Too Big to Fail

by Andrew Ross Sorkin

  “AIG Offers Empathy, Little Else”: Liam Pleven and Randall Smith, “AIG Offers Empathy, Little Else—Some Shareholders Left Wanting More After Insurer’s Slips,” Wall Street Journal, May 15, 2008.

  an additional $10 billion in new collateral: Randall Smith, Amir Efrati, and Liam Pleven, “AIG Group Tied to Swaps Draws Focus of Probes,” Wall Street Journal, June 13, 2008; Liam Pleven, “AIG’s $5.4 Billion Loss Roils the Markets—Investors Impatient on New CEO’s Plan as Problems Attack the Complex Insurer,” Wall Street Journal, August 8, 2008.

  The two men agreed to have dinner together: Liam Pleven, “Two Financial Titans Put on Best Face,” Wall Street Journal, June 17, 2008; Lilla Zuill, “New AIG Chief and Ex-CEO Greenberg Set to Meet Thursday,” Reuters, June 18, 2008.

  CHAPTER NINE

  Oil, most crucially, was going for $140 a barrel: A record for oil futures in Russia, this price was predicted to rise—and it did—hitting $147 in July. “Russia’s Crude Money Box,” International Securities Finance, June 26, 2008.

  Russia was pumping out millions of barrels a day: The International Energy Agency said that as of June 11, 2008, Russia was producing 9.5 million barrels of oil per day. Jason Bush, “Prime Minister Putin Primes the Pump,” BusinessWeek, June 30 2008.

  who had coined the appellation for those four economies: Goldman’s chief economist Jim O’Neill, leading a team from the firm, created the acronym in 2001, when they were making growth predictions about the four emerging markets. See Dominic Elliott, “Fundamentals Drive the ‘BRIC’ Rebound,” Wall Street Journal, July 27, 2009.

  defaulting on nation’s debt: “On August 13, with dollars fleeing the country, its reserves dwindling, its budget overtapped, and the price of oil, its chief commodity, down 33 percent, the government imposed controls on the ruble.” Lowenstein, When Genius Failed, 140–45.

  Long-Term Capital Management: Ibid.

  “I really think we are a little better”: Bethany McLean, “The Man Who Must Keep Goldman Growing,” Fortune, March 17, 2008.

  They had bet against something called the ABX index: Chris Blackhurst, “The Credit Crunch Genius Who Masterminded a £2 billion Jackpot,” Evening Standard (London), December 18, 2007.

  “I don’t speak Russian”: Ellis, The Partnership, 37.

  Yeltsin’s new government named the firm its banking adviser: “Russia Hires Goldman Sachs as Adviser,” Washington Post, February 18, 1992.

  Goldman pulled out of the country in 1994 but would eventually return: Joseph Kahn and Timothy L. O’Brien, “For Russia and Its U.S. Bankers, Match Wasn’t Made in Heaven,” New York Times, October 18, 1998.

  Adolf Hitler had planned to hold his victory celebration there: Hitler had chosen Astoria’s Winter Garden ballroom for his victory ball, scheduled for November 7, 1941, but Germany’s summer invasion of the Soviet Union didn’t go as planned. Stacks of invitations were later discovered in Berlin’s Nazi headquarters after the war. Corinna Lothar, “Gem of the North—St. Petersburg Reclaims Its Glory as Russia’s ‘Window to the West,’” Washington Times, December 27, 2003.

  short, fat bearded guy who wore tube socks: Jenny Anderson, “Goldman Runs Risks, Reaps Rewards,” New York Times, June 10, 2007.

  Blankfein’s beginnings: Neil Weinberg, “Sachs Appeal,” Forbes, January 29, 2007; Ellis, The Partnership, 669; Bethany McLean, “The Man Who Must Keep Goldman Growing,” Fortune, March 17, 2008; Susanne Craig, “How One Executive Reignited Goldman’s Appetite for Risk,” Wall Street Journal, May 5, 2004.

  Dating a Wellesley student from Kansas City, he took a summer job at Hallmark: Ellis, The Partnership, 707.

  “If we don’t show up Monday it’s because we’ve hit the jackpot”: Craig, “How One Executive Reignited,” Wall Street Journal, May 5, 2004.

  “pre-life crisis”: Ibid.

  taking a job as a salesman of gold coins and bars, she cried: Ibid. Also see “Laura Jacobs Engaged to Lloyd C. Blankfein,” New York Times, May 15, 1983.

  the firm acquired J. Aron in late October 1981: On October 29, 1981, Goldman Sachs announced its acquisition of J. Aron & Company for an undisclosed amount (at the time industry experts said it was “slightly more than $100 million”). H. J. Maidenberg, “Goldman, Sachs Buys Big Commodity Dealer,” New York Times, October 30 1981.

  they pounded their desks with their fists and threw their: Endlich, Goldman Sachs, 96.

