“We had responses for A, B, and C. We were ready. And it became clear on Sunday that it was going to be C. Very early on Monday morning we sent lawyers to deliver notices of default to Lehman, which then allowed us to crystallize whatever swap positions we had and to replace them pretty quickly so that our clients would be protected. We then went around to make sure that every aspect of the business was robust enough to weather the upcoming storm. It took a few days for the whole thing to play out. We had to find out where every dollar of our cash was, who our counterparties were, who had our collateral. And there was a heightened sense that we could no longer take a single thing for granted. We got very defensive very quickly. We raised cash, and we made sure that everybody understood that no matter what they were seeing in their sector, the massive liquidity shock was the overriding issue. We canceled vacations completely. It was all hands on deck. There was a lot more communication with clients, because a lot of our clients—and we have eight million of them—didn’t know what was going on at all. There was a massive increase in the amount of communication with the outside world.”
That scene was duplicated across the financial landscape, on a global level. “The week of September 15, everything halted,” El-Erian said. “And it happened in a cascading and a rapidly accelerating fashion. It was the equivalent of what the economists call a sudden stop to markets. It’s like a cardiac arrest, where it doesn’t matter whether you’re the leg or the arm—if the heart stops, everything stops. So what you got, starting on the Monday, but really building up to Wednesday and Thursday of that week, was a cascading cardiac arrest of the system. We saw it on the trading floor, where area after area simply could not get things done. It didn’t matter if you were the creditor or the debtor on the transaction, you couldn’t get it done. And that’s because the trust in the payments and settlement system evaporated. So no one wanted to take any risk.
“Here’s an analogy. I live in California, and we have the most efficient fast-food drive-through system in the country. You put your order in, you go to the first window to pay, and then to the second window to collect your food, and you’re out of there in thirty seconds. It works very well. Now, imagine what would happen if you went up to your McDonald’s drive-though, put in your order, and went to the first window. What if when they asked for your five dollars, you said, ‘Where’s my Big Mac?’ And they said, ‘Your Big Mac is down at the second window.’ But you weren’t sure if you believed them, because that day you’d heard that the system broke down at a nearby Burger King, and a lot of people paid for their food but found that the second window was closed. So you didn’t trust that you’d find your Big Mac at the second window. You pulled out of line and went away hungry. You had the money, and you were willing to transact, but you didn’t have the confidence that allowed a transaction to happen. Eventually, even though McDonald’s was able to feed people, and even though customers were willing and able to make transactions, the whole system collapsed. And that’s what started to happen in the financial system. It started slowly on Monday, and then really accelerated on Wednesday. The system seized up very quickly.”
It would be late in the evening before I finally arrived home, exhausted but buzzed. The day had been dubbed “Black Monday,” but it felt like black-and-blue Monday to me. I had hours of study ahead of me, another early morning report for the Today show, and my own show at the NYSE later that day. I felt the need to bring clarity to a situation that was messy and unstable. I had learned that while the press was focused on the fates of Lehman Brothers and Merrill Lynch that day, behind the scenes the Feds were scrambling to prevent a major catastrophe brewing at AIG. And unbeknownst to most people, Bob Diamond was still studying Lehman.
The canniness of Bob Diamond was never more evident than on Tuesday, September 16. Diamond had gone into the weekend wanting Lehman, and now he was on a scavenger hunt. Even as pictures of stockbrokers forming a funeral procession out the building doors filled the television screens, Diamond and his Barclays team were at Lehman looking at what they could buy postbankruptcy. Although this was an incredibly sad day for many people, it also represented a great opportunity for Diamond, and he was not going to let it pass him by.
