Too Big to Fail

by Andrew Ross Sorkin

  BNP Paribas announced that it was halting investors from withdrawing: As of August 7, after declining 20 percent in just under two weeks, the funds had some €1.6 billion ($2.2 billion) left in assets. Sebastian Boyd, “BNP Paribas Freezes Funds as Loan Losses Roil Markets,” Bloomberg News, August 9, 2007.

  “The complete evaporation of liquidity”: Ibid.

  Bigger cash infusion than after September 11: On September 12, 2001, a day after the attacks, the European Central Bank (ECB) injected a record €69.3 billion. “ECB Injects 95 billion Euros Into Money Supply Amid US Subprime Worries,” Agence-France Presse, August 9, 2007.

  “unprecedented disruptions”: Countrywide’s SEC filing late Thursday said it had adequate funding liquidity but added, “[T]he situation is rapidly evolving and the impact on the company is unknown.” Randall W. Forsyth, “Why the Blowup May Get Worse,” Barron’s, August 13, 2007.

  “Every banker knows that if he has to prove”: Bagehot, Lombard Street, 69.

  reversed his earlier decision: On Friday, August 17, 2001, the Fed issued a statement lowering the rate on discount window borrowings, which buoyed the market. “S&P 500 Futures Sharply Higher On Fed Statement,” Dow Jones, August 17, 2007.

  “at this point, the troubles in the subprime sector”: Bernanke delivered this speech via satellite to attendees of the 2007 International Monetary Conference in Cape Town, South Africa. See Ben Bernanke, “The Housing Market and Subprime Lending,” June 5, 2007. See http://www.federalreserve.gov/newsevents/speech/bernanke20070605a.htm

  “I’ve got some fairly heavy background in mathematics”: Faber, And Then the Roof Caved In, 95.

  was also a die-hard Sox fan: Stanley Reed, “Barclays: Anything But Stodgy President Bob Diamond has turned the once-troubled investment banking unit into a powerhouse,” BusinessWeek, April 10, 2006.

  they joined the board of Barclays at same time: On June 1, 2005, Robert Diamond Jr., chief executive of investment banking and investment management, joined the board as an executive director, while Robert Steel, former vice chairman of Goldman Sachs, joined as a nonexecutive director. “Barclays PLC—Directorate Change,” Regulatory News Service, May 27, 2005.

  Diamond had so abruptly left Morgan Stanley in 1992: “‘Coach’ Proud of His Trading Floor Origins,” Financial News, December 4, 2000.

  losing an expensive bidding war for Dutch bank ABN AMRO: Seven months after its initial bid for ABN AMRO, and following a battle involving investors in China, Singapore, the Royal Bank of Scotland, and even Bank of America, Barclays withdrew its bid for the Dutch bank on October 5, 2007. Carrick Mollenkamp, “Barclays’s CEO Shifts to Plan B—U.K. Bank Pursues Emerging Markets As ABN Bid Fails,” Wall Street Journal, October 6, 2007.

  CHAPTER FIVE

  breakfast meeting with Dick Fuld: Took place on Thursday, April 2, 2008.

  counted as one of his best friends Eliot Spitzer: When the prostitution scandal broke, Cramer had this to say about his Harvard Law School pal: “Eliot’s one of my oldest friends, so is Silda. You know, look, I hope it’s not true. You know, I read it like you did—I hope it’s not true…. Eliot’s my friend. So he’s my friend, he’ll be my friend after.” “DealBook: Wall Street on Spitzer: ‘There Is a God,’” New York Times, March 10, 2008.

  “the uptick rule”: After the rule’s repeal on July 6, 2007, Cramer continuously lamented the loss on his show Mad Money. “Cramer Is Uptick’d Off” and “Out with Cox, in with Uptick Rule,” Mad Money, CNBC, May 4, 2009, November 21, 2008.,

  unbelievable portfolio from Peloton: Founded in 2005 by Ron Beller and Geoffrey Grant, the London hedge fund Peloton Partners was forced into a fire sale in February 2008. Cassell Bryan-Low, Carrick Mollenkamp, and Gregory Zuckerman, “Peloton Flew High, Fell Fast,” Wall Street Journal, May 12, 2008.

  Tickets as much as $3,250: Hugo Lindgren, “The Confidence Man,” New York, June 23, 2008.

  Tomorrow’s Children Fund: Ira W. Sohn conference proceeds go to this fund, which helps children with serious blood disorders and cancer (Sohn, a trader, died of cancer at twenty-nine). See http://www.atcfkid.com/.

  “We start by asking why a security is likely to be misvalued in the market:” Einhorn, Fooling Some of the People All of the Time, 14.

