Paulson understood AIG’s value all too well. “Every construction project that’s insured by AIG will stop tomorrow if they fail,” he said. “And the building you live in right now, I guarantee it’s insured by AIU Holdings, which is the property and casualty insurance group that’s in one hundred twenty countries. And that’s only the tip of the iceberg.”
In fact, the tentacles of AIG reached into every major country around the globe. It was composed of many insurance companies, covering millions of retirement accounts, life insurance customers, and other entities. Its balance sheet was more than $1 trillion. AIG had made huge investments in credit default swaps to insure mortgage-backed securities.
Paulson picked up the phone and called AIG’s CEO, Bob Willumstad. “Come on over,” he said. Willumstad and his advisers arrived at 4:30 Saturday and sat down with Paulson, who was feeling the weight of the crisis. He had started out the weekend trying to save Lehman Brothers. Now he had a much bigger problem. AIG was suddenly squeezing all the oxygen out of the building.
Hank Greenberg felt an enduring anger that had survived three years of exile from AIG, the company he had built into the largest insurance and financial services enterprise in the world. That anger had only intensified through the mounting financial crisis. Small-framed, but strong and passionate, Greenberg, at eighty-three, had more drive than most men half his age. On Saturday, September 13, he was at his office at C. V. Starr, overlooking Park Avenue. He’d made the decision to stay close to his business that weekend. With so much going on, he felt he’d better stand by. He was aware that AIG was having trouble, and that Willumstad was trying to arrange a meeting with the feds to make the case for a loan because he had been unsuccessful in raising funds on the outside. Greenberg knew something very few people appreciated at that point—that a failure at AIG would make the Lehman collapse look like a day at the beach.
As he drank tea from delicate china cups, studied reports, and made calls, Greenberg considered how the people at AIG were handling the crisis. He was not pleased. They weren’t thinking! They were desperate, and he knew from long experience that desperation was fatally contagious. The one thing you had to do, he believed, when all around you was going awry, was to keep your wits about you and stay calm. You didn’t react to a crisis by becoming part of the crisis, but by stepping away from it, viewing it dispassionately, and making decisions from a place of objectivity.
Greenberg had to work hard himself at maintaining that dispassionate view. He wasn’t usually an overly emotional person, but he was emotional about AIG. The company was his life’s work, the canvas upon which he produced his vision, and it had succeeded brilliantly. After Greenberg took the reins from the founder and his mentor, Cornelius Vander Starr, in 1968, he had put AIG on the map, breaking into hard-fought markets like China and Russia long before others did. Too crusty to be personally popular, Greenberg was nonetheless admired for his business acumen. But he was also feared. When he was at his peak at AIG, everyone knew you didn’t cross Hank Greenberg.
Then, in 2005, crusading New York attorney general Eliot Spitzer went after Greenberg with accusations of accounting fraud. The allegations would never be proved and were later dropped, but the mere hint of wrongdoing was enough to panic AIG’s board. With barely a thought, Greenberg was forced out and replaced by Martin Sullivan, a fifty-year-old British-born executive who worked for Greenberg. Believing Sullivan had helped drive him out, Greenberg never felt the same about him again, but even without the personal animosity, there was no question Sullivan was ill-equipped to run a global insurance powerhouse. From his new perch as the head of the financial services firm C. V. Starr & Co., and as one of AIG’s largest stockholders, Greenberg watched with alarm as the new management made one bad decision after another. In June 2008 Sullivan was ousted and replaced by Willumstad, a former lieutenant of Sandy Weill’s at Citigroup. Willumstad had gotten along well with Greenberg and had also been backed by Greenberg’s powerful ally Eli Broad. (Greenberg’s AIG had purchased Broad’s asset-management company, SunAmerica, in 1999.) Willumstad talked about repairing the relationship with Greenberg once he became CEO—something Greenberg was eager to do. He wanted to help AIG. To be clear, Greenberg wasn’t just being altruistic or paternalistic. His personal wealth was completely tied up in AIG, and it was sinking with the stock price. But so far Willumstad had shut him out, not returning his calls.