On Wednesday, Barclays announced a $1.75 billion purchase of Lehman’s North American investment banking business, which would potentially save the jobs of up to ten thousand Lehman workers. Included in the price was Lehman’s Time Square building, a dazzling thirty-two-floor structure whose flashing LED screens often stopped passersby in their tracks. The facility had trading floors and technology ready to open for business immediately. Prior to purchasing the Times Square building, Lehman was housed in the World Financial Center, a complex across from the World Trade Center that suffered substantial damage on 9/11. Lehman’s data center and trading floor were destroyed. Rather than waiting to see what would happen with the location, Lehman moved quickly to purchase the building at 745 Seventh Avenue in October 2001. Originally built by Morgan Stanley, it had the advantage of being prefitted with state-of-the-art technology and architecture for the trading business. Now it would belong to Barclays, and it was ready for a seamless transaction—just turn on the lights and go. Like it or not, it was an amazing coup for Diamond and for Barclays.
Diamond and Lehman president Bart McDade (who was offered a job with Barclays) visited the trading floors and met personally with the staff, calming jangled nerves and urging everyone to put emotions behind them.
On Wednesday I sat down with Diamond to ask him some questions about the surprising Barclays deal. “I’m trying to figure out how this all plays out,” I said to him. “Let me ask you this: Do you feel any guilt at not rescuing all of Lehman?” It was an uncomfortable question, and Diamond conceded, “We were—we were, you know, quite fortunate. Because of the bank we were able to just select those assets and liabilities that fit with the business we were taking.” He added that Barclays rightly did not want to take on any risk, and without a federal backstop, a deal for the whole purchase was just out of the question. But this limited purchase allowed Barclays to get a foothold in the United States. In many respects it was a brilliant deal. As we spoke, just days after Lehman declared bankruptcy, the Lehman sign was coming off the building and a Barclays sign was going up.
The immediate fallout of the weekend’s events—at least where Merrill and Lehman were concerned—was starting to wrap up. But anyone who believed that the crisis was about the future of a couple of investment banking firms wasn’t seeing the bigger picture. Indeed, the symbol of the crisis in the months to come would not be Lehman, Merrill, or even Bear Stearns, but AIG, which, like Fannie and Freddie before it, became the company deemed too big to fail.
By Tuesday, September 16, all eyes were on AIG, and the news was emerging that the Feds were discussing an $85 billion bailout of the troubled insurance giant.
The force of his personality gave David Boies a youthful demeanor that belied his sixty-seven years. He was one of the most successful and well-known lawyers in America, whose career included a number of landmark cases. In the presidential election of 2000, Boies had achieved great notoriety, appearing on the news and talk shows to defend the interests of his client Al Gore during the dispute over the Florida-vote tally. He lost that battle but remained engaged in many high-profile cases. In 2005 he began representing Hank Greenberg, and now he was carrying his banner into the media battle. Boies appeared on Closing Bell waving a copy of the letter Greenberg had sent Bob Willumstad on Tuesday, after AIG’s credit rating was downgraded Monday by Standard & Poor’s and Moody’s. The stock dropped by 61 percent on Monday, and the slide would continue the next day. This was a stunning fall for the venerable company. The situation was so dire that Monday the Feds once again knocked on the doors of Jamie Dimon and Lloyd Blankfein. Could JPMorgan and Goldman Sachs put together a $75 billion line of credit to save AIG?
Boies explained that in the midst of the approaching calamity, his client, Hank Greenberg, had made rep
eated offers to help. Indeed, his history with the company and his position as its largest shareholder positioned him perfectly to do so. Boies described the letter Greenberg had written to Willumstad as a kind of final appeal that had also been ignored. I perused the text of the letter and found it quite extraordinary. In part it read:
Dear Bob:
We have been discussing for several weeks my offer to assist the company in any way that you and the Board desired. Throughout these discussions, you have told me and David Boies that you believed that my assistance was important to the company. The only concern that you have expressed to me is the fear that if I were to become an advisor to the company that I would “overshadow” you. I respectfully suggest to you, and to the Board, that the continuing refusal to work together to save this great company is far more important than any concern over personal positions or perceptions.
