The Divide: American Injustice in the Age of the Wealth Gap

by Matt Taibbi

  The consideration constitutes reasonably equivalent value or fair consideration.

  This was legalese for “It’s a square deal.” It was also, for all intents and purposes, a done deal. The sale would be formally completed the following Monday morning, but that was just t-crossing and i-dotting. All the important stuff had already been disclosed to the court.

  One small thing was left undone. One of Lehman’s lawyers, a woman named Lori Fife, stood up that afternoon of Friday, September 19, and told Judge Peck that there was some “confusion” about which of Lehman’s subsidiaries would end up being sold. It was nothing big, nothing to worry about, just some stuff that had to be worked out. And it would be, over the weekend. When they were finished working it out, Fife promised, the judge would hear all about it, in writing.

  The changes, Fife told the judge, “we’ve clarified in a clarification letter which we’re hoping to finalize and actually present to Your Honor whenever it comes down here.”

  During the two feverish weekend days to come, September 20–21, this minor side point was worked out. The clarification letter was nothing, just a little addendum to the deal, barely worth talking about, except that it changed the math in Barclays’s favor by a minimum of $5 billion. Ultimately, perhaps much more.

  THE LOST WEEKEND

  Sunday, September 21. Time was running out for Saul Burian. He was supposed to play a key role in one of the biggest transactions in the history of investment banking, a deal the whole world was watching, and yet he couldn’t get anyone on either side of the deal to talk to him or to anyone else on his team. It was late on a Sunday night, and the deal was closing before the start of business on a Monday. It was like manning center field, with a World Series–ending fly ball screaming right at you, but nobody’s given you a glove.

  “You’re standing there, and you’re the least informed people in the room,” he says. “And this is a deal that has enormous importance not just for thousands of employees, but for people around the world. I’d say it was unsettling, yes.”

  Burian was the managing director of the restructuring division of Houlihan Lokey Howard & Zukin Capital, the investment bank that the Lehman Brothers creditors’ committee had hired to oversee the firm’s bankruptcy. In lay terms, Burian and his small team of Houlihan bankers were the financial advisers to everyone around the world who was owed money by the dying megafirm.

  That was a lot of people.

  Burian represented, as another lawyer put it to me, the “great unwashed” of Lehman’s unsecured creditors. And on the weekend of September 20–21, 2008, it was his job to oversee the historic, last-minute sale of what was left of Lehman to the British banking giant Barclays, which had emerged the week before as Lehman’s would-be savior, gallantly (in true British fashion, one might say) stepping in to buy the cratering investment bank. In the process, Barclays was also, perhaps, preventing a global financial tsunami, by keeping the first in a series of great corporate dominoes from falling over completely.

  Burian and some other Houlihan employees, as well as lawyers from Milbank, Tweed, the law firm hired by Lehman’s creditors’ committee, had been invited into the skyscraper offices of Weil, Gotshal & Manges, the powerful international firm that represented Lehman Brothers—not the bank’s creditors, but the actual bank—to participate in the negotiations.

  But for now the creditors were still being treated like a third wheel, literally on the outside. The Houlihan/Milbank teams that weekend were left to sit in separate conference rooms, away from the action, twiddling thumbs, while the real meetings went on all around them in other rooms, other floors. “We were at best an annoyance,” Burian said later.

  What was going down in that skyscraper that weekend was a momentous, unprecedented transfer of wealth and property. Essentially Barclays was staging the ultimate episode of Storage Wars, trying to both price and buy the cargo of one of the world’s largest banking institutions in just a few frenzied meetings, with time playing a key role—it all had to be done before the start of business on Monday, September 22, 2008.

  As one of the world’s leading investment banks, Lehman Brothers was more than just a few thousand hotshots throwing big tips at strippers in Lower Manhattan. The bank was also a major cog in the world’s financial infrastructure, a middleman for deals in practically every territory of every country on earth. It was the banker to unions and pensions, to great nations and to little towns, to boutique hotels and to giant hedge funds, to charities and to Arab princes.

  More than 76,000 institutions and individuals would subsequently surface, claiming losses when Lehman collapsed. I would call dozens of the names on that list, speaking to Australian Boys’ Clubs, missionaries in Africa, a hotel developer in Washington State, a lawyer representing a wine workers’ union that lost $180,000 in pension money, and a string of officials in towns in the American Northwest. Even Bill Maher, the HBO star comedian, got no special status as a celebrity—he was somewhere down the list in the enormous line of Lehman losers.

  The saddest story of all came from Robert Shannon, the city attorney for Long Beach, California. “Our town invested almost twenty million dollars with Lehman two weeks before its collapse,” he said, laughing darkly. “Two weeks.”

  Shannon hadn’t had anything to do with that deal, so when he saw the news on TV that September announcing that Lehman had collapsed, he was mostly just curious. “I thought it was just an interesting story,” he said. A few hours later his phone rang, and someone from the city’s finance department was on the other line. In about a minute, Shannon was white with panic. “That was when I realized how serious this was.”

