by Ron Suskind
Paulson counted on their dreading a domino effect, that if the contagion of fear spread, they’d go down, one after another.
But fear was a hard sell to this crowd: in fact, over the course of nearly a year, it had failed to conquer deeply ingrained hubris and self-regard. Like European monarchs in the centuries before democracy, the financial industry CEOs—like so many American CEOs whose behavior Wall Street had shaped and then rewarded with 1980s-forward “innovations” in compensation practices—acted as sovereigns, untouchable. It was clear since the late summer of 2007 that many of their institutions had been busily swapping and subbing debt—rolling it over, or keeping it invisibly tucked away far from their balance sheets—so they would not have to recognize their underlying insolvency. Vikram Pandit, presiding over the disaster that was Citibank, was sitting in a chair until recently occupied by Charles Prince, who had left in December with a compensation package worth $52 million. Bob Rubin, the bank’s chairman, was in line for $126 million in compensation. Thain’s predecessor, Stan O’Neal, had slipped out of a crippled Merrill the previous fall with a $72 million package. Hank Paulson himself, who oversaw Goldman’s powerful, viral machinations in mortgage securities until his departure for Treasury in 2006, had left with a pay package worth $700 million.
John Mack of Morgan Stanley, looking up and down the table, asked where Dick Fuld was. Paulson said he was “in no condition to be helpful” right now. Some CEOs nodded.
Everyone in the room, men who knew one another as members of a club, understood the darkest scenario of dominos falling: that if Lehman, the fourth-largest investment bank, went down, then Merrill, the third-largest, would be next. After that, Morgan Stanley, the second-largest, and finally Goldman, at the top. Of course, the last three were all close to the same size, each of them three times the size of Lehman. But, in many ways, the more incisive disaster scenario might have put Merrill in its own special category of destructive capability, in terms of shattered confidence. Lehman, like the other investment banks, had only a small arm, $20 billion or so in assets, that came directly and regularly from the public—it was mostly an operator in funds, institutional trading, bank-to-bank operations, and a wide array of investment activities.
The biggest part of Merrill, conversely, was still its ninety-four-year-old consumer brokerage business, now called “wealth management.” That business had grown with breakneck speed over the past thirty years as millions of savers moved from traditional banks to investment funds. Driving the migration was a combination of the government’s 1970s creation of tax-exempt 401(k)s and IRAs, to encourage saving, and the 1980s heady rise in stocks. Merrill, always the biggest brokerage, was soon enough handling the life savings of a significant slice of the country, as traditional banks once did, and there was no going back. By 2008 it boasted fifteen thousand financial advisers handling four million customer accounts worth $1.5 trillion. That would be the nest eggs of more than ten million people.
But, of course, it isn’t a bank. So, those accounts are not federally insured, as bank accounts have been since the Great Depression. That means Merrill was actually like a huge national bank . . . but in 1929.
No one was quite sure what would happen if Lehman went down—trading desks at the big houses were trying to figure that out on Friday, running what-if scenarios. But, being focused on Lehman—with Paulson saying first let’s save Lehman, then we’ll think about what happens next—no one thought much about how a Merrill collapse would have sparked a public panic: people lining up at brokerage houses, banging on the windows and maybe worse, just like they lined up at the locked doors of banks seventy-nine years before, on Black Tuesday.
Such on-the-ground insights—about the behavior of panicked customers or how fear spreads across landscapes far from Wall Street—was not in the line of sight of those at the table. They were mostly looking at one another, measuring themselves against the only men, maybe anywhere, they considered peers and competitors. John Thain, the former number two at Goldman, who after Paulson left was beaten out for the top job by Blankfein, was eager to continue as Merrill’s chief, something he’d long wanted to be, and didn’t see that his house was already on fire, with a weight of toxic assets every bit as bad as Lehman’s.
