decision,” Dow Jones Capital Markets Report, August 7, 2007.

  “They’re nuts! They know nothing!”: “Ben Bernanke needs to open the discount window…. He is being an academic! This is no time to be an academic. Open the darn discount window!…My people have been in this game for 25 years. And they are losing their jobs and these firms are going to go out of business, and he’s nuts! They’re nuts! They know nothing!…The Fed is asleep.” Jim Cramer, Mad Money, CNBC, August 3, 2007.