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

He now said as much to the congressmembers. “I want to be very clear,” Fuld told the committee. “I take full responsibility for the decisions that I made and for the actions that I took.” He added, “None of us ever gets the opportunity to turn back the clock. But, with the benefit of hindsight, would I have done things differently? Yes, I would have.”

But his audience had little use for his contrition, peppering him instead with questions about his compensation. “Your company is now bankrupt, and our country is in a state of crisis,” Representative Henry Waxman said. “You get to keep $480 million. I have a very basic question for you: Is that fair?”

“The majority of my stock, sir, came—excuse me, the majority of my compensation—came in stock,” Fuld replied. “The vast majority of the stock I got I still owned at the point of our filing.” In truth, while he had cashed out $260 million during that period, most of his net worth was tied up in Lehman until the end. His shares, once making him worth $1 billion, were now worth $65,486.72. He had already started working on plans to put his apartment and his wife’s cherished art collection up for sale. It was a telling paradox in the debate about executive compensation: Fuld was a CEO with most of his wealth directly tied to the firm on a long-term basis, and still he took extraordinary risks.

As he spoke he struggled to gain any measure of empathy from his listeners, suggesting, “As incredibly painful as this is for all those connected to or affected by Lehman Brothers, this financial tsunami is much bigger than any one firm or industry.” He also expressed his great frustrations—with hedge funds for spreading baseless rumors, with the Federal Reserve for not allowing him to become a bank holding company over the summer, and ultimately with himself.

For a moment, as his testimony was winding up, he looked as if he was about to break down, but he steadied himself, as he had done at home virtually every day prior to the hearing. The room fell silent as the congressmembers leaned forward in their chairs, waiting for him to speak.

“Not that anybody on this committee cares about this,” Fuld said, putting his notes aside and surprising even his own lawyer by speaking so extemporaneously, “but I wake up every single night wondering, What could I have done differently? ” On the verge of tears, he added, “In certain conversations, what could I have said? What should I have done? And I have searched myself every single night.”

“This,” he said gravely, “is a pain that will stay with me for the rest of my life.” And, he continued, he was baffled by why the government went to extraordinary steps to save the rest of the system but hadn’t done the same for Lehman.

“Until the day they put me in the ground,” he said, as everyone in the chamber hung on his words, “I will wonder.”

That Monday afternoon Hank Paulson received a private four-page, typed letter from his friend Warren Buffett. They had spoken over the weekend about Paulson’s current predicament—namely, that even though his TARP plan had been approved by Congress, it was not passing muster on Wall Street, where investors were beginning to worry that it would be ineffectual. Paulson had confided in him that he was considering using TARP to make direct investment in banks. Buffett told him that before he went down that path, he had some ideas about how to make a program to buy up toxic assets work that he would put in a letter, which he said would spell out both the problems with the current plan and a solution.

In the letter, Buffett, perhaps one of the clearest and most articulate speakers on finance, first explained the shortcomings of Paulson’s current plan:

“Some critics have worried that Treasury won’t buy mortgages at prices close to the market but will instead buy at higher ‘theoretical’ prices that would please selling institutions. Critics have also questioned how Treasury would manage the mortgages purchased: Would Treasury act as a true investor or would it be overly influenced by pressures from Congress or the media? For example, would Treasury be slow to foreclose on properties or too bureaucratic in judging requests for loan forbearance?”

To address those problems, Buffett proposed something he called the “Public-Private Partnership Fund,” or PPPF. It would act as a quasi-private investment fund backed by the U.S. government, with the sole objective of buying up whole loans and residential mortgage-backed securities, but it would avoid the most toxic CDOs. Instead of the government’s doing this on its own, however, he suggested that it put up $40 billion for every $10 billion provided by the private sector. That way the government would be able to leverage its own capital. All proceeds “would first go to pay off Treasury, until it had recovered its entire investment along with interest. That having been accomplished, the private shareholders would be entitled to recoup both the $10 billion and a rate of interest equal to that received by Treasury.” After that, he said, profits would be split three fourths to investors, one fourth to Treasury. His idea also had a unique way to protect taxpayers from losing money: Put the investors’ money first in line to be lost.

Buffett said he was so excited about this structure that he had already spoken to Bill Gross and Mohamed El-Erian at PIMCO, who had offered to run the fund pro bono. He had also been in touch with Lloyd Blankfein, who had likewise offered to raise the investor money on a pro bono basis. Finally, Buffett added, “I would be willing to personally buy $100 million of stock in this public offering,” which, he explained, “constitutes about 20 percent of my net worth outside of my Berkshire holdings.”

After reading the letter, Paulson was intrigued. He was still starting to lean in favor of injecting capital directly into the banks, but he thought maybe a program modeled after portions of Buffett’s proposal could be feasible as well. Paulson called Kashkari into his office; he had just named him interim assistant secretary for financial stability that morning, putting him in charge of the TARP plan. The appointment was already generating a firestorm, with accusations that Paulson was once again favoring his former Goldman Sachs employees. (At Goldman, meanwhile, none of the senior management seemed to know who Kashkari was, and some of them asked their assistants that morning to look though the computer system to find out.)

Paulson handed Kashkari Buffett’s letter. “Call him.”

“It is clearly a panic, and it’s a panic around the world,” John Mack, having flown to London, was telling his employees at their headquarters on Canary Wharf the morning of Wednesday, October 8. “So you think back how the regulators have done and what they have done—could they get ahead of this—you know it’s pretty hard because you really didn’t know how bad it was until it got worse….”

The stock market was cratering yet again amid renewed panic that the banking system—and the economy as a whole—were about to suffer further setbacks. Mack, who had gone to London in part to have dinner with his newest investors from Mitsubishi, was under perhaps the most pressure. He was exhausted, having spent much of the past week living on airplanes. In the wake of China Investment Corp.’s hasty departure from Morgan Stanley’s building after Gao found out the firm was about to do a deal with the Japanese, Mack flew to Beijing to try to repair relations. It was a diplomatic mission, intended to calm frayed nerves and to avoid what seemed as if it might turn into a minor international incident, given that Paulson had quietly gotten involved in the talks with the Chinese government originally. Just as important, CIC was still a large investor in Morgan Stanley, and Mack wanted to placate his foreign partners.