Too Big to Fail

by Andrew Ross Sorkin

  Geithner had greeted him with his usual firm, athletic handshake: According to Geithner’s calendar, they were scheduled to meet from 9:30 to 10:30 a.m. on Tuesday, July 29, 2008.

  Morgan Stanley would receive a token payment of $95,000: Aaron Lucchetti, “The Fannie-Freddie Takeover: Two Veterans Led Task for Morgan Stanley,” Wall Street Journal, September 8, 2008.

  “Either investors are going to be massively diluted”: Al Yoon, “Freddie Posts 4th Straight Qtrly Loss, Slashes Dividend,” Reuters, August 6, 2008.

  Freddie’s reported loss of $821 million: Ibid.

  In the first week of August; On that Monday: These meetings took place on August 4 and 5.

  Min Euoo Sung arrived in Manhattan from Seoul: Lehman’s “secret meetings” with KDB were reported by Henny Sender and Francesco Guerrera, “Lehman’s Secret Talks to Sell 50% Stake Stall,” Financial Times, August 20, 2008.

  Fuld owned ninety-seven acres in the area: “Lehman Brothers CEO Is Local Land Baron,” Idaho Mountain Express, September 24, 2008.

  “A bubble, once ‘pricked’”: Ben Bernanke and Mark Gertler, “Monetary Policy and Asset Price Volatility,” Federal Reserve Bank of Kansas City’s Economic Symposium, Jackson Hole, Wyoming, 1999. See http://www.kc.frb.org/Publicat/sympos/1999/S99gert.pdf.

  “the Bernanke doctrine”: John Cassidy, “Anatomy of a Meltdown,” New Yorker, December 1, 2008.

  “It is not the responsibility of the Federal Reserve”: Ben Bernanke, “Housing, Housing Finance, and Monetary Policy,” Federal Reserve Bank of Kansas City’s Economic Symposium, Jackson Hole, Wyoming, August 31, 2007. See http://www.federalreserve.gov/newsevents/speech/bernanke20070831a.htm.

  One day a little Dutch boy: Alan S. Blinder, “Discussion of Willem Buiter’s, ‘Central Banks and Financial Crises,’” Federal Reserve Bank of Kansas City’s Annual Economic Symposium,” Jackson Hole, Wyoming, August 23, 2008. See http://www.kc.frb.org/publicat/sympos/2008/blinder.08.25.08.pdf

  “statutory resolution regime for nonbanks”: Ben Bernanke, “Reducing Systemic Risk,” Federal Reserve Bank of Kansas City’s Annual Economic Symposium,” Jackson Hole, Wyoming, August 22, 2008.

  Moody’s cuts its ratings: Jody Shenn, “Fannie, Freddie Preferred Stock Downgraded By Moody’s,” Bloomberg News, August 22, 2008.

  having shorted subprime before anyone else: Andy Kessler, “The Paulson Plan Will Make Money for Taxpayers,” Wall Street Journal,” September 25, 2008.

  analyst report issued by Goldman Sachs raising questions about the firm: Hugh Son, “AIG Falls as Goldman Says a Capital Raise Is ‘Likely,’” Bloomberg News, August 19, 2008.

  As the company had warned in an SEC filing: Figures are from AIG’s 10-Q filing on August 6, 2008.

  AIG owning seventy-one state-regulated insurance agencies: AIG issued a press release on September 18, 2008, assuring policyholders that their protection is top priority. “The 71 state-regulated insurance companies within AIG did not receive a bailout; they are financially solvent,” it said. “The federal bailout of the non-insurance portions of AIG does not negatively change the solvency strength of its insurance subsidiaries.” http://www.aig.com.

  “rather than letting these conditions fester”: “The result has been that they have been unable to provide needed stability to the market. They also find themselves unable to meet their affordable housing mission. Rather than letting these conditions fester and worsen and put our markets in jeopardy, FHFA, after painstaking review, has decided to take action now.” “Fhfa Director Lockhart Issues Statement on Safety and Soundness Concerns,” U.S. Fed News, September 7, 2008.

  Treasury’s takeover terms: Rebecca Christie and John Brinsley, “U.S. Takeover of Fannie, Freddie Offers ‘Stopgap,’” Bloomberg News, September 8, 2008.

  “any action we take”: As Obama told reporters in Indiana on September 6, 2008. See http://www.msnbc.msn.com/id/26577811/.

