The Weekend That Changed Wall Street

by Maria Bartiromo

  “No,” Cox hedged, “I’m telling you what the situation is.” As their regulator, he couldn’t order them to go into bankruptcy, but he was letting them know that they were out of options.

  An executive who was on the call told me, “There was no doubt what the intention was. And the Lehman board was scared and shocked. It was a very big deal.” He added that everyone thought Cox had stepped over the line by calling the board. “Our board was outraged that Cox butted into the board meeting. That had never been done before. Everyone’s nerves were so frayed that they briefly let anger get the better of them.”

  It took Lehman until 1:45 a.m., long after the Asian markets had opened, to declare bankruptcy.

  A Treasury official acknowledged to me the difficulty of the outcome but defended the Treasury’s stance on Lehman. “People have said, ‘But why couldn’t you have done something to facilitate a purchase? They forget that everyone who might be a potential buyer knew how bad things were at Lehman. Companies weren’t jumping up and down, saying, ‘Let me buy it!’ They weren’t lined up outside the door saying, ‘I’d buy Lehman if only the government would help me.’ If you have no buyer, you have no buyer. The government can’t compel someone to buy.”

  Many people were confused on this point. What was the proper role of the federal government. “For one thing,” a source in Washington explained, “the Treasury just didn’t have the money to rescue institutions. This was before Congress authorized TARP [Troubled Asset Relief Program] funds. The Treasury couldn’t buy or bail out institutions. It wasn’t a question of whether Hank Paulson wanted to do it or not.”

  Another source in the Treasury spoke with me, the sadness and frustration clear in his voice. “It wasn’t like a decision was made on Friday that these guys were just doomed and we were going to let them go. There was an attempt over that entire weekend to save them. And the fact is, we didn’t. So in that sense it was a failure, and once Barclays pulled out, we didn’t have any other options. We didn’t have the legal authority to do anything differently. So, I don’t blame us for failing that weekend. I blame the fact that we didn’t have mechanisms set up in advance to deal with these sorts of contingencies.” He sighed and added, “It would be great if we were all smarter, but we’re not.”

  Late Sunday, September 14, the CEOs pulled their chairs back from the table and began to pack their briefcases. They had failed at the core mission of the weekend, which was to save Lehman Brothers. But their minds were elsewhere. “When we walked out of there Sunday night, a few of us commented that there was still a big elephant in the room,” one of them told me. “And that was AIG. When we mentioned AIG to Geithner, he kind of brushed us off, saying, ‘Yeah, we’re taking care of that, but it’s not part of this discussion.’ Some of us disagreed. We thought if there was an announcement that Lehman went under, but Merrill was saved and AIG was taken care of, maybe the markets wouldn’t be so negatively affected. But with the big elephant of AIG still in the room, no one felt at ease.”

  It was well into the evening when I reached a source at Lehman Brothers. The adrenaline shot provided by hope had worn off, and he was dragging with exhaustion. He could spare me only a minute because he was immersed in the details of the bankruptcy filing. “This is my family,” he said, and I could hear his tears. “What’s going to happen to my assistants, my secretary? So many people will be hurt by this. We failed them. I failed them.” There was silence on the line for a moment, and then he said, “I feel terrible.”

  Near midnight, John Thain, Ken Lewis, and their teams were lifting champagne glasses, toasting the deal. Had they been able to foretell the future, they might have held off on the bubbly.

  SIX

  Fallout

  “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”

  —ALAN GREENSPAN IN CONGRESSIONAL TESTIMONY, OCTOBER 2008

  SEPTEMBER 15, 2008

  An image played in Win Smith’s mind as he watched the news of the sale of Merrill Lynch: a thundering herd of bulls storming over the horizon, joyfully kicking up huge clouds of dust as their giant hooves pounded into the earth. That was his Merrill, the company he loved, the company his father had joined in 1916 with the founders, Charlie Merrill and Eddie Lynch, to bring Wall Street to Main Street, a goal they achieved with bullish determination. But there was a second image Smith held in his mind, distinctly different but every bit as essential—the benevolent visage of “Mother Merrill,” the good soul of the firm. For if a firm could be said to have a soul, it was Merrill Lynch.