  When the bad news hit that crucial September weekend, all those creditors—the wine workers’ unions and Long Beaches of the world—had everything riding on companies like Houlihan and Milbank, and on Burian in particular. After all, the best (and perhaps only) hope to save any value at all for the Lehman creditors was to safely move the cargo off the Lehman-Titanic and onto the sturdy balance sheet of Barclays, a storied European bank whose very name carried the soothing implication of soundness, honesty, and old-world stability.

  But there was a catch: if the deal to sell the Lehman cargo were put together in a way that was lopsided in Barclays’s favor, then all those Long Beach firemen and African missionaries and Australian Boys’ Clubs, and even the sheikhs running the Abu Dhabi Investment Authority—whose exposure to Lehman was somewhat greater than the mean, an incredible $609 million—would all lose out, as there would be less left over for those thousands of creditors to split up.

  Unfortunately, from the start, the Lehman-Barclays deal was an awesomely complicated fix.

  Again, in the days before its purchase of Lehman’s assets, Barclays had quietly hired on all the key Lehman personnel who were involved with evaluating those assets. In exchange, Lehman deal makers jiggered the numbers of the deal in Barclays’s favor to the tune of billions of dollars.

  Those insiders had spent much of the chaotic week leading up to that weekend in the skyscraper negotiating the details of the secret discount. The insiders had smartly already presented the deal to a bankruptcy court without the discount figured in, and got the court’s approval that Friday afternoon, just as Judge James Peck was about to take off for the weekend. The only hint of what was to come was Lori Fife’s offhand comment about a “clarification letter.”

  The game then moved to the Central Park skyscraper offices of Weil, Gotshal, where the insiders would spend that fateful weekend “clarifying” the approved deal to move billions of extra dollars to the Lehman-Barclays insiders.

  This was the arrangement being hammered out in the rooms from which Burian and the Milbank lawyers were excluded. None of the creditors’ representatives had any clue as to what was going on, and their panic increased all weekend. Most of the team arrived mid-Saturday (Burian, who is Sabbath-observant, arrived after sundown) and failed repeatedly to get an audience with anyone involved with the deal. Houlihan an
d Milbank personnel even camped out strategically in different parts of the building, hoping for a chance to pull someone aside.

  “Every once in a while,” Burian said, “I’d catch someone in the hallway, in the bathroom, you know, getting coffee, you know, what’s going on?”

  All weekend long, phones rang and men and women rushed in and out of conference rooms. Big groups broke into little groups, while little groups scratched out side deals and rushed to rejoin big groups. The main action took place in a huge square-shaped conference room on the twenty-fifth floor. From outside that room, Burian said, he could occasionally hear spirited discussions going on, while officials from the Fed and the Treasury chimed in from a ceiling-mounted speaker system that applied an almost mystical aura to the proceedings. “You could hear, you know, like the voice of God,” he said, “people on conference calls, coming through the ceiling.”

  But all day Saturday and then most of Sunday passed without the creditors’ reps getting anything like a complete answer to a pair of very simple questions: What exactly was Lehman selling to Barclays, and for how much?

  The lack of information coming the creditors’ way from the Lehman-Barclays negotiators presented two distinct possibilities to Burian, both of them dire and deeply concerning. “Either they genuinely didn’t have answers,” he says, “or else they were refusing to show us stuff, and that got us pretty nervous.”

  A conference call between the Houlihan and Milbank folks and creditors all around the world had been scheduled for noon that Sunday, but that call was bumped to two p.m., then four, then six. Then it was eight o’clock, and then ten. And then finally a call actually happened at 11:30 p.m., a call in which Burian had to explain to exasperated creditors in places as far away as Japan that the committee, despite its frantic efforts at calculating the value of the deal, still basically had no idea what the hell was going on, what was in the deal and what wasn’t. “It wasn’t a pretty call,” Burian later said.

  It was after that call, after more “stomping around” and more stalking of coffee machines, that Burian finally lost it. He approached Harvey Miller, one of the Weil, Gotshal lawyers, who was standing outside a conference room where the deal was being negotiated. He told Miller the delay was ridiculous and that it was inconceivable that the largest transaction ever was about to be closed and nobody had time to inform the creditors’ committee.

  Miller sighed, told Burian to wait a minute, and then walked five or six feet to another executive named Michael Klein, who happened to be standing nearby.

  None of the people on the creditors’ committee knew that Michael Klein, as recently as a few weeks before, did not work for either Lehman Brothers or Barclays, or even have an inkling that he might ever do so. In fact, he had been at Citigroup for more than twenty years, from 1985 through July 2008, where he held the title chairman of international clients. Barclays CEO Bob Diamond had hired him just over a week before, and he would ultimately be paid the incredible sum of $10 million, essentially for his work on this one deal. “He was a mercenary” is how one lawyer described him to me later.

  Klein was worth every penny. On the Saturday before the sale was completed, Klein personally sent an email to Diamond, bragging that he’d found more money to take from creditors and move to the Barclays side of the deal. “Great day,” Klein said, of that Saturday. “We clawed back three billion dollars more.”

  So it was this Michael Klein who, in the wee hours of Monday, September 22, felt a tug in the skyscraper hallway. Lehman lawyer Harvey Miller had tapped his shoulder, whispered in his ear, and pointed to Burian. At the sight of Burian, Klein sagged like he was taking a bullet but, seeming resigned, motioned to Burian to follow him into a conference room.