Greenberg also had a reason to follow Lehman Brothers closely. Back in June 2008, when others were pulling away from Lehman, Greenberg took a chance on the firm, making a substantial investment. He’d called Lehman “a great franchise” and predicted the end of the real estate crisis. Now he was watching his investment turn to dust, and he wanted to be involved in a solution. Over the course of the weekend, Greenberg spoke with Dick Fuld several times. Fuld, hunkered down in his office across town, outlined the possibilities as he saw them but told Greenberg that he believed a deal would be struck with Bank of America. Greenberg noticed during those conversations with Fuld that Lehman’s chief had absolute confidence that Lehman Brothers would survive. He didn’t sound desperate or afraid.
As for AIG, Greenberg was deeply concerned but not surprised that it had reached a crisis point. I had interviewed him in June, right after Martin Sullivan was replaced by Bob Willumstad. It seemed that since Greenberg had been pushed out, AIG had suffered a crisis of leadership. The price of stock fell by half in one year, and the company was suffering $13 billion in losses and another $30 billion in write-downs. It was deeply upsetting to Greenberg. “Shareholders are disgusted,” he said, speaking for himself and others. “You can’t have a company as great as AIG was in market value—the highest of any insurance company in history—suddenly become a basket case.” He added pointedly, “You have to ask yourself, where was the board in all this period of time? The board elevated its fees by three times, literally, for all the, quote ‘hard work they were doing’ unquote. Well, you don’t have to be a rocket scientist to figure out things are going badly.”
I looked at him intently. I could feel the frustration radiating off his slender shoulders. “AIG operates in a hundred and thirty countries,” I said. “You built this company. Some people say there’s no one who can really control this behemoth other than you, given your intimate knowledge of the firm.”
He smiled thinly. “I’ve heard people say that, and I think it’s silly. There’s more than one person in the world that can run a company. You’ve got to have an individual who has the vision, the energy, who is willing to pay the price, which means working 24/7—and you don’t do it because you have to, you do it because you love to…”
This was a familiar theme of my conversations with Greenberg. He took it personally. Now, with his old company on the rocks, he desperately wished he were at the helm so he could steer the ship to safety. Instead, he was shut out and shut down, and he feared what each day’s news cycle would bring.
By Saturday afternoon the complexion of the crisis had changed. When I heard that Ken Lewis was talking to John Thain, I knew that Lehman was down to one suitor. It was all happening with dizzying speed. Obviously, Thain didn’t go into that weekend with the intention of selling his firm, but that’s what seemed to be happening. For his part, it was startling to me how quickly Ken Lewis was able to orchestrate a deal. He hadn’t gone into the weekend expecting to buy Merrill Lynch, either.
I reached out to a source at Lehman, wondering how Fuld was handling the news.
“Dick is amazing,” he told me. “He must be pissed as hell, but you’d never know it. He’s shifting all his attention to Barclays, and he thinks it will happen.”
The CEOs, hard at work at the Fed, were operating on that premise. Their task was to figure out how to plug the gap. Everything was on the table. Could Barclays put in a little more? “It looked like we could get something done,” UBS’s Robert Wolf told me. “If Barclays would take on more of the [bad] assets, then we’d put together a new company of the leftov
er assets and the Street would own it. We were very focused, and no one had time to sit back and say, ‘What does this next step mean, or worse, what will it mean if Lehman actually fails?’ We only had until Sunday.”
As it became clear that Bank of America was out of the running for Lehman, Bob Diamond of Barclays was still working the financials. By late afternoon he thought there might be a deal. Paulson burned up the lines with Barclays CEO John Varley in London. Barclays was the only potential buyer left, and there were problems. By law Barclays had to have a shareholder vote on such a major purchase, and that could take thirty to sixty days. Diamond and Varley were pressuring Paulson. Would the federal government guarantee a purchase until then? Paulson knew there was no way he could do that.