So many of the dynamics of the crisis, in fact, were exacerbated by the ego-addled dance of the CEOs—over the years and in this very room—marking an era when the imperial chief executive often existed in a cloud city immune from accountability, even to quarterly earnings. Critics of astronomical CEO pay, and captive boards, in which CEOs supported fellow CEOs, often said the interests of chief executives were no longer woven with those of either shareholder or employee. The idea was get to be a CEO, by any means necessary, and you’d live in your own separate universe that defied traditional laws of business physics.
Even Dick Fuld, atop his Midtown office tower, couldn’t imagine a world without Lehman. A week before, the Koreans were ready essentially to merge with Lehman. Once his subordinates had it all set, Fuld, who’d been kept at a distance, burst into the deal room pronouncing that they’d undervalued Lehman’s real estate—that “plenty of those assets were good as gold”—ultimately scuttling the deal. Tonight, he was holed up atop his castle, where he’d presided for two decades, wrestling with wounded pride, and outrage—“Thain’s worse off than we are!” he was yelling at subordinates, and “Hank will never let us go down.” Paulson, and a few other CEOs in the know, were, meanwhile, livid at Fuld for having shooed away the Koreans.
Blankfein, for one, was concerned about how Lehman would pay its obligations to Goldman. Goldman, in fact, was owed money by many of the men in the room, having been early, and most active, in hedging and selling swaps on the great piles of toxic mortgage debt. For any banks wanting to restructure those debts, Goldman was poised like the sword of Damocles. Any attempts to restructure CDOs, to ease pressure on overburdened balance sheets, would trigger a contractual violation of the CDS contracts Goldman held, underwritten by AIG and other banks.
Jamie Dimon, who became CEO of JPMorgan in December 2005, was fortunate that his predecessor, Bill Harrison, expressed distaste in the late 1990s for the mortgage-backed securities and never wavered, even as JPMorgan’s earnings sagged in the coming years compared with those of CDO-trading competitors. When Dimon took over in early 2006, with Harrison still chairman, he never loaded up on toxic mortgage securities, even though many of what would prove disastrous “innovations” in how to trade and account for CDOs occurred under Dimon’s 1990s tenure at Citigroup. Now with the strongest balance sheet at the table, Dimon was looking for more “Jamie Deals,” drawing suspicions from chairs on all sides.
Meanwhile, John Thain, sitting across from his old boss Paulson, and three seats down from his onetime rival Blankfein, wasn’t even considering a world without Merrill. He’d just made it to the table. He wasn’t going anywhere.
Greg Fleming, of course, was not a member of the CEOs club. Having spent two years enduring an array of cleansing ego-adjustments, he went home that evening to his home in Bedford, New York, ate a late dinner, and fell into fitful sleep. At 4:00 a.m. he awoke, and began wandering the halls of the silent house.
There were too many variables, too many to game. Padding barefoot in his kitchen, he found the world quiet and settled and coming into focus. Merrill needed to be sold this weekend or it would either die or be sold on its knees for a few bucks a share. A sense of panic began to rise from his gut. While Merrill had profited in recent years from exotic trading in CDOs, Fleming, after all, was overseeing the firm’s old core business, “wealth management.” He’d traveled the country, edge to edge, many times, talking to brokers at the big offices. Merrill was vastly, systemically woven into the global financial fabric, just like Lehman, but was significantly larger. Its accounts held the money of real people in the real country. Panic at trading desks and in corner offices was horrific, but nothing compared to angry mobs.
He put on a pot of coffee
and grabbed a pad. He needed to move—now. Even though he’d received a come-hither nod of interest in early August from Bank of America, nothing could happen unless Thain were fully on board. He wrote down lines for what he would say to his CEO as soon as the sun came up.
The first call went in at 6:30 a.m. Thain was already in the back of a Town Car, on his way to New York City for the Saturday meeting at the Fed. He was surprised to hear from Fleming. The two men did not get along.
“What is it?”
“I think you need to talk to Ken Lewis.”
“About what?”
“About a deal.”
“What are you talking about? Greg, this really isn’t the time.”
“If you don’t talk with Bank of America, I think this company is going to fail.”