  CHAPTER TWELVE

  Reuters headline: Kim Yeon-hee and Chris Wickham, “Eyes on Lehman Rescue as Korea Lifeline Drifts,” Reuters, September 8, 2008.

  had held a briefing with reporters: Ibid.; Susanne Craig, Diya Gullapali, and Jin-Young Yook, “Korean Remarks Hit Lehman,” Wall Street Journal, September 9, 2008.

  Shares of Lehman started to drop precipitously: Joe Bel Bruno, “Lehman Shares Plunge 30 percent on Report that Talks with Korea Development Bank Ended,” Associated Press, September 9, 2008.

  annual banking conference: The Lehman Brothers Global Finance Services Conference was held at New York’s Hilton Hotel from September 8–10, 2008. Wachovia CEO Robert Steel presented on Tuesday, September 9, according to the press release: “Wachovia CEO Robert K. Steel to Present at Lehman Conference,” PR Newswire, September 3, 2008.

  “Here we go again”: Fuld, as quoted in an article by John Helyar and Yalman Onaran, “Fuld Sought Buffett Offer He Refused as Lehman Sank,” Bloomberg News, November 10, 2008.

  “Time Running Out for Lehman”: “Stocks to Watch,” CNBC, September 9, 2008.

  “We’ve got to act fast”: John Helyar and Yalman Onaran, “Fuld Sought Buffett Offer He Refused as Lehman Sank,” Bloomberg News, November 10, 2008.

  meeting with Jamie Dimon: According to official calendars obtained from the Department of the Treasury, this meeting was scheduled for 8:30 a.m. on September 9, 2008, and was one of several listed on Paulson’s calendar.

  “[A]ll he wanted was the bazooka”: Alison Vekshin, “Dodd Plans Senate Hearing on Fannie, Freddie Takeover,” Bloomberg News, September 8, 2008.

  “Secretary Paulson knew more than he was telling us”: From a statement issued by Bunning on September 8, 2008, titled “Bunning Rips Bailout of Fannie and Freddie.”

  Lehman’s stock had plunged 30 percent: Joe Bel Bruno, “Lehman Shares Plunge 30 Percent on Report That Talks with Korea Development Bank Ended,” Associated Press, September 9, 2008.

  AIG’s lawyers and advisers: Scott Pegram, “Davis Polk, Weil Gotshal, Sullivan, Simpson Work on AIG Restructuring,” New York Law Journal, March 5, 2009.

  Two documents given to Geithner: Obtained by author from confidential source.

  including Rodgin Cohen: Matthew Karnitschnig and David Enrich, “A Lawyer for All Wall Street Navigates Tempestuous Times,” Wall Street Journal, October 9, 2008.

  Jester hadn’t been required to sell all his Goldman stock: Greg Farrell and Stephanie Kirchgaessner, “Goldman links to US Treasury Raise Questions,” Financial Times, October 12, 2008.

  $3.9 billion loss: On the morning of Wednesday, September 10, Lehman announced its preliminary third-quarter earnings and an estimated net loss of $3.9 billion. See “Lehman Brothers Announces Preliminary Third Quarter Results and Strategic Restructuring,” PR Newswire, September 10, 2008.

  “I was talking to Wes about you the other day”: Peter Briger asked to go on the record to state that while he acknowledges this conversation took place and expressed this exact sentiment, he denies ever using the word “motherfuckers.” Based on the author’s sources, Alex Kirk, who is seen by the reader recounting this conversation to Bart McDade, used the word “motherfuckers” in his retelling.

  “I would much rather have partners that are really, really smart motherfuckers than guys that I like”: Mr. Briger confirmed making such an observation but disputes using the word “motherfucker” despite the accounts of several other sources who either heard it directly or in the retelling from Alex Kirk after he ran down the hall.

  “The stock is coming down.”: Dick Bove to Erin Burnett, Streets Signs, CNBC, “LEH Shares Down,” September 9, 2008.

  “This is coming directly from Paulson”: This quote is one of only a few that caused confusion and consternation among various sources. All the sources for this scene agree that this was the comment that McDade made at the time, based on his conversation with Fuld. It is also clear that Paulson spoke to both Blankfein and Fuld about how the two firms should talk to each other and about a sale of Lehman’s real estate assets. It is also c
lear that David Viniar, Goldman’s CFO, placed a call to Dan Jester earlier in the day seeking help to orchestrate negotiations, which is detailed in an earlier scene. Paulson’s calendar cites a series of phone calls between Paulson and Fuld and Paulson and Blankfein that day, with at least one in rapid succession back to back from each other. Furthermore, multiple sources privy to both of those conversations say that Paulson suggested that Fuld hold discussions with Goldman, as one of many options. So far, nothing is in dispute. What is confusing is why Fuld is under the impression that Goldman is working for the government. There is no evidence that was the case and no evidence that Paulson said so directly. What appears most likely is that there was a miscommunication, with Fuld making certain assumptions and Goldman, during its phone calls with McDade and Kirk, doing little to disavow these views until Wednesday morning, when clarity was required to execute the confidentiality agreement to begin due diligence.