  “The Nonrecurring Room”: Jesse Eisinger, “Diary of a Short-Seller,” Condé Nast Portfolio, May 12, 2008.

  had announced that it was stopping investors: At 2:30 a.m. on August 9, Dow Jones posted a press release from BNP Paribas: “The complete evaporation of liquidity in certain market segments of the US securitisation [sic] market has made it impossible to value certain assets fairly regardless of their quality or credit rating. The situation is such that it is no longer possible to value fairly the underlying US ABS assets in the three above-mentioned funds. We are therefore unable to calculate a reliable net asset value (“NAV”) for the funds. See BNP Paribas Unit to Suspend NAV Calculation of Some Funds, Dow Jones, August 9, 2007.

  code-named “The Credit Basket”: Lindgren, “The Confidence Man,” New York.

  “It is early, and we don’t give guidance on future periods”: Chris O’Meara, Lehman’s Chief Financial Officer, from the “Q3 2007 Lehman Brothers Holdings Inc. Earnings Conference Call,” September 18, 2007.

  “This is crazy accounting”: Lindgren, “The Confidence Man,” New York.

  “Lehman is not that materially different from Bear Stearns”: David Einhorn, “Private Profits and Socialized Risk,” Grant’s Spring Investment Conference, April 8, 2008.

  “I can only feel that you set me up”: Einhorn’s exchange with Callan reported by Susanne Craig, “Finance Chief Is Demoted,” Wall Street Journal, June 13, 2008.

  “This is classic value”: “Stock Picks from Sohn Investment Conference,” Reuters, May 23, 2008.

  shares of Allied plunged nearly 11 percent: Stephen Taub, “Speaking Candidly,” Alpha, May 2005.

  the Securities and Exchange Commission started investigating him: Lindgren, “The Confidence Man, New York.

  “One of the key issues I raised about Allied”: This and all succeeding speech quotes by David Einhorn of Greenlight Capital are from his “Accounting Ingenuity” speech at the Ira W. Sohn Investment Research Conference, May 21, 2008.

  CHAPTER SIX

  “Who talked?”: Susanne Craig, “Lehman Struggles to Shore Up Confidence,” Wall Street Journal, September 11, 2008.

  “Lehman Is Seeking Overseas Capital”: Susanne Craig, “Lehman Is Seeking Overseas Capital—As Its Stock Declines, Wall Street Firm Expands Search for Cash, May Tap Korea,” Wall Street Journal, June 4, 2008.

  it had tapped the Federal Reserve’s discount window: Lehman emphatically denied the rumors on June 3, 2008, referencing its previous quarter, which had ended with more than $40 billion of liquidity. Joe Bel Bruno, “Lehman Brothers Treasurer: Firm Did Not Tap Fed Discount Window to Avert Cash Problems,” Associated Press, June 3, 2008.

  stock was plummeting anyway: Ibid. Lehman’s shares fell 15 percent in the afternoon of Tuesday, June 3, after Lehman liquidity rumors surfaced.

  “Lehman’s straight shooter”: Susanne Craig, “Lehman’s Straight Shooter,” Wall Street Journal, May 17, 2008.

  “Wall Street’s Most Powerful Woman”: Jesse Eisinger, “Diary of a Short-Seller,” Condé Nast Portfolio, April 2008.

  Lehman’s deal with Woori: Hae Won Choi, “Woori Sets Pact with Lehman to Cut Bad Debt,” Asian Wall Street Journal, September 6, 2002; Donald Kirk, “No Pause for Woori,” Institutional Investor, July 1, 2002.

  having judged his credentials as inadequate, had tried unsuccessfully to stop it: In June 2008, instead of settling in to his new office at KDB, Min spent several days addressing complaints and protests from KDB trade union workers enraged about his appointment. Song Jung-A, “Man Behind Doubts Rise over KDB’s Push for Global Status,” Financial Times, September 2, 2008.

  he sang a song called “Leopard in Mt. Kilimanjaro”: Kim Yeon-hee, “KDB’s CEO: A Leopard on t
he Hunt for Lehman,” Reuters, September 5, 2008.

  “Korea situation sounds promising”: Goldfarb’s e-mail, sent May 26, 2008, was made available from the House Oversight and Government Reform Committee’s investigation on the “Causes and Effects of the Lehman Brothers Bankruptcy.” See “Lehman Brothers Email Regarding Punishing Short Seller,” http://oversight.house.gov/story.asp?ID =2208.

  set off for Korea: According to flight records obtained by the Wall Street Journal. See Craig, “Lehman Struggles to Shore Up Confidence,” Wall Street Journal, September 11, 2008.