There was a pause on the other end.
“Go on,” Thain said.
Fleming laid out the variables, all the scenarios of what might happen over the weekend, and how Merrill needed to move, today, not in spite of those uncertainties, but because of them. “It’s Saturday. We have until Monday in early morning, before Asia opens, to get this done. If those markets open, and we don’t have a buyer, we’ll have the whole world breathing down our necks.” He raced through a calculus of how Merrill’s stock, currently $17, “could lose $15 in a day—and we’d be at $2. The next thirty-six hours is like eight years in deal land. Now’s our moment.”
“Greg, you’re panicking,” Thain said, dismissively.
Fleming was sitting on the front steps of his house, script in hand, and it was all slipping away. He made a desperate bid. “We need to do the right thing for our sixty-five thousand employees and the shareholders,” he said evenly. “It’s not about me and you and you being pissed about what I’m saying and how I’m saying it.”
Silence. After years living under Stan O’Neal’s explosive bravado, Fleming had become a survivalist, expert in managing the blend of insecurity and willed confidence common to the modern, wildly compensated, and ever more imperial CEO.
“Listen,” he said to Thain, his voice softening. “You’re going to be a hero if you save this company.”
Thain cleared his throat. “Well, umm, that’s not the focus.” And, finally: “All right, I’ll think about it.”
A green light? Not really. But Fleming decided to see it as one.
He immediately called up Greg Curl, Bank of America’s number two, and Ed Herlihy, the bank’s lead lawyer at Wachtell Lipton. “We’re on.”
Curl and Fleming each began to pound through their contact lists, alerting and assembling their respective SWAT teams of lawyers, accountants, and key executives within each institution. The two number twos, both with a long history of buying and selling financial institutions, had to get their two number ones together to get things launched officially. They decided on a 2:30 meeting in the Bank of America apartment in the Time Warner Center, on Columbus Circle. Curl called Lewis in Charlotte and said he needed to be on the corporate jet to New York, and fast. Lewis, following CEO protocol, said he wasn’t getting on any jet until he’d heard directly from Thain.
While the CEOs settled into the New York Fed to try to make Lehman saleable to Barclays—which, Paulson had informed them, was the sole potential buyer—an actual Wall Street deal, the last deal of the golden era, was taking shape.
Or almost.
Fleming was back on the phone to Thain.
“You’ve got to call Lewis.”
“No way,” said Thain. “I don’t want to do it. I’ll be at a tactical disadvantage.”
Fleming was speechless. A tactical disadvantage? It’s these guys or nobody, he wanted to shout at Thain. Either they want Merrill or they don’t. He composed himself. “Look, you just have to tell him it’s a beautiful day in New York and you’re looking forward to seeing him. Talk about the weather.”
Thain wouldn’t budge—nope—and then he hung up.
Fleming was back on the phone with Curl, staking everything—“my reputation, my whole career”—on a guarantee that Thain would show up at that apartment by 2:30. But Curl had his own imperial CEO to deal with. Without a call, Lewis wasn’t coming—and unless the call came quickly, Lewis would be hard-pressed to get to New York today.
But now Thain wasn’t picking up. He was in the conference room at the Fed, looking over Lehman’s books. The clock was ticking. A half hour passed; it was already past 11:00 a.m. Fleming had talked to his boss six times already that morning, and was now dialing into the ether every few minutes. Finally he called Ed Herlihy, Wachtell’s lawyer, telling him, “this whole thing is about to collapse,” because he couldn’t get Thain on the phone. Herlihy paused. “He’s sitting right next to me here,” in the New York Fed conference room. “I think he just doesn’t want to talk to you.”
A few minutes later, Thain finally picked up. “I’m not happy with this Greg. I’m not happy with the way you’re handling this!”
Fleming had nothing more to say. He pleaded, he begged.
“All right,” Thain finally groused. “I’m going to call him just so I don’t have to talk to you again!” And he hung up.
A few feet away, in the hallway outside the Fed conference room, Wolf looked for a quiet nook and punched in a number.