Paulson was concerned about the number of roadblocks the British were putting up. The regulators were brutal. “It’s like they don’t want to catch the American disease,” Paulson observed to an aide.
Yet at day’s end, Barclays was still in there. It was a last-minute reprieve. Everyone breathed a sigh of relief as the word spread that Barclays had agreed to buy Lehman—on the condition that the sale would not include bad real estate assets. But there was complete uncertainty about what would happen. Late Saturday evening, a Lehman executive walked into a conference room and saw several sheets of paper lined up on the table. They were press releases. One press release announced a sale to Bank of America. Another announced a sale to Barclays. Another announced that Lehman had found a halo investor in the Middle East. One announced a bank consortium had purchased Lehman’s real estate assets. He stared at the press releases and thought, “No one knows which one will be released—or, worse, if the press release that isn’t here, the one announcing bankruptcy, will be the outcome.” He backed out of the conference room, not wanting to look.
FIVE
Death Sentence and Champagne
“This company’s going to be a thing of beauty as we get to the other side of this economic downturn. It will be the envy of the financial services industry.”
—KEN LEWIS, CEO OF BANK OF AMERICA, IN AN INTERVIEW WITH MARIA BARTIROMO, SEPTEMBER 15, 2008
SEPTEMBER 14, 2008
By Sunday morning I realized that the developments in New York were so significant that I couldn’t leave to attend the CME conference. I sent my regrets to the chairman, Terrence Duffy. He was quite understanding. I was hardly the only one to bail on his conference. In fact, when Paul Volcker gave the keynote Monday afternoon to a half-filled room, he joked, “I want to congratulate you for the timing of this conference.”
On Sunday I was following two tracks. The first and most significant was the fate of Lehman Brothers. I could feel the tick, tick, ticking of this time bomb as we headed into the final twelve hours. The deadline was set for the opening of the Asian markets. The second track was the emerging—and unexpected—story of a developing agreement between Bank of America and Merrill Lynch. I got ready for a busy day.
Bob Diamond and his team had worked through the night, trying to put together the pieces of the deal. It was 4:00 a.m. before they left the Fed, and Diamond didn’t go to bed. He had a call scheduled with his board; it was 10:00 a.m. in London. He was sleepy but optimistic. All that remained was for the deal to be sent to the British regulatory body, the Financial Services Authority, for its approval. But the call jolted him—and not in a good way. For the first time he was hearing that the FSA was probably going to reject the purchase, even if the consortium covered Lehman’s bad debt. It was, they felt, just too risky. Diamond knew that he wouldn’t be getting any sleep.
It wasn’t just the failure of his arduous efforts over the past few days that upset Diamond, or even the prospect of not getting Lehman, which he wanted more than his superiors, his board, or the British government. He felt blindsided and embarrassed. His counterparts had expected him to act in good faith, and he had, but he knew it wouldn’t look that way on the Street.
At 8:00 a.m. Diamond joined a conference call with Geithner and Paulson at the Fed, and John Varley in London. Varley broke the news to Geithner and Paulson that the FSA was balking. They were shocked but immediately went into action. Geithner placed a call to Callum McCarthy, the FSA chairman. McCarthy repeated the British government’s concern that they would be taking on too much risk. He didn’t exactly say no, but he asked for more time for due diligence, and there just wasn’t any. He also mentioned the requirement that Barclays’ shareholders vote on big acquisitions and said that if the American government could cover Lehman for thirty to sixty days prior to a vote, maybe they could do the deal.
Geithner already knew that was impossible, but it also made absolutely no sense. Let’s say the federal government lent Lehman Brothers enough to carry it for sixty to ninety days. Investors would surely bolt in large numbers in response to the uncertainty, and the problems with Lehman’s balance sheet would grow much worse. By the time the Barclays shareholders considered a purchase, it would be a real mess, and they would likely say no. It just wasn’t going to happen.