  Winthrop Smith Jr., fifty-five, had personally known every Merrill CEO, from Charlie Merrill to John Thain—although he didn’t know Thain well. He grew up hearing the iconic tales of “Mother Merrill” at his father’s knee—how Merrill warned its clients to sell ahead of the crash of 1929, thus rescuing their investments; or of the time in the 1970s when a stock Merrill recommended crashed and CEO Don Regan (future secretary of the Treasury and then chief of staff in the Reagan administration) said outright, “We goofed,” and made investors whole. These were the stories everyone at Merrill loved to tell, believing they belonged to a unique bastion of virtue at the craven heart of Wall Street.

  Smith had spent twenty-eight years there himself, rising to become executive vice president and chairman of Merrill Lynch International before leaving in 2001. Stan O’Neal had just been named chairman and CEO, and Smith was offered the vice chairmanship but declined to stay. Seven years later, he still felt so much pride in the company and its people. He had loved the underdog feistiness of Merrill, the strong leadership and warm heart that had characterized it for most of its history. Now Merrill’s motto, “We’re bullish on the future,” seemed like a relic of the past.

  It was sad to say good-bye. But for Win Smith, the emotional end had come much, much earlier. He did not believe that the current subprime crisis had brought Merrill down. In the months and years preceding the sale, Smith had made no secret of his anger toward one man, who he believed was responsible for ruining a great company: Stan O’Neal, the CEO who had been forced out in 2007.

  Smith was openly bitter about O’Neal’s tenure and the damage it had done to Merrill. Although O’Neal had received positive press as the grandson of a former slave and the first African American to run a major Wall Street firm, he was responsible for moving Merrill away from its core business into the lucrative (and ultimately fatal) subprime market. And then, much like Dick Fuld, he had failed to see the path of destruction until Merrill was already shaken. Shortly before his ouster in 2007, O’Neal told investors that the subprime problem was “reasonably well contained. There have been no clear signs that it is spilling over into other subsets of the bond market, the fixed income market, and the credit market.” He was wrong about that, of course, but being wrong did not prevent O’Neal from taking away a compensation package worth $161.5 million when he left. In Win Smith’s view, it was highway robbery.

  There were those on the Street who said Smith’s anger was really just sour grapes, since O’Neal had beaten him out for the top job. I once asked Smith if that was true, and if O’Neal’s poor reception and ultimate ouster was a case of the old guard at Merrill taking aim at an outsider. He denied it vehemently. “What he did that made many of us nonsupportive was to publicly castigate Mother Merrill without understanding what Mother Merrill stood for,” he said. “It was really a culture built around five principles: [Number one,] the client’s interests must come first. Second, one was to respect one’s colleagues. Third, the firm relied on teamwork. Fourth, you had a responsibility to your communities. And fifth was integrity: you never did anything that you couldn’t read about on the front page of the Wall Street Journal. I don’t think those principles were something Stan embraced or articulated. He thought Mother Merrill stood for paternalism—softness—which it did not in any way.”

  He admitted that he was disappoi
nted to have been passed over as CEO. “Would I have loved to have had the job? Absolutely. Would I have totally supported any of the candidates if they had not taken the firm in a direction with which I didn’t agree? Absolutely. So no, I’m not bitter. I just do not agree with what O’Neal did, and I certainly don’t agree with the way he maligned a culture that had worked for almost ninety years.”

  Now Smith watched the events unfolding that would bring an end to Merrill’s magnificent reign. He knew the sale was necessary. He was ready to support John Thain. But it felt like a death in the family.