  The Shilla: http://www.shilla.net/en/seoul/.

  Hana Financial was also considering an investment: Hana Financial Group was one of several top South Korean banks (Shinhan, Woori) reportedly contemplating a Lehman bid. The company, however, publicly “denied any interest in joining a consortium bidding for Lehman Shares.” Kim Yeon-hee, “KDB Confirms Lehman Talks; Korea Bank Shares Fall,” Reuters, September 1, 2008.

  bringing on $3.9 billion in revenue: Lehman’s Investment Banking net revenues rose from $3.2 billion in 2006 to $3.9 billion in 2007, a 24 percent increase, according to the company’s 10-K filing with the Securities and Exchange Commission on January 29, 2008.

  Over at Neuberger Berman: Lehman sealed its $2.6 billion purchase of Neuberger Berman on October 31, 2003.

  demanding that top Lehman managers forgo bonuses: Vale, Walker, and Fuld’s e-mail string available under “Lehman Brothers Email Regarding Suspending Executive Compensation,” House Oversight and Government Reform Committee’s investigation, http://oversight.house.gov/story.asp?ID=2208.

  Few seemed to flaunt their personal wealth as much as he did: Michael Shnayerson, “Profiles in Panic,” Vanity Fair, January 2009; Christina S. N. Lewis, “Hot Words in Finance: ‘For Sale,’” Wall Street Journal, January 16, 2009.

  He gave generously to charities: Shnayerson, “Profiles in Panic,” Vanity Fair; “Spelman Receives $10 Million Gift,” Jet, November 19, 2007.

  he used it to ram through deals much more quickly: About Walsh, Aby Rosen told the New York Times: “He was fast…. He doesn’t try to kill you or retrade. To be honest, there are very few people in the industry you can say that about.” See Devin Leonard, “How Lehman Brothers Got Its Real Estate Fix,” New York Times, May 3, 2009; Dana Rubinstein, “Mark Walsh, Lehman’s Unluckiest Gambler,” New York Observer, October 1, 2008.

  her input was virtually nil: See Nick Mathiason, Heather Connon, and Richard Wachman, “Banking’s Big Question: Why Didn’t Anyone Stop Them?” Observer (London), February 15, 2009.

  Lehman buying Grange Securities for $100 million: Chris Wright, “Can Lehman Build on Grange?” Euromoney, July 2007.

  Had there been a sound reason for acquiring Eagle Energy: In 2006, Lehman purchased one third of Eagle Energy and agreed to buy the remaining two thirds a year later. “Lehman Buys Rest of Energy Marketing Co. Eagle Energy,” Reuters, May 9, 2007.

  deals that did concern him were the ones that Lehman failed to get: Leonard, “How Lehman Brothers Got Its Real Estate Fix,” New York Times.

  “I am very disappointed”: On the morning of June 9, Fuld said: “I am very disappointed in this quarter’s results. Notwithstanding the solid underlying performance of our client franchise, we had our first-ever quarterly loss as a public company. However, with our strengthened balance sheet and the improvement in the financial markets since March, we are well-positioned to serve our clients and execute our strategy.” See “Lehman Brothers Announces Expected Second Quarter Results,” Reuters, June 9, 2008.

  Lehman’s second-quarter earnings: Susanne Craig and Tom Lauricella, “Big Loss At Lehman Intensifies Crisis Jitters,” Wall Street Journal, June 10, 2008; “Preliminary 2008 Lehman Brothers Holdings Inc. Earnings Conference Call,” June 9, 2008.

  “Dick Fuld is Lehman”: “Lehman’s $2.8B Loss,” George Ball, Squawk Box, CNBC, June 9, 2008.

  “Are you saying ‘I told you so’”: “Lehman’s Q2 Loss,” Carl Quintanilla, Squawk Box, CNBC, June 9, 2008.

  an e-mail to Fuld from Benoît D’Angelin: See “Lehman Brothers Email Regarding Lack of Accountability,” House Oversight and Government Reform Committee’s investigation, http://oversight.house.gov/story.asp?ID=2208.

  So she sent Fuld a two-sentence e-mail: Read to author by confidential source.

  Fuld met with the investment bankers for lunch on Wednesday, June 11: Previously referenced by Steve Fishman, “Burning Down His House,” New York, December 8, 2008, as well as Susanne Craig, “Lehman Shuffles 2 Key Jobs In Bid to Restore Confidence—Finance Chief Is Demoted; ‘Wall Street Wants a Head,’” Wall Street Journal, June 13, 2008.