In little over a year, I and other shareholders, have watched the company that I helped build over 35 years into the largest and most successful insurance company in history and one of the most profitable financial companies in the world lose over 90% of its value…Over the last two weeks as the threats to the company increased, I have made repeated requests to meet with you and to meet with the Board to offer my suggestions and help. Those requests have been ignored.
Since you became Chairman of AIG, you and the Board have presided over the virtual destruction of shareholder value built up over 35 years. It is not my intention to try to point fingers or be critical. My only point is that under the circumstances, I am truly bewildered at the unwillingness of you and the Board to accept my help.
Hank
“He just wants to help,” Boies said. “He’s trying to salvage the company he built.” He shook his head with disgust. “One would think,” he said, “given his shareholdings, the company would want to talk to him.”
I had to agree that it made sense for AIG to consult with him. This was crisis time, and not only did Greenberg hold substantial stock in AIG, he built this company, he knew where the bodies were buried, and he remained close to a number of investors who were of like mind. When I reached Greenberg himself for comment, he told me that he and a group of investors were interested in working with AIG and the Feds on a solution that didn’t involve such a big infusion of money. “I would ask for less than $85 billion,” he said. “I’d sell assets, do other things to reduce the amount.” He told me he had ideas and was willing to serve. But no one was calling.
Greenberg later told me that he would have done everything he could—including perhaps tapping his connections in China and elsewhere—to keep the government out of AIG. And he was suspicious of the terms, which called for the government to pay 100 cents on the dollar to AIG counterparties, chief among them Goldman Sachs. He fumed that the bailout seemed to have as much to do with saving Goldman Sachs as with saving AIG and “the system.”
In Washington, Paulson was busy explaining to a nervous White House why the bailout was necessary and why AIG was being saved when Lehman had been allowed to wither. “There is a difference between a capital problem and a liquidity problem,” Paulson said, noting that AIG had subsidiaries that could be sold to raise capital. The problem was, once the word was out that AIG was in desperate need of cash, the values on those subsidiaries would begin to drop, and it would be tough to raise the money expected.
By Wednesday the deal was all but done. The government would bail out AIG for $85 billion and assume an 80 percent ownership in the company. (Ultimately, the government would shovel $182 billion into AIG.) In effect, the government now owned AIG. Willumstad would be replaced by Ed Liddy, the retired CEO of Allstate, for the yearly cash compensation of one dollar.
I spoke with Liddy immediately after the announcement. “I feel energized,” he said. “I think I can help. I’d like to help this company. I think I can help the country.” He seemed deeply sincere and committed to the task.
“But how did this happen?” I asked. “Can you explain how the largest insurance company in the world was actually exploring bankruptcy last weekend?”
“There’s a lot of glory to go around,” Liddy joked, then turned serious. “Insurance is the oxygen of free enterprise. Nothing can happen without insurance. AIG is interconnected. It touches too many other institutions. Some of the largest banks in the world are carrying credit default swaps, and AIG is insuring them.” Reflecting on the image of oxygen, I hoped that AIG and the rest of the financial system would soon be taking large, healthy breaths of air. But realistically, the life support would have to continue for some time.
Dick Fuld was shattered. He had vowed to fight for Lehman until his dying day, and he had lost. It felt like death. In the days and weeks ahead, he would play the events over and over again in his mind, trying to think of a way Lehman’s collapse could have been avoided.
“Dick and I had this conversation several times,” one of his former colleagues at Lehman told me. “We asked each other what we could have done differently. And we’d say, maybe we should have had a better government relationship, because our interface was woefully inadequate compared with Goldman Sachs and Morgan Stanley. Or we’d say, maybe we shouldn’t have had so many illiquid securities. Maybe we should have allocated our capital differently, so we didn’t have a high margin business. But then we’d be the laggard in terms of return on equity. The market would have punished us as an underperformer. We kept concluding that it was an industry issue. Look, there were countless things that could have been done that would have saved the day. Like turning into a bank holding company. [Ironically, it wasn’t until after Lehman failed that the government allowed the remaining investment banks, Goldman Sachs and Morgan Stanley, the option of becoming bank holding companies.] Like getting a guarantee on the debt Friday night. Like getting a Bank of America or a Barclays deal done. We knew all of the options going in. It wasn’t as if we took a left when we should have taken a right.”