  I awoke hours before dawn on Monday morning and left the house at 5:45 for an early appearance on the Today show, which would be filmed live from the floor of the New York Stock Exchange. The overnight news, as expected, was terrible. The foreign markets were sliding. It would be a long day for me as I tried to stay on top of developments. This was phase one of the crisis, characterized by panic and speculation. It would take several days to get a sensible picture—that is, assuming there were no new calamities in store. Over the weekend, Hurricane Ike had wrought devastation in Galveston, Texas. The analogies to the financial storm on Wall Street were inescapable.

  At 7:00 a.m., reporting from the NYSE, I tried to cobble together the outline of the facts. It was clear to me at that point that the Merrill sale to Bank of America was as big a story as the fall of Lehman Brothers, because it provided a window into the questions on everyone’s mind: What happens next? Was it a precursor of more trouble to come?

  After the Today show, I headed over to Bank of America headquarters, where Ken Lewis and John Thain were scheduled to give a 10:00 a.m. press conference. The first thing I noticed when the two men walked into the room and shook hands for the camera was the awkward body language. They were not comfortable with each other, or, I suspected, entirely confident about the giant leap they had made over the course of a single weekend. Thain’s face looked gray with fatigue, and his standard close-mouthed smile seemed more strained than usual. I could see in his eyes that he felt defeated. Sitting side by side in their dark suits and red ties, sipping water from glasses embossed with the Bank of America logo, they were an odd couple. Lewis’s opening statement—“We thought this was the strategic opportunity of a lifetime”—might have seemed more plausible if the financial world wasn’t in upheaval. Thain added that his own people inside Merrill were delighted with the deal, glossing over what must have been incredible turmoil and uncertainty at Merrill.

  I thought it interesting that early on in the press conference reporters phrased their questions as if assuming that Bank of America and Merrill had been talking about a deal for weeks, although the agreement was nailed down only over the weekend. Lewis and Thain both looked a bit abashed when they admitted that prior to Saturday morning there had been no discussion between them about a purchase. It was unbelievably fast. Why not just wait? Why buy Merrill at such a premium? I wasn’t the only one wondering what was going on. Surely, after the Lehman news, Merrill’s stock would have been under pressure, and Lewis could have picked it up cheaper.

  Toward the end of the press conference there was an odd note when a reporter asked Thain what his role would be in the new merger. His face went blank for a second before he murmured, “To be honest, I haven’t had a chance to flesh out that discussion.” Lewis smiled approvingly, calling Thain selfless. “It was never about him,” he said. “It was always about the deal.” In the months ahead I would have reason to think about this many times.

  As the room cleared after the press conference, I sat down to tape a lengthier one-on-one with Lewis, which would air on Closing Bell. I wanted to pursue the question of due diligence—how such a major deal could be struck in a forty-eight-hour period. Did he really have the time to study Merrill’s books? He replied in a very relaxed manner—essentially saying, “Not to worry. We know what we’re doing.”

  I was also curious about the man himself. Lewis had told me on many occasions that investment banking was too volatile, and he definitely didn’t want to be in that business. “You are in that business now in a big way,” I observed. “What changed?”

  He tried to sell me on a new vision of a company that married the two strongest factions of the financial industry to form an unbeatable entity. “It will be the envy of the financial services industry in terms of market share,” he said. “And the power with which we can operate in the best country in the world. If you want to create that formidable company, you have to be opportunistic.”

  There was no doubt in my mind that Lewis was optimistic. He saw the purchase as an amazing opportunity, a real coup. He leaned toward me, forcefully making his point. “This company’s going to be a thing of beauty as we get to the other side of this economic downturn,” he insisted. “It will be the envy of the financial services industry.”

  I left my interview with Lewis and headed back downtown to prepare for my show at the New York Stock Exchange. I needed time to think and study, but events were happening too fast to allow an opportunity for reflection. Complicating matters was the fact that we were in the final weeks of an intensely fought presidential campaign. Ticking across the wire was a statement by Republican nominee John McCain, obviously trying to quell panic, saying, “The fundamentals of our economy are strong.” It was one of those devastating remarks that continued to echo long into the campaign. The debate McCain’s remark generated had to do with what the fundamentals actually were. But there was no escaping it. Everywhere you looked there was a meltdown. Wall Street was getting the stuffing kicked out of it, and the stakes were no less than the future of the entire U.S. economy.