Paulson got on the phone with Chancellor of the Exchequer Alistair Darling, whose response was chilly. He asked Paulson why the British government and taxpayers should take on Lehman’s problems if the American government would not.
Paulson got it but he was deeply disappointed. “They kind of strung us along,” one of Paulson’s aides told me. “It felt like the British government never had any intention of doing this deal without a promise from the American government, which Hank could not give. We had been living on pure adrenaline for days, and now we felt deflated. It was awful.”
As noon approached, it became clear that the British would not budge. It was over.
Paulson retreated to a private office and called Fuld. “Dick,” he said, “I feel terrible about this, but the British government is not going to approve the sale. We’re out of options.”
“No!” Fuld cried. “You’ve got to do something.” But there was nothing that could be done. Fuld looked out of his office where board members had begun drifting onto the thirty-first floor, waiting while executives continued working on a Barclays deal. When the word came down that the British government said a sale to Barclays was too risky, all the wind went out of their efforts. Now what?
A source told me, “You know, this whole weekend has been a roller coaster—‘We’re done.’ ‘We’re not done.’ ‘We’re done.’ ‘We’re not done.’ Now we really were done.”
At the Federal Reserve, unaware of the drama, the CEOs were working on an arrangement to put up $30 billion. It was a remarkable act of collaboration—and, one may even say, of generosity. To be sure, they all felt jeopardized by the prospect of a Lehman failure, but it was still impressive that they were able to finalize such a huge commitment in less than two days.
At 1:00 p.m., Paulson, Geithner, and Cox entered the room. Paulson delivered the news to the CEOs. “The British screwed us,” he said. Christopher Cox said he had notified Dick Fuld that Lehman should file for bankruptcy.
“I actually thought there was going to be a solution for Lehman, up until the moment there wasn’t,” BlackRock’s Larry Fink told me. “At one time during the weekend it felt as if everything was going to be resolved. Everybody said Lehman was too big to fail. But we didn’t have time to figure it out.”
Word of a pending bankruptcy was leaking out to Lehman employees, and the fear and uncertainty were tremendous. “People don’t know what to expect on Monday,” a source inside the company told me. “They’re talking about wearing jeans to work. They don’t know if they’ll have jobs.” Managers were trying to still the panic. Someone later e-mailed me a copy of a message that went out from a manager on Sunday afternoon:
Team:
Given the recent press reports regarding Lehman, I wanted to communicate that we are counting on you to be at work on Monday and ready for business as usual. In fact, I ask that you take the extra time necessary to coordinate with your teams to conduct a “ready for business” check
on all mission critical activities before the day begins. Thanks as always for your commitment.
Things were a little better over at Merrill Lynch, where the final details of an agreement between John Thain and Ken Lewis were being worked out—although many people did not know what to make of a sale to Bank of America and what it would mean to them. The terms surprised me a bit. This was no fire sale. At $29 a share, it looked as if Bank of America was paying a huge premium, since Merrill had closed Friday at $17.05. Clearly, Lewis really wanted to own Merrill Lynch.
When I learned that there would be a press conference at Bank of America’s New York offices Monday morning, I reached out to Lewis, hoping to do a one-on-one afterward. My producer Lulu Chiang had cameras at the press conference and followed up on the interview with Lewis.
At the Federal Reserve, Chris Cox and a team of lawyers were outlining the basic mechanics of bankruptcy to Lehman’s people. The SEC had a role to play in bankruptcy, but only as a facilitator. He couldn’t force Fuld to declare. “It’s important that you make an announcement before the Asian markets open [8:00 p.m. Sunday, New York time],” he told Fuld. But Lehman was dragging its feet. Watching the clock, Cox grew increasingly concerned. Finally, at 8:00 p.m., with Lehman’s board gathered, Cox put in a call. “It’s time for you to do the right thing,” he said.
The board wasn’t sure what he meant. “Are you telling us to go into bankruptcy?” one member asked.
The Weekend That Changed Wall Street Page 9