Too Big to Fail

by Andrew Ross Sorkin

  “Federal officials currently”: Efrati, “Greenberg Settles,” Wall Street Journal.

  “But while the Treasury Department”: Walsh and Glater, “Investors Turn Gaze to A.I.G.,” New York Times.

  “At least in the Bear case: “Lehman’s Fate,” Wall Street Journal, September 12, 2008.

  “Source: There will be no government money”: Steve Liesman to David Faber, Faber Report, CNBC, September 12, 2008.

  “Lehman is going down”: Susanne Craig, Jeffrey McCracken, Aaron Lucchetti, and Kate Kelly, “The Weekend that Wall Street Died,” Wall Street Journal, December 29, 2008.

  “We are not Lehman”: Ibid.

  “concerns about AIG’s ability to shed”: “AIG Shares Fall 20 Percent On Mortgage Woes,” Reuters, September 12, 2008.

  CHAPTER FOURTEEN

  he had given her some $4,600 in donations: On February 21, 2007 Lloyd Blankfein made two contributions, of $2,300 each, to Hillary Clinton’s Presidential Campaign. See http://www.opensecrets.org.

  after testifying at a hearing for the Committee on Energy and Natural Resources: “Summit to consider how to achieve a more secure, reliable, sustainable, and affordable energy future for the American people.” Friday, September 12, 2008.

  BofA shares closed that day at $33.74: Bank of America rose $.68 or 2.1 percent, to $33.74 on Friday, September 12, 2008. “Finance companies shares mixed at the close of trading,” Associated Press, September 12, 2008.

  “a quality which, for lack of a better word, I can best describe as epic.” Christopher Gray, “Mix of Limestone and Sandstone, in Florentine Style,” New York Times, November 11, 2001.

  a three-level vault: www.newyorkfed.org.

  Emergency meeting at NY Fed: Evan Thomas and Michael Hirsh, “Paulson’s Complaint,” Newsweek, May 16, 2009.

  “He is in denial,” Paulson continued: Author obtained notes from the emergency meeting at the New York Federal Reserve.

  “There is no political will for a federal bailout”: Deborah Solomon, Dennis K. Berman, Susanne Craig, and Carrick Mollenkamp, “Ultimatum by Paulson Sparked Frantic End,” Wall Street Journal, September 15, 2008.

  “I assume we are going to talk about AIG?”: Tett, Fool’s Gold, 233.

  “Stop being such a jerk”: Kate Kelly, “The Fall of Bear Stearns,” Wall Street Journal, May 29, 2008.

  Fuld swallowed his pride and dialed Lewis’s home in Charlotte: According to the Wall Street Journal, Fuld placed the call to Lewis on the afternoon of Sunday, September 14, 2008. Subsequent reporting by the author has revealed that the call was actually made on the evening of Friday, September 12, 2008. See Susanne Craig, Jeffrey McCracken, Aaron Lucchetti, and Kate Kelly in “The Weekend That Wall Street Died,” Wall Street Journal, December 29, 2008.

  the same home he had purchased in 1958 for $31,500: Roger Lowenstein, “King Midas—Warren Buffett,” Independent on Sunday, February 18, 1996.

  David Bonderman of Texas Pacific Group: Riva D. Atlas and Edward Wong, “Texas Pacific Goes Where Others Fear to Spend,” New York Times, August 25, 2002.

  watched his investment lose virtually all of its value in less than half a year: Peter Lattman, “WaMu Fall Crushes TPG,” Wall Street Journal, September 27; Geraldine Fabrikant, “WaMu Tarnishes Star Equity Firm,” New York Times, September 27, 2008.

  Paulson hated Flowers, and the antipathy was mutual: Peter Truell and Joseph Kahn, “Goldman Sachs Nears Decisive Talks on Going Public,” New York Times, June 2, 1998.

  “Urgent. Code name: Equinox”: Craig, McCracken, Lucchetti, and Kelly, “The Weekend that Wall Street Died,” Wall Street Journal. For a more detailed account of Weil Gotschal’s involvement in the Lehman bankruptcy, see Ben Hallman, “A Moment’s Notice; Weil Gotshal put together the largest bankruptcy in U.S. History in Record Time.” American Lawyer, December 1, 2008.

  “If we do that” Cohan, House of Cards,.

  Eric R. Dinallo: Matthew Karnitschnig, Liam Pleven, and Peter Lattman, “AIG Scrambles to Raise Cash, Talks to Fed,” Wall Street Journal, September 15, 2008.