  Ken Lewis: Shawn Tully, “Meanwhile, Down in Charlotte…,” Fortune, October 13, 2008.

  CHAPTER THIRTEEN

  The lead of the New York Times: Jenny Anderson and Ben White, “Wall Street’s Fears on Lehman Bros. Batter Markets,” New York Times, September 10, 2008.

  “Some may worry that Treasury”: Ibid.

  Wall Street Journal noted: “The firm’s situation differs markedly from that of Bear Stearns, which was taken over earlier this year after it ran into a liquidity crisis. Unlike Bear Stearns, Lehman has access to new Federal Reserve facilities that can provide short-term funding when the markets won’t, in addition to the ability to exchange illiquid assets for safer securities such as Treasurys.” Susanne Craig, Randall Smith, Serena Ng, and Matthew Karnitschnig, Wall Street Journal, September 10, 2008.

  reduced the amount of business: On September 16, 2008, GLG Partners issued the following statement regarding Lehman Brothers: “With respect to Lehman, GLG last week transferred substantially all of the remaining positions of the GLG Funds to other prime brokers. The majority of these transfers have already settled and we expect the remainder to settle shortly. We believe the residual exposure of the GLG Funds to Lehman will not be material. Lehman is also a shareholder in GLG, owning approximately 33.7 million shares, through Lehman (Cayman Islands), a Cayman Islands company, about 13.7 per cent of the total GLG stock outstanding.”

  See note in Chapter 12 on page 245.

  “That’s it? That’s fucking it?”: McDonald and Robinson, A Colossal Failure of Common Sense, 314.

  “The firm remains committed”: From press release issued by Lehman that morning. “Lehman Brothers Announces Preliminary Third Quarter Results and Strategic Restructuring,” September 10, 2008.

  Herlihy had worked on nearly every deal Bank of America had orchestrated: “Bailout Lawyer Optimistic Worst Is Over,” Wall Street Journal Blog/Deal Journal, October 16, 2008.

  forecasted a third-quarter loss of $3.9 billion: Ben White, “With Big Loss Forecast, Lehman to Spin Off Assets,” New York Times, September 11, 2008.

  “In light of these last two days”: Lehman Brothers preliminary F3Q08 Earnings Call Transcript, September 10, 2008.

  “The real estate held-for-sale portfolio”: Ibid.

  “To the extent you might need $7 billion”: Ibid.

  “The Bungalow”: “HSBC’s Canary Wharf headquarters towers over that of Barclays. So much so that HSBC workers have christened their neighbour’s building ‘the bungalow.’ A spokesman for Barclays retorts: ‘Size is not our objective—growth is.’ Touche.” Dominic Walsh, “Barclays Bungalow; City Diary,” The Times (London), July 8, 2006.

  having both vied for the top job in 2003: Grant Ringshaw, “Barclays’ Odd Couple John Varley and Bob Diamond,” Sunday Times, February 17, 2008.

  (In 2007, Diamond earned $42 million to Varley’s $8.4 million): “Barclays’ Diamond Gets 21 Million Pounds in Pay and Bonus,” Reuters, March 27, 2008; Ben Livesey and Jon Menon, “Barclays Pays Diamond Five Times More than CEO Varley,” March 26, 2007.

  “Bob Diamond 3, John Varley 0”: Ringshaw, “Barclays’ Odd Couple,” Sunday Times.

  trying to buy ABN AMRO: After a harrowing nine-month takeover battle, Barclays withdrew its bid of €67.5 billion for ABN AMRO in October 2007, finally conceding to a consortium led by the Royal Bank of Scotland. Julia Werdigier, “Barclays Withdraws Bid to Take Over ABN Amro,” New York Times, October 6, 2007.

  been on the phone with Tim Geithner, and Hank Paulson twice about it: From Geithner’s calendar for Wednesday, September 10, 2008.

  “Unless I’ve missed something”: Brian Blackstone, “Ex-Fed Official Poole: Fed Not Defining Post-Bailout World,” Dow Jones, September 10, 2008.