  “You can call yourself contessa, if you want”: Bethany McLean, “Rising Star: Lloyd Blankfein, Goldman Sachs,,” Fortune, February 6, 2006.

  Winkelman first noticed Blankfein: Craig, “How One Executive Reignited,” Wall Street Journal.

  “We’ve never seen it work to put”: Ellis, The Partnership, 266.

  structuring a trade that allowed a Muslim client to obey the Koran’s proscriptions: Craig, “How One Executive Reignited,” Wall Street Journal.

  Winkelman was crushed when he was passed over for Corzine: Adrian Cox and George Stein, “Winkelman, Denied Top Goldman Job, Seeks to Fix Refco,” Bloomberg News, October 24, 2005.

  he announced that he had selected Blankfein as his replacement: Jenny Anderson, “Blankfein Next in Line at Goldman,” New York Post, December 19, 2003; Kate Kelly, Greg Ip, and Ianthe Jeanne Dugan, “For NYSE, New CEO Could Be Just the Start,” Wall Street Journal, December 19, 2003.

  “Legally, we would be buying Morgan”: Ellis, The Partnership, 639.

  Gramm-Leach-Bliley Act: Barbara A. Rehm, “Commerce, a Reform Gem, in Fed’s Hands,” American Banker, November 9, 2000.

  Goldman’s collateral dispute with AIG: Serena Ng, “Goldman Confirms $6 Billion AIG Bets,” Wall Street Journal, March 21, 2009.

  Dmitry Medvedev had recently been elected to succeed him: Medvedev was elected Russia’s president on Sunday, March 2, 2008, after Putin had officially endorsed him in December. Peter Finn, “Putin’s Chosen Successor, Medvedev, Elected in Russia; Power-Sharing Is Main Focus After a Crushing Win,” Washington Post, March 3, 2008.

  visiting the Persian Gulf states; attending the Group of Eight meeting of finance ministers in Osaka: Paulson’s trip began at the end of May, with Saudi Arabia, Qatar, and the United Arab Emirates. In Abu Dhabi, he delivered a speech on the importance of open investment and then headed off to Osaka, where he met with Japanese finance minister Fukushiro Nukaga, before the G-8 conference began. “Treasury Secretary Paulson to Travel to the Middle East,” Department of the Treasury Press Releases/Statements, May 28, 2008; “Nukaga, Paulson Set to Meet Ahead of G-8 Finance Ministers’ Talks,” Japan Economic Newswire, June 13, 2008.

  “To address the perception that some institutions”: “Remarks by U.S. Treasury Secretary Henry M. Paulson, Jr. on the U.S., the World Economy and Markets before the Chatham House,” July 2, 2008. See http://www.treas.gov/press/releases/hp1064.htm

  Spaso House: See moscow.usembassy.gov/spaso.html

  private sessions with Medvedev and Putin: David Lawder, “Paulson in Russia to Meet with Medvedev, Putin,” Reuters, June 29, 2008.

  “best practices”: “Putin—No Sovereign Wealth Fund in Russia Yet,” Reuters, June 30, 2008.

  CHAPTER TEN

  rehire Michael Gelband and Alex Kirk: See Susanne Craig, “Gelband, Kirk Rejoin Lehman in Shake-Up,” Wall Street Journal, June 25, 2008; Jed Horowitz, “Lehman’s New President McDade Brings in His Own Team,” Dow Jones, June 25, 2008.

  classmates at the University of Michigan Business School: Susanne Craig, “Lehman Vet Grapples With the Firm’s Repair,” Wall Street Journal, September 4, 2008.

  on Little St. Simons Island: to Paulson’s calendar, he left Dulles Airport at 8:00 a.m. on Friday, July 4, 2008, headed for Georgia, where he would “REMAIN OVERNIGHT” for three nights.

  Paulsons bought up three quarters of the ten-thousand-acre property: Mary Jane Credeur, “Paulson’s Georgia Investment Rises as Blind Trust Becomes Joke,” Bloomberg News, January 14, 2008.

