Andrew Sorkin - Too Big to Fail - The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

For their troubles, Flowers and Fox-Pitt would earn a combined $20 million in fees, $15 million of which was contingent on the conclusion of the deal. Not bad for less than a week’s work.

Ruth Porat of Morgan Stanley had gone over to the apartment of a friend, a Lehman executive, to console her. Just as they were pouring a glass of wine to commiserate, she took a call from Dan Jester, her pal from Treasury, with whom she had just worked for over a month on Fannie and Freddie.

“I need your help,” he told her. “You’re not going to believe this, but we think AIG may go into bankruptcy this week. I’m wondering if we can reconvene the team to focus on AIG.” In this case, the assignment would be to work on behalf of the Federal Reserve. He told her that he’d like Morgan Stanley to pull a team together and be down at the Fed in the morning.

“Hold on, hold on,” Porat said in disbelief. “You’re calling me on a Sunday night saying that we just spent the entire weekend on Lehman and now we have this? How the fuck did we spend the past forty-eight hours on the wrong thing?”

The drive home was excruciating; Fuld sat in the backseat feeling paralyzed. Gone was the bluster, the gusto, the fight. He was still angry, but really, he was just sad. For once, it was completely quiet except for the hum of the engine and the tires rolling down the highway. He had stopped looking at his BlackBerry.

By the time his Mercedes rolled into his driveway, it was 2:00 a.m. His wife, Kathy, was waiting up for him in bed. He slowly walked into his bedroom, still in a state of shock. He hadn’t slept in days; his tie was undone and his shirt wrinkled. He sat down on the bed.

“It’s over,” he said mournfully. “It’s really over.”

Looking on solemnly, she said nothing as she watched his eyes well up. “The Fed turned against us.”

“You did everything you could,” she assured him, rubbing his hand.

“It’s over,” he repeated. “It’s really over.”

CHAPTER SIXTEEN

At 7:10 a.m. on Monday, September 15, Hank Paulson was sitting at the edge of his bed in a suite at the Waldorf Astoria, the day’s newspapers spread out before him. He had gotten very little sleep, worrying about how the markets would react to the previous day’s news—and about whether AIG would be the next domino to fall.

The headline on the front page of the Wall Street Journal ——spanning all six columns and running to two lines, in double the normal point size—told the story: CRISIS ON WALL STREET AS LEHMAN TOTTERS, MERRILL IS SOLD AND AIG SEEKS TO RAISE CASH. The Journal had gone to press before Lehman formally filed for bankruptcy protection at exactly 1:45 that morning in the Southern District of New York.

Paulson was just finishing dressing when he received a call from President George W. Bush.

Paulson had spoken to the president the night before but only briefly. This would be his first opportunity to explain fully where things stood with the economy and to strategize with him about the administration’s message to the American people.

His voice more hoarse than usual, Paulson began by telling Bush that Lehman’s bankruptcy filing was official. “I’m sure some in Congress are going to be happy about this, but I’m not sure they should be,” he added, acknowledging the political pressure that had been brought to bear against another bailout.

Paulson said he was cautiously optimistic that investors would be able to accept the news but warned him that there could be further pressure on the financial system. Jim Awad, managing director of Zephyr Management, was quoted in that morning’s Wall Street Journal as saying, “Everybody’s prepared this time—it’s different from Bear Stearns. There could be a brief relief rally. You won’t get a 1,000-point shock drop because we’re all ready for it. But a grueling, long bear market will resume.”

Although the U.S. markets wouldn’t open for another three and a half hours, Paulson told Bush that the Asian and European markets were down only slightly, and while the Dow Jones futures were off, it was only by approximately 3 percent.

Paulson then recounted the specific details of the weekend, blaming the British government for misleading them. “We were out of options,” Paulson told Bush, who was sympathetic.

But the president wasn’t concerned about what might have been. He told Paulson that he was unhappy about the bankruptcy, but that allowing Lehman Brothers to fail would send a strong signal to the market that his administration wasn’t in the business of bailing out Wall Street firms any longer.

As they spoke, the first clues that the market wasn’t going to take the news especially well began appearing. Alan Ruskin, a banking analyst at RBS Greenwich Capital, had sent out a note to his clients early that morning trying to divine the meaning of Lehman’s bankruptcy:

“At the time of writing it seems the US Treasury has decided to teach us ALL a lesson, that they will not backstop every deal in the wave of financial sector consolidation that is upon us,” he wrote. “Their motivation is part fiscal and part moral hazard. I suspect more the latter. Presumably the most important reason to teach Wall Street this lesson, is that they will change their behavior, and not take the decisions that are reliant on a public bailout. For many, but not all, this is an impossible lesson to learn in the middle of the worst financial storm since the Great Depression.”

Paulson walked Bush through the Fed’s plan to keep Lehman’s broker-dealer functioning so that it could complete its trades with other banks. “We’re hoping that over the next couple of days, they can unwind this thing in an organized way,” he said.

While Paulson was clearly more disturbed than the president about Lehman’s bankruptcy, he expressed his elation about Bank of America’s decision to buy Merrill Lynch, a sign, he suggested, “of strength” in the market that might “mitigate” the possibility of panic.

Paulson also warned him for the first time that “AIG could be a problem” but assured him that Geithner and the Fed were planning to rally the troops and help raise capital for the firm later that day.

“Thanks for your hard work,” the president told him. “Let’s hope things settle down.”

Doug Braunstein of JP Morgan was leaving his apartment on Manhattan’s Upper East Side at about 7:00 a.m. to head down to AIG when he received a call from Jamie Dimon.

“New plan,” Dimon told him. “Geithner wants us to work with them to do a huge capital raise for AIG. There’s going to be a meeting down at the Fed at eleven a.m.” Braunstein, blocking his ear against the noise of Manhattan traffic, protested, “We can’t raise this kind of money.”

Dimon promised that he’d have some help. “The government is inviting us and Goldman to make this happen.”

A look of horror came over Braunstein’s face as he asked, raising his voice, “Where the hell did Goldman Sachs come from? Don’t they have a conflict? I mean, look at their exposure to AIG. They’re a huge counterparty.”

Dimon dismissed his concerns. “The U.S. government is telling us to do this,” he repeated.