Characteristically, Fuld remained out of the spotlight, refusing to give interviews or even produce an official statement. Few people would hear from him until October 7, when he sat alone in front of the House Committee on Oversight and Government Reform. The congressmen were angry, looking for answers—and for blood.
Glaring down at Fuld, his dark eyes beneath heavy glasses flashing with outrage, committee chairman Henry Waxman demanded to know why Lehman failed.
Fuld’s voice was thick with emotion, and he frequently stumbled over his words. “I do not know why we were the only one…I must tell you…we walked into that weekend firmly believing that we were going to do a transaction. My employees, my shareholders, my clients, have taken a huge amount of pain.” He gazed back at the committee, looking wounded. “Not that anybody on this committee cares about this, but I wake up every single night thinking, ‘What could I have done differently? What could I have said? What should I have done?’ And I have searched myself every single night. And I come back to this: at the time I made those decisions, I made those decisions with the information I had. I can look at you and say, this is a pain that will stay with me the rest of my life, regardless of what comes out of this committee, and regardless of what the record book will say when it’s finally written.”
Waxman was not impressed. With a mix of anger and sarcasm, he replied, “I accept the fact that you are still haunted by whether this could have had a different ending. But the system you lived under gave you a very, very generous reward when everything was going up…but when things weren’t holding up, you still got substantial compensation. We thought you made $500 million; you say that you made only $350 million. That seems to me an incredible amount of money…. What I didn’t hear from you, Mr. Fuld, is that you say you wished you had done some things differently, but you don’t seem to acknowledge that you did anything wrong.”
Fuld left the hearings and made his way down the steps of Capitol Hill with his head bowed. A crowd of protesters surrounded him, angry and shouting. One of them shoved a bright pink s
ign in his face, on which was scrawled a single word: “Crook.” It was public anger colliding with free-market capitalism.
SEVEN
Popcorn and Dominoes
“It was extraordinary from a personal point of view. I remember being in the meetings and thinking, ‘My gosh, I’m a mere mortal and I’m in a situation where me and half a dozen people hold the fate of three hundred million people in our hands.’”
—ED LAZEAR, ECONOMIST AND CHIEF ECONOMIC ADVISER TO PRESIDENT GEORGE W. BUSH, IN AN INTERVIEW WITH MARIA BARTIROMO, FEBRUARY 25, 2010
SEPTEMBER 21, 2008
The mild Sunday evening provided perfect baseball weather, but for the crowds that jammed Yankee Stadium in the Bronx, the victory over the Baltimore Orioles was bittersweet. After eighty-five years and twenty-six world championships, it was the last game to be played at the stadium Ruth built. Twelve miles away, in the caverns of Wall Street, it would also go down as the last day of investment banking as we knew it.
It had been a bad week on Wall Street. Morgan Stanley CEO John Mack, who had watched the disastrous events unfold over the Lehman weekend, and had seen Merrill Lynch jump the investment banking ship to save its life, was deeply troubled. It was becoming increasingly clear that the two remaining investment banks, Morgan Stanley and Goldman Sachs, were vulnerable to the same forces that brought the other three to their knees. Mack knew he had to move fast to save his firm. “It wasn’t a question of being scared,” he told me. “It was a question of how we were going to solve these problems. After Merrill was bought, Morgan Stanley’s and Goldman’s stock went down. There was a lot of fear in the market about these firms.” Mack started reaching out to international companies that might be investment partners—in particular, Mitsubishi and CIC in China. It was a frustrating period. “What do we have to do to get people to have confidence not only in us but in the entire system? That kind of leadership was the critical piece in keeping the meltdown from being much worse.”
The Weekend That Changed Wall Street Page 11