  I worked my BlackBerry lining up guests and gathering information. “Let’s get Win Smith to talk about his reaction to the Merrill deal,” I suggested to my producer. “And find out if Meredith Whitney is available.”

  Closing Bell was a packed show that day. Win Smith was my first guest. Smith was not one to grab the spotlight, but more than almost anyone I could think of, he represented the Merrill founders. He had a dog in this fight, if only because of his father’s service. “What are your thoughts?” I asked him. His words were measured but his voice sounded grief stricken. “As I’ve gone though the day I’ve had three types of emotions,” he said. “First, I feel very, very sad—my family is sad; the Merrill families are sad. On the other hand, there’s relief. Things could have been much worse. Thain made a good deal with Bank of America.”

  And the third emotion?

  “Frankly, I feel a lot of anger,” Smith said. “I feel a lot of anger for the former CEO Stan O’Neal, and for the board of directors, who really acted incredibly irresponsibly and got us into this position and dealt John the hand that he was dealt today.”

  I had no doubt that Win Smith would have plenty more to say as the dust settled and the full implications of the merger took hold—and that turned out to be true. However, with all the turmoil swirling around us that day, Merrill seemed more like a winner than a loser. We had to look at the entities that may still fall in the coming weeks and months, the state of insecurity of the system as a whole, and whether a greater collapse was imminent. Meredith Whitney of Oppenheimer, who had been calling it right during this period, had been one of the first to start issuing warnings about the consequences of overleveraging years earlier when people should have paid heed. She never minced words or offered standard pap. She was often the first one out with the bad news, which earned her the informal title of the new “ax” on Wall Street. (One of Whitney’s best calls was that Citigroup would be forced to cut its dividend, which happened weeks after she predicted it and caused the stock to plummet.)

  Whitney was completely unsentimental about Wall Street. She called it as she saw it, and on September 15 she was already looking ahead to the next upheavals and failures, specifically naming Wachovia, Washington Mutual, and Citibank as being vulnerable. (In retrospect, her predictions would prove to be 100 percent true.) By the time the closing bell rang at 4:00 p.m. on Monday
, the Dow had dropped 500 points, the largest drop in seven years.

  Throughout the day the news cameras focused on the volatile scene taking place at Lehman Brothers, as stunned workers carried boxes of their belongings out through the revolving doors. Most of them looked shell-shocked. Some were blistering with anger. At one point during the day, a group erected a giant picture of Dick Fuld outside the building, and employees scribbled comments like, “Thanks for screwing up.” Tourists gathered, pointing digital cameras at the scene and having their pictures taken under the Lehman logo.

  One source said to me on Monday, “I wasn’t here in 1929, but I’m pretty sure it felt like what it feels like today.”

  Back in Washington, Hank Paulson held a press conference in the West Wing briefing room. He knew what to expect. People wanted to understand the difference between Bear Stearns and Lehman Brothers. And they wanted to know if the Lehman collapse was a message from the government that there would be no more help coming from Washington. At the press conference, Paulson insisted that Lehman Brothers’ circumstances were different than Bear Stearns’, and voiced a sentiment likely to be well received on Capitol Hill: “I never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers.”

  Literally every player across the board in the financial system was scrambling to secure its own interests. “Our days had been starting at two a.m. for a couple of weeks,” Mohamed El-Erian recalled. “The weekend of Lehman we were in all of Saturday, all of Sunday. We had plan A, plan B, and plan C. Plan A was that you’d get a repeat of Bear Stearns, so at the very last minute you’d have a marriage of some sort—like the Barclays-Lehman solution. Plan B was that Lehman failed, but in an orderly fashion, so that someone in the government minimized the shock to the payments and settlement system. And plan C was that Lehman failed in a disorderly fashion.