  Gasparino hectoring Lehman’s spokesperson: Dealbreaker.com posted a series of Gasparino’s taped voicemail messages to Kerrie Cohen. “Charlie Gasparino Leaves The Greatest Voicemail(s) of All Time,” September 22, 2008. http://dealbreaker.com/2008/09/charlie-gasparino-leaves-the-g.php.

  “Our credibility has eroded”: Yalman Onaran, “Lehman Drops Callan, Gregory; McDade Named President,” Bloomberg News, June 12, 2008.

  CHAPTER SEVEN

  “Lehman is not a Bear Stearns situation”: “BlackRock’s Fink Says Lehman Not Another Bear-CNBC,” Reuters, June 11, 2008.

  Fleming had helped broker a 2006 deal to merge Merrill’s $539 billion asset-management business: On February 15, 2006, Merrill Lynch agreed to sell its investment managers business to BlackRock in exchange for a 49.8 percent stake in the combined company. “Given its complexity, the transaction was put together quickly, helped by the close friendship that Mr. Fleming, who took BlackRock public at a price of $14, and Mr. Fink enjoy.” Landon Thomas Jr., “On the Menu for Breakfast: $1 Trillion,” New York Times, February 16, 2006.

  “Everyone is shrinking their balance sheet”: Joseph A. Giannone, “Merrill CEO Wants Ongoing Fed Access, Rules Reform,” Reuters, June 10, 2008.

  “We all have concerns about what we read in the papers”: Joe Bel Bruno, “Merrill CEO Sees More Industry Consolidation,” Associated Press, June 10, 2008.

  Merrill’s shares down 32 percent for the year: Tenzin Pema, “Merrill Lynch Outlook Cut at JP Morgan,” Reuters, June 11, 2008.

  who was sometimes referred to as “I-Robot”: “Stiff, cerebral and intimidating, John Thain is not a ‘people person.’ Behind his back his nickname is ‘I Robot.’” See Dominic Rushe, “The IRobot Rides In to Sort Out Merrill Lynch,” Sunday Times (London), November 18, 2007.

  Fink, ironically, had lead the exchange’s search committee that selected him: Kate Kelly, Greg Ip, and Ianthe Jeanne Dugan, “For NYSE, New CEO Could Be Just the Start,” Wall Street Journal, December 19, 2003.

  shutting the wood-paneled Luncheon Club and firing the exchange’s barber: Asked about his firing of the NYSE barber, a kindly old man who made $24,000 a year, Thain said: “The barber was a very nice guy who’d been there for a very long time…. [I]t’s difficult to argue that a publicly traded company needs to have its own barber.” Gary Weiss, “The Taming of Merrill Lynch,” Portfolio, May 2008.

  when he interned at Procter & Gamble: Justin Schack, “The Adventures of Superthain,” Institutional Investor—Americas, June 14, 2006.

  “When he made conversation”: Lisa Kassenaar and Yalman Onaran, “Merrill’s Repairman,” Bloomberg Markets, February 2008.

  “Would it hurt you to suck up to me once in a while?”: Ibid.

  “So, I think you said before that you’re comfortable”: Deutsche Bank analyst Mike Mayo, asked Thain during a conference call. “John A. Thain, Chairman and Chief Executive Officer–Merrill Lynch, to Participate in a Conference Call Hosted by Deutsche Bank on June 11—Final,” Fair Disclosure Wire, June 11, 2008.

  “At the end of last year when we were looking to”: Ibid.

  having heard him repeatedly say, “We have plenty of capital”: On March 8, 2008, Thain told France’s Le Figaro: “Today I can say that we will not need additional funds. These problems are behind us. We will not return t
o the market.” To the Japanese Nikkei Report on April 3, he said: “We have plenty of capital going forward, and we don’t need to come back into the equity market.” At a news conference in Mumbai on May 7: “We have no present intention of raising any more capital.” See Nick Antonovics, “Merrill CEO Says Won’t Need More Capital,” Reuters, March 8, 2008; “Full Text of Interview with Merrill Lynch CEO John Thain,” Nikkei Report, April 4, 2008; John Satish Kumar, “Credit Crunch: Merrill’s Thain Backs Auction-Rate Securities,” Wall Street Journal, May 8, 2008.

  “as the most vulnerable brokerage after Lehman”: Reinhardt Krause, “Lehman Bros. Extends Slide As Wall St. Doubts Future,” Investor’s Business Daily, June 13, 2008.

  For a single day John Thain had the job he had wanted for his entire career: Kassenaar and Onaran, “Merrill’s Repairman,” Bloomberg Markets. Craig Horowitz, “The Deal He Made,” New York, July 10, 2005.