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

Steel called Kovacevich to tell him the news, and then dialed Bair’s BlackBerry, which she had instructed him to call instead of her home number so as not to wake her children.

“We’re all approved,” he told her.

“All right,” Bair said, sounding relieved. “We will have to call Vikram first thing in the morning.”

“Sheila, we’re not waiting until the morning,” Steel said resolutely. “We’ve done this; we’ve approved it. I think we have to call him now. I don’t want him hearing this when he wakes up from someone else.”

“You should do it,” she said equally firmly.

“I think you should be on the phone, since you married us,” he replied.

With Bair on the line, Steel conferenced in Jane Sherburne, and then he called Pandit, not surprisingly waking him.

“Bob, what’s going on?” he asked groggily.

“Well, there’s been an important development,” Steel said carefully. “I’m on the phone with Sheila and Jane. Do you need a moment?”

“No, I’m fine,” Pandit said, collecting himself. “What is it?”

“We received an unsolicited proposal from Wells Fargo for the entire company of Wachovia, $7 a share, no assistance, and a Wells Fargo board-approved doc that we’ve accepted. We think this is the right thing to do.”

“Well, that’s interesting,” Pandit answered, a bit taken aback. “A better bid? Let me call Ned. Let’s work with you, and let’s see what we can do and get this thing resolved.”

“No, no. You don’t understand,” Steel interrupted, pausing for a moment. “I’ve signed it already.”

There was silence on the other end of the line. If Pandit hadn’t been completely awake before, he was now. When he resumed speaking he was irate, the full force of Steel’s news having registered with him.

“We have a deal! You know you can’t do this, because we actually have an exclusive arrangement with you. You are not allowed to sign.” Pandit, frustrated, appealed to Bair. “Madame Chairwoman?”

“Well, I can’t get in the way of this,” Bair replied, in her most official tones.

“This isn’t just about Citi,” Pandit explained to her. “There are other issues we need to consider. I need to speak to you privately.”

Steel agreed to leave the conversation, and as soon as he hung up Pandit began pleading with Bair. “This is not right. It’s not right for the country, it’s just not right!”

But the decision, she made it abundantly clear, was final.

Stock prices were surging before the House began voting on the bailout bill for a second time on the afternoon of Friday, October 3. Its passage was eased after the Senate version of the legislation added a number of tax breaks that were otherwise due to expire. Another popular addition increased the amount in individual bank accounts insured by the FDIC to $250,000 from $100,000. What had begun as a three-page draft was now more than 450 pages of legislative legalese, which the Senate had approved after sundown on Wednesday.

Many of the House Democrats and Republicans who had opposed the measure on Monday had since been persuaded to switch their votes—some by appeals from the two presidential candidates or from the president, some by the added provisions in the bill, and others by the mounting signs that the financial crisis was dragging the economy down into a deep recession. A recent report indicated that 159,000 jobs had been lost in September, the fastest pace of monthly job cuts in more than five years. Stocks had slid sharply that week, and both the takeover of Washington Mutual and the desperate jockeying to secure a partner for Wachovia revealed that not only Wall Street was in trouble.

In the final House tally, thirty-three Democrats and twenty-four Republicans who had voted against the bill on Monday now approved it. That afternoon, President Bush signed the Emergency Economic Stabilization Act of 2008, which created the $700 billion Troubled Assets Relief Program, or TARP. “We have shown the world that the United States will stabilize our financial markets and maintain a leading role in the global economy,” the president declared.

Of course, what none of the congressmembers nor the public knew was that TARP was being completely rethought within Treasury, as Jester, Norton, and Nason began developing plans to use a big chunk of the $700 billion to invest directly in individual banks.

Jester had flown back to his home in Austin for a brief respite, but he was constantly on his BlackBerry with Norton going over their various options. Norton and Nason, told by Treasury’s general counsel, Bob Hoyt, that they could not hire an outside financial adviser because of the inherent conflicts, made a series of outbound calls to Wall Street bankers on an informal basis to bounce various ideas off them about how to implement a capital injection program. Their call list included a cast of characters that had become well known to them through the recent spate of weekend deal making: Tim Main and Steven Cutler of JP Morgan, Ruth Porat of Morgan Stanley, Merrill Lynch’s Peter Kraus, and Ned Kelly of Citigroup, among others. They intentionally did not call anyone from Goldman Sachs, concerned that the conspiracy theory rumor mill was already in overdrive.

Norton and Nason asked them all the same questions: How would you design the program? Should the government seek to receive common or preferred shares in exchange for their investment? How big a dividend would banks be willing to pay for the investment? What other provisions would make such a program attractive, and what provisions would make it unappealing?

But Jester, Norton, and Nason knew they had precious little time to complete their planning. Even with TARP approved, the markets did not immediately respond by stabilizing. The Dow Jones Industrial Average, which had been up as many as 300 points before the start of the voting, closed down 157.47 points, or 1.5 percent. After the Wells Fargo deal for Wachovia was revealed, shares of Citigroup fell 18 percent, their sharpest decline since 1988. For the week, the Standard & Poor’s 500 stock index was down another 9.4 percent.

“I’m the ugliest man in America,” Dick Fuld, beside himself in a mix of sadness and anger, privately acknowledged to his team of advisers before they strode into a congressional hearing in Washington on Monday, October 6, that had been called to examine the failure of Lehman Brothers. The markets remained in turmoil, falling another 3.5 percent despite the passing of TARP, as investors continued to question whether the program would actually work.

As he entered, spectators were waving pink sign with handwritten scrawls proclaiming JAIL NOT BAIL and CROOK, and in case Fuld didn’t fully comprehend how he was perceived, John Mica, a Republican congressman, announced, “If you haven’t discovered your role, you’re the villain today. You’ve got to act like a villain.”

For the past several weeks Fuld had been in a depression deeper than any he’d ever experienced, pacing his home in Greenwich at all hours, taking calls from former Lehman employees who wanted either to scream at him or to cry. He continued to go to the office, but it was unclear even to him what he was doing there. He was, however, sufficiently self-aware to finally comprehend what had happened and to perceive the full extent of the vitriol that was now being directed at him. He wanted to be defiant, but he found he couldn’t. He was at times saddened and angry—angry at himself, and increasingly angry at the government, especially at Paulson, whom he saw as having saved every firm but his. His beloved Lehman Brothers had died on his watch.