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

About a month after he settled into the job, in the summer of 2006, Paulson called Fuld, whom he reached playing golf with a friend in Sun Valley, where he had a home. Fuld had just teed off on the 7th hole, a par 5, dogleg left, when he heard his cell ringing. Although mobile phones weren’t allowed on the course, he picked up anyway, and no one protested.

“I know this call may be a little unusual,” Paulson began. “You and I have been trying to kill each other for years.”

Fuld laughed, flattered by Paulson’s acknowledgment of him as a worthy opponent.

“I’d like to be able to call you from time to time,” Paulson continued, “to talk markets, deals, competition; to find out what your concerns are.”

Fuld was pleased by the gesture and told him as much.

After that conversation they talked to each other regularly. Indeed, Paulson came to rely heavily on Fuld for market intelligence, and, in turn, shared his own views about the markets, which Fuld regarded as the official read. Almost to his surprise—given how much he had vilified the man when he was Goldman’s CEO—Paulson found Fuld to be engaging and impressively hands-on. Although he still didn’t completely trust him, he knew he could work with him.

But in the current market climate, the past few calls had been particularly tricky, and the next one would be especially so.

As Paulson’s morning meeting came to an end, he handed out a number of assignments to his staffers, one of which was urging Neel Kashkari and Phil Swagel to hurry up and finish a draft of an apocalyptic white paper they had been working on about how the government should think about saving the financial system if it started melting down.

As everyone began to leave, the Treasury secretary stopped Bob Steel and pulled him aside to discuss the special assignment he had given to himself. “I’m going to lean on Dick,” he announced.

An hour later his assistant, Christal West, had Dick Fuld on line one.

“Dick,” Paulson said cheerily, “how are you?”

Fuld, who had been in his office waiting for the phone call, answered, “Holding up.”

They had checked in with each other a handful of times over the past week since the Bear deal, but they hadn’t discussed anything substantial. This morning’s call was different. They talked about the fluctuations in the market and Lehman’s stock. All the banks were suffering, but Lehman’s share price was being hammered the most, down more than 40 percent for the year. More worrisome was that the shorts were smelling blood, meaning that the short position—the bet that Lehman’s stock had much further to fall—was swelling, accounting for more than 9 percent of all Lehman shares. Fuld had been trying to convince Paulson to have Christopher Cox, chairman of the SEC, get the short-sellers to stop trashing his firm.

Paulson was not unsympathetic to Fuld’s position, but he wanted an update on Lehman’s plans to raise capital. Fuld had already been hearing from some of his top investors that this would be a wise course of action, especially while things were still relatively positive for the firm in the press.

“It would be a real show of strength,” Paulson said, hoping to persuade him.

To Paulson’s surprise, Fuld said he agreed and had already been thinking about it. Some of his bondholders had been pressing him to raise money on the back of the firm’s positive earnings report.

“We’re thinking about reaching out to Warren Buffett,” Fuld replied. That had been a carefully considered remark; Fuld knew that Paulson was a friend of the legendary Omaha investor. Although Buffett had a public disdain for investment bankers in general, for years he had used Goldman’s Chicago office for some of his business, and Paulson and Buffett had become friends.

An investment by Buffett was the financial world’s equivalent of a Good Housekeeping Seal of Approval. The markets would love it. “You should pitch him,” Paulson said, relieved that Fuld was finally taking action in that direction.

Yes, Fuld agreed. But he had a favor to ask. “Could you say something to Warren?”

Paulson hesitated, reflecting that it probably wasn’t a particularly good idea for a Treasury secretary to be brokering deals on Wall Street. The situation could only be complicated by the fact that Buffett was a Goldman client.

“Let me think about it, Dick, and get back to you,” Paulson said.

On March 28, Warren Buffett, the legendary value investor, sat in his office at Berkshire Hathaway’s Omaha headquarters, working at the plain wooden desk that his father had once used, waiting for Dick Fuld’s call. A day earlier, the call had been arranged by Hugh “Skip” McGee, a Lehman banker, who had reached out to David L. Sokol, chairman of Berkshire Hathaway-owned MidAmerican Energy Holdings. (Buffett receives such pitch calls almost daily, so he regarded this one as a fairly routine matter.)

He didn’t know Fuld well, having met him on only a few occasions; the last time they had been together, he had been seated between Fuld and Paul Volcker, the former chairman of the Federal Reserve, at a Treasury dinner in Washington in 2007. Wearing one of his trademark off-the-rack, no-fuss suits and tortoise-rimmed glasses, Buffett had been making the rounds when he had managed to spill a glass of red wine all over Fuld just before dessert arrived. The world’s second-richest man (after Bill Gates) turned crimson as the dinner guests—a group that included Jeffrey Immelt of General Electric, Jamie Dimon of JP Morgan Chase, and former Treasury secretary Robert Rubin—looked on politely. Fuld had tried to laugh the spill off, but the wine had landed directly in his lap. The two hadn’t seen each other since.

When Debbie Bosanek, Buffett’s longtime assistant, announced that Dick Fuld was on the line, Buffett set down his Diet Cherry Coke and reached for the receiver.

“Warren, it’s Dick. How are you? I’ve got Erin Callan, my CFO, on with me.”

“Hi there,” Buffett greeted him in his dependably affable manner.

“As I think you know, we’re looking to raise some money. Our stock ’s been killed. It’s a huge opportunity. The market doesn’t understand our story,” Fuld said, before launching into his sales pitch. He explained that Lehman was looking for an investment of $3 billion to $5 billion. After some back and forth, Buffett made a quick proposal: He indicated he might be interested in investing in preferred shares with a dividend of 9 percent and warrants to buy shares of Lehman at $40. Lehman’s stock had closed at $37.87 that Friday.

It was an aggressive offer by the Oracle of Omaha. A 9 percent dividend was a very expensive proposition—if Buffett made a $4 billion investment, for example, he’d be due $360 million a year—but that was the cost of “renting” Buffett’s name. Still, Buffett said, he needed to do some due diligence before committing to even those terms. “Let me run some numbers and I’ll get back to you,” he told Fuld before hanging up.

In Omaha, Buffett had already begun doing a little soul searching, uncertain if he could even bring himself to put his money into an investment bank again. In 1991 he had rescued Salomon Brothers when the storied New York investment house was on the brink, but he quickly realized then that he couldn’t bear the culture of Wall Street. If he now came to Lehman’s assistance, the world would be scrutinizing his participation, and he was well aware that not only would his money be on the line, but his reputation as well.

Even though Buffett had often traded in the market using hedges and derivatives, he despised the trader ethos and the lucrative paydays that enriched people he thought were neither particularly intelligent nor created much value. He always remembered how unnerved he had been after paying out $900 million in bonuses at Salomon, and was especially stunned when John Gutfreund, the firm’s chairman, had demanded $35 million merely to walk away from the mess he had created. “They took the money and ran,” he once said. “It was just so apparent that the whole thing was being run for the employees. The investment bankers didn’t make any money, but they felt they were the aristocracy. And they hated the traders, partly because the traders made the money and therefore had more muscle.” Buffett decided to hunker down that evening at his office and pick apart Lehman’s 2007 annual report. After getting himself another Diet Cherry Coke, he began to read Lehman’s 10-K, its annual report, when the phone rang; it was Hank Paulson. This seems orchestrated.