  Any hope that the SpinCo plan was going to turn Lehman’s fortunes around: Susanne Craig, Randall Smith, Serena Ng, and Matthew Karnitschnig, “Lehman Faces Mounting Pressures,” Wall Street Journal, September 10, 2008.

  announced his plans to “retire” from the firm: Mark Kleinman, “Jeremy Isaacs to Step Down at Lehman,” Daily Telegraph, September 7, 2008.

  $5 million severance: Danny Fortson, “Five Lehman Chiefs Coop $100m Days Before Collapse,” Sunday Times, October 12, 2008.

  “engage in detrimental activity”: From Exhibit A of Lehman’s “Termination Arrangements for Executives” in a section called “Restrictive Covenants.” Document was made public by the House Oversight and Government Reform Committee and is available online under “Materials for Lehman Brothers Compensation Meeting,” http://oversight.house.gov/story.asp?ID=2208.

  pocketing some $540 million from an investment in Shinsei Bank: Matthew Miller, “Cash Kings,” Forbes, October 9, 2006.

  town house on the Upper East Side for $53 million: Zachery Kouwe, “Sallie’s Suitor—Flowers’ Power: Art of the Deal,” New York Post, October 7, 2007.

  Goldfield happened to be the banker depicted: Roger Lowenstein, When Genius Failed, 170–85.

  Greenberg bought millions of preferred shares: In June 2008, Lehman sold $6 billion in common and preferred shares to a group of investors, which included Hank Greenberg. Greenberg would not disclose how much he spent. Lavonne Kuykendall, “Greenberg: Lehman ‘A Great Franchise,’ Now Has Enough Capital,” Dow Jones, June 10, 2008.

  “Management did not successfully put to rest”: Patrick M. Fitzgibbons, “Lehman in Sale Talks as Survival Questioned—Sources,” Reuters, September 11, 2008.

  “The change in rating agency posture”: Alistair Barr, “Treasury, Fed Reportedly Helping as Deal Sought by This Weekend,” MarketWatch.com, September 11, 2008.

  “He is as feisty as ever”: Louise Story, “Tough Fight for Chief at Lehman,” New York Times, September 11, 2008.

  buy Chicago’s LaSalle Bank from ABN: “ABN AMRO Shareholders Vote in Favor of Sale, Breakup,” Dow Jones, April 26, 2007.

  “It is with deep regret”: Letter obtained by author.

  had just gotten off the phone with Geithner: The Wall Street Journal reported that Willumstad made his first call to Geithner on Thursday, but they didn’t actually speak on the phone until Friday morning. Author’s subsequent reporting places the phone conversation on Thurs day morning. See Monica Langley, Deborah Solomon, and Matthew Karnitschnig, “Bad Bets and Cash Crunch Pushed Ailing AIG to Brink,” Wall Street Journal, September 18, 2008.

  272 Greg Farrell, Aline van Duyn, and Nicole Bullock, “S&P in Warning after AIG Shares Plunge,” Financial Times, September 12, 2008.

  The cost to insure the debt of AIG: Lilla Zuill, “AIG Woes Knock Its Market Value Below Peers,” Reuters, September 11, 2008.

  Hank Greenberg, who was being deposed that morning: In the midst of settling a Delaware shareholder suit for $115 million, Greenberg began his deposition with Andrew Cuomo for a civil fraud lawsuit, which would stretch over the next several days. Amir Efrati, “Greenberg Settles AIG Shareholder Case,” Wall Street Journal, September 12, 2008.

  “What the hell are you people waiting for?” James Bandler, “Hank’s Last Stand,” Fortune, October 7, 2008.r />
  If the agency cut AIG’s credit rating: Mary Williams Walsh and Jonathan D. Glater, “Investors Turn Gaze to A.I.G.,” New York Times, September 12, 2008

  Texaco trucks and Eastern Airlines jets: Stephen Labaton, “Bankruptcy Bar: Never So Solvent,” New York Times, April 1, 1990.

  he billed clients nearly $1,000 an hour: Jonathan D. Glater, “The Man Who Is Unwinding Lehman Brothers,” New York Times, December 14, 2008.

  He had grown up in the Gravesend neighborhood of Brooklyn: Ibid.; Labaton, “Bankruptcy Bar,” New York Times.

  “Bankruptcy,” he once said, “is like dancing”: Ibid.

  “With a beleaguered Lehman:” Jessica Papini, “Possible Govt Backstop for Lehman Buy Has Two Prior Models,” Dow Jones, September 11, 2008.