  Merrill had just sold $8.55 billion of convertible stock: “Thain Gains $2 Mln on Merrill Lynch Share Purchase,” Reuters, July 31, 2008.

  the restaurant plays host to Wall Street bigwigs over lunch: Landon Thomas Jr. “Make Your Best Offer and Pass the Parmesan, Please,” New York Times, October 2, 2005.

  the “good bank”: Cohan, House of Cards, 445.

  “How much equity do you need to raise”: This exchange between Gary Shedlin and Michael Klein was first reported in William D. Cohan’s article for Fortune magazine, soon followed up in his book, House of Cards. According to Cohan, “Shedlin confirmed the exchange to Fortune; Klein did not respond to requests to be interviewed.” See William D. Cohan, “Three days that shook the world,” Fortune, December 16, 2008.

  lost $20 billion more than anyone had recorded: Eric Dash and Andrew Ross Sorkin, “Throwing a Lifeline to a Troubled Giant,” New York Times, September 18, 2008.

  CHAPTER FIFTEEN

  “I don’t think I can take another day of this”: The “Goldman aide” referenced in the Wall Street Journal is Blankfein’s chief of staff, Russell Horwitz. Susanne Craig, Jeffrey McCracken, Aaron Lucchetti, and Kate Kelly, “The Weekend That Wall Street Died,” Wall Street Journal, December 29, 2008.

  not-so-subtle reference to John Whitehead: John C. Whitehead, A Life in Leadership: From D-Day to Ground Zero: An Autobiography, New York: Basic Books, 2005.

  “Certain Deal Issues”: Author obtained copy of document.

  had posed a decade earlier: “Merrill’s Mr. Allison, reading from a handwritten sheet, spelled out the terms. ‘We think we need $4 billion to assure the fund can withstand any concerted attack by others against its positions.’ Sixteen firms were asked to pitch in $250 million.” Michael Siconolfi, Anita Raghavan and Mitchell Pacelle, “All Bets Are Off: How the Salesmanship and Brainpower Failed at Long-Term Capital,” Wall Street Journal, November 16, 1998.

  “What the fuck are you doing?”: Lowenstein, When Genius Failed, 203.

  he had contributed only $100 million: Wall Street Journal, November 16, 1998.

  Merrill’s market capitalization: According to Standard & Poor’s, Merrill’s market capitalization for Friday, September 12, 2008 was $26.1 billion. “Five Facts About Merrill Lynch and Bank of America,” Reuters, September 14, 2008.

  “It looks like we may have the outlines of a deal around the financing”: William D. Cohan, “Three Days,” Fortune.

  tapped out a message on his BlackBerry to Michael Gelband: A version of this anecdote was reported by Steve Fishman, “Burning Down His House,” New York, December 8, 2008.

  McCarthy, meanwhile, in London…: Nick Mathiason, “Three Weeks That Changed the World,” The Observer, December 28, 2008.

  FSA’s refusal to waive shareholder-approval requirements: As reported by Bloomberg, Barclays spokesman Leigh Bruce said: “The only reason it didn’t happen is that there was no guarantee from the U.S. government, and a technical stock-exchange rule required prior shareholder approval for us to make a similar guarantee ourselves. We didn’t have that approval, so it wasn’t possible for us to do the deal. No U.K. bank could have done it. It was a technical rule that could not be overcome.” John Helyar and Yalman Onaran, “Fuld Sought Buffett Offer He Refused as Lehman Sank,” Bloomberg, November 10, 2008.

  editorial in the Sunday Telegraph: Mark Keinman, “Barclays Should Be Wary of the Gorilla in Its Midst,” Sunday Telegraph, Sep 14, 2008.

  “Those of you who do not want to assist a Barclay deal…”: Author received notes from this meeting, with Paulson’s remarks dictated, as well as Geithner’s proposal to create a $100 billion emergency fund for the three remaining investment banks.

  Thain having coffee with Ken Lewis on Sunday morning: Referenced by Craig, McCracken, Lucchetti, and Kelly in “The Weekend that Wall Street Died,” Wall Street Journal, December 29, 2008.

  “Couldn’t have gone more poorly
…” Diamond’s e-mail exchange read to author.