  “The U.S. economy is…facing a trio of headwinds.: From Paulson’s
speech in London on the U.S., the world economy and markets, July 2, 2008. See http://www.treas.gov/press/releases/hp1064.htm.

  brother, Richard Paulson, worked as a fixed-income salesman in Lehman’s Chicago office: Anita Raghavan, “Paulson Brothers On Either Side of Lehman Divide,” Forbes, September 12, 2008.

  reporting a $708 million loss: After restating its first quarterly loss since 2001 (it had mistakenly reported $393 million), Wachovia ousted Ken Thompson as chairman and—a month later—as CEO. See David Mildenberg and Hugh Son, “Wachovia Ousts Thompson on Writedowns, Share Plunge,” Bloomberg News, June 2, 2008.

  flown back home on a private chartered jet to Dulles Airport: According to his calendar, Paulson left Georgia at 2:00 p.m. on Monday, July 7, arriving back in Washington, D.C., at 3:42 p.m.

  Freddie tumbled as much as 30 percent: On Monday, July 7, 2008, Fannie Mae shares fell $3.04, or 16.2 percent, to $15.74, their lowest since 1992, while Freddie stock was down $2.59, or 17.9 percent, to $11.91, its lowest since 1993. See James R. Hagerty and Serena Ng, “Mortgage Giants Take Beating On Fears Over Loan Defaults,” Wall Street Journal, July 8, 2008.

  Fannie shares slid 16.2 percent: Ibid.

  wrote that revised accounting rules might require Fannie and Freddie to raise: Harting Report released on Monday, July 7, 2008. Aaron Lucchetti, “How Fannie/Freddie Selldown Went Down,” Wall Street Journal, July 12, 2008.

  “the closest thing I’ve seen to a holy war”: In February 2007, Paulson told the House of Representatives’ budget committee: “I feel very strongly that we need a regulator that’s independent, got more muscle, and a number of other changes…. I also know people feel very strongly on both sides of this issue. I’ve never witnessed anything quite like this. It’s the closest thing I’ve seen to a holy war.” “US House to Have GSE Bill by End-Mar,” Reuters, February 7, 2007.

  “we are the equivalent of a Federal Reserve system for housing”: Franklin Raines, as reported by David A. Vise, “The Financial Giant That’s in Our Midst,” Washington Post, January 15, 1995.

  55 percent of the $11 trillion US Mortgage market: Shannon D. Harrington and Dawn Kopecki, “Fannie, Freddie Downgraded by Derivatives Traders,” Bloomberg, July 9, 2008.

  n moving, even tentatively, into this new area of lending: Steven A. Holmes, “Fannie Mae Eases Credit to Aid Mortgage Lending,” New York Times, September 30, 1999.

  “[We] always won, we took no prisoners”: Mudd wrote this in a note to Franklin Raines in November 2004. See James Tyson, “Fannie, Freddie Retreat as Mortgage Bonds Mutate,” Bloomberg News, September 6, 2006.

  Bush administration lowered the amount of capital: Damian Paletta and James R. Hagerty, “U.S. Puts Faith in Fannie, Freddie,” Wall Street Journal, March 20, 2008.

  “Congress ought to recognize”: Dawn Kopecki and Shannon D. Harrington, “Fannie, Freddie Tumble on Bailout Concern, UBS Cut,” Bloomberg, July 10, 2008.

  “You’re not going to like this conversation”: Portions of this exchange, including Fuld having heard “a lot of noise,” were first reported by Kate Kelly and Susanne Craig, “Goldman Is Queried About Bear’s Fall,” Wall Street Journal, July 16, 2008.

  “There’s blood in the water, let’s go kill someone!”: According to a former Morgan Stanley trader, Frank Partnoy, from his book Fiasco, 99.

  “I see that again, and you’re fired”: Michael Carroll, “Morgan Stanley’s global gamble,” Institutional Investor, March 1, 1995.

  House Financial Services Committee hearing: “Systemic Risk and the Financial Markets” hearing, with witnesses Henry Paulson and Ben Bernanke, held on July 10, 2008. See http://financialservices.house.gov/hearing110/hr071008.shtml.

  “We’re going to need broader emergency authorities”: Ibid.

  some confusion about tracking down Greenspan’s home phone number: First reported by Deborah Solomon, “The Fannie & Freddie Question—Treasury’s Paulson Struggles with the Mortgage Crisis,” Wall Street Journal, August 30, 2008.

  “considering a plan to have the government take over”: Stephen Labaton and Steven R. Weisman, “U.S. Weighs Takeover Plan for Two Mortgage Giants,” New York Times, July 11, 2008.

  It had already been a long morning for Paulson: Paulson’s calendar.