“Wolf, what have you got for me?”
“It’s a fucking mess, Barack. Just getting our arms around the problem will be a feat.”
Inside, he explained to Obama that they were, first, trying to figure out the depth of “the hole inside of Lehman”—meaning the value of its toxic assets and how far underwater that left the firm. Once that could be established—and the midday numbers looked to be about $70 billion—every bank would decide how much capital it was willing to put up to keep Lehman whole while it found a suitor. He said that the likely buyer was Barclays. But it would want only the profitable parts of Lehman. The toxic assets, in some of kind of bad bank, would have to be assumed by those in the room. Obama asked if they could accurately gauge the “depth of the hole,” because “aren’t lots of these securities difficult to value?”
Wolf said, yes, that was a problem, “especially considering how much stuff is not on the balance sheet” in terms of counterparty risks on instruments such as CDSs. “So what happens, Robert, on Monday morning if this doesn’t work?”
“A shit storm, Barack. We’d have to take the company apart, piece by piece, but it would be a nightmare. They’re in the middle of trading relationships all over the planet. The value of billions of financial instruments would go zero, because they can no longer be funded.”
Wolf had been closely following the solvency-versus-liquidity game since the previous summer, and he had his eye on Wall Street’s insurance broker, AIG. That was not just an intermediary’s business, like much of financial services. Insurance was different—a miracle product invented in the 1600s after the then-newfangled “theory of probability” was matched with statistical breakthroughs to create the actuarial tables still used today. Insurance was, in fact, the only proven model to manage and price risk, a leap of progress as great as any in human history. Life, fire, flood, liability, maritime, property, and casualty—the familiar list of lines allowed for the modern economy to develop across three centuries, and AIG was the world’s largest insurer. And now the most precarious, having strayed from core principles to sell the faux insurance of CDSs. For that there was no actuarial table, no informed oceans of data, but rather computer models assessing the probabilities of events yet to occur.
“I don’t understand why no one is talking about AIG,” Wolf told Obama. “There’s no way they can survive, and the part of AIG that’s gone bad, with all the CDSs, will pull down the side that still insures everything under the sun.”
Wolf was being beckoned. He had to go. He’d call later, and Obama went back to his first quiet Saturday afternoon at home in three months.
As Thain prepared to meet Lewis at 2:30 uptown, he told Fleming, “I don’t want to sell the company; they c
an buy 9.9 percent.” At the New York Fed, Thain had been talking to Blankfein about Goldman Sachs taking a 9.9 percent stake, infusing some new capital into Merrill. He’d now decided that Bank of America would be convenient as someone for Goldman to bid against. Fleming was succinct: Bank of America wanted to buy the whole company or nothing, which is what Lewis soon told Thain at their 2:30 meeting when the Merrill CEO proffered his minority stake idea. The meeting was brief, perfunctory. Thain left Columbus Circle to head back downtown to the Fed, and told Fleming to nonetheless have the negotiations move on two tracks: one to sell the whole company, the other to sell a minority stake. Fleming nodded and ignored the directive.
Now, with the CEOs out of the way, he and Curl could actually start to cut the deal, something Wall Street still knew how to do, starting with a discussion of Merrill’s earnings potential, with those fifteen thousand advisers and million of customers, who weren’t going anywhere. Merrill also owned 50 percent of the giant asset manager and mutual fund company BlackRock, locked up in 1994 when Fleming, then a young Turk at Merrill, helped Larry Fink break his firm away from Blackstone, the huge private equity firm. How did those franchises fit with Bank of America’s structure and product lines—were there synergies or overlap—and would their value be enough to counteract the heavy load of hard-to-value toxic assets built up by Merrill’s other half, its trading operations? It was, in essence, old Wall Street versus new: traditional investment, mutual fund, and brokerage activities versus the new innovations of bets and bonuses based on high-stakes math competitions. Merrill remained valuable because in the trading frenzy of the past decade, no one had bothered to jettison its legacy operations.