  It was inside that conference room that the $10-million-man Klein treated Burian, and by extension every firefighter, wine worker, African missionary, and Australian Boys’ Club creditor on earth, to a demonstration of sheer chutzpah.

  Klein understood that he was being asked to explain the contours of this gigantic transfer of wealth not to anyone with real juice on Wall Street, but to the representative of people whose only leverage was that they held a huge stack of paper claims against Lehman.

  So Klein, showing what was apparently all due respect, scanned the room looking for a sheet of paper to write on. His eyes settled on “a credenza or somewhere on the table” where there happened to sit a stack of manila folders. He paused, took one of those folders, and for a few minutes, scribbled on it.

  When he was finished, he showed Burian the following picture:

  Burian stood back in amazement. Michael Klein had essentially diagrammed the biggest asset purchase in the history of finance on a manila folder. It was like submitting a design for a nuclear bomb to the Pentagon via a ballpoint drawing on the back of a napkin.

  Burian stared at Klein’s scribblings. He would testify later that he was awestruck by the moment, overwhelmed by the fact that he was participating in something so historically important. He was also relieved. Unlike almost everyone else in the world, he understood what Klein’s picture meant. The manila folder contained a crude list of assets and liabilities, and a small set of calculations, but more than anything, it contained, at the very least—after all those days and hours of waiting—an answer, an explanation.

  The manila folder asked the entire universe of Lehman creditors to accept on faith that the deal that had been reported to the court had changed, but only because the assets being transferred had since lost value in the market.

  “We were relieved that there was an agreement,” Burian said. As for what that agreement was, he told the negotiators that he believed them, of course, but that he would have to check it all out later. “It was trust but verify,” he says.

  Still, the absolute certainty with which the deal was explained to him acted like a balm on his nerves. They all seemed so sure. “I turned to all of them and said, ‘If this is what’s happening, then so be it,’ ” he said.

  In truth, Klein in handing that manila folder over had acted as the getaway driver, the man responsible for delivering the Big Lie to Lehman’s creditors. The lie was couched in a pair of those feverishly etched lines:

  Pre Mark 49.9

  Post Mark 44–45.

  In essence, Klein was telling Burian—whom he professed later not to even remember, testifying only that there was a “guy with glasses” at the meeting, where he had “grabbed a manila thing” and had a “recollection of drawing boxes”—that the Lehman assets had dropped from $49.9 billion in value when the deal was struck to “44–45” in current value, just due to market forces.

  The “44–45” notation was a piece of great showmanship. Like a car salesman who throws in a new set of radials to close the deal, Klein was telling Burian that Barclays was actually rounding things up about a billion dollars in Lehman’s favor—that the assets were actually probably only worth $44 billion now, but Barclays was going to give them credit for $45 billion. For good measure, you know, as a show of good faith. “They were going to cut us a break,” Burian testified later.

  Something didn’t feel quite right to the lawyers for the creditors, the whole weekend didn’t feel quite right, but there was no time to do anything about it. Houlihan and Milbank had no choice but to take Klein’s word about the deal. The sale closing was hours away. There was no conceivable way to do due diligence (or to “diligence it,” to use the verb form favored on Wall Street) in the hours remaining, and leverage-wise, there was no move left to make. If Lehman’s creditors balked, the Barclays sale might collapse, and Lehman itself might be worth pennies in a matter of hours. There was nothing to do but take Klein’s word on the math.

  Burian quietly scooped up the manila folder, shoved it into a briefcase, and went home. He had no idea he had just witnessed the misappropriation of at least $5 billion.

  And billions more were about to disappear in the final sale, through a variety of mechanisms so ingeniously conceived that it would take
several years, dozens of lawyers, and hundreds of depositions to sort it all out.

  The creditors ultimately did not object to the sale that next morning. They didn’t support it, either. It was, they felt, the only move they could make under the circumstances.

  “The reason we’re not objecting is really based on the lack of a viable alternative,” said Luc Despins, one of the Milbank counsel, that Monday afternoon of September 22, the day of the sale. “We did not support the transaction because there had not been enough time to properly review it.”

  In the months and years to come, the representatives of Lehman’s creditors would unearth stunning details about just exactly what had gone on behind all those closed doors. The first part of that process of discovery would unfold like a classic detective story, in which clues slowly revealed themselves until the truth gradually came into focus. There would come a time when the Lehman creditors would be able to see the contours of the whole heist. They would have documents, emails, admissions even. But almost precisely at that moment of evidentiary victory, they were politically and legally checkmated. The creditors were thrust face-first into the immovable principle that underlies everything modern that Wall Street does: if a crime is complicated enough, and sanctified by enough “reputable” attorneys and accountants, then American law enforcement will inevitably be too slow or too weak to stop it.

  THE INVESTIGATION

  The Lehman bankruptcy swindle was singular because of its sheer size, and also because of the extraordinary circumstances surrounding that chaotic September week when the deal took place. (“The whole world is melting down out there” is how one Lehman executive described the week of the sale in court.)