  “Today our primary focus is supporting Fannie Mae.”: Brendan Murray,” Paulson Backs Fannie, Freddie in Their ‘Current Form,’” Bloomberg News, July 11, 2008.

  briefed Bush on the Fannie and Freddie situation: Later that morning, at the Department of Energy, Bush said: “I want to thank the members of my economic team for assembling here at the Department of Energy. Secretary Bodman, thank you for hosting us. First of all, Secretary Paulson came by this morning to brief me on the financial markets. Freddie Mac and Fannie Mae are very important institutions. You spent a fair amount of time discussing these institutions. He assured me that he and Ben Bernanke will be working this issue very hard.” Office of the Press Secretary, “President Bush Meets with Economic Team,” July 11, 2008, 11:38 a.m. EDT

  Paulson had a call with Sheila Bair: Verified from his calendar.

  FDIC was about to seize IndyMac: On Friday July 11, 2008, the Office of Thrift Supervision closed IndyMac Bank, F.S.B, with total assets of $32.01 billion, transferring its operations to the FDIC. “OTS Closes IndyMac Bank and Transfers Operations to FDIC,” July 11, 2008. See http://www.fdic.gov/news/news/press/2008/pr08056.html

  “We have a new kind of bank”: James Surowiecki, “Too Dumb to Fail,” New Yorker, March 31, 2008.

  “We’re giving serious consideration to becoming a bank holding company: Fuld’s plea to become a bank holding company was first reported by Julie MacIntosh and Francesco Guerrera, “Lehman Failed to Convince Fed Officials Over Survival Strategy,” Financial Times, October 6, 2008; and subsequently reported by Julie Creswell and Ben White, “The Guys from ‘Government Sachs,’” the New York Times, October 19, 2008.

  “As long as I am alive this firm will never be sold.”: Susanne Craig, Jeffrey McCracken, Aaron Lucchetti, and Kate Kelly, “The Weekend That Wall Street Died,” Wall Street Journal, December 29, 2008.

  he came close to buying Lazard: See Cohan, The Last Tycoons, 517–20.

  “You know, I can see why you’re such a shitty M&A banker”: Ibid., 596. Fuld, according to Ken Wilson.

  About Greg Curl: Zachary R. Mider, “Lewis Turns to Tomato-Growing ‘Unknown Genius’ on Merrill Deal,” Bloomberg News, September 24, 2008.

  “Okay you can fight him”: Daniel S. Morrow, “Kenneth Lewis Oral History,” Computerworld Honors Program International Archives, May 3, 2004. See www.cwhonors.org/archives/histories/Lewis.pdf.

  197 “No, we wouldn’t use our petty cash to buy an investment bank”: Heidi N. Moore, “Ken Lewis Tells Investment Bankers All Is Forgiven, WSJ Blog/Deal Journal, June 11, 2008.

  Paulson, unshaven and wearing jeans, was pacing the halls and pestering his staff: This scene was first reported by Deborah Solomon, who quoted Wilkinson as saying: “[Y]ou need to leave us alone so we can do our jobs.” Author’s subsequent reporting revealed slightly different wording. See Deborah Solomon, “The Fannie & Freddie Question—Treasury’s Paulson Struggles With the Mortgage Crisis,” Wall Street Journal, August 30, 2008.

  take a quick bike ride: Ibid.

  “Fannie Mae and Freddie Mac play a central role”: “Paulson Announces GSE Initiatives,” press release, Department of the Treasury, July 13, 2008. See http://www.treas.gov/press/releases/hp1079.htm.

  “Our proposal”: “Part I, Part II of a Hearing of the Senate Banking, Housing and Urban Affairs Committee,” Federal News Service, July 15, 2008.

  SEC to begin cracking down on improper short selling: The SEC issued an emergency diktat to halt “unlawful manipulation through ‘naked’ short selling,” which was set to start that Monday, July 21, 2008, and expire after thirty days. Kara Scannell and Jenny Strasburg, “SEC Moves to Curb Short-Selling,” Wall Street Journal, July 16, 2008.

  Lehman’s board: D
ennis K. Berman, “Where Was Lehman’s Board?” WSJ Blog/Deal Journal, September 15, 2008.

  Ken Wilson was standing in line at Westchester County Airport: Susanne Craig, “In Ken Wilson, Paulson Gets Direction from the Go-To Banker of Wall Street,” Wall Street Journal, July 22, 2008.

  On the evening of July 21 Paulson arrived for a dinner: From Paulson’s July calendar, with dinner scheduled from 6:45 to 8:30 p.m.

  CHAPTER ELEVEN

  “to conduct a thorough strategic”: “American International Group Names Robert B. Willumstad Chief Executive Officer.” Transcript of an AIG board conference call, June 16, 2008.

  AIG’s $5.4 billion loss: Liam Pleven, “AIG Posts $5.4 Billion Loss as Housing Woes Continue,” Wall Street Journal, August 7, 2008.