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

The arc of their careers more recently had been nearly identical: Both Steel and Diamond, as Yankees in Queen Elizabeth’s court, had made quite a splash in London. For Steel, success had come with starting Goldman’s European equities trading operation, a feat Hank Paulson, his former boss, always remembered. For his part, Diamond had transformed a small investment bank with some 3,000 employees into a major London powerhouse that currently had a payroll of 15,000. Barclays Capital now accounted for about a quarter of the bank’s profits.

The two had remained friends after Steel quit the Barclays board to follow Paulson to Treasury, to the point that each had always been able to count on the other to pick up the phone if he called, whatever the reason.

“Listen, one of my jobs here is to brainstorm,” Steel said somewhat stiffly after greeting Diamond, “and, ah, sort of sketch out various scenario plans. In that capacity, I have a question for you.”

Steel’s uncharacteristically distant tone surprised Diamond, who asked, “Is this official business, Bob?”

“No, no. Look, I’m not calling on behalf of anyone,” he assured him. “The markets have calmed down a bit now, but I am trying to figure out that if things do get worse, and we get to a certain level, if, ah, things can happen.”

“All right, shoot.”

Steel took a deep breath and then asked his question: “Is there a price at which you’d be interested in Lehman? And if so, what would you need from us?”

Diamond was momentarily speechless; Treasury, he realized, was clearly trying to formulate strategic solutions in the event that Lehman found itself in a Bear Stearns-like situation. From long acquaintance he knew Steel to be a no-nonsense pragmatist, not someone who idly floated trial balloons.

“I’m going to have to think about that because I don’t have an answer,” Diamond said carefully.

“Yes, but do think about it,” Steel said.

“Never say never,” Diamond answered, and both men laughed. Diamond had always trotted out that line when reporters pressed him about possible acquisitions, though this was the first time that Steel had been on the receiving end of it.

Steel was well aware of Barclays Capital’s desire to increase its presence in the United States, an ambition that Diamond practically wore on the sleeve of his Savile Row suits. While he had built, from the ground up, a major investment bank that had been a London phenomenon, he had always yearned to be a major player on Wall Street. His restless pursuit of that goal explained why Diamond had so abruptly left Morgan Stanley for Credit Suisse First Boston in 1992, taking much of the repo trading desk with him and inciting the wrath of John Mack. Four years later, Diamond left for BZW, whose remnants were the foundation for Barclays Capital.

Lehman was a logical merger candidate if Diamond—and, of course, his boss and the board in London—wanted Barclays to become an overnight investment banking powerhouse in New York. But he knew it would be an expensive purchase so long as Dick Fuld was running it. Still, an opportunity like this hardly came up often.

What the rest of Wall Street didn’t know at the time was that Barclays had been contemplating another purchase: Diamond had been in conversation with UBS about buying its investment banking franchise and was planning to fly to Zurich later that week for further meetings. He now shared this information with Steel but cautioned him that the talks with UBS were very preliminary, and the last thing Diamond needed was word of them leaking out. As was always a possibility, the deal might not go anywhere.

Lehman, in any case, was in a different league altogether. It wouldn’t be easy selling an acquisition of this magnitude to his board, who were still feeling gun shy after losing an expensive bidding war for Dutch bank ABN AMRO months earlier. But Lehman was the fourth biggest investment house in the United States. If Lehman could be had for a major discount, he’d have to consider the prospect seriously, wouldn’t he?

“Yes,” Diamond said to Steel, “ it’s definitely something to think about.”

CHAPTER FIVE

Surprisingly soft-spoken when not on the air, Jim Cramer, CNBC’s blustery market guru, politely told the security guard standing outside Lehman Brothers’ headquarters on Seventh Avenue and Fiftieth Street that he was expected for a breakfast meeting with Dick Fuld. He was ushered through the revolving door, past Lehman’s bomb-sniffing Labrador, Bella, and to the reception desk, where he made his way through the familiar security procedures. Looking rumpled as usual, he was received in the waiting area of the thirty-second floor as ceremoniously as if he were a major client who had arrived to negotiate a billion-dollar deal. Erin Callan, the CFO, was present, as was Gerald Donini, the head of global equities and a neighbor of Cramer’s in Summit, New Jersey.

Fuld, who was still zealously conducting his jihad against the short-sellers, had personally invited Cramer for the meeting. By now he had come to realize that he needed an ally in his struggle against the shorts, but so far, nobody had been willing to join the battle. Not Cox. Not Geithner. And not Paulson, despite their recent conversation at Treasury. But maybe Cramer, with his huge television audience and connections deep within the hedge fund world, could somehow help sway the debate and talk up Lehman’s stock price.

Fuld had known Cramer for a decade. After Long-Term Capital Management blew up in 1998, word spread that Lehman had huge exposure to the fund and might be the next to go down. Fuld had received a major public boost from Cramer, then a new face at CNBC, when he declared on television that all Lehman needed to do was buy back its own shares to halt the downward spiral and squeeze the shorts. The following morning, Fuld, who had never met Cramer, called him at his office and told him, “I bid thirty-one dollars for one million shares of Lehman.” Shares of the company steadied soon afterward.

If Wall Street had indeed been taking on some aspects of a Shakespearean tragedy, Cramer would likely serve as the comic relief. Voluble and wild-eyed, he spoke in his TV appearances so quickly that it often seemed as if his head might explode from the sheer effort of communicating his ideas. But for all his carnival-barker antics, people on Wall Street knew Cramer was no fool. He had managed a hedge fund and founded TheStreet .com, an early and influential investing Web site, and had a keen understanding of how the market worked.

Fuld and Cramer had come to respect each other as no-nonsense street fighters, despite their pronounced differences in character. Cramer, a media star, was solidly Harvard, had once worked at Goldman, and counted as one of his best friends Eliot Spitzer, the bane of Wall Street. Fuld, for his part, tended to despise Ivy Leaguers, liked to think of himself as the anti-Goldman, and had never been much of a communicator. Still, he appreciated the fact that Cramer had always been an honest broker, willing to speak his mind, however unpopular his opinions might be.

After one of Lehman’s wait staff had taken food orders for the group, Fuld walked an attentive Cramer through his talking points. Lehman, Fuld said, was working hard to reduce the firm’s leverage and restore confidence among investors. Though they had raised $4 billion in new capital in the first quarter, Fuld was convinced that a “cabal of shorts” was preventing the stock price from being properly reflected. The franchise was undervalued.

Cramer nodded his head energetically. “Look,” he said, “I think there is definitely a problem with the shorts—they’re leaning all over you.”

Fuld was gratified to see that he had a receptive audience. As he was well aware, his short-seller predicament touched on an obscure issue near and dear to Cramer: the uptick rule—a regulation that had been introduced by the Securities and Exchange Commission in 1938 to prevent investors from continually shorting a stock that was falling. (In other words, before a stock could be shorted, the price had to rise, indicating that there were active buyers for it in the market. Theoretically, the rule would prevent stocks from spiraling straight downward, with short-sellers jumping on for the ride.) But in 2007 the commission had abolished the rule, and to critics like Cramer, its decision had been influenced by free-market ideologues who were eager to remove even the most benign speed bumps from the system. Ever since, Cramer had been warning anyone who’d listen that without this check, hedge funds were free to blitzkrieg good companies and drive down their stock.