  “We’ve got a good deal in hand”: Greg Fleming’s words to Peter Kraus were first reported in the Wall Street Journal and differ slightly from the author’s subsequent reporting. According to the WSJ, Fleming said: “We have a great deal in hand, and need to finish doing this deal.” Susanne Craig, Jeffrey McCracken, Aaron Lucchetti, and Kate Kelly, “The Weekend That Wall Street Died,” Wall Street Journal, December 29, 2008.

  together they had prepared an offer for the company: Zachary R. Mider and Erik Holm, “Allianz, Flowers Said to Have Bid for AIG Before Fed Takeover,” Bloomberg, September 17, 2008.

  The company’s market value on Friday had been about $31 billion: “With a market value of $31 billion on Friday, based on an intraday low of $11.49, it now trails some other insurers, including AXA SA. The shares slipped further after the closing bell, following a warning from Standard & Poor’s that it may cut AIG’s ratings.” Lilla Zuill, “AIG Could Hold Investor Call as Soon as Mon,” Reuters, September 12, 2008.

  “I don’t approve of”: Dr. Paul Achleitner of Allianz denies having made these comments. However, several eyewitnesses confirmed that these were the words he used.

  Miller grabbed three senior partners: Ben Hallman, “A Moment’s Notice for Lehman,” American Lawyer, December 16, 2008.

  Roberts took a call from a partner: Ibid.

  “You don’t understand the consequences”: Ibid.

  “All trades conducted will be done”: Author obtained copy of Fed memo.

  “The extraordinary trading session held today”: Jennifer Ablan, “Pimco’s Gross Sees Tsunami of Risk if Lehman Fails,” Reuters, September 14, 2008.

  “a group of global commercial and investment banks”: From Morgan Stanley press release, issued September 14, 2008.

  He had received bids for it on Friday from two separate private equity firms, Bain Capital and TPG: Christine Williamson, “Walker Rises from Ashes of Lehman Brothers Firestorm,” Pensions & Investments, October 13, 2008.

  Diamond’s cell phone rang: First reported by Aleksandrs Rozens, “Who Dares Wins; Barclays’ Diamond Leads Team to Snare One of Wall Street’s Most Storied Investment Banks,” Investment Dealers Digest, January 19, 2009.

  Thomas Cruikshank, who had led the oil services company Halliburton: Cruikshank served as the chairman and CEO of Houston-based Halliburton from 1989 to 1995, after which Dick Cheney assumed his position. He had been on Lehman’s board of directors for twelve years when the company filed for bankruptcy. Hillary Durgin, “Halliburton—On the Offensive,” Houston Chronicle, October 5, 1997.

  Known as “Dr. Doom”: Karen Pennar, “Dr. Doom and Dr. Gloom Are Still Prescribing Caution,” BusinessWeek, October 17, 1988.

  “providing only tepid oversight”: From a speech Kaufman gave at a conference in Philadelphia in April 2008. “Credit Crisis a ‘Global Calamity’—Kaufman,” Reuters, April 18, 2008.

  Mayor Michael Bloomberg: Azi Paybarah, “Bloomberg and Schwarzenegger (and Sheekey?) Together Again,” New York Observer, January 16, 2008.

  “My goodness. I’ve been in the business”: Andrew Ross Sorkin, Jenny Anderson, and Eric Dash, “A Buyer for Merrill,” New York Times, September 16, 2008.

  “Words cannot express the sadness”: Carrick Mollenkamp, Susanne Craig, Jeffrey McCracken, and Jon Hilsenrath, “The Two Faces of Lehman’s Fall,” Wall Street Journal, October 6, 2008.

  $5.8 billion in “incentive compensation”: A complaint later filed by the SEC against Bank of America revealed that the bank had “contractually authorized” Merrill to pay billions in discretionary bonuses—not to exceed $5.8 billion—to its employees. SEC press release, “SEC Charges Bank of America for Failing to Disclose Merrill Lynch Bonus Payments,” Washington, D.C., August 3, 2009. See http://www.sec.gov/news/press/2009/2009-177.htm.

  “BAC Update”: http://online.wsj.com/public/resources/documents/FedbofaDocs.pdf.

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

  Flowers and Fox-Pitt would earn $20 million: From Bank of America’s SEC filing.

  CHAPTER SIXTEEN

  “CRISIS ON WALL STREET AS LEHMAN TOTTERS”: Carrick Mollenkamp, Susanne Craig, Serena Ng, and Aaron Lucchetti, “Crisis on Wall Street as Lehman Totters, Merrill Is Sold, AIG Seeks to Raise Cash,” Wall Street Journal, September 15, 2008.

  Lehman formally filed for bankruptcy at 1:45 that morning: Legal documents show that Lehman filed a voluntary petition under Chapter 11 with the United States Bankruptcy Court for the Southern District of New York on Monday morning at 1:45 a.m. See www.lehman-docket.com; Peg Brickley, “Lehman Makes It Official in Overnight Chapter 11 Filing,” Wall Street Journal, September 15, 2008.

  “Everybody’s prepared this time”: Annelena Lobb, “A Chaotic Sunday Opens Wall Street’s Week,” Wall Street Journal, September 15, 2008.

  sent out a note to his clients: “Analysts’ View 3—Lehman Files for Bankruptcy, Merrill to be Sold,” Reuters, September 15, 2008.

  a mogul unto himself: Landon Thomas Jr., “Banker, Loan Maestro Jimmy Lee Switched Suspenders for Sweaters,” New York Observer, December 24, 2001.

  finance some of the biggest deals in history: Ibid. Beginning in the late seventies at Chemical Bank, Lee raised hundreds of billions for companies on the brink, such as IBM, General Motors, Seagram, Nextel, and AT&T, to name a few.; Robert Lenzner, “Jimmy’s List,” Forbes, April 17, 2000.

  they were angry: Aleksandrs Rozens, “Death of an Era: Within the Span of Several Days, Wall Street Loses Two Titans,” Investment Dealers Digest, September 22, 2008.

  “Wall of Shame”: Ibid.; McDonald and Robinson, A Colossal Failure of Common Sense, 317.

  “Dumb and Dumber,” “Voting in Braille Only”: Ibid.

  Geithner’s phone conference with Dimon, Blankfein: According to Geithner’s calendar, the call was scheduled from 10:00 to 10:15 a.m. that Monday.

  relatively uneventful press conference of Bank of America and Merrill Lynch: A press release on Bank of America’s Web site early Monday morning announced the merger with Merrill Lynch, and also that Lewis and Thain would be hosting a press conference at 10:00 a.m. in the auditorium at Bank of America’s New York City headquarters. See http://www.bankofamerica.com/merrill/.

  formally agreed to allow AIG to use some of its regulated insurance company assets: In a press conference at noon on Monday, September 15, New York governor Paterson said that he had given Eric Dinallo “authorization, such that AIG can access $20 billion of its assets through its subsidiaries for the purpose of posting these assets as collateral to provide liquid cash in order to run the day-to-day operations of the parent company.” States News Service, Transcript: Governor Paterson Press Conference on AIG—September 15, 2008, September 15, 2008.

  Geithner called and told him he should be at this meeting instead: Paterson thanked Dinallo in his speech, acknowledging that he was presently meeting with Federal Reserve officials.

  to discuss the fate of the insurers Ambac and MBIA: Susanne Craig and Liam Pleven, “Credit Crunch: Good Plan, but Who Will Pay?” Wall Street Journal, January 30, 2008.

  “I hope you all had an enjoyable weekend”: Paulson’s comments to the press, and their questions, were taken from transcripts released by the White House. “White House Conducts Press Briefing, Sept. 15,” 1:42 p.m. EDT. US Fed News, September 15, 2008.

  “It is oddly reassuring that the Treasury Department…let Lehman Brothers fail: “Wall Street Casualties,” New York Times, September 16, 2008.

  “Stocks Plunge as Crisis Intensifies”: Glenn Kessler and David S. Hilzenrath, “Stocks Plunge as Crisis Intensifies; AIG at Risk; $700 Billion in Shareholder Value Vanishes,” Washington Post, September 16, 2008.

  The Dow Jones Industrial Average had slumped 504.48 points: Dow dropped 504.5 points on Monday. Alex Berenson, “Wall St.’s Turmoil Sends Stocks Reeling,” New York
Times, September 16, 2008.

  Fed had kept Lehman’s broker-dealer in the United States open: According to Lehman’s official press release issued that Monday, the company was “exploring the sale of its broker-dealer operations” and that its subsidiaries, including Neuberger Berman, LLC, and Lehman Brothers Asset Management, would “not be subject to the bankruptcy case of its parent.” See http://www.lehman.com/press/pdf_2008/091508_lbhi_Chapter11_announce.pdf.

  as was the case with Ramius Capital: Cassell Bryan-Low, “Crisis on Wall Street: Funds Assess Lehman (Gulp!) Exposure,” Wall Street Journal, September 26, 2008.

  he presided over the FOMC meeting at the Federal Reserve in Washington: The meeting was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, September 16, 2008 at 8:30 a.m. See http://www.federalreserve.gov/FOMC.